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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 March 31, 2009
 o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission file number: 0-17304
 Cistera Networks, Inc.
  Nevada
    
    91-1944887State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization
    
    Identification No.)
 6509 Windcrest Drive, suite 160, Plano, Texas 75024
  Issuers telephone number
    
    (972) 381-4699
 
 Common Stock Par Value $0.001
   o þ
  o þ
  þ o
  þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reportingcompany þ
 o þ




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##### 



Item Number and Caption
    
    PagePART IItem 1.
    
    Description of Business
    
    
    1Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    
    19Item 2.
    
    Properties
    
    
    19Item 3.
    
    Legal Proceedings
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    20Item 6.
    
    Selected Financial Data
    
    
    23Item 7.
    
    Managements Discussion
and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    30Item 9A.
    
    Controls and Procedures
    
    
    30Item 9B.
    
    Other Information
    
    
    31PART IIIItem 10.
    
    Directors, Executive Officers, and Corporate Governance
    
    
    32Item 11.
    
    Executive Compensation
    
    
    35Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    36Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    38Item 14.
    
    Principal Accountant Fees & Services
    
    
    39PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2




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PART I
 
 ITEM 1: DESCRIPTION OF BUSINESS
 BACKGROUND
     BUSINESS OVERVIEW
    1




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CURRENT ECONOMIC ENVIRONMENT
 st
    2




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REVERSE/FORWARD SPLIT
 th
       Accounting and Audit Fees
    
    $
    38,000Internal Control Compliance
    
    $
    140,000Stockholder Expenses
    
    $
    5,000Legal Fees
    
    $
    15,000Total
    
    $
    198,000
 3




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##### Table of Contents



KEY TERMS AND DEFINITIONS
 
    
    Enterprise Voiceis defined as the combination of Enterprise Telephony and
Enterprise VoIP Gateways.
    
    Enterprise Telephonyis defined as the combination of Enterprise IP Telephony and
traditional telephony (PBX/KTS).
    
    Enterprise IP Telephonyis defined as the combination of LAN Telephony, Converged
Telephony, and IP Phones.
    
    Enterprise VoIP Gatewayis defined as a Layer 3 network device which provides the
interconnection of CPE-based voice and data traffic across a WAN network or the PSTN,
also refereed to as trunks. This device is typically a modular or standalone router
specially equipped with voice DSP resources.
    
    LAN Telephony (IP-Only)is defined as those ports and systems which provide
Enterprise Voice services over a LAN whereby both call control and voice traffic
traverse a packet network, in most cases IP running over Ethernet. The use of a
traditional PBX or KTS is not required. In most cases the three fundamental elements to
this network architecture include a server running call control software, Ethernet
switches, and IP Phones.
    
    Converged Telephony (TDM/IP)is defined as those lines and systems that provide
voice services whereby voice traffic traverses TDM lines but call control is packet
based. In most cases this enables a traditional Enterprise Voice network to migrate
its infrastructure to IP incrementally with the prime advantage of maintaining prior
capital investment in PBXs and traditional phones. In most cases call control resides
on a server, connected to a LAN, running call control software that provides call
control to a PBX. In this case, the end-points remain TDM but the call control is IP.
Also, other form factors of this segment may not include traditional phone systems, but
an integrated standalone device that integrates the functions of TDM and IP at a
systems level. These standalone solutions are targeted to smaller deployments as found
at branch offices or small offices.
    
    IP Phoneis defined as a packet based telephone that has a Layer 3 IP address and a
Layer 2 network connection (in most cases Ethernet or Voice over Ethernet). The
functions of an IP Phone mirror that of a traditional phone. Technically, an IP Phone
transmits voice traffic by first taking the Voice Payload and adding an RTP header,
then a UDP header, then an IP header and finally an Ethernet header per frame. An IP
Phone is an IP appliance, which has been optimized for voice applications. Given that
it is more than a traditional telephone, other network services may be available to the
IP Phone such as Internet browsing or other network services. An IP Phone can be a hard
phone, soft phone, or wireless device.
 4




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
    
    Perpetual License Model This is where the customer purchases the solution
outright with the license to use the hardware and software. Typically the customer
installs the Cistera solution on the customer premise and pays annual maintenance fees
for support and upgrades.
    
    Subscription License This is where the customer pays a monthly service fee for
the right to use the services provided by the solution set. Typically our solution is
installed in a third-partys computer center and multiple clients take advantage of the
solution. There is usually an upfront installation and configuration charge in addition
to the monthly recurring software license fee.
    
    Revenue Share This is where a third-party hosted service provider and Cistera
share the revenue along with the cost of operating the solution. End user customers pay
a determined fee each month to use the Cistera Services. It is typically sold as part
of a complete IP Communications offering from a hosted service provider.
 SUBSEQUENT EVENTS
 Reverse/Forward Split
 th
     5




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Accounting and Audit Fees
    
    $
    38,000Internal Control Compliance
    
    $
    140,000Stockholder Expenses
    
    $
    5,000Legal Fees
    
    $
    15,000Total
    
    $
    198,000
  Default On Convertible Promissory Notes
  th
 Resignation Of CEO
   Company Restructuring
 th
 
    
    Significant cuts in staffing in all areas in line with our reduced revenue expectations;
    
    Reductions in travel expenses, with increasing reliance on Web conferencing capabilities;
    
    Subleasing unneeded office and warehouse space, which should result in
a 30% reduction in facilities costs; and
    
    Decreases in our software licensing costs, in line with the reduction in staff and requirements
 6




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Release Of Version 1.9
 th
 INDUSTRY BACKGROUND
    Limitations of Existing IP Telephony Solutions
  7




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THE OPPORTUNITY FOR CONVERGENCE OF VOICE, VIDEO AND DATA
        OUR STRATEGY
  Extend Our Product and Technological Leadership.
 Expand Sales and Distribution Channels.
 8




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Capitalize on Our Professional Services Capabilities.
 Build a comprehensive annuity business.
 PRODUCTS
  Hardware platforms.
 
    
    Cistera ConvergenceServer (CCS)the foundation of a Cistera IPT solution is
available in six form factorsthe CCS 1000, the CCS 1500, the CCS 2500, the CCS 5500
and the CCS 7500 are designed to support small, medium, large and service
provider performance requirements for specific customer locations. The servers are
rack-mountable, open standards-based hardware systems.
    
    Cistera ZoneController (CZC) and ZoneSpeakenables IP phone systems to work with
existing or newly installed overhead speakers to create a unified paging system.
Cisteras solution is the only one that supports simultaneous broadcasting to IP phones
and speakers.
 Cistera 1.9 Software Platform
 Cistera Advanced IP Phone Application Solutions.
 9




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Quality Assurance and Compliance
  
    
    QuickRecord is a robust IP telephony voice recorder and media management service
designed to support those environments requiring reliable call recording functionality
on an adhoc basis, using major IP Telephony platforms like Ciscos Call Manager, Call
Manager Express and Sylantro PBX platforms.
    
    CallCenterRecordStandardDynamic call recording and playback features for your
IP phone network. Providing high-quality, continuous call recording capabilities that
will become an integral part of the way you do business. With digitized recordings, you
will be able to transport recorded calls in your network as you see fit  attach them
to a problem ticket, analyze them for customer service, minimize potential liability to
your organization.
    
    CallCenterRecord Enhanced CallCenterRecord Enhanced builds on the successful
CallCenterRecord. Enhanced provides for capabilities for the supervisor and auditor
including Quality Reporting, Monitoring, and screen captures. Enhanced offers a
complete recording and monitoring solution for small and medium contact centers.
    
    CallCenterRecord Enterpriseis Cisteras premier solution for large-scale contact
centers. It provides a comprehensive solution for unified contact centers and builds on
the functionality of Enhanced including tighter integration with Cisco Unified Contact
Center (TM?) and Cistera QuickConnect outbound dialer, remote desktop control as well
as comprehensive dashboarding functionality
    
    LMRRecord for Cisco IPICSis Cisteras solution specifically designed to support
Ciscos IP Interoperable Communications Solutions. Cistera is the first and only
recording solution designed and certified for Ciscos IPICS offering. With this
solution, customers can record all two-way radio, cell phone, and traditional analog
systems in a single talk group.
 Event Alerting and Notification 
 
    
    RapidBroadcast Advanced, full-featured messaging service that links data and
voice with your business communication devices. Instantly transmit text or voice
messages or schedule pre-recorded broadcasts to your entire organization through IP
phones or external overhead speakers. Easy to configure and administer,
RapidBroadcast, and the entire suite of Cistera Networks applications, is managed via
a web-based interface. Features include Whisper, Intercom, paging, text messaging and
numerous other features.
    
    LMRConnect Two-way radios are a communications cornerstone for public agencies,
emergency operations and businesses around the world. However, until today, proprietary
technology confined push-to-talk radios to their own networkskeeping them
well-separated from convergence with IP Telephony. Recognizing the need to integrate,
Cistera Networks has created the LandMobileRadio (LMR) Connect Application
Enginebringing two-way radios into the IPT network.
    
    MasterBellScheduler Cistera provides a comprehensive solution for scheduled
alerting and notification such as school bell ringing schedule. Using the popular
RapidBroadcast Application
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Engine and the Cistera Convergence Server (CCS), education IT administrators can control
all elements of school bell ringing. From short days, K-12 and High School to
emergencies, the IT administrator can tailor a schedule unique to their environment.
    
    QuickConnect is the premier engine for the delivery of event alerting and
notification for cellular and analog phones. As part of the Event Alerting and
Notification Solution, QuickConnect extends the popular RapidBroadcast to launch
notifications beyond IP Phones, overhead paging systems and two-way radios now to every
communications device. QuickConnect as an outbound dialing engine, can manage
communications for Contact Centers, Education facilities, Local Government and
Healthcare.
 Collaboration and Productivity
 
    
    VirtualDirectory a centralized directory system that allows telephone users, both
internal and external, to traverse corporate information quickly without time consuming
tree-based systems. Callers can use their touchtone or voice to request information or
to be directed to the appropriate extension. It supports LDAP integration into popular
contact management systems.
    
    ContentStreamer Bringing advanced voice, graphics, music, and data streaming
capabilities to your IP phone network. You apply your own business logic, and let
ContentStreamer work with your implementation of Cisco CallManager to determine who is
on-hold. ContentStreamer will then stream your message to that caller, conserving
bandwidth. ContentStreamer also provides NetRadio, the ability to stream media
directly to the phone, Concerto, a picture management system for IP Phones, RSS Readers
and RSS Feed Management, Podcasting and more.
    
    PresenceManager Presence Manager allows IP phone users and administrators to
tailor their environments based on multiple factors, including physical presence and
availability. Presence Manager allows administrators to control Global Presence for
phones, such as setting the phone access for phones in classrooms. The Cistera
ConvergenceServer(TM) uses PresenceManager to appropriately deliver, record and
playback calls, to present notifications and events correctly and to allow a more
comprehensive real-time directory view of an organization.
    
    CentraMail Cisteras CentraMail offers unified voice mail and messaging
capabilities in the Cisco and Nortel environments. CentraMail provides advanced
functionalitya necessity no matter your organizations size! With optimal flexibility
and enterprise scalability, CentraMail fulfills all of your voice mail needs.
    
    QuickConference offers high-level conferencing capabilities with easy-to-use
administration. QuickConference gives every organization an advanced means to host
multi-channel, multi-user conferencesa key to successful business communications.
Quick Conference is tightly integrated into IP phone environment to provide an
unparalleled user experience.
   11




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COMPETITION
   
 ITEM 1A: RISK FACTORS
 CERTAIN RISK FACTORS
  
    
    Our products and solutions are complex and are deployed in a wide variety of network
environments. The proper use of our software requires extensive training and, if our
software products are not used correctly or as intended, inaccurate results may be
produced. Our products may also be intentionally misused or abused by clients who use our
products. The incorrect or improper use of our products or our failure to properly provide
training, consulting, implementation and maintenance services to our clients may result in
losses suffered by our clients, which could result in negative publicity and product
liability or other legal claims against us.
    
    We rely on technology and marketing relationships with major PBX vendors predominately
Cisco. We are required to maintain a certification level with these vendors in order to be
recommended as a solution. These requirements may change over time and, as a result, we
might be forced to limit the features available in our current or future product offerings
and the commercial release of our products could be delayed.
    
    We are expanding our offerings to include hosted service providers who offer our
solutions on a subscription model to end users. As a result we will become subject to
increased regulatory burdens including warranty and certification requirements for
participation in public communications networks. We might, as a result, be forced to limit
the features available in our current or future product offerings and the commercial
release of our products could be delayed.
    
    We are expanding our offerings to include federal governments as well as state and local
governments. As a result we will become subject to increased regulatory burdens including
warranty and certification requirements for participation in government procurement
networks. We might, as a result, be forced to limit the features available in our current
or future product offerings and the commercial release of our products could be delayed
within the government sector.
 12




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
    
    We integrate various third party software products as components of our products. We
utilize third party software products to enhance the functionality of our products. Our
business could be disrupted if functional versions of this software were either no longer
available to us or no longer offered to us on commercially reasonable terms. In either
case, we would be required to spend additional capital to either redesign our software to
function with alternate third party software or develop these components ourselves. We
might, as a result, be forced to limit the features available in our current or future
product offerings and the commercial release of our products could be delayed.
    
    As our market opportunities change, our reliance on particular distribution channels or
other partners may increase, which may negatively impact gross margins. There can be no
assurance that we will be successful in maintaining or expanding these channels. If we are
not successful, we may lose sales opportunities, customers and market share. In addition,
some of our distribution channels or our other partners are suppliers of telecommunication
infrastructure equipment.
    
    We rely on a combination of patent, trade secret, copyright and trademark law, together
with non-disclosure and non-competition agreements, as well as third party licenses to
establish and protect the technology used in our systems. However, we cannot assure you
that such measures will be adequate to protect our proprietary technology, that competitors
will not develop products with features based upon, or otherwise similar to our systems, or
that third party licenses will be available to us or that we will prevail in any proceeding
instituted by us in order to enjoin competitors from selling similar products. Although we
believe that our products do not infringe upon the proprietary rights of third parties, we
cannot assure you that one or more third parties will not make a contrary claim or that we
will be successful in defending such claim.
    
    Certain of our software products contain a limited amount of open source code and we may
use more open source code in the future. Open source code is code that is covered by a
license agreement that permits the user to liberally use, copy, modify and distribute the
software without cost, provided that users and modifiers abide by certain licensing
requirements. The original developers of the open source code provide no warranties on such
code. As a result of our use of open source software, we could be subject to lawsuits by
parties claiming ownership of what we believe to be open source code and we may incur
expenses in defending claims that we did not abide by the open source code license. If we
are not successful in defending against such claims, we may be subject to monetary damages
or be required to remove the open source code from our products. Such events could disrupt
our operations and the sale of our products, which would negatively impact our revenues and
cash flows. In addition, under certain conditions, the use of open source code to create
derivative code may obligate us to make the resulting derivative code available to others
at no cost. The circumstances under which our use of open source code would compel us to
offer derivative code at no cost are subject to varying interpretations. If we are required
to publicly disclose the source code for such derivative products or to license our
derivative products that use an open source license, our previously proprietary software
products may be available to others without charge. If this happens, our customers and our
competitors may have access to our products without cost to them, which could harm our
business. We monitor our use of such open source code to avoid subjecting our products to
conditions we do not intend. The use of such open source code, however, may ultimately
subject some of our products to unintended conditions so that we are required to take
remedial action that may divert resources away from our development efforts.
    
    Many of our customers use our solutions to record and to store recordings of commercial
interactions. These recordings are used to provide back-up and verification of transactions
and to guard against risks posed by lost or misinterpreted voice communications. These
customers rely on our solutions to record, store and retrieve voice data in a timely,
reliable and efficient manner. If our solutions fail to record our customers interactions
or our customers are unable to retrieve stored recordings when necessary, we may be subject
to liability and our reputation may be harmed. Although we attempt to limit any potential
exposure through quality assurance programs, insurance and contractual terms, we cannot
assure you that we will eliminate or successfully limit our liability for any failure of
our recording and storage solutions.
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FINANCIAL RISK FACTORS
  Our ability to continue as a going concern is in doubt and we may not be successful in generating
revenue and gross profit at levels sufficient to cover our operating costs and cash investment
requirements.
    We may need to raise additional capital to fund our operations.
   14




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Due to the project based nature of our Customer Premise Equipment (CPE), or Enterprise segment,
and the early stage of our Service Provider Equipment (SPE) or Hosted segment, we have
difficulty predicting revenue for future periods, which may result in expense levels unsupported by
actual revenues.
   All of our sales are currently to customers operating Cisco IP telephony environments, and if we
were to lose the relationship with Cisco, our sales would decline significantly.
  Our operations currently rely on continued access to our accounts receivable factoring
instrument and to trade credit from suppliers. If we lose access to such financial instruments, our
operations may be significantly impaired.
   15




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We have experienced a material weakness in our internal controls. If we fail to maintain an
effective system of internal controls over financial reporting, we may not be able to accurately
report our financial results or prevent fraud. As a result, current and potential shareholders
could lose confidence in our financial reporting, which could negatively impact the value of our
common stock.
    There are risks associated with introducing new products. If we are not successful with
those product introductions, we will not realize on our investment in developing those products.
  Our ability to grow our business depends on relationships with our Value-Added Resellers. If we
were to lose those relationships, we could lose our ability to sell our products.
  16




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We are a relatively small company with limited resources compared to some of our current and
potential competitors, which may hinder our ability to compete effectively.
  We may be unable to hire and retain key personnel.
  We have a thinly-traded stock and public sale of shares by any major shareholder could cause
the market price of our shares to drop significantly.
  The sale of securities by investors in the private placement could cause dilution of existing
holders of our common stock by decreasing the price of our common stock.
  We could issue preferred stock that could adversely affect the rights of our common stockholders.
  
    
    dividend and liquidation preferences,
    
    voting rights,
    
    conversion terms and privileges,
    
    redemption terms and privileges, and
    
    other privileges and rights of the shares of each authorized series.
 17




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Future issuances of securities could adversely affect the interests of our existing shareholders.
  The resale of our common stock by investors may be limited because of its low price which could
make it more difficult for broker/dealers to sell our common stock.
    We do not expect to pay cash dividends in the foreseeable future.
  18




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ITEM 1B: UNRESOLVED STAFF COMMENTS
  
 ITEM 2: PROPERTIES
    
 ITEM 3: LEGAL PROCEEDINGS
   
 ITEM 4: SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
  19




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PART II
 
 ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  High
    
    
    LowJune 30, 2007
    
    $
    1.64
    
    
    $
    0.85September 30, 2007
    
    $
    1.02
    
    
    $
    0.63December 31, 2007
    
    $
    1.01
    
    
    $
    0.44March 31, 2008
    
    $
    1.00
    
    
    $
    0.73June 30, 2008
    
    $
    0.85
    
    
    $
    0.63September 30, 2008
    
    $
    0.60
    
    
    $
    0.16December 31, 2008
    
    $
    0.39
    
    
    $
    0.22March 31, 2009
    
    $
    0.30
    
    
    $
    0.06
  RECORD HOLDERS
  DIVIDENDS
  RECENT SALES OF UNREGISTERED SECURITIES
    20




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21




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th
   22




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ITEM 6: SELECTED FINANCIAL DATA
  
 ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
  OVERVIEW OF BUSINESS
     23




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FISCAL YEAR
  SOURCES OF REVENUES
    COST OF REVENUES AND OPERATING EXPENSES
 Cost of Revenues
   24




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Research and Development
  Marketing and Sales
  General and Administrative
  CRITICAL ACCOUNTING POLICIES
   Revenue Recognition
   25




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Accounting for Sales Commissions
  Convertible debt and warrants
  Registration payment arrangements
   26




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RESULTS OF OPERATIONS
  Overview of Results of Operations for: Fiscal 2009, Ended March 31, 2009, and Fiscal 2008,
Ended March 31, 2008.
 For the Year Ended March 31,2009
    
    
    %of rev
    
    
    2008
    
    
    % of revRevenues:Convergence Solutions
    
    $
    2,498,763
    
    
    
    67
    %
    
    $
    1,871,923
    
    
    
    65
    %Professional Services
    
    
    231,222
    
    
    
    6
    %
    
    
    406,923
    
    
    
    14
    %Support and Maintenance
    
    
    984,287
    
    
    
    27
    %
    
    
    595,769
    
    
    
    21
    %Total Revenues
    
    
    3,714,272
    
    
    
    100
    %
    
    
    2,874,615
    
    
    
    100
    %Cost of Revenues:Convergence Solutions
    
    
    657,507
    
    
    
    18
    %
    
    
    520,952
    
    
    
    18
    %Professional Services
    
    
    209,680
    
    
    
    6
    %
    
    
    311,100
    
    
    
    11
    %Support and Maintenance
    
    
    90,726
    
    
    
    2
    %
    
    
    148,750
    
    
    
    5
    %Total Cost of revenues
    
    
    957,913
    
    
    
    26
    %
    
    
    980,802
    
    
    
    34
    %Gross Profit
    
    
    2,756,359
    
    
    
    74
    %
    
    
    1,893,813
    
    
    
    66
    %Expenses:Sales and marketing
    
    
    1,112,375
    
    
    
    30
    %
    
    
    1,433,888
    
    
    
    50
    %Software development
    
    
    823,040
    
    
    
    22
    %
    
    
    630,411
    
    
    
    22
    %Engineering and support
    
    
    706,167
    
    
    
    19
    %
    
    
    268,754
    
    
    
    9
    %General and administrative
    
    
    1,367,645
    
    
    
    37
    %
    
    
    1,470,056
    
    
    
    51
    %Charge for litigation contingency
    
    
    
    
    
    
    
    %
    
    
    650,000
    
    
    
    23
    %Depreciation and amortization
    
    
    403,813
    
    
    
    11
    %
    
    
    353,582
    
    
    
    12
    %Total expenses
    
    
    4,413,040
    
    
    
    119
    %
    
    
    4,806,691
    
    
    
    167
    %Loss from operations
    
    
    (1,656,681
    )
    
    
    (45
    %)
    
    
    (2,912,878
    )
    
    
    (101
    %)Other income (expense)Interest income
    
    
    326
    
    
    
    
    %
    
    
    22,626
    
    
    
    1
    %Interest expense
    
    
    (233,886
    )
    
    
    (6
    %)
    
    
    (311,108
    )
    
    
    (11
    %)Charge for stock issued to convertible
promissory note holders
    
    
    (1,324,444
    )
    
    
    (36
    %)
    
    
    (135,825
    )
    
    
    (5
    %)Amortization of discount on convertible
notes
    
    
    (1,434,353
    )
    
    
    (39
    %)
    
    
    (1,532,511
    )
    
    
    (52
    %)Charge for estimated liquidated damages
    
    
    10,921
    
    
    
    
    %
    
    
    (381,924
    )
    
    
    (13
    %)Other income (expense)
    
    
    10,000
    
    
    
    
    %
    
    
    (800
    )
    
    
    
    %Total other income (expense)
    
    
    (2,971,436
    )
    
    
    (81
    %)
    
    
    (2,339,542
    )
    
    
    (81
    %)Net loss
    
    $
    (4,628,117
    )
    
    
    (126
    %)
    
    $
    (5,252,420
    )
    
    
    (182
    %)Basic & diluted net loss per share
    
    $
    (0.30
    )
    
    
    
    
    
    $
    (0.61
    )Weighted average shares outstanding  basic
and diluted
    
    
    15,390,834
    
    
    
    
    
    
    
    8,644,112
 28




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
       
 ITEM
7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  29




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##### Table of Contents



ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A: CONTROLS AND PROCEDURES
 EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
     MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  30




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##### Table of Contents



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
  
 ITEM 9B: OTHER INFORMATION
  31




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##### Table of Contents



PART III
 
 ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
 EXECUTIVE OFFICERS AND DIRECTORS
  Directors Name
    
    Age
    
    Position with CompanyDerek P. Downs
    
    
    41
    
    
    Chief Executive Officer and DirectorGreg T. Royal
    
    
    43
    
    
    Chief Technology Officer, Executive Vice President and
Director
  Derek Downs
 Gregory T. Royal
 BOARD COMPOSITION AND COMMITTEES
  32




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##### Table of Contents



Audit Committee Financial Expert
  Indebtedness of Directors and Executive Officer
  Family Relationships
  Compensation Committee
  Nominating Committee
    
    
    an individuals business or professional experience, accomplishments,
education, judgment, understanding of the business and the industry in
which the Company operates, specific skills and talents, independence,
 33




---



##### Table of Contents



time commitments, reputation, general business acumen and personal and
professional integrity or character;
    
    the size and composition of the Board of Directors and the interaction
of its members, in each case with respect to the needs of the Company
and its shareholders; and
    
    regarding any individual who has served as a director of the Company,
his or her past preparation for, attendance at, and participation in
meetings and other activities of the Board of Directors or its
committees and his or her overall contributions to the Board and the
Company.
  Shareholder Communications with the Companys Board of Directors
  COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
  CODE OF ETHICS
  34




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##### Table of Contents



ITEM 11: EXECUTIVE COMPENSATION
 SUMMARY COMPENSATION
 SUMMARY COMPENSATION TABLE
  SUMMARY COMPENSATION TABLE(a)
    
    (b)
    
    
    (c)
    
    
    (d)
    
    
    (e)
    
    
    (f)
    
    
    (g)
    
    
    (h)
    
    
    (i)NonqualifiedYear
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    Deferred
    
    
    All OtherName and
    
    Ended
    
    
    
    
    
    
    
    
    
    
    Stock
    
    
    Option
    
    
    Incentive Plan
    
    
    Compensation
    
    
    Compen-Principal
    
    March
    
    
    Salary
    
    
    Bonus
    
    
    Awards
    
    
    Awards
    
    
    Compensation
    
    
    Earnings
    
    
    sation
    
    
    TotalPosition
    
    31
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Derek P. Downs
    
    
    2009
    
    
    $
    128,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    128,064CEO/Director
    
    
    2008
    
    
    $
    150,000
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,880
    
    
    $
    233,084Greg T. Royal
    
    
    2009
    
    
    $
    109,940
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    109,940Executive
V.P./Director
    
    
    2008
    
    
    $
    136,370
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,979
    
    
    $
    207,349
 (1)
    
    The base salary amount for Mr. Downs is $150,000. There was an
additional bonus of $52,439 provided to offset the tax impact of a
stock grant for historical accrued salary and additional compensation
of $30,441 was recognized for prior years accrued salary.(2)
    
    The base salary amount for Mr. Royal is $150,000. There was
additional compensation of $70,979 recognized for prior years accrued
salary.
  35




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##### Table of Contents



OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
 Outstanding Equity Awards at Fiscal Year-End
 Option Awards
 Number of
    
    
    Number of
    
    
    Number ofSecurities
    
    
    Securities
    
    
    SecuritiesUnderlying
    
    
    Underlying
    
    
    UnderlyingUnexercised
    
    
    Unexercised
    
    
    Unexercised
    
    
    OptionOptions
    
    
    Options
    
    
    Unearned
    
    
    Exercise
    
    
    Option(#)
    
    
    (#)
    
    
    Options
    
    
    Price
    
    
    ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    (#)
    
    
    ($)
    
    
    DateDerek Downs
    
    
    0
    
    
    
    0
    
    
    
    275,000
    (3)
    
    
    1.30
    
    
    
    2/6/2009Cynthia Garr
    
    
    41,831
    (1)
    
    
    0
    
    
    
    0
    
    
    
    0.46
    
    
    
    4/1/2009275,000
    (3)
    
    
    1.10
    
    
    
    10/1/2009Gregory Royal
    
    
    271,174
    (2)
    
    
    0
    
    
    
    0
    
    
    
    0.46
    
    
    
    5/3/2009275,000
    (3)
    
    
    1.10
    
    
    
    10/1/2009
     DIRECTOR COMPENSATION
  
 ITEM 12: SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
 PRINCIPAL SHAREHOLDERS
  36




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##### Table of Contents



Title of
    
    Name and Address
    
    Nature and AmountClass
    
    Of Beneficial Owners
    
    of Beneficial Ownership
    
    
    PercentCommon
    
    Gregory T. Royal(1)
    
    
    1,396,159
    (2)
    
    
    7.89
    %Common
    
    Derek P. Downs(3)
    
    
    125,199
    
    
    
    *Common
    
    Cynthia A. Garr
5935 Buffridge Trail
Dallas TX 75252
    
    
    1,330,191
    (4)
    
    
    7.62
    %Common
    
    Kingdon Hughes
16475 Dallas Pkwy, Suite 440
Addison, TX 75001
    
    
    1,465,593
    (5)
    
    
    8.32
    %Common
    
    Roaring Fork Capital Management
5350 South Roslyn St., Suite 380
Greenwood Village, CO 80111
    
    
    3,533,379
    (6)
    
    
    20.03
    %All Officers and Directors as a Group
    
    
    1,396,159
    
    
    
    7.89
    %
 *
    
    Less than 1%(1)
    
    Mr. Royal is the Companys only Director and its Chief Executive Officer,
President and acting Chief Financial Officer. The business address for Mr.
Royal is 6509 Windcrest Drive, Suite 160, Plano, Texas 75024.(2)
    
    Includes options to purchase 271,174 shares resulting from the post merger
conversion of options to purchase shares of XBridge common stock that are
presently exercisable.(3)
    
    Mr. Downs was a Director and the Companys Chief Executive Officer,
President and acting Chief Financial Officer until April 30, 2009 when he
resigned.(4)
    
    Includes options to purchase 41,831 shares resulting from the post merger
conversion of options to purchase shares of XBridge common stock that are
presently exercisable.(5)
    
    Includes 189,822 shares subject to warrants that are presently exercisable.(6)
    
    Roaring Fork has a $200,000 note, currently convertible into 367,742
shares of common stock. These shares are included in the above number.
 EQUITY COMPENSATION PLAN INFORMATION
  37




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##### Table of Contents



Equity Compensation Plan Information
 Number ofsecuritiesremainingNumber of
    
    
    
    
    
    
    available for futuresecurities to be
    
    
    
    
    
    
    issuance underissued upon
    
    
    Weighted-average
    
    
    equityexercise of
    
    
    exercise price of
    
    
    compensationoutstanding
    
    
    outstanding
    
    
    plans (excludingoptions, warrants
    
    
    options, warrants
    
    
    securities reflectedand rights
    
    
    and rights
    
    
    in column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity Compensation Plans approved by security holders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AEquity Compensation Plans not approved by security holders
    
    
    547,917
    
    
    $
    0.63
    
    
    
    1,452,083Total
    
    
    547,917
    
    
    $
    0.63
    
    
    
    1,452,083
 EQUITY COMPENSATION PLAN GRANTS NOT APPROVED BY SECURITY HOLDERS.
     
 ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
INDEPENDENCE
  38




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##### Table of Contents



ITEM 14: PRINCIPAL ACCOUNTANT FEES & SERVICES
  Service
    
    2009
    
    
    2008Audit Fees
    
    $
    55,000
    
    
    $
    33,428Audit-Related Fees
    
    
    
    
    
    $Tax Fees
    
    
    
    
    
    
    1,945All Other Fees
    
    
    
    
    
    
    Total
    
    $
    55,000
    
    
    $
    35,373
 Audit Fees
 Tax Fees
 Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
  39




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##### Table of Contents



PART IV
 
 ITEM 15: EXHIBITS
  ExhibitNumber
    
    Title of Document3(i)
    
    Restated Articles of Incorporation (Incorporated by reference from
Exhibit 3(i) to the Companys Quarterly Report of Form 10-Q for the
fiscal quarter ended December 31, 2008)3(ii)
    
    Bylaws (Incorporated by reference from Exhibit 3(ii) to the Companys
Quarterly Report of Form 10-Q for the fiscal quarter ended December 31,
2008)4.1
    
    Form of Convertible Note Purchase Agreement dated as of December 13,
2004 (Incorporated by reference from Exhibit 4.1 to the Companys
Current Report on Form 8-K filed with the Commission on December 20,
2004)4.2
    
    Form of Senior Unsecured Convertible Note (Incorporated by reference
from Exhibit 4.2 to the Companys Current Report on Form 8-K filed with
the Commission on December 20, 2004)4.3
    
    Form of Warrant (Incorporated by reference from Exhibit 4.3 to the
Companys Current Report on Form 8-K filed with the Commission on
December 20, 2004)4.4
    
    Registration Rights Agreement dated as of December 13, 2004
(Incorporated by reference from Exhibit 4.4 to the Companys Current
Report on Form 8-K filed with the Commission on December 20, 2004)4.5
    
    Form of Convertible Note Purchase Agreement dated as of April 5, 2007
(Incorporated by reference from Exhibit 4.1 to the Companys Current
Report on Form 8-K filed with the Commission on April 12, 2007)4.6
    
    Form of Senior Unsecured Convertible Note (Incorporated by reference
from Exhibit 4.2 to the Companys Current Report on Form 8-K filed with
the Commission on April 12, 2007)4.7
    
    Form of Warrant (Incorporated by reference from Exhibit 4.3 to the
Companys Current Report on Form 8-K filed with the Commission on April
12, 2007)4.8
    
    Registration Rights Agreement dated as of April 7, 2005 (Incorporated
by reference from Exhibit 4.4 to the Companys Current Report on Form
8-K filed with the Commission on April 12, 2007)6.1
    
    License Agreement (incorporated by reference to Exhibit 10.1 to the
Companys Annual Report on Form 10-KSB for the fiscal year ended March
31, 2004)10.1
    
    Employment Agreement between Richard McDowell and Cistera Networks,
Inc. dated as of March 12, 2008 (Incorporated by reference from Exhibit
10.1 to the Companys Current Report on Form 8-K filed with the
Commission on March 17, 2008)10.2
    
    Waiver Agreement dated as of June 30, 2008, by and between Cistera
Networks, Inc., and Roaring Fork Capital SBIC, LP. (Incorporated by
reference from Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Commission on July 3, 2008)10.3
    
    Factoring Agreement dated as of November 19, 2008, by and between
Allied Capital Partners, LP and Cistera Networks, Inc. (Incorporated by
reference from Exhibit 10.1 to the Companys Current Report on Form 8-K
filed with the Commission on December 15, 2008)31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 40




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##### Table of Contents



SIGNATURES
  CISTERA NETWORKS, INC.Dated: July 14, 2009
    
    By /S/ Gregory T RoyalGregory T RoyalChief Executive Officer
(Principal Executive Officer)  Signatures
    
    Title/S/ Gregory T. Royal
    
    CEO/President/Chief TechnologyGregory T. Royal
    
    Officer and Director
 41




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##### Table of Contents



Index to Financial Statements
    
    PageReport of Independent Registered Public Accountants
    
    
    F - 2Consolidated Balance Sheet March 31, 2009 and 2008
    
    
    F - 3Consolidated Statements of Operations for the Years Ended March 31, 2009 and 2008
    
    
    F - 4Consolidated Statements of Stockholders Equity for the Years Ended March 31, 2009 and 2008
    
    
    F - 5Consolidated Statements of Cash Flows for the Years Ended March 31, 2009 and 2008
    
    
    F - 6Notes to Consolidated Financial Statements
    
    
    F - 8
 F - 1




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##### Table of Contents



/s/ Farmer, Fuqua & Huff, P.C.Plano, TexasJuly 14, 2009
 F - 2




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##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEET
 March 31, 2009
    
    
    March 31, 2008Current assets:Cash and cash equivalents
    
    $
    1,493
    
    
    $
    125,007Restricted cash
    
    
    
    
    
    
    50,000Accounts receivable, net of allowance for doubtful accounts $-0-
    
    
    151,322
    
    
    
    248,186Related party receivables
    
    
    
    
    
    
    15,837Inventory
    
    
    124,656
    
    
    
    187,960Prepaid expenses
    
    
    37,341
    
    
    
    46,030Total current assets
    
    
    314,812
    
    
    
    673,020Property and equipment, net
    
    
    324,217
    
    
    
    355,411Intangible assets, net
    
    
    1,751,442
    
    
    
    2,023,218Total long-term assets
    
    
    2,075,659
    
    
    
    2,378,629TOTAL ASSETS
    
    $
    2,390,471
    
    
    $
    3,051,649Current liabilities:Accounts payable
    
    $
    517,052
    
    
    $
    420,603Related party payables
    
    
    
    
    
    
    129,702Accrued liquidated damages  outside investors
    
    
    177,402
    
    
    
    629,957Accrued liquidated damages  related parties
    
    
    
    
    
    
    41,485Accrued liabilities
    
    
    1,527,811
    
    
    
    1,076,360Deferred revenue
    
    
    865,271
    
    
    
    971,474Note payable
    
    
    7,781
    
    
    
    Convertible promissory notes  outside investors, net of discount
    
    
    976,426
    
    
    
    408,204Line of credit
    
    
    
    
    
    
    17,503Total current liabilities
    
    
    4,071,743
    
    
    
    3,695,288Convertible promissory notes  outside investors, net of discount
    
    
    
    
    
    
    1,606,300Convertible promissory notes  related parties, net of discount
    
    
    
    
    
    
    59,719Deferred revenue
    
    
    174,554
    
    
    
    225,917Other long-term liabilities
    
    
    58,031
    
    
    
    285,470Total long-term liabilities
    
    
    232,585
    
    
    
    2,177,406Total liabilities
    
    
    4,304,328
    
    
    
    5,872,694Commitments and Contingencies (Note 5)Stockholders deficit:Preferred stock, $0.001 par value; 1,000,000 shares authorized;
-0- shares issued and outstanding
    
    
    Common stock, $0.001 par value; 50,000,000 shares authorized;
17,423,410 and 8,820,192 shares issued and outstanding
    
    
    17,423
    
    
    
    8,820Additional paid-in capital
    
    
    19,291,219
    
    
    
    13,764,517Accumulated deficit
    
    
    (21,222,499
    )
    
    
    (16,594,382
    )Total stockholders deficit
    
    
    (1,913,857
    )
    
    
    (2,821,045
    )TOTAL LIABILITIES AND STOCKHOLDERSDEFICIT
    
    $
    2,390,471
    
    
    $
    3,051,649
 F - 3




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##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Years ended March 31,2009
    
    
    2008RevenuesConvergence Solutions
    
    $
    2,498,763
    
    
    $
    1,871,923Professional Services
    
    
    231,222
    
    
    
    406,923Support and Maintenance
    
    
    984,287
    
    
    
    595,769Total revenues
    
    
    3,714,272
    
    
    
    2,874,615Cost of revenuesConvergence Solutions
    
    
    657,507
    
    
    
    520,952Professional Services
    
    
    209,680
    
    
    
    311,100Support and Maintenance
    
    
    90,726
    
    
    
    148,750Total cost of revenues
    
    
    957,913
    
    
    
    980,802Gross Profit
    
    
    2,756,359
    
    
    
    1,893,813Expenses:Sales and marketing
    
    
    1,112,375
    
    
    
    1,433,888Software development
    
    
    823,040
    
    
    
    630,411Engineering and support
    
    
    706,167
    
    
    
    268,754General and administrative
    
    
    1,367,645
    
    
    
    1,470,056Charge for litigation contingency (Note 5)
    
    
    0
    
    
    
    650,000Depreciation and amortization
    
    
    403,813
    
    
    
    353,582Total expenses
    
    
    4,413,040
    
    
    
    4,806,691Loss from operations
    
    
    (1,656,681
    )
    
    
    (2,912,878
    )Other income (expense)Interest income
    
    
    326
    
    
    
    22,626Interest expense
    
    
    (233,886
    )
    
    
    (311,108
    )Charge for stock issued to convertible note holders
    
    
    0
    
    
    
    (135,825
    )Amortization of discount on convertible notes  outside investors
    
    
    (1,393,293
    )
    
    
    (1,492,342
    )Amortization of discount on convertible notes  related parties
    
    
    (41,060
    )
    
    
    (40,169
    )Charge for inducements related to stock issued to convertible note holders
    
    
    (1,324,444
    )
    
    
    Charge for estimated liquidated damages  outside investors
    
    
    10,921
    
    
    
    (340,439
    )Charge for estimated liquidated damages  related parties
    
    
    0
    
    
    
    (41,485
    )Other income (expense)
    
    
    10,000
    
    
    
    (800
    )Total other income (expense)
    
    
    (2,971,436
    )
    
    
    (2,339,542
    )Net loss
    
    $
    (4,628,117
    )
    
    $
    (5,252,420
    )Basic & diluted net loss per share
    
    $
    (0.30
    )
    
    $
    (0.61
    )Weighted average shares outstanding  basic and diluted
    
    
    15,390,834
    
    
    
    8,644,112
  F - 4




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##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
 Additional paid-in
    
    
    Accumulated
    
    
    Total stockholdersPreferred Stock
    
    
    Common Stock
    
    
    capital
    
    
    deficit
    
    
    equity (deficit)Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalances at March 31, 2007
    
    
    
    
    
    $
    
    
    
    
    8,292,022
    
    
    $
    8,292
    
    
    $
    9,526,323
    
    
    $
    (10,586,847
    )
    
    
    (1,052,232
    )Cumulative effect of change in accounting principle (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,730,824
    
    
    
    (755,115
    )
    
    
    1,975,709Stock issued to convertible promissory note holders as inducement for debt conversion
    
    
    
    
    
    
    
    
    
    
    134,462
    
    
    
    135
    
    
    
    135,671
    
    
    
    
    
    
    
    135,806Adjustment for common stock shares previously not reported
    
    
    
    
    
    
    
    
    
    
    302,447
    
    
    
    302
    
    
    
    (309
    )
    
    
    
    
    
    
    (7
    )Stock issued for conversion of convertible promissory notes
    
    
    
    
    
    
    
    
    
    
    91,261
    
    
    
    91
    
    
    
    68,355
    
    
    
    
    
    
    
    68,446Allocation of discount on convertible promissory notes to warrants (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488,054
    
    
    
    
    
    
    
    488,054Beneficial conversion feature of convertible promissory notes (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    815,599
    
    
    
    
    
    
    
    815,599Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,252,420
    )
    
    
    (5,252,420
    )Balances at March 31, 2008
    
    
    
    
    
    
    
    
    
    
    8,820,192
    
    
    $
    8,820
    
    
    $
    13,764,517
    
    
    $
    (16,594,382
    )
    
    $
    (2,821,045
    )Stock issued from the conversion of convertible notes
    
    
    
    
    
    
    
    
    
    
    6,175,857
    
    
    
    6,176
    
    
    
    3,280,940
    
    
    
    
    
    
    
    3,287,116Stock issued from the exercise of warrants
    
    
    
    
    
    
    
    
    
    
    2,368,584
    
    
    
    2,368
    
    
    
    894,547
    
    
    
    
    
    
    
    896,915Stock issued for waiver of registration rights payments
    
    
    
    
    
    
    
    
    
    
    58,777
    
    
    
    59
    
    
    
    21,983
    
    
    
    
    
    
    
    22,042Inducement charges related to conversion of convertible notes and exercise of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,302,403
    
    
    
    
    
    
    
    1,302,403Charge for issuance of warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,829
    
    
    
    
    
    
    
    26,829Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,628,117
    )
    
    
    (4,628,117
    )Balances at March 31, 2009
    
    
    
    
    
    $
    
    
    
    
    17,423,410
    
    
    
    17,423
    
    
    $
    19,291,219
    
    
    $
    (21,222,499
    )
    
    $
    (1,913,857
    )
  F - 5




---



##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years ended March 312009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (4,628,117
    )
    
    $
    (5,252,420
    )Adjustments used to reconcile net loss to net cash used in operating activities:Charge for inducement to convert debt to convertible promissory notes
    
    
    1,324,443
    
    
    
    135,799Amortization of discount on convertible promissory notes  outside investors
    
    
    1,393,293
    
    
    
    1,492,342Amortization of discount on convertible promissory notes  related parties
    
    
    41,060
    
    
    
    40,169Charge (credit) for estimated liquidated damages  outside investors
    
    
    (10,921
    )
    
    
    340,439Charge for estimated liquidated damages  related parties
    
    
    
    
    
    
    41,485Share-based compensation
    
    
    26,829
    
    
    
    Stock issued for investor fees
    
    
    
    
    
    
    10,000Depreciation and amortization
    
    
    403,813
    
    
    
    353,582Charge for litigation contingency
    
    
    
    
    
    
    650,000Changes in operating assets and liabilities:Accounts receivable
    
    
    72,734
    
    
    
    75,282Related party receivables
    
    
    15,837
    
    
    
    (1,200
    )Inventory
    
    
    17,940
    
    
    
    (112,217
    )Prepaid expenses
    
    
    8,689
    
    
    
    (35,887
    )Accounts payable
    
    
    95,844
    
    
    
    (48,051
    )Related party payables
    
    
    (129,702
    )
    
    
    105,664Accrued sales commissions
    
    
    (54,177
    )
    
    
    167,866Accrued interest
    
    
    (136,956
    )
    
    
    289,519Other accrued liabilities
    
    
    742,036
    
    
    
    (62,427
    )Deferred revenue
    
    
    (157,566
    )
    
    
    647,244Other long-tem liabilities
    
    
    41,832
    
    
    
    16,200Net cash used in operating activities
    
    
    (933,088
    )
    
    
    (1,146,611
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment, net
    
    
    (55,479
    )
    
    
    (315,172
    )Net cash used in investing activities
    
    
    (55,479
    )
    
    
    (315,172
    )CASH FLOWS FROM FINANCING ACTIVITIES:(Increase) Decrease in restricted cash
    
    
    50,000
    
    
    
    (50,000
    )Net proceeds from short-term advances
    
    
    25,630
    
    
    
    Net borrowings (payments) on line of credit
    
    
    (17,503
    )
    
    
    (44,591
    )Net proceeds from issuance of convertible promissory notes
    
    
    
    
    
    
    1,220,000Net proceeds from exercise of warrants
    
    
    843,604
    
    
    
    Payments on convertible promissory notes and other loans
    
    
    (36,678
    )
    
    
    (71,075
    )Payments on other notes payable and capital lease
    
    
    
    
    
    
    (2,415
    )Net cash provided by financing activities
    
    
    865,053
    
    
    
    1,051,919Net increase (decrease) in cash and cash equivalents
    
    
    (123,514
    )
    
    
    (409,864
    )Cash and cash equivalents at beginning of year
    
    
    125,007
    
    
    
    534,871Cash and cash equivalents at end of year
    
    $
    1,493
    
    
    $
    125,007




---



##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years ended March 312009
    
    
    2008SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    62,696
    
    
    $
    17,584Income taxes
    
    
    
    
    
    
    SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion of convertible promissory notes and related accrued interest to
common stock
    
    $
    3,287,116
    
    
    $
    68,539Conversion of accounts payable and other accrued liabilities to convertible
promissory notes
    
    
    53,312
    
    
    
    363,171Conversion of other notes payable to common stock
    
    
    
    
    
    
    Allocation of discount on convertible promissory notes to warrants
    
    
    
    
    
    
    488,054Conversion of accrued liabilities to common stock
    
    
    45,364Discount related to beneficial conversion feature on convertible promissory
Notes
    
    
    
    
    
    
    815,599OTHER NON-CASH TRANSACTIONS:Cumulative effect of change in accounting principle:Reclassification of warrants from derivative financial instruments to
equity Securities (as valued at inception)
    
    $
    
    
    
    $
    2,730,824Accrue liquidated damages at April 1, 2007
    
    
    
    
    
    
    289,518Reclassification of warrants from derivative financial instruments to
equity securities (as valued at April 1, 2007)
    
    
    
    
    
    
    (2,265,227
    )Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    755,115




---



##### Table of Contents



CISTERA NETWORKS, INC. & SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  NATURE OF OPERATIONS AND GOING CONCERN
    Organization and Basis of Presentation
    Nature of Operations




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##### Table of Contents



NOTE 2  SUMMARY OF ACCOUNTING POLICIES
 Principles of Consolidation
    Use of Estimates
  Cash and Cash Equivalents
  Accounts Receivable
  Receivables Assigned to Factor
    
    $
    125,402
    
    
    $
    757,603Advances to (from) Factor
    
    
    (70,570
    )
    
    
    (694,808
    )Fees, Expenses and Charges to Reserve
    
    
    (792
    )
    
    
    (36,886
    )Amounts Due from Factor
    
    
    54,040
    
    
    
    25,909Unfactored Accounts Receivable
    
    
    97,282
    
    
    
    222,277Total Receivables
    
    $
    151,322
    
    
    $
    248,186
 Accounts receivable and concentration of credit risk




---



##### Table of Contents



Inventory
  Liabilities
  Accrued expenses
    
    $
    82,924
    
    
    $
    170,119Reserve for litigation contingency
    
    
    650,000
    
    
    
    650,000Accrued compensation and payroll taxes
    
    
    545,626
    
    
    
    167,866Accrued interest
    
    
    225,330
    
    
    
    88,375Other
    
    
    23,931
    
    
    
    Total Accrued Liabilities
    
    $
    1,527,811
    
    
    $
    1,076,360
  Accrued interest
    
    $
    
    
    
    $
    269,270Deferred rent
    
    
    58,031
    
    
    
    16,200Total Other Long-Term Liabilities
    
    $
    58,031
    
    
    $
    285,470
 Revenue recognition
  
    
    persuasive evidence of an arrangement exists,
    
    delivery has occurred or services have been rendered,
    
    the sales price is fixed or determinable, and
    
    collectability of the resulting accounts receivable is reasonably assured.




---



##### Table of Contents



Accounting for Sales Commissions
  Depreciation and Amortization
  2009
    
    
    2008Computer Equipment
    
    $
    234,277
    
    
    $
    223,314Trade Show Booth & Fixtures
    
    
    15,637
    
    
    
    15,637Office Equipment
    
    
    399,537
    
    
    
    327,761Leasehold Improvements
    
    
    22,164
    
    
    
    7,372Property held under capital leases
    
    
    10,205
    
    
    
    10,205Less accumulated depreciation
    
    
    (357,603
    )
    
    
    (228,878
    )Total
    
    $
    324,217
    
    
    $
    355,411




---



##### Table of Contents



Intangible Assets
  Intangible Asset
    
    2009
    
    
    2008
    
    
    Amortization PeriodIntellectual Property
    
    $
    2,717,755
    
    
    $
    2,717,755
    
    
    10 YearsSoftware Development
    
    
    366,040
    
    
    
    366,040
    
    
    4 YearsLess accumulated amortization
    
    
    (1,332,353
    )
    
    
    (1,060,577
    )Total
    
    $
    1,751,442
    
    
    $
    2,023,218
      2009
    
    $
    271,7762010
    
    
    271,7762011
    
    
    271,7762012
    
    
    271,7762013
    
    
    271,776Total
    
    $
    1,358,880
 Long-Lived Assets




---



##### Table of Contents



Loss per Share
   Reclassifications
  Stock Options
  Fair Value of Financial Instruments
  Recently Issued Accounting Pronouncements




---



##### Table of Contents



NOTE 3  FINANCIAL CONDITION
     NOTE 4  DEBT




---



##### Table of Contents



PP1 Notes and Warrants




---



##### Table of Contents



PP2 Notes and Warrants
       STIIP




---



##### Table of Contents



Registration payment arrangements




---



##### Table of Contents



Line of credit
   PP1 and PP2 Notes:Principal
    
    $
    976,426Accrued interest
    
    
    225,330Accrued estimated liquidated damages
    
    
    177,4021,379,158Less: unamortized discount
    
    
    01,379,158Other notes payable
    
    
    8,386Total
    
    $
    1,387,544
 NOTE 5  COMMITMENTS AND CONTINGENCIES
 Lease commitments
   April 1, 2009 - March 31, 2010
    
    $
    177,004April 1, 2010 - March 31, 2011
    
    
    181,888April 1, 2011 - March 31, 2012
    
    
    186,764April 1, 2012 - March 31, 2013
    
    
    191,644April 1, 2013 - March 31, 2014
    
    
    196,536Total minimum future lease payments
    
    $
    933,836




---



##### Table of Contents



April 1, 2009 - March 31, 2010
    
    $
    34,219April 1, 2010 - March 31, 2011
    
    
    April 1, 2011 - March 31, 2012
    
    
    April 1, 2012 - March 31, 2013
    
    
    April 1, 2013 - March 31, 2014
    
    
    Total minimum future lease payments
    
    $
    34,219
 Litigation
   NOTE 6  INCOME TAXES




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##### Table of Contents



March 31,Net deferred tax assets
    
    2009
    
    
    2008Net operating loss carryforwards
    
    $
    5,603,178
    
    
    $
    4,416,297Accrued liquidated damages
    
    
    
    
    
    
    129,854Valuation allowance
    
    
    (5,603,178
    )
    
    
    (4,546,151
    )$
    
    
    
    $
    
  March 31,2009
    
    
    2008Income tax benefit at federal statutory rate
    
    $
    1,573,560
    
    
    $
    1,785,823Less Non-deductible itemsCharge for stock issued to convertible note holders
    
    
    (516,533
    )
    
    
    (46,181
    )(516,533
    )
    
    
    (46,181
    )Change in valuation allowance
    
    
    (1,057,027
    )
    
    
    (1,739,642
    )Income tax benefit
    
    $
    
    
    
    $
    
   United States (a)
    
    2003  Present
 (a)
    
    Includes federal as well as state or similar local jurisdictions, as applicable.




---



##### Table of Contents



NOTE 7  STOCKHOLDERS EQUITY (DEFICIT)
          NOTE 8  STOCK OPTIONS AND STOCK PURCHASE WARRANTS




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    Contractual
    
    
    AggregateShares
    
    
    Price
    
    
    Term (Years)
    
    
    Intrinsic ValueOutstanding, March 31, 2007
    
    
    2,122,917
    
    
    
    1.30Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited/expired
    
    
    865,000
    
    
    
    1.17Outstanding, March 31, 2008
    
    
    1,257,917
    
    
    
    1.39
    
    
    
    0.20
    
    
    $
    137,007Vested and exercisable at March 31, 2008
    
    
    1,246,667
    
    
    
    1.39
    
    
    
    0.19
    
    
    $
    137,007Forfeited/expired
    
    
    20,000
    
    
    
    1.1060,000
    
    
    
    1.30Vested and exercisable at March 31, 2009
    
    
    1,177,917
    
    
    
    1.40
    
    
    
    0.00
    
    
    $
    0
   SharesOutstanding, March 31, 2007
    
    
    3,022,712Granted
    
    
    1,656,088Exercised
    
    
    Forfeited/expiredOutstanding, March 31, 2008
    
    
    4,678,800Granted
    
    
    175,596Exercised
    
    
    (507,675
    )Forfeited/expired
    
    
    Outstanding, March 31, 2009
    
    
    4,346,721




---



##### Table of Contents



NOTE 9  RELATED PARTY TRANSACTIONS
    NOTE 10  SUBSEQUENT EVENTS
 REVERSE/FORWARD SPLIT
 th