UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





Form
10-QSB/A


(Amendment
No. 2)








(Mark
One)


[X]   QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended:  September30,
2007





[  ]   TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE


EXCHANGE
ACT





For the
transition period from ________ to ________


Commission
file number  0-17304





CISTERA NETWORKS,
INC.


(Exact
name of small business issuer as


specified
in its charter)





Nevada
            
            91-1944887(State
      or other jurisdiction
            
            (IRS
      Employerof
      incorporation or organization)
            
            Identification
      No.)





6509 Windcrest Drive, Suite
160, Plano, Texas  75024


(Address
of principal executive offices)





(972)
381-4699


Issuer's
telephone number





Check
whether the issuer  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period  that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes X   No ___





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes    No
X





At
November 19, 2007, the issuer had 8,594,469 shares of its common stock
outstanding.





Transitional
Small Business Disclosure Format (check one): Yes    No
X





CISTERA NETWORKS, INC &
SUBSIDIARY




TABLE OF
CONTENTS










Explanatory
      Note
            2PART
      I: FINANCIAL INFORMATIONItem
      1.
            Financial
      Statements:Consolidated
      Balance Sheets – September 30, 2007 (unaudited) (as restated)
      andMarch
      31, 2007 (audited)
            3Consolidated
      Statements of Operations – For the three months ended September 30,
      2007and
      2006 (unaudited) (as restated)
            5Consolidated
      Statements of Operations – For the six months ended September 30,
      2007and
      2006 (unaudited) (as restated)
            6Consolidated
      Statement of Stockholders’ Equity (Deficit) – September 30, 2007
      (unaudited)(as
      restated) and March 31, 2007 (audited)
            7Consolidated
      Statements of Cash Flows – For the six months ended September 30, 2007
      and2006
      (unaudited) (as restated)
            8Notes
      to Consolidated Financial Statements (unaudited)
            10Item
      2.
            Management’s
      Discussion and Analysis or Plan of Operation
            26Item
      3.
            Controls
      and Procedures
            38PART
      II: OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            40Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            40Item
      3.
            Defaults
      Upon Senior Securities
            40Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            40Item
      5.
            Other
      Information
            40Item
      6.
            Exhibits
            41SIGNATURE
            42


1


EXPLANATORY NOTE





This
Amendment No. 2 to the Quarterly Report on Form 10-QSB/A (the “Report”) for the
quarterly period ended September 30, 2007 includes a restatement of our
consolidated financial statements for the quarterly periods ended September 30,
2007 and 2006 (and related disclosures), initially filed on November 19, 2007
and amended on January 5, 2008.





The
Company has restated its Consolidated Balance Sheet as of September 30, 2007,
its Consolidated Statements of Operations for the three and six months ended
September 30, 2007 and 2006, its Consolidated Statement of Stockholders’ Equity
(Deficit) for the six months ended September 30, 2007 and its Consolidated
Statements of Cash Flows for the six months ended September 30, 2007 and
2006 (as contained in this Report) to correct its accounting for its Senior
Unsecured Convertible Promissory Notes and detachable warrants issued in private
placements during the period from December 2004 to April 2007 (the “PP1 Notes,”
“PP1 Warrants,” “PP2 Notes” and “PP2 Warrants”).  Also, the Company
has restated its Consolidated Balance Sheet as of September 30, 2007, its
Consolidated Statements of Operations for the three and six months ended
September 30, 2007 and its Consolidated Statements of Stockholders’ Equity
(Deficit) and Cash Flows for the six months ended September 30, 2007 to correct
its accounting for registration payment arrangements associated with the
aforementioned securities.  The Company concluded that its original
accounting for the PP1 Notes and PP1 Warrants issued in fiscal year 2005 and the
PP2 Notes and PP2 Warrants issued in fiscal years 2007 and 2008, including the
associated registration payments was incorrect, and that the necessary
adjustments were material to the consolidated financial statements as of
September 30, 2007 and for the three and six months ended September 30, 2007 and
2006.  Additionally, the Company has restated its Consolidated
Statements of Operations for the three and six months ended September 30, 2006
and its Consolidated Statement of Cash Flows for the six months ended September
30, 2006 for share-based compensation related to employee stock
options.





Except
for the foregoing amended information, this Form 10−QSB/A continues to speak as
of the date of the original filing, and the Company has not updated the
disclosures contained herein to reflect events that occurred at a later date.
Other events occurring after the filing of the original filing or other
disclosures necessary to reflect subsequent events will be addressed in any
reports filed with the SEC subsequent to the date of this filing.





A further
discussion of the restatement of the consolidated financial statements for these
fiscal quarters is contained under “Part I, Item 2 – Management’s Discussion and
Analysis or Plan of Operation" and in Note 2 to the unaudited consolidated
financial statements of this Report.


2


PART
I. FINANCIAL INFORMATION





Item
1.  Financial Statements





CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED BALANCE
SHEETS


(Unaudited)





September
      30, 2007
            
            
            March
      31, 2007As
      restatedCurrent
      Assets:Cash
            
            $
            842,566
            
            
            $
            534,871Accounts
      receivable
            
            
            591,020
            
            
            
            314,178Other
      receivable
            
            
            19,387
            
            
            
            23,927Inventory
            
            
            93,590
            
            
            
            75,743Prepaid
      expenses
            
            
            11,022
            
            
            
            10,143Total
      Current Assets
            
            
            1,557,585
            
            
            
            958,862Fixed
      Assets:Computer
      equipment
            
            
            183,680
            
            
            
            123,035Trade
      show booth & fixtures
            
            
            14,390
            
            
            
            10,641Office
      equipment
            
            
            187,737
            
            
            
            129,064Property
      held under capital leases
            
            
            10,205
            
            
            
            10,205Less
      Accumulated depreciation
            
            
            (179,885
            )
            
            
            (150,899
            )Net
      Fixed Assets
            
            
            216,127
            
            
            
            122,046Intangible
      Assets:Intellectual
      property
            
            
            2,717,755
            
            
            
            2,717,755Software
      development
            
            
            366,040
            
            
            
            366,040Less
      Amortization
            
            
            (924,689
            )
            
            
            (788,802
            )Net
      Intangible Assets
            
            
            2,159,106
            
            
            
            2,294,993Total
      Assets
            
            $
            3,932,818
            
            
            $
            3,375,901














The
accompanying notes are an integral part of these financial
statements.






3




CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED BALANCE SHEETS
(continued)


(Unaudited)





September
      30, 2007
            
            
            March
      31, 2007As
      restatedCurrent
      Liabilities:Accounts
      payable
            
            $
            254,701
            
            
            $
            544,796Accrued
      liabilities
            
            
            274,635
            
            
            
            547,714Accrued
      liquidated damages - outside investors
            
            
            525,115
            
            
            
            -Accrued
      liquidated damages - related parties
            
            
            15,579
            
            
            
            -Related
      party payables
            
            
            185,661
            
            
            
            24,038Line
      of credit
            
            
            -
            
            
            
            62,094Convertible
      promissory notes – outside investors
            
            
            89,785
            
            
            
            144,000Current
      portion of long-term debt
            
            
            352
            
            
            
            2,415Current
      portion of deferred revenue
            
            
            737,186
            
            
            
            465,179Total
      Current Liabilities
            
            
            2,083,014
            
            
            
            1,790,236Long-Term
      LiabilitiesConvertible
      promissory notes – outside investors, net of discount
            
            
            1,231,885
            
            
            
            237,395Convertible
      promissory notes – related parties, net of discount
            
            
            39,467
            
            
            
            -Accrued
      interest
            
            
            172,944
            
            
            
            50,309Derivative
      financial instruments – warrants
            
            
            -
            
            
            
            2,265,225Deferred
      revenue
            
            
            130,689
            
            
            
            84,968Total
      Long-Term Liabilities
            
            
            1,574,985
            
            
            
            2,637,897Total
      Liabilities
            
            
            3,657,999
            
            
            
            4,428,133Stockholders’
      Equity (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;
              8,594,469
      and 8,292,022 shares issued and outstanding,
              respectively
            
            
            8,594
            
            
            
            8,292Additional
      Paid-In Capital
            
            
            13,560,497
            
            
            
            9,526,323Accumulated
      Deficit
            
            
            (13,294,272
            )
            
            
            (10,586,847
            )Total
      Stockholders’ Equity (Deficit)
            
            
            274,819
            
            
            
            (1,052,232
            )Total
      Liabilities and Stockholders’ Equity (Deficit)
            
            $
            3,932,818
            
            
            $
            3,375,901

















The
accompanying notes are an integral part of these financial
statements.


4


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)





Three
      months ended September 30,2007
            
            
            2006As
      restated
            
            
            As
      restatedRevenues
            
            $
            893,782
            
            
            $
            399,880Cost
      of goods sold
            
            
            192,271
            
            
            
            65,280Gross
      Profit
            
            
            701,511
            
            
            
            334,600Operating
      expenses:Sales
      and marketing
            
            
            172,610
            
            
            
            42,726Research
      and development
            
            
            179,441
            
            
            
            119,746Software
      consulting
            
            
            377,871
            
            
            
            188,997General
      and administrative
            
            
            338,876
            
            
            
            226,050Total
      Expenses
            
            
            1,068,798
            
            
            
            577,519Loss
      from operations
            
            
            (367,287
            )
            
            
            (242,919
            )Other
      Income (Expense)Interest
      income
            
            
            8,534
            
            
            
            36Interest
      expense
            
            
            (74,935
            )
            
            
            (12,404
            )Charge
      for inducement to convert debt to convertible promissory
    notes
            
            
            (135,825
            )
            
            
            -Amortization
      of discount on convertible notes – outside investors
            
            
            (371,775
            )
            
            
            (27,557
            )Amortization
      of discount on convertible notes – related parties
            
            
            (10,237
            )
            
            
            -Benefit
      for change in estimated fair value of derivative financial
              instruments
      – Warrants
            
            
            -
            
            
            
            172,322Total
      Other Income (Expense)
            
            
            (584,238
            )
            
            
            132,397Net
      Loss
            
            $
            (951,525
            )
            
            $
            (110,522
            )Basic
      & diluted net loss per share
            
            $
            (0.11
            )
            
            $
            (0.01
            )Weighted
      Average Shares outstanding – basic and diluted
            
            
            8,594,469
            
            
            
            8,149,388














The
accompanying notes are an integral part of these financial
statements.


5


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)





Six
      months ended September 30,2007
            
            
            2006As
      restated
            
            
            As
      restatedRevenues
            
            $
            1,573,569
            
            
            $
            894,617Cost
      of goods sold
            
            
            331,926
            
            
            
            93,254Gross
      Profit
            
            
            1,241,643
            
            
            
            801,363Expenses:Sales
      and marketing
            
            
            348,702
            
            
            
            99,246Research
      and development
            
            
            308,476
            
            
            
            247,840Software
      consulting
            
            
            677,877
            
            
            
            456,752General
      and administrative
            
            
            588,933
            
            
            
            529,293Total
      Expenses
            
            
            1,923,988
            
            
            
            1,333,131Loss
      from operations
            
            
            (682,345
            )
            
            
            (531,768
            )Other
      Income (Expense)Interest
      income
            
            
            18,123
            
            
            
            51Interest
      expense
            
            
            (148,360
            )
            
            
            (29,838
            )Charge
      for inducement to convert debt to convertible promissory
    notes
            
            
            (135,825
            )
            
            
            -Amortization
      of discount on convertible notes – outside investors
            
            
            (732,809
            )
            
            
            (54,814
            )Amortization
      of discount on convertible notes – related parties
            
            
            (19,918
            )
            
            
            -Charge
      for estimated liquidated damages
            
            
            (251,176
            )
            
            
            -Benefit
      for change in estimated fair value of derivative financial
              instruments
      – Warrants
            
            
            -
            
            
            
            108,693Total
      Other Income (Expense)
            
            
            (1,269,965
            )
            
            
            24,092Net
      Loss
            
            $
            (1,952,310
            )
            
            $
            (507,676
            )Basic
      & diluted net loss per share
            
            $
            (0.23
            )
            
            $
            (0.06
            )Weighted
      Average Shares – outstanding – basic and diluted
            
            
            8,594,469
            
            
            
            8,113,504














The
accompanying notes are an integral part of these financial
statements.


6


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENT OF
STOCKHOLDERS'EQUITY (DEFICIT)


For the
Six Months Ended September 30, 2007


(Unaudited)


Preferred
      Stock
            
            
            Common
      Stock
            
            
            Additional
      Paid-in Capital
            
            
            Accumulated
      Deficit
            
            
            Total
      Stockholders’ 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 the change in
              an accountingprinciple
      (Note 2)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,730,824
            
            
            
            (755,115
            )
            
            
            1,975,709Allocation
      of discount on
              convertible promissory notes
              to
      warrants (Note 2)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            488,054
            
            
            
            
            
            
            
            488,054Beneficial
      conversion feature of
              convertible promissory
              notes
      (Note 2)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            815,599
            
            
            
            
            
            
            
            815,599Adjustment
      for common stock
              shares previously not
              reported
            
            
            
            
            
            
            
            
            
            
            302,447
            
            
            
            302
            
            
            
            (303
            )
            
            
            
            
            
            
            (1
            )Net
      loss for the six months ended
              September 30, 2007,
              as
      restated
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,952,310
            )
            
            
            (1,952,310
            )Balances
      at September 30, 2007,
              as restated
            
            
            -
            
            
            $
            -
            
            
            
            8,594,469
            
            
            $
            8,594
            
            
            $
            13,560,497
            
            
            $
            (13,294,272
            )
            
            $
            274,819























The
accompanying notes are an integral part of these financial
statements.






7





CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
CASH FLOWS


(Unaudited)





Six
      months ended September 30,2007
            
            
            2006As
      restated
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (1,952,310
            )
            
            $
            (507,676
            )Adjustments
      used to reconcile net loss to net cash used in operating
      activities:Charge
      for estimated liquidated damages
            
            
            251,176
            
            
            
            -Amortization
      of discount on convertible promissory notes – outside
      investors
            
            
            732,809
            
            
            
            54,814Amortization
      of discount on convertible promissory notes - related
    parties
            
            
            19,918
            
            
            
            -Benefit
      for change in estimated fair value of derivative financial
              instruments
      - Warrants
            
            
            -
            
            
            
            (108,693
            )Share-based
      compensation
            
            
            -
            
            
            
            50,850Charge
      for inducement to convert debt to convertible promissory
    notes
            
            
            135,825
            
            
            
            -Depreciation
      and amortization
            
            
            164,873
            
            
            
            191,688Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (272,302
            )
            
            
            83,041Inventory
            
            
            (17,847
            )
            
            
            (550
            )Prepaid
      expenses
            
            
            (879
            )
            
            
            31,633Accrued
      liabilities
            
            
            (2,318
            )
            
            
            189,464Accounts
      payable
            
            
            (32,539
            )
            
            
            (222,524
            )Deferred
      revenue
            
            
            317,728
            
            
            
            34,220Net
      cash used in operating activities
            
            
            (655,866
            )
            
            
            (203,733
            )CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase
      of equipment
            
            
            (123,067
            )
            
            
            (3,563
            )Net
      cash used in investing activities
            
            
            (123,067
            )
            
            
            (3,563
            )CASH FLOWS FROM FINANCING
      ACTIVITIESPayments
      on capital lease
            
            
            (2,063
            )
            
            
            (1,705
            )Net
      cash proceeds from issuance of convertible promissory
notes
            
            
            1,225,000
            
            
            
            215,000Proceeds
      from loans
            
            
            -
            
            
            
            17,565Payments
      on line of credit
            
            
            (62,094
            )
            
            
            -Payments
      on loans
            
            
            (74,215
            )
            
            
            (25,000
            )Net
      cash provided by financing activities
            
            
            1,086,628
            
            
            
            205,860Net
      increase (decrease) in cash and cash equivalents
            
            
            307,695
            
            
            
            (1,436
            )Cash
      and cash equivalents at beginning of period
            
            
            534,871
            
            
            
            60,990Cash
      and cash equivalents at end of period
            
            $
            842,566
            
            
            $
            59,554











The
accompanying notes are an integral part of these financial
statements.


8


CISTERA NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED STATEMENTS OF
CASH FLOWS (continued)


(Unaudited)


Six
      months ended September 30,2007
            
            
            2006As
      restated
            
            
            As
      restatedSUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for:Interest
            
            $
            9,910
            
            
            $
            7,784Income
      taxes
            
            
            -
            
            
            
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Conversion
      of convertible promissory notes and related accrued
              interest
      to common stock
            
            $
            -
            
            
            $
            -Conversion
      of accounts payable and other accrued liabilities to
              convertible
      promissory notes
            
            
            359,885
            
            
            
            -Conversion
      of other notes payable to common stock
            
            
            -
            
            
            
            36,628Allocation
      of discount on convertible promissory notes to warrants
            
            
            488,054
            
            
            
            -Discount
      related to beneficial conversion feature on convertible
              promissory
      notes
            
            
            815,599
            
            
            
            -OTHER
      NON-CASH TRANSACTIONS:Cumulative effect of change in accounting
      principle:Reclassification
      of Warrants from derivative financial instruments to
              equity
      securities (as valued at inception)
            
            $
            2,730,824
            
            
            $
            -Accrued
      liquidated damages at April 1, 2007
            
            
            289,518
            
            
            
            -Reclassification
      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
            
            
            $
            -








During
the quarter ended September 30, 2007, the Company elected to compensate PP1 Note
holders who had opted to convert their PP1 Notes into shares of common stock,
which remained unregistered with the SEC as of the date the PP1 Notes became due
and payable on December 13, 2006.  The amount offered to, and accepted
by, the shareholders was $135,825, payable in the form of additional shares of
common stock.  In August 2007, the company recorded a non-cash charge
and liability in the amount of $135,825 for the impending issuance of this
stock.











The
accompanying notes are an integral part of these financial
statements.


9
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


NOTE 1 - BASIS OF
PRESENTATION AND GOING CONCERN





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States (“US GAAP”),
which contemplate the Company as a going concern.  However, the
Company has sustained substantial operating losses in recent years and has used
substantial amounts of working capital in its operations.  Realization
of a major portion of the assets reflected on the accompanying balance sheet is
dependent upon continued operations of the Company which, in turn, is dependent
upon the Company's ability to meet its financing requirements and succeed in its
future operations.  Management believes that actions presently being
taken to revise the Company’s operating and financial requirements provide them
with the opportunity for the Company to continue as a going
concern.





These
consolidated financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a “going
concern.”  While management believes that the actions already taken or
planned, will mitigate the adverse conditions and events which raise doubt about
the validity of the “going concern” assumption used in preparing these financial
statements, there can be no assurance that these actions will be
successful.





If the
Company were unable to continue as a “going concern,” then substantial
adjustments would be necessary to the carrying values of assets, the reported
amounts of its liabilities, the reported revenues and expenses, and the balance
sheet classifications used.





Interim
Reporting





The
unaudited consolidated financial statements as of September 30, 2007, and for
the three and six months ended September 30, 2007 and 2006 reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the consolidated financial position and
stockholders’ equity at September 30, 2007 and the consolidated results of
operations and cash flows for the three and six months ended September 30, 2007
and 2006.  Operating results for interim periods are not necessarily
indicative of the results that can be expected for full years.  These
consolidated financial statements should be read in connection with the
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-KSB/A for the year ended March 31, 2007, as
amended.





Significant Accounting
Policies





The
Company prepares its financial statements in accordance with US GAAP. The
accounting policies most fundamental to understanding our financial statements
are those relating to recognition of revenue, our use of estimates and the
accounting for convertible debt and warrants. For a detailed discussion on the
application of these accounting policies, see Note 2 to our audited consolidated
financial statements contained in our Annual Report on Form 10-KSB/A for the
fiscal year ended March 31, 2007, as amended.





Loss per
Share





Basic
loss per share has been computed by dividing the net loss for the respective
period applicable to the common stockholders by the weighted average number of
common shares outstanding for the respective period.





Diluted
loss per share is computed using the weighted average number of common shares
outstanding plus the number of common shares that would be issued assuming
exercise or conversion of all potentially dilutive common stock
equivalents.  At September 30, 2007, the total number of potentially
dilutive common stock equivalents was 10,399,356.  At September 30,
2006, the total number of potentially dilutive common stock equivalents was
3,299,011.  These potentially dilutive common stock equivalents have
been excluded from the diluted share calculations for the three and six months
ended September 30, 2007 and 2006, respectively, as they were antidilutive as a
result of the net losses incurred for those periods. Accordingly, basic shares
equal diluted shares for all periods presented.


10
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


Reclassifications





Certain
reclassifications have been made in the fiscal year 2007 financial statements to
conform to the fiscal year 2008 presentation.





Stock
Options





See Note
2 to these unaudited consolidated financial statements for discussion of the
Company’s restatement related to share-based compensation for the three and six
months ended September 30, 2006.





Recent Accounting
Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The Company will be required to adopt SFAS 157 effective for the fiscal year
beginning April 1, 2008. Management is currently evaluating the potential impact
of adopting SFAS 157 on the Company’s consolidated financial
statements.





NOTE 2 – RESTATEMENT OF
PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS





The
Company has restated its Consolidated Balance Sheet as of September 30, 2007,
its Consolidated Statements of Operations for the three and six months ended
September 30, 2007 and 2006, its Consolidated Statement of Stockholders’ Equity
(Deficit) for the six months ended September 30, 2007 and its Consolidated
Statements of Cash Flows for the six months ended September 30, 2007 and
2006 to correct its accounting for its Senior Unsecured Convertible Promissory
Notes and detachable warrants issued in private placements during the period
from December 2004 to April 2007 (the “PP1 Notes,” “PP1 Warrants,” “PP2 Notes”
and “PP2 Warrants”). The Company concluded that its original accounting for
the PP1 Notes and PP1 Warrants issued in fiscal year 2005 and the PP2 Notes and
PP2 Warrants issued in fiscal years 2007 and 2008, including the associated
registration payments was incorrect, and that the necessary adjustments were
material to the consolidated financial statements as of September 30, 2007 and
for the three and six months ended September 30, 2007 and 2006.





In
addition, the Company has restated its Consolidated Balance Sheet as of
September 30, 2007, its Consolidated Statements of Operations for the three and
six months ended September 30, 2007 and its Consolidated Statements of
Stockholders’ Equity (Deficit) and Cash Flows for the six months ended September
30, 2007 to reflect a correction in its accounting for registration payment
arrangements (associated with the aforementioned securities) as required under
FASB Staff Position No. 00-19-2, “Accounting for Registration Payment
Arrangements” (“FSP 00-19-2”).  FSP 00-19-2 was effective April 1,
2007 for the Company, and the Company incorrectly accounted for its registration
payment arrangements as of the effective date (which required the recording of a
cumulative effect of a change in accounting principle) and for the three and six
months ended September 30, 2007.





Additionally,
the Company has restated its Consolidated Statements of Operations for the three
and six months ended September 30, 2006 and its Consolidated Statement of Cash
Flows for the six months ended September 30, 2006 for share-based compensation
related to employee stock options.





11
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The
impact of the restatement on the Consolidated Statements of Operations for the
three and six months ended September 30, 2007 and 2006 is summarized in the
table below:





Adjustments
      to Consolidated Statements of Operations:
              Income
      (Expense)Convertible
      Promissory Notes and Warrants
            
            
            Registration
      payment arrangements
            
            
            Share-based
      compensation
            
            
            TotalThree
      months ended September 30, 2007
            
            $
            (382,012
            )
            
            $
            112,012
            
            
            $
            -
            
            
            $
            (270,000
            )Three
      months ended September 30, 2006
            
            
            144,765
            
            
            
            -
            
            
            
            (25,425
            )
            
            
            119,340Six
      months ended September 30, 2007
            
            
            (752,727
            )
            
            
            (54,453
            )
            
            
            -
            
            
            
            (807,180
            )Six
      months ended September 30, 2006
            
            $
            53,879
            
            
            $
            -
            
            
            $
            (50,850
            )
            
            $
            3,029





The
Company has concluded that its original accounting for the PP1 Notes and PP1
Warrants issued in fiscal year 2005 and the PP2 Notes and PP2 Warrants issued in
fiscal year 2007 and fiscal year 2008 was incorrect and that the necessary
adjustments were material to the consolidated financial statements for the
quarterly periods in fiscal years 2008 and 2007 as well as the consolidated
financial statements for the fiscal years ended March 31, 2007 and
2006.





The
Company based its conclusion upon a further review of the documents associated
with the Notes and Warrants and considered the following sources as relevant
guidance in determining the proper accounting treatment for the Notes and
Warrants:





·
            SFAS
      133, Accounting for
      Derivative Instruments and Hedging Activities(“SFAS
      133”),


·
            APB
      Opinion 14, Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants
      (“APB   14”),


·
            Emerging
      Issues Task Force (EITF) Issue 00-19, Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s
      Own Stock(“EITF 00-19”),


·
            EITF
      05-2,The Meaning of
      “Conventional Convertible Debt Instrument”(“EITF
      05-2”),


·
            EITF
      98-5, Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios (“EITF
  98-5”),


·
            EITF
      00-27, Application of
      Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”),
      and


·
            SEC
      Staff Accounting
      Bulletin No. 107(“SAB 107”)





Conversion feature of the
Notes





The
Company concluded that the Notes meet the definition of “conventional
convertible debt” (as defined in EITF 00-19 and affirmed in EITF
05-2).  EITF 00-19, paragraph 4 states: “The Task Force observed that,
pursuant to paragraphs 11(a) and 12(c) of Statement 133, if an embedded
derivative is indexed to the reporting entity's own stock and would be
classified in stockholders' equity if it was a freestanding derivative, that
embedded derivative is not considered a derivative for purposes of SFAS 133. The
Task Force reached a consensus that for purposes of evaluating under SFAS 133
whether an embedded derivative indexed to a company's own stock would be
classified in stockholders’ equity if freestanding, the requirements of
paragraphs 12–32 of this Issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only realize
the value of the conversion option by exercising the option and receiving the
entire proceeds in a fixed number of shares or the equivalent amount of cash (at
the discretion of the issuer).”





Therefore,
the Company has concluded that the conversion feature of the convertible debt
did not meet the definition of a derivative under SFAS 133 and did not require
separate accounting from the debt instrument.





12
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


Valuation of Notes and
Warrants and beneficial conversion feature





APB 14
addresses the accounting for convertible debt with a nondetachable (embedded)
conversion feature, the terms of which provide for an initial conversion price
that is greater than the market value at the date of issuance and a conversion
price that does not decrease, except under antidilution protection, but does not
explicitly address situations in which the embedded conversion feature is
“in-the money” at issuance.  The Notes, including any accrued
interest, were exercisable into the Company’s common stock at less than the
closing price of the Company’s stock on the dates of issuance, and the Company
considered this conversion to be an “embedded beneficial conversion
feature.”





EITF 98-5
requires “that embedded beneficial conversion features present in convertible
securities should be valued separately at issuance.” Further, EITF 98-5 states
“that the intrinsic value of the beneficial conversion feature may be greater
than the proceeds allocated to the convertible instrument,” and as such, “that
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible instrument.”
EITF 00-27 further states “that the effective conversion price based on the
proceeds received for or allocated to the convertible instrument should be used
to compute the intrinsic value, if any, of the embedded conversion option. As a
result of this consensus, an issuer should first allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange (such as detachable warrants) on a relative fair value basis. Then, the
Issue 98-5 model should be applied to the amount allocated to the convertible
instrument, and an effective conversion price should be calculated and used to
measure the intrinsic value, if any, of the embedded conversion
option.”





Accordingly,
we calculated the fair value of both the convertible Notes and the Warrants and
allocated the respective relative fair value percentages of each in determining
the initial values of the convertible Notes and the Warrants.  Because
the Warrants were determined to be derivative liabilities (see conclusion in
next section below and in Note 2 to the consolidated financial statements), the
Company recorded them at fair value as calculated under the Black-Scholes option
pricing model (“BS model”).  For Notes and Warrants issuances where
the net cash proceeds were greater than the fair value of the Warrants, this
difference was allocated to the value of the Notes.  The amount
assigned to the Warrants represented a debt discount on the Notes, which is
amortized over the life of the Notes.  For Notes and Warrants
issuances where the net cash proceeds were less than the fair value of the
Warrants, the Warrants were recorded at fair value and the difference was
recorded as a charge to the consolidated Statement of Operations at
inception.  This second situation occurred with the issuance of the
PP1 Notes in December 2004 and resulted in a charge to the Statement of
Operations of approximately $230,000; no value was allocated to the Notes, with
a full debt discount recorded and amortized over the life of the
Notes.





After
determining the recorded value of the Warrants and Notes (if any), we calculated
the beneficial conversion feature of the Notes, which resulted in an additional
debt discount which was amortized over the life of the Notes.





13
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


Classification and
accounting for Warrants





We
evaluated the Warrants as a potential free standing derivative under the
criteria in paragraph 11(a) of SFAS 133, which require that a contract
(Warrants) issued by a reporting entity be accounted for as a derivative unless
it is both (1) indexed to its own stock and (2) classified in stockholders’
equity in its statement of financial position. We concluded that the Warrants
were indexed to the Company’s own stock and should be classified in
stockholders’ equity and would qualify for the scope exception contained in this
paragraph.  The Company was required to further review the
requirements for equity classification contained in paragraphs 12-32 of EITF
00-19.  The Company concluded that it had not met criteria (2) above
based on the requirements for equity classification in EITF
00-19.  Specifically, both the PP1 and PP2 Notes contain registration
rights agreements (the “RR agreements”) that stipulate that the Company must
register all “registrable securities” (defined as the “shares of Common Stock
issuable upon conversion of the Notes and the shares of Common Stock issuable
upon exercise of the Warrants”) within a time frame (and this was deemed to be
outside of the control of the Company).  In the event of not filing a
registration statement by a specified date or by not having a registration
effective by a specified date, the Company was obligated to pay liquidated
damages in the amount of 1% of the then current outstanding amount of the Notes
plus accrued interest.  The Company accrued all required liquidated
damages, beginning in FY 2005 with the PP1 Notes. Liquidated damages required
under the RR Agreement for the PP1 Notes ceased on September 25, 2005, which was
the date that the Company filed its initial registration statement for the PP1
Notes and PP1 Warrants.





Accordingly,
the Company concluded that the Warrants did not satisfy the requirement for
equity classification and should be classified, recorded and prospectively
accounted for as derivative liabilities until it has registered all underlying
shares to the Warrants or until such time that the RR agreements are no longer
in effect.  The prospective accounting requires that the Warrants be
remeasured at each balance sheet date based on estimated fair value and any
resultant changes in fair value be recorded to the Statement of
Operations.





The
Company used the BS model for calculating the fair value of all Warrants issued
based on the following assumptions:





Warrants
      issued in PP1
            
            Warrants
      issued in PP2Expected
      volatility
            128%
            
            100%-104%Expected
      term
            5
      years
            
            5
      yearsRisk-free
      interest rate
            3.58%
      - 4.33%
            
            4.46%
      - 4.65%Expected
      dividend yield
            0%
            
            0%


We
estimated volatility primarily based on historical volatility rates through the
date of each closing of the PP1 and PP2 offerings. The Warrants have a
transferability provision and based on guidance provided in SAB 107 for options
issued with such a provision, we used the full, five-year contractual term as
the expected term in the initial valuation of the Warrants.  For the
risk-free interest rate, we used the five year U.S. Treasury zero coupon rate
for the initial valuation of the Warrants.  Expected volatilities,
expected terms and risk-free interest rates were adjusted as of each quarterly
period commensurate with the remaining contractual lives of the Warrants on such
dates and were used to determine the estimated fair value of the Warrants under
the BS model.





14
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


Registration Payment
Arrangements





On
December 21, 2006, the EITF issued FASB Staff Position No. 00-19-2 (“FSP
00-19-2”).  FSP 00-19-2 was effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that were entered into or modified subsequent to the date of issuance of this
FSP. For registration payment arrangements and financial instruments subject to
those arrangements that were entered into prior to the issuance of this FSP, the
FSP was effective for financial statements issued for fiscal years beginning
after December 15, 2006, and interim periods within those fiscal
years.  Effective April 1, 2007, the Company adopted FSP 00-19-2,
which was applicable to the accounting for the liquidated damages on the PP2
Notes.





FSP
00-19-2 requires the Company to account for contingent liquidated damages
separately from the financial instruments to which they relate, which were the
Notes and Warrants issued and sold in the PP1 and PP2
offerings.  Prior to the adoption of FSP-00-19-2, the Company
accounted for the Warrants as derivative liabilities based on the requirement of
the Company to register all underlying shares to the Notes and the
Warrants.  The Company concluded that with the separate accounting
required under FSP 00-19-2 for the liquidated damages, the Warrants by
themselves were properly classified as equity securities (having met all
requirements of EITF 00-19 for equity classification) as of the adoption
date.





Under FSP
00-19-2, the Company is required to estimate and record a contingent liability
if the likelihood is probable that it will pay liquidated damages in future
periods, calculated in accordance with SFAS 5, “Accounting for Contingencies”
(“SFAS 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount
of a Loss.”  Further, FSP 00-19-2 requires that “the financial
instrument(s) subject to the registration payment arrangement shall be
recognized and measured in accordance with other applicable GAAP (for example
SFAS 133 and EITF 00-19) without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement.” Accordingly, on
the date of adoption, the Company accounted for the Warrants separately from the
liquidated damages obligations.





Based on
the above requirements, the Company recorded a cumulative effect of an
accounting change entry (i.e., a charge to the beginning balance of the
accumulated deficit) as of April 1, 2007 for the combination of:  1)
the reclassification of the Warrants from derivative liabilities to equity
securities, and 2) a contingent liability for probable future payment of
liquidated damages (based on the Company’s best estimate as of the date of
adoption, which is through March 31, 2008).  The amount of the
contingent liability recorded was approximately $289,000.  The
difference between the Warrants as measured on the date of adoption and their
original recorded value was approximately $466,000, and, as stated above, was
included in the charge to the beginning balance of the accumulated
deficit.  The total of the cumulative effect of this accounting change
was $755,000.





On April
5, 2007, the Company closed the balance of its PP2 offering and, in accordance
with FSP 00-19-2, recorded a contingent liability and related charge to the
consolidated Statement of Operations for the three months ended June 30, 2007 in
the amount of $251,176 for the estimated liquidated damages related to this
funding through March 31, 2008.  At September 30, 2007, the total
liability for estimated liquidated damages was $540,176.





Share-based
compensation





The
Company concluded that it incorrectly calculated and recorded share-based
compensation expense associated with stock options upon the adoption of
Statement of Financial Accounting Standards No. 123 (revised) “Share-Based
Payment” (“SFAS 123R”) on April 1, 2006.  Specifically, the Company
did not calculate the fair value of employee stock options issued during the
period from February 2004 through October 2004 and did not record any related
expense in the Statement of Operations for the fiscal year ended March 31, 2007,
or for the respective quarterly periods for that fiscal year, related to the
unrecognized stock option cost as of April 1, 2006.  The Company has
not issued any additional stock options to employees since October
2004.





15
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statements of Operations for the three months ended September 30, 2007 and
2006:





For
      the three months ended
              September
      30, 2007
            
            
            For
      the three months ended
              September
      30, 2006As
      previously reported
            
            
            Adjustments
            
            
            As
      restated
            
            
            As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedGross
      profit
            
            $
            701,511
            
            
            $
            -
            
            
            $
            701,511
            
            
            $
            334,600
            
            
            $
            -
            
            
            $
            334,600Operating
      expenses
            
            
            1,068,798
            
            
            
            
            
            
            
            1,068,798
            
            
            
            552,094
            
            
            
            25,425
            
            
            
            577,519Loss
      from operations
            
            
            (367,287
            )
            
            
            
            
            
            
            (367,287
            )
            
            
            (217,494
            )
            
            
            (25,425
            )
            
            
            (242,919
            )Other
      income (expense)Interest
      expense, net
            
            
            (178,413
            )
            
            
            112,012
            
            
            
            (66,401
            )
            
            
            (12,368
            )
            
            
            
            
            
            
            (12,368
            )Charge
      for inducement to
              convertdebt
      to convertible
              promissorynotes
            
            
            (135,825
            )
            
            
            
            
            
            
            (135,825
            )
            
            
            -
            
            
            
            
            
            
            
            -Amortization
      of discount on
              convertible
      notes
            
            
            -
            
            
            
            (382,012
            )
            
            
            (382,012
            )
            
            
            -
            
            
            
            (27,557
            )
            
            
            (27,557
            )Benefit
      for change in estimated
              fair
      value of derivative
              financialinstruments
              - Warrants
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            172,322
            
            
            
            172,322Net
      loss
            
            $
            (681,525
            )
            
            $
            (270,000
            )
            
            $
            (951,525
            )
            
            $
            (229,862
            )
            
            $
            119,340
            
            
            $
            (110,522
            )Basic
      & diluted net loss per share
            
            $
            (0.08
            )
            
            
            
            
            
            $
            (0.11
            )
            
            $
            (0.03
            )
            
            
            
            
            
            $
            (0.01
            )Weighted
      average shares
              outstanding: basic and diluted
            
            
            8,576,538
            
            
            
            17,931
            
            
            
            8,594,469
            
            
            
            8,149,388
            
            
            
            
            
            
            
            8,149,388





16
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statements of Operations for the six months ended September 30, 2007 and
2006:





For
      the six months ended
              September
      30, 2007
            
            
            For
      the six months ended
              September
      30, 2006As
      previously reported
            
            
            Adjustments
            
            
            As
      restated
            
            
            As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedGross
      profit
            
            $
            1,241,643
            
            
            $
            -
            
            
            $
            1,241,643
            
            
            $
            801,363
            
            
            $
            -
            
            
            $
            801,363Operating
      expenses
            
            
            1,923,988
            
            
            
            
            
            
            
            1,923,988
            
            
            
            1,282,281
            
            
            
            50,850
            
            
            
            1,333,131Loss
      from operations
            
            
            (682,345
            )
            
            
            
            
            
            
            (682,345
            )
            
            
            (480,918
            )
            
            
            (50,850
            )
            
            
            (531,768
            )Other
      income (expense)Interest
      expense, net
            
            
            (326,960
            )
            
            
            196,723
            
            
            
            (130,237
            )
            
            
            (29,787
            )
            
            
            
            
            
            
            (29,787
            )Charge
      for inducement to
              convertdebt
      to convertible
              promissorynotes
            
            
            (135,825
            )
            
            
            
            
            
            
            (135,825
            )
            
            
            -
            
            
            
            
            
            
            
            -Amortization
      of discount on
              convertible
      notes
            
            
            -
            
            
            
            (752,727
            )
            
            
            (752,727
            )
            
            
            -
            
            
            
            (54,814
            )
            
            
            (54,814
            )Charge
      for estimated liquidated
              damages
            
            
            -
            
            
            
            (251,176
            )
            
            
            (251,176
            )
            
            
            -
            
            
            
            
            
            
            
            -Benefit
      for change in estimated
              fair value of derivative
              financialinstruments
              - Warrants
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            108,693
            
            
            
            108,693Net
      loss
            
            $
            (1,145,130
            )
            
            $
            (807,180
            )
            
            $
            (1,952,310
            )
            
            $
            (510,705
            )
            
            $
            3,029
            
            
            $
            (507,676
            )Basic
      & diluted net loss per share
            
            $
            (0.13
            )
            
            
            
            
            
            $
            (0.23
            )
            
            $
            (0.06
            )
            
            
            
            
            
            $
            (0.06
            )Weighted
      average shares
              outstanding: basic and diluted
            
            
            8,576,538
            
            
            
            17,931
            
            
            
            8,594,469
            
            
            
            8,113,504
            
            
            
            
            
            
            
            8,113,504





17
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Balance Sheet as of September 30, 2007:





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCurrent
      liabilities:Accounts
      payable
            
            $
            254,701
            
            
            $
            -
            
            
            $
            254,701Related
      party payables
            
            
            185,661
            
            
            
            
            
            
            
            185,661Accrued
      liabilities
            
            
            274,635
            
            
            
            
            
            
            
            274,635Accrued
      liquidated damages
            
            
            -
            
            
            
            540,694
            
            
            
            540,694Deferred
      revenue
            
            
            737,186
            
            
            
            
            
            
            
            737,186Current
      portion of long-tem debt, net of discount
            
            
            105,137
            
            
            
            (15,000
            )
            
            
            90,137Total
      current liabilities
            
            
            1,557,320
            
            
            
            525,694
            
            
            
            2,083,014Convertible
      promissory notes, net of discount
            
            
            3,485,491
            
            
            
            (2,214,139
            )
            
            
            1,271,352Accrued
      interest
            
            
            372,597
            
            
            
            (199,653
            )
            
            
            172,944Deferred
      revenue
            
            
            130,689
            
            
            
            
            
            
            
            130,689Total
      long-term liabilities
            
            
            3,988,777
            
            
            
            (2,413,792
            )
            
            
            1,574,985Total
      liabilities
            
            
            5,546,097
            
            
            
            (1,888,098
            )
            
            
            3,657,999Stockholders’
      equity (deficit):Preferred
      stock
            
            
            -
            
            
            
            
            
            
            
            -Common
      stock
            
            
            8,576
            
            
            
            18
            
            
            
            8,594Additional
      paid-in capital
            
            
            8,721,755
            
            
            
            4,838,742
            
            
            
            13,560,497Cumulative
      effect of adoption of FSP 00-19-2
            
            
            -
            
            
            
            (755,115
            )
            
            
            (755,115
            )Accumulated deficit
            
            
            (10,343,610
            )
            
            
            (2,195,547
            )
            
            
            (12,539,157
            )Total
      stockholders’ equity (deficit)
            
            
            (1,613,279
            )
            
            
            1,888,098
            
            
            
            274,819TOTAL
      LIABILITIES AND STOCKHOLDERS’
              EQUITY
      (DEFICIT)
            
            $
            3,932,818
            
            
            $
            -
            
            
            $
            3,932,818





18
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The table
below summarizes the effect of the restatement adjustments as well as the
correction in errors in the reporting of components of cash flows from
operations and cash flows from financing activities on the Consolidated
Statement of Cash Flows for the six months ended September 30,
2007:





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (1,145,130
            )
            
            $
            (807,180
            )
            
            $
            (1,952,310
            )Adjustments
      used to reconcile net loss to net cash used in
              operating
      activities:Charge
      for estimated liquidated damages
            
            
            -
            
            
            
            251,176
            
            
            
            251,176Amortization
      of discount on convertible promissory notes -
              outside
      investors
            
            
            -
            
            
            
            732,809
            
            
            
            732,809Amortization
      of discount on convertible promissory notes -
              related
      parties
            
            
            -
            
            
            
            19,918
            
            
            
            19,918Charge
      for inducement to convert debt to convertible
              promissory
      notes
            
            
            -
            
            
            
            135,825
            
            
            
            135,825Depreciation
      and amortization
            
            
            164,873
            
            
            
            
            
            
            
            164,873Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (272,302
            )
            
            
            
            
            
            
            (272,302
            )Inventory
            
            
            (17,847
            )
            
            
            
            
            
            
            (17,847
            )Prepaid
      expenses
            
            
            (879
            )
            
            
            
            
            
            
            (879
            )Accrued
      liabilities
            
            
            194,108
            
            
            
            (196,426
            )
            
            
            (2,318
            )Accounts
      payable
            
            
            (256,302
            )
            
            
            223,763
            
            
            
            (32,539
            )Deferred
      revenue
            
            
            317,728
            
            
            
            
            
            
            
            317,728Net
      cash used in operating activities
            
            
            (1,015,751
            )
            
            
            359,885
            
            
            
            (655,866
            )Net
      cash used in investing activities
            
            
            (123,067
            )
            
            
            
            
            
            
            (123,067
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds from issuance of convertible promissory notes
            
            
            1,584,885
            
            
            
            (359,885
            )
            
            
            1,225,000Payments
      on convertible promissory notes and other loans
            
            
            (74,215
            )
            
            
            
            
            
            
            (74,215
            )Net
      payments on line of credit
            
            
            (62,094
            )
            
            
            
            
            
            
            (62,094
            )Payments
      on capital lease
            
            
            (2,063
            )
            
            
            
            
            
            
            (2,063
            )Net
      cash provided by financing activities
            
            
            1,446,513
            
            
            
            (359,885
            )
            
            
            1,086,628Net
      increase in cash and cash equivalents
            
            
            307,695
            
            
            
            
            
            
            
            307,695Cash
      and cash equivalents at beginning of period
            
            
            534,871
            
            
            
            
            
            
            
            534,871Cash
      and cash equivalents at end of period
            
            $
            842,566
            
            
            $
            -
            
            
            $
            842,566





19
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the six months ended September 30,
2006.  There was no impact on cash flows from investing or financing
activities.





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (510,705
            )
            
            $
            3,029
            
            
            $
            (507,676
            )Adjustments
      used to reconcile net loss to net cash used in
              operating
      activities
            
            
            306,972
            
            
            
            
            
            
            
            306,972Amortization
      of discount on convertible promissory notes
            
            
            -
            
            
            
            54,814
            
            
            
            54,814Benefit
      for change in estimated fair value of derivative
              financial
      instruments - Warrants
            
            
            -
            
            
            
            (108,693
            )
            
            
            (108,693
            )Share-based
      compensation
            
            
            -
            
            
            
            50,850
            
            
            
            50,850Net
      cash used in operating activities
            
            $
            (203,733
            )
            
            $
            -
            
            
            $
            (203,733
            )





NOTE 3 - CONCENTRATION OF
RISK





For the
three months ended September 30, 2007, the Company received approximately 35% of
its gross revenues from its top three re-sellers.  This represents an
increase in the concentration of customers from the 33% reported for the three
months ended September 30, 2006.  The loss of these re-sellers would
adversely impact the business of the Company.





NOTE 4 - LEASE
COMMITMENT





As of
September 30, 2007, the Company leased approximately 4,264 square feet of office
space at 17304 Preston Road, Suite 975, Dallas, Texas from Memshalah Realty, a
successor to CMD Realty Fund.  The lease payments are approximately
$7,626 per month and the lease expires November 30, 2009.  At
September 30, 2007, this office space was used as the corporate
headquarters.





The
minimum future lease payments under this lease for the next five years
are:





October
      1, 2007 - March 31, 2008
            
            $
            45,756April
      1, 2008 - March 31, 2009
            
            
            94,357April
      1, 2009 – March 31, 2010
            
            
            63,852April
      1, 2010 - March 31, 2011
            
            
            -April
      1, 2011 - March 31, 2012
            
            
            -Total
      minimum future lease payments
            
            $
            203,965





NOTE 5 - COMMON
STOCK





On July
1, 2006, the Company issued 70,803 shares of common stock in connection with the
exercise of warrants issued in the merger of the Company with XBridge Software,
Inc.  The exercise price of the warrants was $0.46 per
share.  The warrants were exercised for notes payable totaling
$32,594.




On August
1, 2006, the Company issued 4,034 shares of common stock upon conversion of the
principal and accrued interest on a previously issued convertible
note.  The principal amount of the note converted was $1,000 and the
amount of accrued interest converted $3,034.  The notes converted at
$1.00 per share.




20
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


During
the quarter ended September 30, 2007, the Company elected to compensate PP1 Note
holders who had opted to convert their PP1 Notes into shares of common stock,
which remained unregistered with the SEC as of the date the PP1 Notes became due
and payable on December 13, 2006.  The amount offered to, and accepted
by, the shareholders was $135,825, payable in the form of additional shares of
common stock.  In August 2007, the company recorded a non-cash charge
and liability in the amount of $135,825 for the impending issuance of this
stock.  On January 11, 2008, the Company issued 134,462 shares of
common stock at the agreed upon conversion rate of $1.01, and paid $19 in cash
for fractional shares in settlement of this liability.




NOTE 6 – LINE OF
CREDIT





On May
18, 2007, the Company secured a line of credit with JPMorgan Chase Bank in the
amount of $50,000.  The line of credit carries an interest rate of
prime plus one half-point.  The line of credit is secured with a
deposit guarantee of $50,000.  At September 30, 2007, the total amount
outstanding on this line of credit was $-0-.





NOTE 7 - RELATED PARTY
TRANSACTIONS





On May
31, 2004, the Company received a loan of $55,755 from one of its executive
officers.  The note carries an interest rate of 8%.  At
September 30, 2007, the total amount of principal and interest due on this note
was $16,622.





Effective
May 27, 2005, we acquired XBridge through a merger transaction in exchange for
4,150,000 shares of our common stock (which after the cancellation of the
2,150,000 originally issued to XBridge resulted in the issuance of only
2,000,000 new shares) and the elimination of approximately $1.86 million on
inter-company payables owed to XBridge.  Prior to entering into the
agreement governing the merger, (a) Ms. Cynthia Garr, the Company's Executive
Vice President, acting Chief Financial Officer and a director, was also the
President and a director of XBridge, (b), Mr. Gregory Royal, the Company's Chief
Technology Officer and a director, was also a Vice President and a director of
XBridge, (c) Mr. Derek Downs the Company's acting Chief Executive Officer and a
director, was also a consultant to XBridge.




At the
time of the merger, Ms. Garr owned 451,000 shares of XBridge common stock and
held options to purchase another 15,426 shares, and Mr. Royal owned 375,000
shares of XBridge common stock and held options to purchase another 100,000
shares.  At an exchange ratio of 2.71174 shares of our common stock
for each share of XBridge stock outstanding, post merger, (1) Ms. Garr owned
1,222,997 shares of our common stock and held options to purchase another 41,831
shares; (2) Mr. Royal owned 1,016,904 shares of our common stock and held
options to purchase an additional 271,174 shares.  Ms. Garr's options
expire April 1, 2009, and Mr. Royal’s options expire May 3, 2009. With regard to
these stock options and all other outstanding options to purchase XBridge shares
at the time, the original provisions for the XBridge stock options were applied
in a carry-forward manner to the options to purchase shares of our
stock.





Pursuant
to an employment agreement dated January 1, 2005, the Company agreed to pay
$125,000 per year to Derek Downs, an officer and director of the
Company.  This agreement was mutually terminated by the parties,
effective March 31, 2007.





Pursuant
to an employment agreement dated January 1, 2005, the Company agreed to pay
$125,000 per year to Cynthia Garr, an officer and director of the
Company.  This agreement was mutually terminated by the parties,
effective April 1, 2006.





Pursuant
to an employment agreement dated October 1, 2004, the Company agreed to pay
$130,000 per year to Gregory Royal, an officer and director of the
Company.  This agreement was mutually terminated by the parties,
effective March 31, 2007.





21
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


On April
5, 2007, the Company issued a PP2 Note in the principal amount of $30,000, and
issued PP2 Warrants to purchase 30,000 shares of the Company’s common stock to
Derek Downs, an officer and director of the Company, in connection with the
cancellation of an equal amount of the Company’s outstanding obligations. As of
September 30, 2007, interest of $2,871 had been accrued on this PP2
Note.





On April
5, 2007, the Company issued a PP2 Note in the principal amount of $70,779, and
issued PP2 Warrants to purchase 70,779 shares of the Company’s common stock to
Gregory Royal, an officer and director of the Company, in connection with the
cancellation of an equal amount of the Company’s outstanding obligations. As of
September 30, 2007, interest of $6,773 had been accrued on this PP2
Note.





NOTE 8 - CONVERTIBLE
DEBT





PP1
Notes





Effective
December 13, 2004, the Company issued and sold an aggregate of $1,146,000 in
principal amount of PP1 Notes, and issued PP1 Warrants to purchase 1,146,000
shares of our common stock, par value $0.001 per share.  Of the
$1,146,000 in PP1 Notes, $1,004,000 in principal amount were issued for cash,
and $142,000 in principal amount were issued in connection with the cancellation
of an equal amount of the Company’s outstanding obligations.  At
December 31, 2005, a number of PP1 Note holders opted to convert their debt as
provided in their note agreements.  The total number of shares issued
due to this conversion was 946,392.  The amount of principal and
accrued interest represented by these shares was $859,000 and $87,392,
respectively.  At March 31, 2006, three PP1 Note holders opted to
convert their debt as provided in their note agreements.  The total
number of shares issued due to this conversion was 67,785.  The amount
of principal represented by these shares was $57,000.  The amount of
accrued interest represented by these shares was $10,785.  These PP1
Notes converted at $1.00 per share.  The total amount of principal and
interest due at December 13, 2006 was $196,088.  At August 31, 2006,
one PP1 Note holder who had previously converted most of his outstanding debt
opted to convert the outstanding balance.  The total number of shares
issued due to this conversion was 4,034.  The remaining amount of
principal represented by these shares was $1,000.  The amount of
interest earned on his original note represented by these shares was
$3,034.  At December 13, 2006, one PP1 Note holder opted to convert
their outstanding balance.  There were 17,931 shares issued at $1.00
per share to convert principal of $15,000 and accrued interest of
$2,931.  At December 13, 2006, two PP1 Note holders opted to convert
their outstanding balance to a second private placement, which was the first
closing of the PP2 Note purchase agreements.  The total amount
converted was $56,071.





During
the six months ended September 30, 2007, the Company paid $54,215 of principal
and accrued interest of $9,770 on certain PP1 Notes.  At
September 30, 2007, there was $89,785 of principal and $24,711 of accrued
interest due on the outstanding PP1 Notes.  During the quarter
ended September 30, 2007, the Company elected to compensate PP1 Note holders who
had opted to convert their PP1 Notes into shares of common stock, which remained
unregistered with the SEC as of the date the PP1 Notes became due and payable on
December 13, 2006. The amount offered to, and accepted by, these shareholders
was $135,825, payable in the form of additional shares of common stock. In
August 2007, the Company accrued a liability for the amount of this debt
conversion expense, pending the issuance of the additional shares.





The PP1
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 that the PP1 Notes are
outstanding (each, an interest compounding date).  The outstanding
principal on the PP1 Notes and all accrued interest become due and payable on
the earlier of (a) December 9, 2006, or (b) the date on which a change in
control of the Company occurs.





22
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The
outstanding principal and accrued interest on the PP1 Notes are convertible into
shares of common stock at a conversion rate equal to the lesser of (a) $1.30 per
share, or (b) a 25% discount to the average closing bid price of the Company’s
common stock for the five days including and immediately preceding the interest
compounding date, provided that in no event shall the conversion price per share
be less than $1.00 per share.  The PP1 Notes may be converted, in
whole or in part, at the option of the note holder on any interest compounding
date occurring after the effective date of a registration statement covering the
resale of shares of common stock to be issued upon conversion of the PP1
Notes.





In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP1 Notes may be converted, in whole or in part at the
option of the PP1 Note holders, into the convertible securities, upon the same
terms and conditions governing the issuance of the convertible securities in the
private transaction.  The right of the PP1 Note holders to convert the
PP1 Notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.





The
Company may prepay the PP1 Notes in whole or in part, upon thirty days prior
written notice to PP1 Note holders; provided that partial prepayments may be
made only in increments of $10,000 and, provided further, that the PP1 Note
holders may convert the amount of the proposed prepayment into shares of our
common stock, regardless of the period of time that the PP1 Notes have then been
outstanding.





The PP1
Warrants have a term of five years and are exercisable at an exercise price of
$1.30 per share.  Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
Warrants, the Company may, upon thirty days prior written notice, redeem the
warrants for $0.10 per share, in whole or in part, if our common stock closes
with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.





Both the
PP1 Notes and Warrants carried registration rights and required the payment of
liquidated damages for failure to file a registration statement by June 22,
2005.  The Company did not meet this filing date and began accruing
liquidated damages at a rate of 1% per month on the total of the principal and
accrued interest of the PP1 Notes.  On August 24, 2005, the Company
filed its initial registration statement covering all of the PP1 Notes and
Warrants and ceased accruing liquidated damages as of this date.





PP2
Notes





On
December 29, 2006 the Company completed the first closing of its PP2 Notes
offering and issued and sold an aggregate of $433,362 in principal amount of PP2
Notes, and issued PP2 Warrants to purchase 433,571 shares of our common
stock.  Of the $433,362 in principal, the Company received cash of
$397,500 and $35,862 in principal and interest of PP1 Notes was
converted.  During January through March 2007, the Company received
additional funding from investors in the amount of approximately $1,466,000,
which were formally issued and sold as PP2 Notes on April 5, 2007, when the
Company also issued an additional $1,593,000 in PP2
Notes.  Additionally, the Company issued PP2 Warrants to purchase
3,065,205 shares of our common stock, par value $0.001 per share.  Of
the $3,065,205 in principal, the Company received cash of $2,416,429, and
$648,776 in principal amount of the PP2 Notes was issued in connection with the
cancellation of an equal amount of the Company’s outstanding
obligations.  Included in the outstanding obligations that were
cancelled were $100,779 of obligations to principal officers and directors in
the following amounts: Greg Royal $70,779 and Derek Downs $30,000.





23
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


The PP2
Notes bear interest at the rate of 8% per annum, compounded quarterly on each
March 31, June 30, September 30 and December 31 anniversary that they are
outstanding (each, an interest compounding date).  The outstanding
principal and all accrued interest become due and payable two years from the
date of the PP2 Notes.  The outstanding principal and accrued interest
are convertible into shares of common stock at a fixed rate of $0.75 per
share.  The PP2 Notes may be converted, in whole or in part, at the
option of the PP2 Note holder on any interest compounding date occurring after
the effective date of a registration statement covering the resale of shares of
common stock to be issued upon conversion of the PP2 Notes.





In
addition, if the Company subsequently issues or sells any new securities
convertible, exercisable or exchangeable into shares of our common stock
(“convertible securities”) in a private transaction and receives gross proceeds
of at least $500,000, the PP2 Notes may be converted, in whole or in part at the
option of the note holders, into the convertible securities, upon the same terms
and conditions governing the issuance of the convertible securities in the
private transaction.  The right of the PP2 Note holders to convert
their notes into convertible securities does not apply to any convertible
securities issued by the Company (a) in connection with a merger, acquisition or
consolidation of the Company, (b) in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (c) in connection with bona fide firm
underwritten public offerings of its securities, (d) pursuant to the Company’s
incentive and stock option plans, (e) as a result of the exercise of options or
warrants or conversion of convertible notes or preferred stock which were
granted or issued as of December 13, 2004.





The
Company may prepay the PP2 Notes in whole or in part, upon thirty days prior
written notice to note holders; provided that partial prepayments may be made
only in increments of $10,000 and, provided further, that the PP2 Note holders
may convert the amount of the proposed prepayment into shares of our common
stock at any time.





The PP2
Warrants have a term of five years and are exercisable at an exercise price of
$1.00 per share.  Subject to an effective registration statement
covering the resale of the shares of common stock issuable upon exercise of the
PP2 Warrants, the Company may, upon thirty days prior written notice, redeem the
PP2 Warrants for $0.10 per share, in whole or in part, if our common stock
closes with a bid price of at least $3.50 for any ten (10) out of fifteen (15)
consecutive trading days.





Both the
PP2 Notes and Warrants carry registration rights and require the payment of
liquidated damages for failure to file a registration statement by April 20,
2007 and to have an effective registration statement by November 30,
2007.  The Company did not meet the April 20, 2007 filing date and
began accruing liquidated damages as of this date at a rate of 1% on the total
of the principal and accrued interest of the PP2 Notes.





Restatement





As stated
in Note 2 to the consolidated financial statements, the Company has restated its
consolidated financial statements for: 1) the accounting it originally applied
in the initial valuation and recording of the PP1 Notes and Warrants and the PP2
Notes and Warrants and subsequent remeasurement of their carrying values, and 2)
the accounting for liquidated damages related to the PP2 Notes and Warrants as
of April 1, 2007 upon the adoption of FSP 00-19-2.  See specific
accounting treatment in Note 2.





24
 CISTERA NETWORKS, INC. &
SUBSIDIARY
 Notes to
Consolidated Financial Statements
 (Unaudited)


NOTE 9 -
CONTINGENCIES





The
Company, and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS. GREGORY T.
ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH HOLDINGS
COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.;Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas.  The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005.  The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement.  We are
currently in the process of negotiating definitive settlement
agreements.





NOTE 10 – INCOME
TAXES





Effective
April 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
tax positions taken or expected to be taken in a tax return. For those benefits
to be recognized, a tax position must be more-likely-than-not to be sustained
upon examination by taxing authorities. The adoption of the provisions of FIN 48
did not have a material impact on the Company’s consolidated financial position
or results of operations. At April 1, 2007, the Company had no liability for
unrecognized tax benefits and no accrual for the payment of related
interest.





Interest
costs related to unrecognized tax benefits are classified as “Interest expense,
net” in the accompanying consolidated statements of operations. Penalties, if
any, would be recognized as a component of “Selling, general and administrative
expenses”. The Company recognized $-0- of interest expense related to
unrecognized tax benefits for the quarter ended September 30,
2007.  In many cases the Company’s uncertain tax positions are related
to tax years that remain subject to examination by relevant tax authorities.
With few exceptions, the Company is generally no longer subject to U.S. federal,
state, local or non-U.S. income tax examinations by tax authorities for years
before 2003. The following describes the open tax years, by major tax
jurisdiction, as of April 1, 2007:





United
      States (a)
            
            2003
      – Present





(a)
Includes federal as well as state or similar local jurisdictions, as
applicable.





25


ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





The
following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
consolidated financial statements and related notes that appear in this filing.
In addition to historical consolidated financial information, the following
discussion contains forward-looking information as defined in Section 21E of the
Securities Exchange Act of 1934.





Forward
Looking Statements:





Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements,
which are other than statements of historical facts.  Certain
statements in this Form 10-QSB/A are forward-looking statements. Words such as
“expects,” “believes,” “anticipates,” “may,” “intends,” “projects,” “estimates”
and similar expressions are intended to identify forward-looking
statements.  The Company’s expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis, including without limitation, management’s examination of historical
operating trends, data contained in the Company’s records and other data
available from third parties, but there can be no assurance that management’s
expectation, beliefs or projections will be achieved or
accomplished.  However, forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected.  Such risks and uncertainties include, but are
not limited to, limited operating history, historical operating losses and the
uncertainty of the Company’s profitability in the future, the need to raise
additional capital to sustain operations and implement its future business plan,
and other factors that may be beyond the Company’s control.  These
factors include changes in regulations or legislation, adverse determination
with respect to litigation or other claims, ability to recruit and retain
employees, and increases in operating costs.  Factors that could cause
or contribute to these differences have been included throughout the public
filings from the Company.  The Company has no obligation to publicly
update or revise these forward-looking statements to reflect the occurrence of
future events or circumstances.





OVERVIEW





We
provide IP network-based application appliances and services that add features
and enhanced functionality to the telecommunications services used by large
enterprises, small and mid-sized organizations, both in the commercial and
public sector.  Our software- and hardware-based solutions are
delivered on our open-architecture, component-based platform known as the
Cistera ConvergenceServer, which allows administrators to centrally manage
advanced applications for IP telephony environments across large single-site and
multi-site private voice/data networks. Because our solutions improve
productivity and efficiencies for customers using IP telephony systems, we
believe that our convergence solutions complement the efforts of IP telephony
solution providers to increase the overall return on investment and value
contribution associated with IP telephony systems.  This has allowed
us to establish cooperative relationships with IP telephony solution providers,
as well as large value added resellers (VARs) and systems integrators (SIs)
focused on delivering IP telephony systems and services.





Currently,
we offer customers a robust IP-based applications platform pre-loaded with a
variety of packaged applications (we refer to them as application
engines).  We market our software and hardware solutions through a VAR
channel, and in some cases directly to Fortune 500 customers.  To
ensure growth scalability, our VAR channel is being trained to deliver
professional services for standard installations, which we believe will allow us
to focus on advanced professional services for complex
installations.





Our
objective is to be the leading provider of IP communications application
platforms and advanced IP-based applications for businesses
worldwide.  To address our market opportunity, our management team is
focused on a number of short and long-term challenges including: strengthening
and extending our solution offerings; adding new customers and expanding our
sales efforts into new territories; deepening our relationships with our
existing customers, VARs, and SIs; and encouraging the development of
third-party applications on our platform.





26


During
the quarter the company focused on two initiatives that offer significant
revenue growth opportunity for the company.  The first initiative is
the Cisco Industry Solution Partner Network (ISPN).  Cisco Systems
launched its ISPN program that is designed to streamline the design of IP
communications solutions that incorporate robust features and functionality such
as those delivered by the Cistera platform, and provide incentives to partners
that incorporate these applications solutions into
deployments.  Cistera Networks was one of the first applications
providers certified in the program and the only platform approved across the
Government, Education, Healthcare and Financial Services vertical
markets.  The second initiative is a hosted solution for providing IP
application services to customers who prefer that their system be managed by an
outsourced provider rather than owning and managing it
themselves.   We introduced our platform at the Sylantro Global
Summit for use by Service Providers that want to offer hosted IP application
services.





In order
to increase our revenues and take advantage of our market opportunity, we will
need to add substantial numbers of customer installations. We plan to reinvest
our earnings for the foreseeable future in the following ways: hiring additional
personnel, particularly in sales and engineering; expanding our domestic and
international selling and marketing activities; increasing our research and
development activities to upgrade and extend our solution offerings and to
develop new solutions and technologies; growing our VAR and systems
implementation channel; adding to our infrastructure to support our growth; and
expanding our operational and financial systems to manage a growing
business.





RESTATEMENT OF PREVIOUSLY ISSUED
CONSOLIDATED FINANCIAL STATEMENTS





The
Company has restated its Consolidated Balance Sheet as of September 30, 2007,
its Consolidated Statements of Operations for the three and six months ended
September 30, 2007 and 2006, its Consolidated Statement of Stockholders’ Equity
(Deficit) for the six months ended September 30, 2007 and its Consolidated
Statements of Cash Flows for the six months ended September 30, 2007 and
2006 to correct its accounting for its Senior Unsecured Convertible Promissory
Notes and detachable warrants issued in private placements during the period
from December 2004 to April 2007 (the “PP1 Notes,” “PP1 Warrants,” “PP2 Notes”
and “PP2 Warrants”). The Company concluded that its original accounting for
the PP1 Notes and PP1 Warrants issued in fiscal year 2005 and the PP2 Notes and
PP2 Warrants issued in fiscal years 2007 and 2008, including the associated
registration payments was incorrect, and that the necessary adjustments were
material to the consolidated financial statements as of September 30, 2007 and
for the three and six months ended September 30, 2007 and 2006.





In
addition, the Company has restated its Consolidated Balance Sheet as of
September 30, 2007, its Consolidated Statements of Operations for the three and
six months ended September 30, 2007 and its Consolidated Statements of
Stockholders’ Equity (Deficit) and Cash Flows for the six months ended September
30, 2007 to reflect a correction in its accounting for registration payment
arrangements (associated with the aforementioned securities) as required under
FASB Staff Position No. 00-19-2, “Accounting for Registration Payment
Arrangements” (“FSP 00-19-2”).  FSP 00-19-2 was effective April 1,
2007 for the Company, and the Company incorrectly accounted for its registration
payment arrangements as of the effective date (which required the recording of a
cumulative effect of a change in accounting principle) and for the three and six
months ended September 30, 2007.





Additionally,
the Company has restated its Consolidated Statements of Operations for the three
and six months ended September 30, 2006 and its Consolidated Statement of Cash
Flows for the six months ended September 30, 2006 for share-based compensation
related to employee stock options.





27


The
impact of the restatement on the Consolidated Statements of Operations for the
three and six months ended September 30, 2007 and 2006 is summarized in the
table below:





Adjustments
      to Consolidated Statements of Operations:
              Income
      (Expense)Convertible
      Promissory Notes and Warrants
            
            
            Registration
      payment arrangements
            
            
            Share-based
      compensation
            
            
            TotalThree
      months ended September 30, 2007
            
            $
            (382,012
            )
            
            $
            112,012
            
            
            $
            -
            
            
            $
            (270,000
            )Three
      months ended September 30, 2006
            
            
            144,765
            
            
            
            -
            
            
            
            (25,425
            )
            
            
            119,340Six
      months ended September 30, 2007
            
            
            (752,727
            )
            
            
            (54,453
            )
            
            
            -
            
            
            
            (807,180
            )Six
      months ended September 30, 2006
            
            $
            53,879
            
            
            $
            -
            
            
            $
            (50,850
            )
            
            $
            3,029





The
Company has concluded that its original accounting for the PP1 Notes and PP1
Warrants issued in fiscal year 2005 and the PP2 Notes and PP2 Warrants issued in
fiscal year 2007 and fiscal year 2008 was incorrect and that the necessary
adjustments were material to the consolidated financial statements for the
quarterly periods in the fiscal years 2008 and 2007 as well as the consolidated
financial statements for the fiscal years ended March 31, 2007 and
2006.





The
Company based its conclusion upon a further review of the documents associated
with the Notes and Warrants and considered the following sources as relevant
guidance in determining the proper accounting treatment for the Notes and
Warrants:





·
            SFAS
      133, Accounting for
      Derivative Instruments and Hedging Activities(“SFAS
      133”),


·
            APB
      Opinion 14, Accounting
      for Convertible Debt and Debt Issued with Stock Purchase Warrants
      (“APB   14”),


·
            Emerging
      Issues Task Force (EITF) Issue 00-19, Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s
      Own Stock(“EITF 00-19”),


·
            EITF
      05-2,The Meaning of
      “Conventional Convertible Debt Instrument”(“EITF
      05-2”),


·
            EITF
      98-5, Accounting for
      Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios (“EITF
  98-5”),


·
            EITF
      00-27, Application of
      Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”),
      and


·
            SEC
      Staff Accounting
      Bulletin No. 107(“SAB 107”)





Conversion feature of the
Notes





The
Company concluded that the Notes meet the definition of “conventional
convertible debt” (as defined in EITF 00-19 and affirmed in EITF
05-2).  EITF 00-19, paragraph 4 states: “The Task Force observed that,
pursuant to paragraphs 11(a) and 12(c) of Statement 133, if an embedded
derivative is indexed to the reporting entity's own stock and would be
classified in stockholders' equity if it was a freestanding derivative, that
embedded derivative is not considered a derivative for purposes of SFAS 133. The
Task Force reached a consensus that for purposes of evaluating under SFAS 133
whether an embedded derivative indexed to a company's own stock would be
classified in stockholders’ equity if freestanding, the requirements of
paragraphs 12–32 of this Issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only realize
the value of the conversion option by exercising the option and receiving the
entire proceeds in a fixed number of shares or the equivalent amount of cash (at
the discretion of the issuer).”





Therefore,
the Company has concluded that the conversion feature of the convertible debt
did not meet the definition of a derivative under SFAS 133 and did not require
separate accounting from the debt instrument.





28


Valuation of Notes and
Warrants and beneficial conversion feature





APB 14
addresses the accounting for convertible debt with a nondetachable (embedded)
conversion feature, the terms of which provide for an initial conversion price
that is greater than the market value at the date of issuance and a conversion
price that does not decrease, except under antidilution protection, but does not
explicitly address situations in which the embedded conversion feature is
“in-the money” at issuance.  The Notes, including any accrued
interest, were exercisable into the Company’s common stock at less than the
closing price of the Company’s stock on the dates of issuance, and the Company
considered this conversion to be an “embedded beneficial conversion
feature.”





EITF 98-5
requires “that embedded beneficial conversion features present in convertible
securities should be valued separately at issuance.” Further, EITF 98-5 states
“that the intrinsic value of the beneficial conversion feature may be greater
than the proceeds allocated to the convertible instrument,” and as such, “that
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the convertible instrument.”
EITF 00-27 further states “that the effective conversion price based on the
proceeds received for or allocated to the convertible instrument should be used
to compute the intrinsic value, if any, of the embedded conversion option. As a
result of this consensus, an issuer should first allocate the proceeds received
in a financing transaction that includes a convertible instrument to the
convertible instrument and any other detachable instruments included in the
exchange (such as detachable warrants) on a relative fair value basis. Then, the
Issue 98-5 model should be applied to the amount allocated to the convertible
instrument, and an effective conversion price should be calculated and used to
measure the intrinsic value, if any, of the embedded conversion
option.”





Accordingly,
we calculated the fair value of both the convertible Notes and the Warrants and
allocated the respective relative fair value percentages of each in determining
the initial values of the convertible Notes and the Warrants.  Because
the Warrants were determined to be derivative liabilities (see conclusion in
next section below and in Note 2 to the consolidated financial statements), the
Company recorded them at fair value as calculated under the Black-Scholes option
pricing model (“BS model”).  For Notes and Warrants issuances where
the net cash proceeds were greater than the fair value of the Warrants, this
difference was allocated to the value of the Notes.  The amount
assigned to the Warrants represented a debt discount on the Notes, which is
amortized over the life of the Notes.  For Notes and Warrants
issuances where the net cash proceeds were less than the fair value of the
Warrants, the Warrants were recorded at fair value and the difference was
recorded as a charge to the consolidated Statement of Operations at
inception.  This second situation occurred with the issuance of the
PP1 Notes in December 2004 and resulted in a charge to the Statement of
Operations of approximately $230,000; no value was allocated to the Notes, with
a full debt discount recorded and amortized over the life of the
Notes.





After
determining the recorded value of the Warrants and Notes (if any), we calculated
the beneficial conversion feature of the Notes, which resulted in an additional
debt discount which was amortized over the life of the Notes.





29


Classification and
accounting for Warrants





We
evaluated the Warrants as a potential free standing derivative under the
criteria in paragraph 11(a) of SFAS 133, which require that a contract
(Warrants) issued by a reporting entity be accounted for as a derivative unless
it is both (1) indexed to its own stock and (2) classified in stockholders’
equity in its statement of financial position. We concluded that the Warrants
were indexed to the Company’s own stock and should be classified in
stockholders’ equity and would qualify for the scope exception contained in this
paragraph.  The Company was required to further review the
requirements for equity classification contained in paragraphs 12-32 of EITF
00-19.  The Company concluded that it had not met criteria (2) above
based on the requirements for equity classification in EITF
00-19.  Specifically, both the PP1 and PP2 Notes contain registration
rights agreements (the “RR agreements”) that stipulate that the Company must
register all “registrable securities” (defined as the “shares of Common Stock
issuable upon conversion of the Notes and the shares of Common Stock issuable
upon exercise of the Warrants”) within a time frame (and this was deemed to be
outside of the control of the Company).  In the event of not filing a
registration statement by a specified date or by not having a registration
effective by a specified date, the Company was obligated to pay liquidated
damages in the amount of 1% of the then current outstanding amount of the Notes
plus accrued interest.  The Company accrued all required liquidated
damages, beginning in FY 2005 with the PP1 Notes. Liquidated damages required
under the RR Agreement for the PP1 Notes ceased on September 25, 2005, which was
the date that the Company filed its initial registration statement for the PP1
Notes and PP1 Warrants.





Accordingly,
the Company concluded that the Warrants did not satisfy the requirement for
equity classification and should be classified, recorded and prospectively
accounted for as derivative liabilities until it has registered all underlying
shares to the Warrants or until such time that the RR agreements are no longer
in effect.  The prospective accounting requires that the Warrants be
remeasured at each balance sheet date based on estimated fair value and any
resultant changes in fair value be recorded to the Statement of
Operations.





The
Company used the BS model for calculating the fair value of all Warrants issued
based on the following assumptions:





Warrants
      issued in PP1
            
            Warrants
      issued in PP2Expected
      volatility
            128%
            
            100%-104%Expected
      term
            5
      years
            
            5
      yearsRisk-free
      interest rate
            3.58%
      - 4.33%
            
            4.46%
      - 4.65%Expected
      dividend yield
            0%
            
            0%


We
estimated volatility primarily based on historical volatility rates through the
date of each closing of the PP1 and PP2 offerings. The Warrants have a
transferability provision and based on guidance provided in SAB 107 for options
issued with such a provision, we used the full, five-year contractual term as
the expected term in the initial valuation of the Warrants.  For the
risk-free interest rate, we used the five year U.S. Treasury zero coupon rate
for the initial valuation of the Warrants.  Expected volatilities,
expected terms and risk-free interest rates were adjusted as of each quarterly
period commensurate with the remaining contractual lives of the Warrants on such
dates and were used to determine the estimated fair value of the Warrants under
the BS model.





Registration Payment
Arrangements





On
December 21, 2006, the EITF issued FASB Staff Position No. 00-19-2 (“FSP
00-19-2”).  FSP 00-19-2 was effective immediately for registration
payment arrangements and the financial instruments subject to those arrangements
that were entered into or modified subsequent to the date of issuance of this
FSP. For registration payment arrangements and financial instruments subject to
those arrangements that were entered into prior to the issuance of this FSP, the
FSP was effective for financial statements issued for fiscal years beginning
after December 15, 2006, and interim periods within those fiscal
years.  Effective April 1, 2007, the Company adopted FSP 00-19-2,
which was applicable to the accounting for the liquidated damages on the PP2
Notes.





30


FSP
00-19-2 requires the Company to account for contingent liquidated damages
separately from the financial instruments to which they relate, which were the
Notes and Warrants issued and sold in the PP1 and PP2
offerings.  Prior to the adoption of FSP-00-19-2, the Company
accounted for the Warrants as derivative liabilities based on the requirement of
the Company to register all underlying shares to the Notes and the
Warrants.  The Company concluded that with the separate accounting
required under FSP 00-19-2 for the liquidated damages, the Warrants by
themselves were properly classified as equity securities (having met all
requirements of EITF 00-19 for equity classification) as of the adoption
date.





Under FSP
00-19-2, the Company is required to estimate and record a contingent liability
if the likelihood is probable that it will pay liquidated damages in future
periods, calculated in accordance with SFAS 5, “Accounting for Contingencies”
(“SFAS 5”) and FASB Interpretation No. 14, “Reasonable Estimation of the Amount
of a Loss.”  Further, FSP 00-19-2 requires that “the financial
instrument(s) subject to the registration payment arrangement shall be
recognized and measured in accordance with other applicable GAAP (for example
SFAS 133 and EITF 00-19) without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement.” Accordingly, on
the date of adoption, the Company accounted for the Warrants separately from the
liquidated damages obligations.





Based on
the above requirements, the Company recorded a cumulative effect of an
accounting change entry (i.e., a charge to the beginning balance of the
accumulated deficit) as of April 1, 2007 for the combination of:  1)
the reclassification of the Warrants from derivative liabilities to equity
securities, and 2) a contingent liability for probable future payment of
liquidated damages (based on the Company’s best estimate as of the date of
adoption, which is through March 31, 2008).  The amount of the
contingent liability recorded was approximately $289,000.  The
difference between the Warrants as measured on the date of adoption and their
original recorded value was approximately $466,000, and, as stated above, was
included in the charge to the beginning balance of the accumulated
deficit.  The total of the cumulative effect of this accounting change
was $755,000.





On April
5, 2007, the Company closed the balance of its PP2 offering and, in accordance
with FSP 00-19-2, recorded a contingent liability and related charge to the
consolidated Statement of Operations for the three months ended June 30, 2007 in
the amount of $251,176 for the estimated liquidated damages related to this
funding through March 31, 2008.  At September 30, 2007, the total
liability for estimated liquidated damages was $540,176.





Share-based
compensation





The
Company concluded that it incorrectly calculated and recorded share-based
compensation expense associated with stock options upon the adoption of SFAS
123R on April 1, 2006.  Specifically, the Company did not calculate
the fair value of employee stock options issued during the period from February
2004 through October 2004 and did not record any related expense in the
Statement of Operations for the fiscal year ended March 31, 2007, or for the
respective quarterly periods for that year, related to the unrecognized stock
option cost as of April 1, 2006.  The Company has not issued any
additional stock options to employees since October 2004.





31


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statements of Operations for the three months ended September 30, 2007 and
2006:





For
      the three months ended
              September
      30, 2007
            
            
            For
      the three months ended
              September
      30, 2006As
      previously reported
            
            
            Adjustments
            
            
            As
      restated
            
            
            As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedGross
      profit
            
            $
            701,511
            
            
            $
            -
            
            
            $
            701,511
            
            
            $
            334,600
            
            
            $
            -
            
            
            $
            334,600Operating
      expenses
            
            
            1,068,798
            
            
            
            
            
            
            
            1,068,798
            
            
            
            552,094
            
            
            
            25,425
            
            
            
            577,519Loss
      from operations
            
            
            (367,287
            )
            
            
            
            
            
            
            (367,287
            )
            
            
            (217,494
            )
            
            
            (25,425
            )
            
            
            (242,919
            )Other
      income (expense)Interest
      expense, net
            
            
            (178,413
            )
            
            
            112,012
            
            
            
            (66,401
            )
            
            
            (12,368
            )
            
            
            
            
            
            
            (12,368
            )Charge
      for inducement to
              convertdebt
      to convertible
              promissorynotes
            
            
            (135,825
            )
            
            
            
            
            
            
            (135,825
            )
            
            
            -
            
            
            
            
            
            
            
            -Amortization
      of discount on
              convertible
      notes
            
            
            -
            
            
            
            (382,012
            )
            
            
            (382,012
            )
            
            
            -
            
            
            
            (27,557
            )
            
            
            (27,557
            )Benefit
      for change in estimated
              fair
      value of derivative
              financialinstruments
              - Warrants
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            172,322
            
            
            
            172,322Net
      loss
            
            $
            (681,525
            )
            
            $
            (270,000
            )
            
            $
            (951,525
            )
            
            $
            (229,862
            )
            
            $
            119,340
            
            
            $
            (110,522
            )Basic
      & diluted net loss per share
            
            $
            (0.08
            )
            
            
            
            
            
            $
            (0.11
            )
            
            $
            (0.03
            )
            
            
            
            
            
            $
            (0.01
            )Weighted
      average shares
              outstanding: basic and diluted
            
            
            8,576,538
            
            
            
            17,931
            
            
            
            8,594,469
            
            
            
            8,149,388
            
            
            
            
            
            
            
            8,149,388





32


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statements of Operations for the six months ended September 30, 2007 and
2006:





For
      the six months ended
              September
      30, 2007
            
            
            For
      the six months ended
              September
      30, 2006As
      previously reported
            
            
            Adjustments
            
            
            As
      restated
            
            
            As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedGross
      profit
            
            $
            1,241,643
            
            
            $
            -
            
            
            $
            1,241,643
            
            
            $
            801,363
            
            
            $
            -
            
            
            $
            801,363Operating
      expenses
            
            
            1,923,988
            
            
            
            
            
            
            
            1,923,988
            
            
            
            1,282,281
            
            
            
            50,850
            
            
            
            1,333,131Loss
      from operations
            
            
            (682,345
            )
            
            
            
            
            
            
            (682,345
            )
            
            
            (480,918
            )
            
            
            (50,850
            )
            
            
            (531,768
            )Other
      income (expense)Interest
      expense, net
            
            
            (326,960
            )
            
            
            196,723
            
            
            
            (130,237
            )
            
            
            (29,787
            )
            
            
            
            
            
            
            (29,787
            )Charge
      for inducement to
              convertdebt
      to convertible
              promissorynotes
            
            
            (135,825
            )
            
            
            
            
            
            
            (135,825
            )
            
            
            -
            
            
            
            
            
            
            
            -Amortization
      of discount on
              convertible
      notes
            
            
            -
            
            
            
            (752,727
            )
            
            
            (752,727
            )
            
            
            -
            
            
            
            (54,814
            )
            
            
            (54,814
            )Charge
      for estimated liquidated
              damages
            
            
            -
            
            
            
            (251,176
            )
            
            
            (251,176
            )
            
            
            -
            
            
            
            
            
            
            
            -Benefit
      for change in estimated
              fair value of derivative
              financialinstruments
              - Warrants
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            108,693
            
            
            
            108,693Net
      loss
            
            $
            (1,145,130
            )
            
            $
            (807,180
            )
            
            $
            (1,952,310
            )
            
            $
            (510,705
            )
            
            $
            3,029
            
            
            $
            (507,676
            )Basic
      & diluted net loss per share
            
            $
            (0.13
            )
            
            
            
            
            
            $
            (0.23
            )
            
            $
            (0.06
            )
            
            
            
            
            
            $
            (0.06
            )Weighted
      average shares
              outstanding: basic and diluted
            
            
            8,576,538
            
            
            
            17,931
            
            
            
            8,594,469
            
            
            
            8,113,504
            
            
            
            
            
            
            
            8,113,504





33


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Balance Sheet as of September 30, 2007:





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCurrent
      liabilities:Accounts
      payable
            
            $
            254,701
            
            
            $
            -
            
            
            $
            254,701Related
      party payables
            
            
            185,661
            
            
            
            
            
            
            
            185,661Accrued
      liabilities
            
            
            274,635
            
            
            
            
            
            
            
            274,635Accrued
      liquidated damages
            
            
            -
            
            
            
            540,694
            
            
            
            540,694Deferred
      revenue
            
            
            737,186
            
            
            
            
            
            
            
            737,186Current
      portion of long-tem debt, net of discount
            
            
            105,137
            
            
            
            (15,000
            )
            
            
            90,137Total
      current liabilities
            
            
            1,557,320
            
            
            
            525,694
            
            
            
            2,083,014Convertible
      promissory notes, net of discount
            
            
            3,485,491
            
            
            
            (2,214,139
            )
            
            
            1,271,352Accrued
      interest
            
            
            372,597
            
            
            
            (199,653
            )
            
            
            172,944Deferred
      revenue
            
            
            130,689
            
            
            
            
            
            
            
            130,689Total
      long-term liabilities
            
            
            3,988,777
            
            
            
            (2,413,792
            )
            
            
            1,574,985Total
      liabilities
            
            
            5,546,097
            
            
            
            (1,888,098
            )
            
            
            3,657,999Stockholders’
      equity (deficit):Preferred
      stock
            
            
            
            
            
            
            
            
            
            
            -Common
      stock
            
            
            8,576
            
            
            
            18
            
            
            
            8,594Additional
      paid-in capital
            
            
            8,721,755
            
            
            
            4,838,743
            
            
            
            13,560,498Cumulative
      effect of adoption of FSP 00-19-2
            
            
            -
            
            
            
            (755,115
            )
            
            
            (755,115
            )Accumulated deficit
            
            
            (10,343,610
            )
            
            
            (2,195,548
            )
            
            
            (12,539,158
            )Total
      stockholders’ equity (deficit)
            
            
            (1,613,279
            )
            
            
            1,888,098
            
            
            
            274,819TOTAL
      LIABILITIES AND STOCKHOLDERS’
              EQUITY
      (DEFICIT)
            
            $
            3,932,818
            
            
            $
            -
            
            
            $
            3,932,818





34


The table
below summarizes the effect of the restatement adjustments as well as the
correction in errors in the reporting of components of cash flows from
operations and cash flows from financing activities on the Consolidated
Statement of Cash Flows for the six months ended September 30,
2007:





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (1,145,130
            )
            
            $
            (807,181
            )
            
            $
            (1,952,311
            )Adjustments
      used to reconcile net loss to net cash used in
              operating
      activities:Charge
      for estimated liquidated damages
            
            
            -
            
            
            
            251,176
            
            
            
            251,176Amortization
      of discount on convertible promissory notes -
              outside
      investors
            
            
            -
            
            
            
            732,809
            
            
            
            732,809Amortization
      of discount on convertible promissory notes -
              related
      parties
            
            
            -
            
            
            
            19,918
            
            
            
            19,918Charge
      for inducement to convert debt to convertible
              promissory
      notes
            
            
            -
            
            
            
            135,825
            
            
            
            135,825Depreciation
      and amortization
            
            
            164,873
            
            
            
            
            
            
            
            164,873Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (272,302
            )
            
            
            
            
            
            
            (272,302
            )Inventory
            
            
            (17,847
            )
            
            
            
            
            
            
            (17,847
            )Prepaid
      expenses
            
            
            (879
            )
            
            
            
            
            
            
            (879
            )Accrued
      liabilities
            
            
            194,108
            
            
            
            (196,425
            )
            
            
            (2,317
            )Accounts
      payable
            
            
            (256,302
            )
            
            
            223,763
            
            
            
            (32,539
            )Deferred
      revenue
            
            
            317,728
            
            
            
            
            
            
            
            317,728Net
      cash used in operating activities
            
            
            (1,015,751
            )
            
            
            359,885
            
            
            
            (655,866
            )Net
      cash used in investing activities
            
            
            (123,067
            )
            
            
            
            
            
            
            (123,067
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds from issuance of convertible promissory notes
            
            
            1,584,885
            
            
            
            (359,885
            )
            
            
            1,225,000Payments
      on convertible promissory notes and other loans
            
            
            (74,215
            )
            
            
            
            
            
            
            (74,215
            )Net
      payments on line of credit
            
            
            (62,094
            )
            
            
            
            
            
            
            (62,094
            )Payments
      on capital lease
            
            
            (2,063
            )
            
            
            
            
            
            
            (2,063
            )Net
      cash provided by financing activities
            
            
            1,446,513
            
            
            
            (359,885
            )
            
            
            1,086,628Net
      increase  in cash and cash equivalents
            
            
            307,695
            
            
            
            
            
            
            
            307,695Cash
      and cash equivalents at beginning of year
            
            
            534,871
            
            
            
            
            
            
            
            534,871Cash
      and cash equivalents at end of year
            
            $
            842,566
            
            
            $
            -
            
            
            $
            842,566





35


The table
below summarizes the effect of the restatement adjustments on the Consolidated
Statement of Cash Flows for the six months ended September 30,
2006.  There was no impact on cash flows from investing or financing
activities.





As
      previously reported
            
            
            Adjustments
            
            
            As
      restatedCASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (510,705
            )
            
            $
            3,029
            
            
            $
            (507,676
            )Adjustments
      used to reconcile net loss to net cash used in
              operating
      activities:
            
            
            306,972
            
            
            
            
            
            
            
            306,972Amortization
      of discount on convertible promissory notes
            
            
            -
            
            
            
            54,814
            
            
            
            54,814Benefit
      for change in estimated fair value of derivative
              financial
      instruments - Warrants
            
            
            -
            
            
            
            (108,693
            )
            
            
            (108,693
            )Share-based
      compensation
            
            
            -
            
            
            
            50,850
            
            
            
            50,850Net
      cash used in operating activities
            
            $
            (203,733
            )
            
            $
            -
            
            
            $
            (203,733
            )





RESULTS
OF OPERATIONS





The
following discussion should be read in conjunction with the consolidated
statements of financial operations, in their entirety.





OVERVIEW
OF RESULTS OF OPERATIONS FOR SECOND QUARTER FISCAL 2008, ENDED SEPTEMBER 30,
2007





The
Company recognized $893,782 in revenue for the quarter, a 31.5% increase over
the previous quarter of $679,787, and an increase of more than 100% over the
same period last year of $399,880.  The Company received over $680,000
in orders for the quarter, and invoiced over $997,000.  The amount
invoiced includes orders received in the previous quarter that were not shipped
until the current quarter.  The Company recognized revenues of
$893,782 for the quarter from projects that were fully installed and
implemented.  Revenues for a number of the projects that were near
full completion at the end of the quarter have not yet been
recognized.







Gross
profit during the quarter was $701,511, or 78.5% of revenues.  Gross
profit for the previous quarter was $540,131 or 79.5% of revenues, and for the
same period in fiscal year 2007, it was $334,600 or 83.7% of
revenues.  The Company's software revenue results in higher margins
than hardware revenue. Because a substantial portion of the Company's revenues
are derived from software sales, our gross margins are positively impacted.
 Management expects that as sales continue to ramp up, margins will remain
above 75 percent.







Sales and
marketing costs for this quarter totaled $172,610 and represented 19.3 percent
of revenues, as compared to $42,726 and 10.7 percent for the same quarter last
year. On an annual basis, we expect marketing and sales costs to continue to
track higher and will represent a substantial portion of total revenues in the
future as we seek to add and manage more customers, increase sales and marketing
programs to enable our VAR channel, build brand awareness and increase the
number of web-based seminars and sponsored events.  As the Company
develops support for additional platforms, we anticipate that the Company will
increase visibility through participation in future industry
events.  While we also anticipate that the Company will continue to
leverage some of the marketing programs funded by large technology and VAR
partners, the Company’s participation will be reflected in increased sales and
marketing costs.





The
Company continued to add personnel to support increased demand anticipated from
its participation in Cisco’s Industry Solutions Partner Network, and development
of its platform to support hosted solutions provided by Sylantro
Systems.





36


The
Company’s sales continue to show diversification across
industries.  Sales for the quarter ended September 30, 2007 were
distributed among six primary vertical markets in the following percentages:
financial services 9.22%, healthcare 5.33%, government 19.09%, education 44.35%,
manufacturing 0%, management and retail 16.85%.  The Company has
continued to reduce dependency on any single reseller as it has continued to
expand its VAR relationships.





LIQUIDITY
AND CAPITAL RESOURCES





For the
six months ended September 30, 2007, the Company used $655,866 of cash from
operating activities, used cash of $123,067 from investing activities and
generated net cash of $1,086,628 from financing activities.  The
Company generated cash of $1,225,000 from the issuance of the PP2 Notes offering
that closed in April 2007.





At
September 30, 2007, the Company had cash, cash equivalents and short-term
marketable securities of $842,566, as compared to $1,137,826 at June 30, 2007
and $59,554 at September 30, 2006.  At September 30, 2007, the Company
had accounts receivable of $591,020, as compared to $630,381 at June 30, 2007
and $115,278 at September 30, 2006, and deferred revenue of $867,875, as
compared to $769,908 at June 30, 2007 and $263,379 at September 30,
2006.





From the
start of operations in May 2003 through the end of the current quarter,
operations have been funded primarily through sales, financing obtained from
private investors, and from the PP1 and PP2 private placements.





The
Company does not have any special purpose entities, and other than operating
leases for office space and computer equipment, which are described below, the
Company does not engage in off-balance sheet financing arrangements. The Company
does have a bank line of credit with Chase bank for $50,000 and has a factoring
agreement with Allied Capital Group whereby Allied Capital will purchase, with
recourse, up to $750,000 of accounts receivable at any one
time.  These agreements, although not heavily used, enable the Company
to smooth its cash-flow cycles and to expand its capability to fund
manufacturing credit requirements. At September 30, 2007, there were no balances
outstanding on these lines of credit.





Future
capital requirements will depend on many factors including: rate of revenue
growth; the expansion of marketing and sales activities; the timing and extent
of spending to support product development efforts and expansion into new
territories; the timing of introductions of new services and enhancements to
existing services; and the continuing market acceptance of the Company's
products and services.  To the extent that existing cash and
securities and cash from operations are insufficient to fund future activities,
the Company will need to raise additional funds through public or private equity
or debt financing.  Although the Company is currently not a party to
any agreement or letter of intent with respect to potential investments in, or
acquisitions of, complementary businesses, services or technologies, the Company
may enter into these types of arrangements in the future, which could also
require additional equity or debt financing. Additional funds, however, may not
be available on terms favorable to the Company or at all.





Critical
Accounting Policies




We
prepare our financial statements in accordance with US GAAP. The accounting
policies most fundamental to understanding our financial statements are those
relating to recognition of revenue, our use of estimates and the accounting for
convertible debt and warrants. For a detailed discussion on the application of
these accounting policies, see Note 2 to our audited consolidated financial
statements contained in our 2007 10-KSB/A.





Recently Issued Accounting
Pronouncements





We
discuss the potential impact of recent accounting pronouncements in Note 1 to
the unaudited consolidated financial statements contained in this
Report.





37


ITEM
3.  Controls and Procedures




As of
September 30, 2007, we carried out an evaluation, under the supervision and with
the participation of the Company's management, chief executive and chief
financial officers, of the effectiveness of the Company's disclosure controls
and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act").  Based upon the evaluation, the
Company's chief executive and chief financial officers concluded that, as of the
end of the period, our disclosure controls and procedures were effective in
timely alerting them to material information required to be included in the
reports that we file and submit pursuant to the Exchange Act.




During
the second quarter of fiscal year 2008, the Company’s chief executive officer
(and its “Certifying Officer” for the fiscal year ended March 31, 2008)
determined that our financial management team did not have sufficient experience
in the preparation of the narrative disclosures in notes to the interim
financial statements and that our disclosure controls and procedures (as defined
in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), were not effective in ensuring that information
is recorded, processed, summarized and communicated to our Certifying Officers,
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  In an effort to remediate this
deficiency, we engaged an independent financial consulting group to provide the
personnel resources necessary for technical accounting and for the recording of
complex financial transactions, preparation of financial statements, and
management reporting and disclosure reporting.  This engagement
resulted in a comprehensive review of our financial statements and disclosure
controls, whereby we became aware of errors made in applying the Company’s new
deferred revenue recognition policy adopted in the third quarter of fiscal year
2007.  On November 9, 2007, we determined that we needed to restate
our financial statements for the fiscal year ended March 31, 2007, which were
included in our Annual Report on Form 10-KSB for the fiscal year ended March 31,
2007 (“2007 10-KSB”), originally filed with the Commission on June 29,
2007.  Also, we concluded that our Form 10-QSB filings for the
quarterly periods ended June 30, 2007 (“June 2007 10-QSB”) and September 30,
2007 (“September 2007 10-QSB”) should be restated.  We amended and
refiled the 2007 10-KSB and the June 2007 10-QSB during the fiscal quarter ended
December 31, 2007, and amended and refiled the September 2007 10-QSB during the
fiscal quarter ended March 31, 2008.




As a
result of these restatements, we conducted a search and retained new financial
leadership with the addition of a Chief Financial Officer in March of
2008.  On July 14, 2008, the CFO was terminated, for, among other
reasons, the inability to provide the necessary technical accounting expertise
for the recording of complex financial transactions, preparation of financial
statements, management reporting and disclosure reporting.  To
remediate the situation, an independent consultant with prior CFO experience
with micro-cap companies was retained to complete the financial reporting
requirements.  While engaged, this financial consultant identified the
Company’s incorrect accounting for the Company’s PP1 Notes, PP1 Warrants, PP2
Notes, PP2 Warrants and share-based compensation expense related to stock
options issued to employees during the fiscal years 2005 through
2007.  This resulted in the Company further amending its consolidated
financial statements for the fiscal year ended March 31, 2007 and restating its
consolidated financial statements for the fiscal year ended March 31, 2006.
Further, we have amended our consolidated financial statements for the three
months ended June 30, 2007 and restated our consolidated financial statements
for the three months ended June 30, 2006. In addition,, we have amended our
consolidated financial statements for the three and six months ended September
30, 2007 and restated our consolidated financial statements for the three and
six months ended September 30, 2006, both of which are included in this
Report.  Further and as a result of the impact of these errors, the
Company expects to restate and refile its Form 10-QSB filings for the period
ended December 31, 2007 within a reasonably practical time period.




38


We
estimate that during the second half of fiscal 2009, the Certifying Officer,
along with the Company’s other management representatives, will complete
remediation measures that may include engaging an independent consulting firm to
further evaluate, remediate, implement, document and test the internal controls
in these key areas:





1.
            Order
      Entry Accounting & Reporting


2.
            Debt/Equity
      Accounting & Compliance


3.
            Cash
      & Other Working Capital
Management


4.
            Compensation
      Accounting & Administration


5.
            Other
      Assets & Liability Account
Management


6.
            Financial
      Reporting





We will
also monitor our disclosure controls and procedures on a continuing basis to
ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management,
including its principal executive and principal financial officers, as
appropriate, to allow timely decisions regarding required disclosure. In the
future as such controls change in relation to developments in our business and
financial reporting requirements, our evaluation and monitoring measures will
also address any additional corrective actions that may be
required.





Our
management does not expect that our disclosure control procedures or our
internal control over financial reporting will prevent all errors and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, have been detected.





39


PART
II - OTHER INFORMATION





ITEM
1.  Legal Proceedings





The
Company, and certain of its current and former officers and directors are
defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS.
GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH
HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No.
DV05-0600-G; G-134th District Court, Dallas County, Texas.  The
plaintiff has alleged a number of complaints against the defendants, including
breach of fiduciary duty, misappropriation of corporate opportunities, fraud,
fraudulent inducement, breach of contract, tortuous interference with contract,
fraudulent transfer, and shareholder oppression arising in connection with the
license agreement between the Company and XBridge in May 2003 and the
acquisition of XBridge by the Company in May 2005.  The parties held a
mediation conference in April 2006 and have come to an understanding with
respect to the principal elements of a potential settlement.  We are
currently in the process of negotiating definitive settlement
agreements.








ITEM
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





None








ITEM
3.  Defaults Upon Senior Securities





None








ITEM
4.  Submission Of Matters To A Vote Of Securities Holders





None








ITEM
5.  Other Information





None








40


ITEM
6.  Exhibits





(a)
            EXHIBITS





The
following documents are filed herewith or have been included as exhibits to
previous filings with the Commission and are incorporated herein by this
reference:





Exhibit
No.                      Exhibit





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 by and between Derek Downs and Cistera Networks, Inc. dated as
      of January 1, 2005 (Incorporated by reference from Exhibit 10.1 to the
      Company’s Registration Statement on Form SB-2 filed with the Commission on
      May 23, 2007)





10.2
            Employment
      Agreement by and between Cynthia Garr and Cistera Networks, Inc. dated as
      of January 1, 2005 (Incorporated by reference from Exhibit 10.2 to the
      Company’s Registration Statement on Form SB-2 filed with the Commission on
      May 23, 2007)





10.3
            Employment
      Agreement between Gregory Royal and Cistera Networks Canada, Inc. dated as
      of October 1, 2004(Incorporated by reference from Exhibit 10.3 to the
      Company’s Registration Statement on Form SB-2 filed with the Commission on
      May 23, 2007)





31.1
            Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002





32.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002


41


SIGNATURES


Pursuant
to the requirements of the Exchange Act of 1934, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.








CISTERA
      NETWORKS, INC.Date: October
      10, 2008
            
            /s/    Derek
      P. DownsDerek
      P. DownsChief
      Executive Officer and interimChief
      Financial Officer(Principal
      Executive, Financial andAccounting
      Officer)