UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C.  20549





Form
      10-QSB





(Mark
      One)


[X]   QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
      the
      quarterly period ended:December
      31,
      2007





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





For
      the
      transition period from ________ to ________


Commission
      file number0-17304





CISTERA
      NETWORKS,
      INC.


(Exact
      name of small business issuer as specified
      in its charter)





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





17304
      Preston Road, Suite
      975, Dallas, TX 75252


(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
      January 25, 2008, the issuer had
      8,801,384 shares of its common stock outstanding.





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








1


PART
      I





Item
      1.  Financial Statements





CISTERA
      NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED
      BALANCE
      SHEETS








(Unaudited)
            
            
            (As
                Amended)December
                31,
            
            
            March
                31,2007
            
            
            2007Current
                Assets:Cash
            
            $
            447,601
            
            
            $
            534,871Accounts
                Receivable (Net)
            
            
            425,367
            
            
            
            314,178Other
                Receivable
            
            
            16,037
            
            
            
            23,927Inventory
            
            
            150,367
            
            
            
            75,743Prepaid
                Expenses
            
            
            27,553
            
            
            
            10,143Total
                Current Assets
            
            
            1,066,925
            
            
            
            958,862Fixed
                Assets:Computer
                Equipment
            
            
            203,595
            
            
            
            123,035Trade
                Show Booth & Fixtures
            
            
            15,637
            
            
            
            10,641Office
                Equipment
            
            
            207,174
            
            
            
            129,064Property
                held under capital leases
            
            
            10,205
            
            
            
            10,205Less
                Accumulated Depreciation
            
            
            (200,383
            )
            
            
            (150,899
            )Net
                Fixed Assets
            
            
            236,228
            
            
            
            122,046Intangible
                Assets:Intellectual
                property
            
            
            2,717,755
            
            
            
            2,717,755Software
                development
            
            
            366,040
            
            
            
            366,040Less
                Amortization
            
            
            (992,633
            )
            
            
            (788,802
            )Net
                Intangible Assets
            
            
            2,091,162
            
            
            
            2,294,993Total
                Assets
            
            $
            3,394,315
            
            
            $
            3,375,901




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




2




CISTERA
      NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED
      BALANCE
      SHEETS


(continued)








(Unaudited)
            
            
            (As
                Amended)December
                31,
            
            
            March
                31,2007
            
            
            2007Current
                Liabilities:Accounts
                payable
            
            $
            264,522
            
            
            $
            544,796Accrued
                liabilities
            
            
            593,803
            
            
            
            598,023Related
                party payables
            
            
            171,137
            
            
            
            24,038Line
                of credit
            
            
            17,534
            
            
            
            62,094Convertible
                promissory notes
            
            
            92,140
            
            
            
            144,000Current
                portion of long-term debt
            
            
            433,571
            
            
            
            2,415Current
                portion of deferred income
            
            
            862,785
            
            
            
            465,179Total
                Current Liabilities
            
            
            2,435,492
            
            
            
            1,840,545Long-Term
                LiabilitiesConvertible
                promissory notes
            
            
            3,060,206
            
            
            
            1,900,606Accrued
                interest
            
            
            505,474
            
            
            
            -Deferred
                income
            
            
            184,216
            
            
            
            84,968Total
                Long-Term Liabilities
            
            
            3,749,896
            
            
            
            1,985,574Total
                Liabilities
            
            
            6,185,388
            
            
            
            3,826,119Stockholders’
                Equity:Common
                Stock, Par Value $.001Authorized
                50,000,000 shares,Issued
                8,576,538 shares at December 31, 2007 and8,292,022
                shares at March 31, 2007
            
            
            8,576
            
            
            
            8,292Paid-In
                Capital
            
            
            8,721,755
            
            
            
            8,739,970Retained
                Deficit
            
            
            (11,521,404
            )
            
            
            (9,198,480
            )Total
                Stockholders’ Equity(Deficit)
            
            
            (2,791,073
            )
            
            
            (450,218
            )Total
                Liabilities and Stockholders’ Equity
            
            $
            3,394,315
            
            
            $
            3,375,901





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


3


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF
      OPERATIONS




(Unaudited)For
                the three months endedDecember
                31,2007
            
            
            2006(restated)Revenues
            
            $
            618,761
            
            
            $
            601,871Cost
                of goods sold
            
            
            (98,501
            )
            
            
            (92,559
            )Gross
                Profit
            
            
            520,260
            
            
            
            509,312Expenses:Sales
                and marketing
            
            
            349,722
            
            
            
            113,631Research
                and development
            
            
            166,550
            
            
            
            134,475Software
                consulting
            
            
            523,443
            
            
            
            224,412General
                and administrative
            
            
            426,255
            
            
            
            216,432Total
                Expenses
            
            
            1,465,970
            
            
            
            688,950Other
                Income (Expense)Interest
                income
            
            
            3,760
            
            
            
            8Interest
                expense
            
            
            (235,844
            )
            
            
            (12,431
            )Total
                Other Income (Expense)
            
            
            (232,084
            )
            
            
            (12,423
            )Net
                Loss
            
            $
            (1,177,794
            )
            
            $
            (192,061
            )Basic
                & Diluted loss per share
            
            $
            (0.14
            )
            
            $
            (0.02
            )Weighted
                Average Shares
            
            
            8,576,538
            
            
            
            8,152,648





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





4


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF
      OPERATIONS




(Unaudited)For
                the nine months endedDecember
                31,2007
            
            
            2006(restated)Revenues
            
            $
            2,192,330
            
            
            $
            1,496,488Cost
                of goods sold
            
            
            (430,427
            )
            
            
            (185,813
            )Gross
                Profit
            
            
            1,761,903
            
            
            
            1,310,675Expenses:Sales
                and marketing
            
            
            698,424
            
            
            
            212,067Research
                and development
            
            
            475,026
            
            
            
            383,125Software
                consulting
            
            
            1,201,320
            
            
            
            681,164General
                and administrative
            
            
            1,015,188
            
            
            
            694,875Total
                Expenses
            
            
            3,389,958
            
            
            
            1,971,231Other
                Income (Expense)Interest
                income
            
            
            21,883
            
            
            
            59Interest
                expense
            
            
            (580,927
            )
            
            
            (42269
            )Debt
                conversion expense
            
            
            (135,825
            )
            
            
            -Total
                Other Income (Expense)
            
            
            (694,869
            )
            
            
            (42,210
            )Net
                Loss
            
            $
            (2,322,924
            )
            
            $
            (702,766
            )Basic
                & Diluted loss per share
            
            $
            (0.27
            )
            
            $
            (0.09
            )Weighted
                Average Shares
            
            
            8,576,538
            
            
            
            8,126,989







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


5


CISTERA
      NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF
      CASH FLOWS





(Unaudited)For
                the nine months endedDecember
                31,2007
            
            
            2006(restated)CASH
                FLOWS FROM OPERATINGACTIVITIES:Net
                Loss
            
            $
            (2,322,924
            )
            
            $
            (702,766
            )Adjustments
                used to reconcile net loss to net cashprovided
                by (used in) operating activities:Depreciation
                and amortization
            
            
            253,317
            
            
            
            270,861Deferred
                income
            
            
            499,929
            
            
            
            329,486Stock
                issued for accrued interest
            
            
            -
            
            
            
            13,060Debt
                issued for services and fees
            
            
            13,078
            
            
            
            -Decrease
                in other receivable
            
            
            7,890
            
            
            
            -(Increase)
                in accounts receivable
            
            
            (111,189
            )
            
            
            (266,399
            )(Increase)
                in inventory
            
            
            (74,500
            )
            
            
            (33,773
            )(Increase)
                Decrease in prepaid expenses
            
            
            (17,410
            )
            
            
            32,208Increase
                in accrued liabilities
            
            
            625,167
            
            
            
            71,121(Decrease)
                in accounts payable
            
            
            (238,856
            )
            
            
            (151,831
            )Net
                Cash Used in operating activities
            
            
            (1,365,498
            )
            
            
            (438,033
            )CASH
                FLOWS FROM INVESTINGACTIVITIES:Purchase
                of equipment
            
            
            (163,666
            )
            
            
            (8,197
            )Net
                cash Used in investing activities
            
            
            (163,666
            )
            
            
            (8,197
            )CASH
                FLOWS FROM FINANCINGACTIVITIES:Payments
                on capital lease
            
            
            (2,415
            )
            
            
            (2,621
            )Cash
                received from convertible debt
            
            
            1,584,885
            
            
            
            338,362Proceeds
                from loans
            
            
            -
            
            
            
            16,434Proceeds
                from line of credit
            
            
            17,500
            
            
            
            251,421Payments
                on line of credit
            
            
            (62,178
            )
            
            
            -Payments
                on loans
            
            
            (95,898
            )
            
            
            (70,434
            )Net
                Cash Provided by Financing Activities
            
            
            1,441,894
            
            
            
            533,162Net
                Increase (Decrease) in cash and cash equivalents
            
            
            (87,270
            )
            
            
            86,932Cash
                and Cash Equivalents at beginning of period
            
            
            534,871
            
            
            
            60,990Cash
                and Cash Equivalents at end of period
            
            $
            447,601
            
            
            $
            147,922





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


6


CISTERA
      NETWORKS, INC. &
SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF
      CASH FLOWS


(continued)





(Unaudited)For
                the nine months endedDecember
                31,2007
            
            
            2006(restated)SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid during the year for:Interest
            
            $
            14,878
            
            
            $
            7,376Franchise
                and income taxes
            
            $
            -
            
            
            $
            -SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND
                FINANCING ACTIVITIES:Debt
                conversion expense
            
            
            135,825
            
            
            
            -





On
      April 29, 2005, the Company issued
      173,511 shares of common stock for accrued liabilities of $482,364.





On
      May 27, 2005, the Company issued
      4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
      and cancelled 2,150,000 shares then held by XBridge, in connection with the
      Company’s merger with XBridge Software, Inc.  In the merger, the
      Company acquired all of the assets and liabilities of XBridge Software, valued
      at a net of $782,245, and intellectual property valued at
      $2,717,755.  Goodwill of $2,134,821 was also acquired and subsequently
      expensed.





On
      June 24, 2005, the Company issued
      100,000 shares of common stock from the exercise of outstanding stock options
      at
      $2 per share.





Effective
      September 21, 2005, the
      Company’s authorized shares were increased from 10 million shares to 50 million
      shares.





On
      December 31, 2005, the Company
      issued 311,600 shares of stock in connection with the exercise of warrants
      issued in the 2004 private placement of notes and warrants at $1.30 per
      share.





On
      December 31, 2005, the Company
      issued 946,392 shares of stock upon conversion of certain outstanding notes
      issued in the 2004 private placement.  The amount of principal
      represented by these shares was $859,000.  The amount of accrued
      interest represented by these shares was $87,392.  These notes
      converted at $1.00 per share.











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


7





On
      March 31, 2006, the Company issued
      67,785 shares of stock due to the conversion of note principal and interest
      from
      private placement fund holders.  The amount of principal represented
      by these shares was $57,000.  The amount of accrued interest
      represented by these shares was $10,785.





On
      March 31, 2006 the Company issued
      2,000 shares of stock to a former contractor for providing project management
      services valued at $2,000.  As part of the initial agreement with this
      contractor, these shares were to be issued upon the delivery of services defined
      by the agreement.





On
      March 31, 2006, the Company issued
      8,000 shares of stock as part of a legal settlement.  The shares had
      been previously issued and were cancelled as part of a court order, but were
      never returned to the Company.  As per the settlement, the 8,000
      outstanding were cancelled and subsequently reissued as unrestricted
      shares.





On
      July 1, 2006, the Company issued
      70,893 shares of 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 $.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.





On
      October 25, 2006, the Company issued
      122,028 shares of common stock in connection with the exercise of options issued
      in the merger of the Company with XBridge Software, Inc.  The exercise
      price for these options was $.01 per share.












































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


8


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS





NOTE
      1 - NATURE OF
      OPERATIONS AND GOING CONCERN





The
      accompanying consolidated financial
      statements have been prepared in conformity with accounting principles generally
      accepted in the United States, 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 financial statements as
      of December 31, 2007, and for the three and nine month periods then ended
      reflect, in the opinion of management, all adjustments (which include only
      normal recurring adjustments) necessary to fairly state the financial position
      and results of operations for the three and nine months.  Operating
      results for interim periods are not necessarily indicative of the results that
      can be expected for full years.





Organization
      and Basis of
      Presentation





CNH
      Holdings Company, a Nevada corporation (the Company) was incorporated in
      Delaware on April 15, 1987, under the name of I.S.B.C. Corp.  The
      Company subsequently changed its name first to Coral Companies, Inc., and then
      to CNH Holdings Company.  Domicile was changed to Nevada in
      1997.  The Company conducted an initial public and secondary offerings
      during the 1980's.  On June 15, 1998, the Company acquired Southport
      Environmental and Development, Inc.  This acquisition however was
      subsequently rescinded by agreement between the parties and made a formal order
      of the court effective April 19, 2000.  This order put the Company in
      the position that it occupied






9




CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      1 - NATURE OF
      OPERATIONS AND GOING CONCERN (continued)





at
      June
      14, 1998, as if none of the actions that had occurred from that time to the
      date
      of rescission had transpired.




On
      May 5,
      2003, Corvero Networks, Inc., a Florida corporation, was formed by CNH Holdings
      Company as a wholly owned subsidiary to acquire the use of certain technology
      known as the XBridge Technology.  This technology has as its principal
      component the Corvero Convergence Platform.  The acquisition was
      accomplished by entering into a license agreement with XBridge Software, Inc.,
      a
      Delaware corporation.




The
      Company was in the development stage from January 1, 1992 to May 5,
      2003.  Since May 5, 2003, the Company has commenced planned principal
      operations and is no longer in the development stage.




On
      August
      31, 2004, as part of a corporate restructuring aimed at simplifying the Company’s operating
      structure, Corvero Networks merged into CNH Holdings and began doing
      business as Cistera Networks.  As a continuation of this
      restructuring, effective May 27, 2005, the Company acquired XBridge in a merger
      of XBridge with a newly formed Company subsidiary.  As consideration
      for the acquisition, we issued an aggregate of 4,150,000 shares of our common
      stock, net of the cancellation of 2,150,000 shares of our common stock held
      by
      XBridge at the time of the acquisition.




On
      September 27, 2005, we changed our
      name to Cistera Networks, Inc.




Nature
      of
      Operations





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-based and hardware-based solutions are
      delivered on our open-architecture, component-based platform known as the
      Cistera ConvergenceServerTM, which allows administrators to centrally manage
      advanced applications for IP telephony environments across large single-site
      and
      multi-site private voice/data networks.  Although the origins of the
      solution started back in 2000, we began operations in May 2003 as a public
      entity under the name CNH Holdings Company.




Our
      general business plan is to drive
      adoption of the Cistera technology--establishing the Cistera ConvergenceServer
      as the leading platform for advanced IP-based applications, through the
      strategic technology relationships with the IP Telephony equipment
      providers—Cisco, Nortel, Sylantro and Avaya, as well as the leading channel
      resellers—AT&T, Verizon, Bell Canada, Comstor, BT,
      etc.  The


10


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      1 - NATURE OF
      OPERATIONS AND GOING CONCERN (continued)





Company
      plans to extend our product and technological leadership in the IP
      communications industry, and to increase our market penetration by continuing
      to
      expand our sales and distribution channels and by capitalizing on new market
      opportunities like two-way radio interoperability mobile/wireless
      devices.





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES





This
      summary of accounting policies for
      Cistera Networks, Inc. is presented to assist in understanding the Company's
      consolidated financial statements.  The accounting policies conform to
      generally accepted accounting principles and have been consistently applied
      in
      the preparation of the consolidated financial statements.





Principles
      of
      Consolidation





The
      consolidated financial statements
      for the quarter ended December 31, 2007 include the accounts of Cistera
      Networks, Inc. and its wholly-owned subsidiary XBridge Software,
      Inc.  XBridge Software, Inc. was acquired by the Company on May 27,
      2005.





The
      results of subsidiaries acquired or
      sold during the year are consolidated from their effective dates of acquisition
      through their effective dates of disposition.





All
      significant inter-company balances
      and transactions have been eliminated.





Use
      of
      Estimates





Our
      consolidated financial statements
      are prepared in accordance with accounting principles generally accepted in
      the
      United States.  The preparation of these consolidated financial
      statements requires us to make estimates and assumptions that affect the
      reported amounts of assets, liabilities, revenues, costs and expenses, and
      related disclosures.  On an ongoing basis, we evaluate our estimates
      and assumptions.  Our actual results may differ from these estimates
      under different assumptions or conditions.





Cash
      and Cash
      Equivalents





For
      purposes of the statement of cash
      flows, the Company considers all highly liquid debt instruments purchased with
      a
      maturity of three months or less to be cash equivalents to the extent the funds
      are not being held for investment purposes.














11


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES (continued)





Accounts
      Receivable





Accounts
      receivable are comprised of
      the following at December 31, 2007 and March 31, 2007:





(Unaudited)December
                31,
            
            
            March
                31,2007
            
            
            2007Receivables
                Assigned to Factor
            
            $
            259,390
            
            
            
            1,023,280Advances
                to (from) factor
            
            
            (220,494
            )
            
            
            (997,559
            )Fees,
                expenses, & charges to reserve
            
            
            (2,270
            )
            
            
            (25,641
            )Amounts
                due from factor
            
            
            36,626
            
            
            
            80Unfactored
                accounts receivable
            
            
            399,088
            
            
            
            314,098Allowances
                for returns and uncollectible accounts
            
            
            (10,347
            )
            
            
            -$
            425,367
            
            
            $
            314,178





Pursuant
      to a factoring agreement with Allied Capital Partners L.P., effective December
      2007, the Company is able to factor up to $1,500,000 of receivables at any
      one
      time at an 80% advance rate, with recourse against the Company in the event
      of a
      loss. The Company’s obligations to Allied are collateralized by all of the
      Company’s accounts receivable, chattel paper, general intangibles, supporting
      obligations, inventory and proceeds thereof. The term of the current agreement
      is for a period of twelve months with automatic twelve month renewals
      thereafter.





For
      the
      nine months ended December 31, 2007 and the twelve months ended March 31, 2007,
      the factoring charges amounted to 0.875% and 1.59%, respectively, of the
      receivables purchased.








Concentration
      of Credit
      Risk





The
      Company has no significant
      off-balance sheet concentrations of credit risk such as foreign exchange
      contracts, options contracts or other foreign hedging arrangements.





Inventory





Inventory
      consists of equipment that
      has been purchased but not yet shipped, shipped but not yet installed, and
      equipment that has been returned to the Company because the customer has
      cancelled the project or there were problems with the hardware. The inventory
      assets are recorded at cost.


12





CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES (continued)





Revenue
      Recognition





In
      an effort to establish an accounting
      policy that provides shareholders with the most accurate representation of
      the
      company's performance, the company has instituted a new policy that only
      declares revenue from software, hardware and services once fully installed
      and
      implemented. This method of revenue reporting will not reflect all orders
      received and shipped during the reporting period, but only those orders
      received, shipped and completely installed within the reporting
      period.  Prior to the adoption of this policy, the Company recognized
      revenues when orders for our products and solutions were received and
      shipped.




In
      future
      earnings reporting, the Company will continue to provide the "booked" revenue
      figures, i.e., the amount based upon purchase orders (POs) received from
      customers and delivered to resellers, during the reporting period in addition
      to
      the new recognized revenue reporting policy.




The
      Company recognizes revenue according to SOP 97-2 (Software Revenue Recognition)
      as defined by paragraphs 07-14 in SOP 97-2 and as amended by SOP 98-9
      (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
      Transactions).  This SOP provides guidance on when revenue should be
      recognized and in what amounts for licensing, selling, leasing or otherwise
      marketing computer software (including computer hardware and support
      services).




Technical
      support services revenue is deferred and recognized ratably over the period
      during which the services are to be performed, which is typically from one
      to
      three years. Advanced services revenue is recognized upon delivery or completion
      of performance.




We
      make
      sales to distributors and retail partners and recognize revenue based on a
      sell-through method using information provided by them.








































13


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES (continued)





Depreciation
      and
      Amortization





Fixed
      assets are recorded at cost and
      depreciated using straight-line and accelerated methods over the estimated
      useful lives of the assets that range from three to seven
      years.  Fixed assets consisted of the following at December 31, 2007
      and March 31, 2007:





(Unaudited)December
                31,
            
            
            March
                31,2007
            
            
            2007Computer
                Equipment
            
            $
            203,595
            
            
            $
            123,035Trade
                Show Booth & Fixtures
            
            
            15,637
            
            
            
            10,641Office
                Equipment
            
            
            207,174
            
            
            
            129,064Property
                held under capital leases
            
            
            10,205
            
            
            
            10,205Less
                accumulated depreciation
            
            
            (200,383
            )
            
            
            (150,899
            )Total
            
            $
            236,228
            
            
            $
            122,046





Maintenance
      and repairs are charged to
      operations; betterments are capitalized.  The cost of property sold or
      otherwise disposed of and the accumulated depreciation thereon are eliminated
      from the property and related accumulated depreciation accounts, and any
      resulting gain or loss is credited or charged to income.





Total
      depreciation expense for the nine
      months ended December 31, 2007 and 2006 was $49,485 and $27,901,
      respectively.





14


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES (continued)





Intangible
      Assets





The
      Company has adopted the Financial
      Accounting Standards Board SFAS No., 142, “Goodwill and Other Intangible
      Assets.”  SFAS 142 requires, among other things, that companies no
      longer amortize goodwill, but instead test goodwill for impairment at least
      annually.  In addition, SFAS 142 requires that the Company identify
      reporting units for the purposes of assessing potential future impairments
      of
      goodwill, reassess the useful lives of other existing recognized intangible
      assets, and cease amortization of intangible assets with an indefinite useful
      life.  An intangible asset with an indefinite useful life should be
      tested for impairment in accordance with the guidance in SFAS 142.





Intangible
      Assets consisted of the
      following at December 31, 2007 and March 31, 2007:





(Unaudited)December
                31,
            
            
            March
                31,Intangible
                Asset
            
            2007
            
            
            2007
            
            Amortization
                PeriodIntellectual
                Property
            
            $
            2,717,755
            
            
            $
            2,717,755
            
            10
                YearsSoftware
                Development
            
            
            366,040
            
            
            
            366,040
            
            4
                YearsLess
                accumulated amortization
            
            
            (992,633
            )
            
            
            (788,802
            )Total
            
            $
            2,091,162
            
            
            $
            2,294,993





Software
      development costs include all
      development costs incurred after the Company’s software became “technologically
      feasible”.  Prior to the software reaching that stage, all development
      costs were expensed as incurred.  Once the software was developed to
      the point of being ready for sale, the Company began amortizing the costs over
      the term of the license agreement it entered into which was four
      years.  The software development costs were acquired in the
      acquisition of XBridge Software, Inc.





On
      May 27, 2005, the Company issued
      2,000,000 shares of common stock to acquire the assets and liabilities of
      XBridge Software, Inc.  The shares were valued at the market price on
      the effective


15


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      2 - SUMMARY OF
      ACCOUNTING POLICIES (continued)





date
      of
      the acquisition, which was $2.65 per share.  The Company acquired net
      assets valued at $782,245 and intellectual property valued at
      $2,717,755.  The Company has determined that the intellectual property
      has a useful life of 10 years, and is using straight-line
      amortization.





Total
      amortization expense for the nine
      months ended December 31, 2007 and 2006 was $203,832 and $243,767,
      respectively.





The
      estimated amortization for the next
      five years is as follows:





2008
            
            $
            271,7762009
            
            
            271,7762010
            
            
            271,7762011
            
            
            271,7762012
            
            
            271,776Total
            
            $
            1,358,880





Earnings
      (Loss) per
      Share





Basic
      earnings (loss) per share has
      been computed by dividing the earnings for the period applicable to the common
      stockholders by the weighted average number of common shares outstanding during
      the years.





Diluted
      loss per common share for the
      nine months ended December 31, 2007 and 2006 is not presented as it would be
      anti-dilutive.  At December 31, 2007, the total number of potentially
      dilutive common stock equivalents was 10,399,356.  At December 31,
      2006, the total number of potentially dilutive common stock equivalents was
      3,557,058.





Reclassification





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





Deferred
      Income





Deferred
      income represents contracts for
      certain revenue to be received in the future and come from support and
      maintenance contracts as well as product sales and professional services which
      have been shipped


16


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS





and
      billed but not
      installed.  Support and maintenance contracts are executed on an
      annual basis and the revenue from these contracts is recognized on a monthly
      basis as the support fees are earned.





Research
      and
      Development





Research
      and development expenses
      consist primarily of salaries and related expenses, and allocated overhead
      related to increasing the functionality and enhancing the ease of use of the
      convergence platform and applications.





Stock
      Options





Effective
      April 1, 2006, the company
      adopted the provisions of SFAS No. 123(R). SFAS No. 123(R) requires employee
      equity awards to be accounted for under the fair value method. Accordingly,
      share-based compensation is measured at grant date, based on the fair value
      of
      the award. Prior to April 1, 2006, the company accounted for awards granted
      to
      employees under its equity incentive plans under the intrinsic value method
      prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for
      Stock Issued to Employees” (APB 25), and related interpretations, and provided
      the required pro forma disclosures prescribed by SFAS No. 123, “Accounting for
      Stock-Based Compensation” (SFAS No. 123), as amended.  No stock
      options were granted to employees during the nine months ended December 31,
      2007
      or 2006 and accordingly, no compensation expense was recognized under APB No.
      25
      for the nine months ended December 31, 2007 or 2006. In addition, no
      compensation expense is required to be recognized under provisions of SFAS
      No.
      123(R) with respect to employees.





Under
      the modified prospective method of
      adoption for SFAS No. 123(R), the compensation cost recognized by the company
      beginning on April 1, 2006 includes (a) compensation cost for all equity
      incentive awards granted prior to, but not yet vested as of April 1, 2006,
      based
      on the grant-date fair value estimated in accordance with the original
      provisions of SFAS No. 123, and (b) compensation cost for all equity incentive
      awards granted subsequent to April 1, 2006, based on the grant-date fair value
      estimated in accordance with the provisions of SFAS No. 123(R). The company
      uses
      the straight-line attribution method to recognize share-based compensation
      costs
      over the service period of the award. Upon exercise, cancellation, forfeiture,
      or expiration of stock options, or upon vesting or forfeiture of restricted
      stock units, deferred tax assets for options and restricted stock units with
      multiple vesting dates are eliminated for each vesting period on a first-in,
      first-out basis as if each vesting period was a separate award. To calculate
      the
      excess tax benefits available for use in offsetting future tax shortfalls as
      of
      the date of implementation, the company followed the alternative transition
      method discussed in FASB Staff Position No. 123(R)-3.























17


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      3 - CONCENTRATION OF
      RISK





For
      the quarter ended December 31,
      2007, the Company receives approximately 36% of its gross revenues from its
      top
      three re-sellers.  This represents an increase in concentration of
      business from the 20% reported for the quarter ended December 31,
      2006.  The loss of these re-sellers would adversely impact the
      business of the Company.





NOTE
      4 - INCOME
      TAXES





As
      of March 31, 2007, the Company had a
      net operating loss carry forward for income tax reporting purposes of
      approximately $6,965,000 that may be offset against future taxable income
      through 2027.  Due to the uncertainty with respect to ultimate
      realization, the Company has established a valuation allowance for all deferred
      income tax assets.





March
                31,2007
            
            
            2006Net
                Operating Losses
            
            $
            2,357,900
            
            
            $
            1,912,500Valuation
                Allowance
            
            
            (2,357,900
            )
            
            
            (1,912,500
            )$
            -
            
            
            $
            -





The
      provision for income taxes differs
      from the amount computed using the federalUSstatutory
      income tax rate as
      follows:





March
                31,2007
            
            
            2006Provision
                (Benefit) at US Statutory Rate
            
            $
            445,400
            
            
            $
            868,576Increase
                (Decrease) in Valuation Allowance
            
            
            (445,400
            )
            
            
            (868,576
            )$
            -
            
            
            $
            -





The
      Company evaluates its valuation
      allowance requirements based on projected future operations.  When
      circumstances change and cause a change in management's judgment about the
      recoverability of deferred tax assets, the impact of the change on the valuation
      is reflected in current income.





18


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      5 - LEASE
      COMMITMENT





The
      Company currently leases
      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.  This office space is used as the
      Corporate Headquarters.





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




January
                  1, 2008 - March 31, 2008
              
              $
              22,878April
                  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
              
              $
              181,087





NOTE
      6 - CAPITAL
      LEASE





On
      October 20, 2004, the Company
      entered into an agreement with Dell Financial Services to lease five laptop
      computers and a laser printer.  The lease is for a period of
      thirty-six months with a payment of approximately $369 per month.  The
      Company has an end of lease purchase option of $1.00.  The Company has
      capitalized a total of $10,205 under capital leases for the computers and
      printer in the financial statements.  The assets are depreciated over
      their related lease terms.  Depreciation of assets under capital
      leases is included in depreciation expense for the three months ended December
      31, 2007.





As
      of
      December 31, 2007, there were no further payments due under this capital lease
      agreement.






19




CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      7 - COMMON
      STOCK





On
      April 29, 2005, the Company issued
      173,511 shares of common stock for accrued liabilities of $482,364.





On
      May 27, 2005, the Company issued
      4,150,000 shares of common stock to the shareholders of XBridge Software, Inc.
      and cancelled 2,150,000 shares then held by XBridge, in connection with the
      Company’s merger with XBridge Software, Inc.  In the merger, the
      Company acquired all of the assets and liabilities of XBridge Software, valued
      at a net of $782,245, and intellectual property valued at
      $2,717,755.  Goodwill of $2,134,821 was also acquired and subsequently
      expensed.





On
      June 24, 2005, the Company issued
      100,000 shares of common stock from the exercise of outstanding stock options
      at
      $2 per share.





Effective
      September 21, 2005, the
      Company’s authorized shares were increased from 10 million shares to 50 million
      shares.





On
      December 31, 2005, the Company
      issued 311,600 shares of stock in connection with the exercise of warrants
      issued in the 2004 private placement of notes and warrants at $1.30 per
      share.





On
      December 31, 2005, the Company
      issued 946,392 shares of stock upon conversion of certain outstanding notes
      issued in the 2004 private placement.  The amount of principal
      represented by these shares was $859,000.  The amount of accrued
      interest represented by these shares was $87,392.  These notes
      converted at $1.00 per share.





On
      March 31, 2006, the Company issued
      67,785 shares of stock upon conversion of certain outstanding notes issued
      in
      the 2004 private placement.  The amount of principal represented by
      these shares was $57,000.  The amount of accrued interest represented
      by these shares was $10,785.  These notes converted at $1.00 per
      share.





On
      March 31, 2006 the Company issued
      2,000 shares of stock to a former contractor for providing project management
      services valued at $2,000.  As part of the initial agreement with this
      contractor, these shares were to be issued upon the delivery of services defined
      by the agreement.





On March 31, 2006, the Company reissued 8,000 shares of stock as part of a
      legal
      settlement.  The shares had been previously issued and were cancelled
      as part of a court order, but were never returned to the Company.  As
      per the settlement, the 8,000 outstanding were cancelled and subsequently
      reissued as unrestricted shares.






20




CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      7 - COMMON STOCK
      (continued)





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 $.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.




On
      October 25, 2006, the Company issued 122,028 shares of common stock in
      connection with the exercise of options issued in the merger of the Company
      with
      XBridge Software, Inc.  The exercise price for these options was $.01
      per share.




NOTE
      8 – 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 December 31, 2007, the total amount outstanding on this
      line of credit was $17,534.










21


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)











NOTE
      9 - 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% with a due date of December 31, 2005.  At
      December 31, 2007, the total amount of principal and interest due on this note
      was $7,691.





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.





On
      March 31, 2006, the Company received
      a loan of $6,400 from one of its executive officers.  The note carries
      an interest rate of 8% and was due March 31, 2007.  At December 31,
      2007, the total amount of principal and interest due on this note was
      $0.





On
      June 30, 2006, the Company received a
      short term loan of $16,434 from one of its executive officers.  At
      December 31, 2007, the balance of the loan was $0.





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.





22


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      9 – RELATED PARTY
      TRANSACTIONS (continued)





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.





On
      April 5, 2007, the Company issued a
      Senior Unsecured Convertible Promissory Note in the principal amount of $30,000,
      and issued 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 $4,863 had been accrued on this
      Note.





On
      April 5, 2007, the Company issued a
      Senior Unsecured Convertible Promissory Note in the principal amount of $70,779,
      and issued 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 $11,472 had been accrued on this
      Note.





NOTE
      10 -
      ACQUISITIONS





On
      May 5, 2003, the Company, Corvero
      Networks, Inc., a Florida corporation our wholly owned subsidiary (Corvero),
      and
      XBridge Software, Inc., a Delaware corporation, entered into a license agreement
      pursuant to which Corvero agreed to license from XBridge Software, Inc. all
      rights, title, and interest of XBridge in and to certain technologies and
      intellectual properties (the “XBridge Technology”).  The exclusive
      license was worldwide in scope and had a term of twenty years, and included,
      but
      was not limited to, the right to make alternations and/or derivative works
      and
      to license, sublicense, cross-license or otherwise transfer the XBridge
      Technology for commercial purposes, and all rights to derivative works would
      be
      the Company’s sole and exclusive property.  This license did not,
      however, give the Company the right to transfer or resell the XBridge Technology
      without the consent of XBridge.  CNH Holdings Company, through
      multiple subsequent amendments to the licensing agreement, ultimately issued
      an
      aggregate of 2,000,000 shares of its common stock to XBridge.





On
      August 31, 2004, CNH Holdings
      Company absorbed its wholly-owned subsidiary Corvero Networks, Inc., and began
      operating as Cistera Networks.  As of that date, all of Corvero's
      rights under the License Agreement dated May 5, 2003 passed to Cistera Networks,
      Inc.





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. Through this acquisition, the Company acquired net assets valued
      at


23


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      10 –
ACQUISITIONS (continued)





$782,245
      and intellectual property valued at $2,717,755.  Of this amount,
      $2,134,821 was allocated to goodwill and has subsequently been
      expensed.





NOTE
      11 - CONVERTIBLE
      DEBT





Effective
      December 13, 2004, the
      Company issued and sold an aggregate of $1,146,000 in principal amount of Senior
      Unsecured Convertible Promissory Notes (the “notes”), and
      issued  warrants to purchase 1,146,000 shares of our common stock, par
      value $0.001 per share (the “warrants”).  Of the $1,146,000 in notes,
      $1,004,000 in principal amount of notes were issued for cash, and $142,000
      in
      principal amount of notes were issued in connection with the cancellation of
      an
      equal amount of the Company’s outstanding obligations.





The
      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 notes are outstanding (each, an interest compounding
      date).  The outstanding principal on the notes and all accrued
      interest become due and payable on the earlier of (a) December 13, 2006, or
      (b)
      the date on which a change in control of the Company occurs.





The
      outstanding principal and accrued
      interest on the 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 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 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 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 note holders to convert the note 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 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,





24


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      11 - CONVERTIBLE DEBT
      (continued)





that
      the
      note holders may convert the amount of the proposed prepayment into shares
      of
      our common stock, regardless of the period of time that the notes have then
      been
      outstanding.





The
      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.  Because at that price it would be profitable for the warrant
      holders to exercise their warrants rather than to allow the redemption to
      proceed, we assume they would choose to exercise. However, there is no assurance
      that our stock price will rise to the $3.50 per share redemption trigger price,
      or that all of the warrants will be exercised.





At
      December 31, 2005, a number of 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 represented by these shares was
      $859,000.  The amount of accrued interest represented by these shares
      was $87,392.  At March 31, 2006, three 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 notes converted at $1.00
      per
      share.    At August 31, 2006, one 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 note holder opted to convert their outstanding balance.  As
      of December 31, 2007, there were 17,931 shares to be issued at $1.00 per share
      to convert principal of $15,000 and accrued interest of $2,931.  At
      December 13, 2006, two note holders opted to convert their outstanding balance
      to the second private placement.  The total amount converted was
      $56,071.  During the nine months ended December 31, 2007, the Company
      paid $66,860 of principal and $9,770 of accrued interest towards these
      notes.  At December 31, 2007, there was $92,140 of principal and
      $29,480 of interest due on these notes. During the quarter ended September
      30,
      2007, the company elected to compensate note holders who had opted to convert
      debt into shares of common stock which had not completed registration with
      the
      SEC as of the date the 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
      accrued a liability for the amount of this debt conversion expense, pending
      the
      issuance of the additional shares. 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. The
      total amount of principal and interest due at December 13, 2006 was
      $214,019.








25


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      11 - CONVERTIBLE DEBT
      (continued)





During
      the nine months ended December
      31, 2007, the Company paid $66,860 of principal and accrued interest of $9,770
      towards these notes.  At December 31, 2007, there was $92,140 of
      principal and $29,481 of interest due on these notes.




The
      Company issued and sold a second
      offering of Senior Unsecured Convertible Promissory Notes.  This
      second offering mirrors the terms of the previous Private Placement Funding
      as
      stated above, except for the conversion of stock and interest is set at a fixed
      rate of $0.75 per share, and the warrants are exercisable at an exercise price
      of $1.00 per share.  The notes and accrued interest are due and
      payable two years from the date of the note.  Effective April 5, 2007,
      the Company sold an aggregate of $3,498,776 in principal amount of Senior
      Unsecured Convertible Promissory Notes, and issued warrants to purchase
      3,498,776 shares of the Company’s common stock. Of the $3,498,776 in Notes,
      $2,815,000 in principal amount of Notes were issued for cash, and $683,776
      in
      principal amount of Notes were 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 $110,279 of obligations to
      principal officers and directors in the following amounts: Greg Royal $77,779;
      Derek Downs $30,000; Jim Miller $9,500.
































26


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      12 - STOCK
      OPTIONS





As
      of December 31, 2007, 190,000 of the
      total stock options are not exercisable, as they are not yet formally
      approved.





The
      following table sets forth the
      options outstanding as of March 31, 2007.





WeightedOption
                /
            
            
            Average
            
            
            WeightedWarrants
            
            
            Exercise
            
            
            AverageShares
            
            
            Price
            
            
            Fair
                ValueOptions
                  and warrants outstanding, March 31, 2006
            
            
            2,532,584
            
            
            $
            1.29
            
            
            $
            1.43Warrants
                outstanding from Private Placement
            
            
            1,842,690
            
            
            
            1.00
            
            
            
            1.00Granted,
                Exercise price more than fair value
            
            
            -
            
            
            
            -
            
            
            
            -Granted,
                Exercise price less than fair value
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            (51,814
            )
            
            
            -
            
            
            
            -Exercised
            
            
            (192,831
            )
            
            
            0.18
            
            
            
            -Options
                and warrants outstanding,March
                31, 2007
            
            
            4,130,629
            
            
            $
            1.04


The
      following table sets forth the
      options outstanding as of December 31, 2007.





WeightedOption
                /
            
            
            Average
            
            
            WeightedWarrants
            
            
            Exercise
            
            
            AverageShares
            
            
            Price
            
            
            Fair
                ValueOptions
                  and warrants outstanding, March 31, 2007
            
            
            4,130,629
            
            
            $
            1.04
            
            
            $
            1.43Warrants
                outstanding from Private Placement
            
            
            1,656,088
            
            
            
            1.00
            
            
            
            1.00Granted,
                Exercise price more than fair value
            
            
            -
            
            
            
            -
            
            
            
            -Granted,
                Exercise price less than fair value
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Options  and
                warrants outstanding,December
                31, 2007
            
            
            5,786,717
            
            
            $
            1.03





27


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      12 - STOCK OPTIONS
      (continued)





Exercise
      prices for optioned shares
      outstanding as of December 31, 2007 ranged from $1.10 to $2.00. A summary of
      these options by range of exercise prices is shown as follows:





Weighted-
            
            Weighted-Option
                /
            
            Weighted-
            
            Shares/
            
            Average
            
            AverageWarrants
            
            Average
            
            Warrants
            
            Exercise
                Price
            
            ContractualExercise
            
            Shares
            
            Exercise
            
            Currently
            
            Currently
            
            RemainingPrice
            
            Outstanding
            
            Price
            
            Exercisable
            
            Exercisable
            
            Life2.00
            
            700,000
            
            2.00
            
            700,000
            
            2.00
            
            1
                years.23
            
            81,353
            
            .23
            
            81,353
            
            .23
            
            5
                years.46
            
            325,564
            
            .46
            
            325,564
            
            .46
            
            2
                years.46
            
            189,822
            
            .46
            
            189,822
            
            .46
            
            2
                years1.30
            
            990,200
            
            1.30
            
            990,200
            
            1.30
            
            2
                years1.00
            
            1,842,690
            
            1.00
            
            1,842,690
            
            1.00
            
            5
                years1.00
            
            1,656,088
            
            1.00
            
            1,656,088
            
            1.00
            
            5
                years





In
      September 2005, although the stock
      price had not achieved the levels necessary to allow the Company to redeem
      the
      warrants, warrant holders were offered an incentive of one-half warrant for
      each
      warrant exercised.  This incentive expired on December 31,
      2005.  The Company raised an additional $405,080 from the exercise of
      311,600 warrants and issued 155,800 incentive warrants.





NOTE
      13 -
      CONTINGENCIES





The
      Company, and certain of its current
      and former officers and directors are defendants in litigation pending inDallas,Texas,
      styledKINGDON
      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 principle
      elements of a potential settlement.  We are currently in the process
      of negotiating definitive settlement agreements.











28


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)








NOTE
      14 – UNCERTAIN TAX
      POSITIONS





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 condensed consolidated financial position and 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 December 31, 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.








NOTE
      15 - RESTATEMENT OF
      PREVIOUSLY ISSUED FINANCIAL STATEMENTS





Cistera
      Networks, Inc. has determined
      the need to restate its historical financial statements for the quarter ended
      September 30, 2007.The restatement is required because of an error made
      in accounting for debt conversion
      expenses related to a private placement, and an error made in accounting for
      outstanding shares of common stock from the corporate restructuring in August
      2004. The required restatement also includes a balance sheet reclassification
      of
      accrued interest on convertible debt that is due in more than one year from
      current liabilities to long-term liabilities.





The
      restatement will
      not affect reported cash balances or liquidity. The effect on the second quarter
      of fiscal year 2008 will be a $135,825 increase in the reported net loss, and
      an
      increase of 284,516 in the number of ending and weighted average common shares
      outstanding as of September 30, 2007. Basic and diluted loss per share for
      the
      three and six month periods ended September 30, 2007 will increase by $0.01,
      to
      $0.08 and $0.13 per share, respectively. The restatement of debt conversion
      expenses will not affect gross profit and gross profit
      margins.


29


CISTERA
      NETWORKS, INC.&
SUBSIDIARY


NOTES
      TO CONSOLIDATED
      FINANCIAL STATEMENTS


(continued)





NOTE
      15 - RESTATEMENT OF
      PREVIOUSLY ISSUED FINANCIAL STATEMENTS (continued)





Rigorous
      new financial
      and accounting processes and procedures that have been implemented as a result
      of the internal review by management in the second quarter of fiscal year 2008
      are expected to ensureproper
      accounting for
      debt conversion expenses and shareholders equity in the
      future.





The
      Company intends to file an amended
      quarterly report containing the restated financial results with the Securities
      and Exchange Commission. The restated financial results for the second quarter
      of fiscal year 2008 and the 10-QSB for the second quarter of fiscal year 2008
      will be filed no later than January 25, 2008. The restatement of financial
      results will also require the Company to file a new amendment to the effective
      registration statement the Company previously filed with the
      Commission.

























































































30


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 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 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 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


31


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.





During
      the quarter the company continued
      to focus on two initiatives that offersignificantrevenue
      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.





Fiscal
      Year




Our
      fiscal year ends on March 31.  References to fiscal 2007, for example,
      refer to the fiscal year ended March 31, 2007.





Quarter
      Summary





While
      the
      Company's reported revenues were insufficient to support operations and it
      reported a net loss of $1,177,794 in this period, the actual cash flow for
      the
      period enabled the Company to support operations with a draw of $585,000 from
      the funds raised in the private placement that closed in April
      2007.





Sales
      and
      marketing costs for this quarter totaled $349,722 representing  34.6%
      of total bookings, 56.5% of total reported revenues, and 23.9% of total
      operating expenses. This compares to a total of $113,631 for the same quarter
      last year, representing 17.2% of total bookings, 18.9% of total reported
      revenues, and 16.5% of total operating expenses.








32





(Unaudited)
            
            
            (Unaudited)For
                three months ended
            
            
            For
                three months endedDecember
                31,
            
            
            December
                31,2007
            
            
            2006(restated)Sales
                and marketing expense
            
            $
            349,722
            
            
            $
            113,631Total
                orders received/booked
            
            $
            1,010,000
            
            
            $
            660,000Percent
                of total orders received
            
            
            34.6
            %
            
            
            17.2
            %Total
                reported revenue
            
            $
            618,761
            
            
            $
            601,871Percent
                of total reported revenue
            
            
            56.5
            %
            
            
            18.9
            %Total
                operating expenses
            
            $
            1,465,970
            
            
            $
            688,950Percent
                of total operating expenses
            
            
            23.9
            %
            
            
            16.5
            %





On
      an
      annualized basis, we expect marketing and sales costs to continue to track
      with
      total bookings 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’s sales continue to show diversification across
      industries.  Sales for the quarter ended December 31, 2007 were
      distributed among six primary vertical markets in the following percentages:
      financial services 17.72%, healthcare 4.95%, government 14.91%, education
      31.20%, manufacturing 3.30%, management and retail 19.52%.  The
      Company has continued to reduce dependency on any single reseller as it has
      continued to expand its VAR relationships.





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 THIRD QUARTER FISCAL 2008, ENDED DECEMBER 31,
      2007





The
      Company recognized $618,761 in revenue for the quarter, a 30.8% decrease from
      the previous quarter, and a 2.8% increase over the $601,871 reported for the
      same period last year.  The Company received over $1 million in orders
      for the quarter, and invoiced $875,391.  The amount invoiced includes
      orders received


33


in
      the
      previous quarter that were not shipped until the current quarter.  The
      Company recognized revenues of $618,607 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.





During
      the current reporting period, we
      uncovered an error in the recognition of debt conversion expense incurred during
      the second quarter of fiscal year 2008, and an error in accounting for
      outstanding shares of common stock from the corporate restructuring in August
      2004. We also identified an error in the classification of accrued interest
      on
      convertible debt that was due in more than one year.





Accordingly,
      on January 25, 2008, Form
      8-K was filed with the SEC informing it of management’s intention to amend the
      financial report for that period.  All reported amounts in this
      filing, and all comparisons reflect the amendments that were made and
      reported.





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.




Gross
      profit during the quarter was $520,260, or 84.1% of revenues.  Gross
      profit for the previous quarter was $701,511 or 78.5% of revenues, and for
      the
      same period in fiscal year 2007, it was $509,312 or 84.6% 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 fromsoftware
      sales, our
      gross margins are positively impacted.




Management
      expects that as sales
      continue to ramp up, margins will remain above 75 percent.




As
      expected, the Company's revenues were insufficient to support operations and
      the
      Company sustained a net loss in this period.





LIQUIDITY
      AND CAPITAL RESOURCES





At
      December 31, 2007, the Company had cash, cash equivalents and short-term
      marketable securities of $447,601, as compared to $842,566 at September 30,
      2007
      and $147,922 at December 31, 2006.  At December 31, 2007, the Company
      had accounts receivable of $425,367, as compared to $591,020 at September 30,
      2007 and $464,718 at December 31, 2006. Current notes and accounts payable
      and
      accrued liabilities totaled $1,572,707, as compared to $820,134 at September
      30,
      2007 and $2,018,481 at December 31, 2006. Deferred revenue was $1,047,001,
      as
      compared to $867,875 at September 30, 2007 and $558,645 at December 31, 2006
      (as
      restated).





The
      $394,965 decrease in cash and cash equivalents during the third fiscal quarter
      is attributable to the investment in personnel and other resources to support
      the future growth expectations for the business.


34


The
      $165,653 decrease in accounts receivable during the third fiscal quarter is
      attributable to the factoring of $259,390 of receivables. Without this
      factoring, the balance in receivables would have been higher than the level
      at
      the end of the prior quarter.





The
      $752,573 total increase in current notes and accounts payable and accrued
      liabilities during the third fiscal quarter is due to $530,850 of convertible
      debt from the second private placement that became due within twelve months
      as
      of December 31, 2007 and was reclassified from long-term liabilities to current
      liabilities. In regards to this increase, the company anticipates that the
      majority of noteholders will convert this debt to equity at a rate comparable
      to
      the greater than 90% level achieved with the first private placement. Another
      $186,580 of the overall increase is due to commissions that were payable to
      the
      Company’s sales force. The increase in commissions was due to the one-time
      impact of a liability accrued for past services rendered, and commissions earned
      by the sales force during the third fiscal quarter under the Company’s newly
      restructured sales compensation plan.





The
      majority of the $179,126 increase in deferred revenue during the third fiscal
      quarter is due to payment received for support and maintenance services. The
      Company’s experience has shown that the cost of rendering support and
      maintenance services is minimal in relation to the revenue to be recognized
      over
      the life of the support agreements. Increases in deferred revenue attributable
      to support and maintenance services represent an expansion of the recurring
      revenue component of the company’s future earnings.





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 two 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 $1.5 million of receivables.  These agreements enable
      the Company to smooth its cash-flow cycles and to expand its capability to
      fund
      manufacturing credit requirements. At December 31, 2007, a total of $17,534
      was
      outstanding on the Chase line of credit, and $259,390 of receivables had been
      factored with Allied Capital.





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.










35


ITEM
      3.  CONTROLS
      AND PROCEDURES




As
      of the end of the reporting period,
      December 31, 2007, the Company carried out an evaluation, under the supervision
      and with the participation of management, including the Company’s Chief
      Executive Officer and the Chief Financial Officer, of the effectiveness and
      design and operation of the disclosure controls and procedures pursuant to
      Rule
      13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), which
      disclosure controls and procedures are designed to insure that information
      required to be disclosed by a company in the reports that it files under the
      Exchange Act is recorded, processed, summarized and reported within required
      time periods specified by the SEC’s rules and forms.  During the
      course of that evaluation, errors requiring the restatement of the previous
      fiscal quarter financial statements that were filed with the SEC on November
      19,
      2007 were identified.The restatement is required because of an error
      made in accounting for debt
      conversion expenses related to a private placement, and an error made in
      accounting for outstanding shares of common stock from the corporate
      restructuring in August 2004. The required restatement also includes a balance
      sheet reclassification of accrued interest on convertible debt that is due
      in
      more than one year from current liabilities to long-term liabilities. Based
      upon
      that evaluation, the Chief Executive Officer and the Chief Financial Officer
      concluded that the disclosure controls and procedures are not effective in
      timely alerting them to material information relating to the Company required
      to
      be included in the Company’s periodic SEC filings. Based upon these findings,
      action is currently being taken to remedy this situation through a combination
      of personnel and process solutions.





There
      were no changes in the Company’s
      internal control over financial reporting during the three months ended December
      31, 2007 that materially affected, or are reasonably likely to materially
      affect, the Company’s internal control over financial
      reporting.





Management,
      including the Chief
      Executive Officer and Chief Financial Officer, does not expect that the
      disclosure controls or internal controls over financial reporting will prevent
      all errors or all instances of fraud.  A control system, no matter how
      well designed and operated, can provide only reasonable, not absolute, assurance
      that the control system’s objectives will be met.  Further, the design
      of a control system must reflect the fact that there are resource constraints,
      and the benefits of controls must be considered relative to their
      costs.  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, within the Company have been
      detected.  These inherent limitations include the realities that
      judgments in decision-making can be faulty, and that breakdowns can occur
      because of simple error or mistake.  Controls can also be circumvented
      by the individual acts of some persons, by collusion of two or more people,
      or
      by management override of the controls.  The design of any system of
      controls is based in part upon certain assumptions about the likelihood of
      future events, and any design may not succeed in achieving its stated goals
      under all potential future conditions.  Over time, controls may become
      inadequate because of changes in conditions or deterioration in the degree
      of
      compliance with policies or procedures.  Because of the inherent
      limitation of a cost-effective control system, misstatements due to error or
      fraud may occur and not be detected.








36


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 inDallas,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/Not
      Applicable







ITEM
      3.  Defaults Upon Senior
      Securities





None/Not
      Applicable.








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





None/Not
      Applicable.








ITEM
      5.  Other
      Information





None.
































37


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.
            Exhibit4.1
            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, 20076.1
            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 200231.2
            Certification
                Pursuant to Section
                302 of the Sarbanes-Oxley Act of 200232.1
            Certification
                Pursuant to 18
                U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
                Sarbanes-Oxley Act of 200232.2
            Certification
                Pursuant to 18
                U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The
                Sarbanes-Oxley Act of
                2002


38


SIGNATURES





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





CISTERA
      NETWORKS,
      INC.








Date:
      January
      25,
      2008                                                                                        
/s/    Derek
      P. Downs


Derek
      P. Downs


President


(Principal
      Executive
      Officer)





/s/    Cynthia
      A. Garr


Cynthia
      A. Garr


Chief
      Financial
      Officer,


Executive
      Vice-President
      of


Corporate
      Development, and
      Director


(Principal
      Financial
      Officer)











39