UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30th, 2010

[_]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________

Commission File Number 0-17304

Cistera Networks, Inc.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

91-1944887

(I.R.S. Employer Identification No.)

6509 Windcrest Drive, Suite 160, Plano, Texas 75024

(Address of principal executive offices) (Zip Code)

972-381-4699

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company ý

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

As of June 30, 2010, 18,022,605 shares of the registrant’s stock, $0.001 par value per share, were outstanding.

CISTERA NETWORKS, INC & SUBSIDIARY

TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION


Item 1.	Financial Statements:

	Consolidated Balance Sheets – June 30, 2010 (unaudited) and March 31, 2010 (audited)	3
	Consolidated Statements of Operations – For the three months ended June 30, 2010 and 2009 (unaudited)	4
	Consolidated Statements of Stockholders’ Deficit – June 30, 2010 (unaudited) and March 31, 2010 (audited)	5
	Consolidated Statement of Cash Flows – For the three months ended June 30, 2010 and 2009 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4T.	Controls and Procedures	21

PART II: OTHER INFORMATION


Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits	23

SIGNATURES

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CISTERA NETWORKS, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2010 (Unaudited)			March 31st, 2010 (Audited)
Current assets
Cash and cash equivalents	$	6,322		$	12,954
Accounts receivable, net of allowance for doubtful accounts of $-0-		185,704			188,983
Inventory		29,400			45,000
Prepaid expenses		90,983			113,565
Total current assets		312,409			360,502

Property and equipment, net		203,118			206,960
Intangible assets, net		1,443,003			1,479,667
Total long-term assets		1,646,121			1,686,627

TOTAL ASSETS	$	1,958,530		$	2,047,129

Current liabilities
Accounts payable		344,659			350,853
Accrued liquidated damages – outside investors		177,402			177,402
Accrued liabilities		1,618,537			1,636,700
Deferred revenue		573,935			609,532
Convertible promissory notes and other notes payable, net of discount		793,426			793,426
Related party payables		78,676			78,676
Total current liabilities		3,586,635			3,646,589

Deferred Revenue		354,534			357,337
Other long-term liabilities		45,723			45,722
Total long-term liabilities		400,257			403,059

Total liabilities		3,986,892			4,049,648

Commitments and contingencies (Note 4)

Stockholders' deficit:
Preferred stock, $0.01 par value; 1,000,000 shares authorized;		-			-
-0- shares issued and outstanding		-			-
Common stock, $0.001 par value; 50,000,000 shares authorized;		18,023			18,023
18,022,605 shares issued and outstanding,
Respectively
Additional paid-in capital		19,541,214			19,541,214
Accumulated deficit		(21,587,599	)		(21,561,756	)
Total stockholders' deficit		(2,028,362	)		(2,002,519	)

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	1,958,530		$	2,047,129

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

CISTERA NETWORKS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended June 30,
	2010			2009 (unaudited)
	(unaudited)			2009 (unaudited)

Revenues
Convergence solutions	$	329,907		$	189,143
Professional services		24,172			35,504
Support and maintenance		290,094			233,320
Total revenues		644,173			457,967

Cost of revenues
Convergence solutions		128,912			103,013
Professional services		42,500			47,718
Support and maintenance		30,215			18,000
Total cost of revenues		201,627			168,731

Gross Profit		442,546			289,236

Operating expenses
Sales and marketing		65,056			57,497
Software development		74,755			29,149
Engineering and support		43,151			64,057
General and administrative		236,790			151,750
Depreciation and amortization		5,929			97,660
Total operating expenses		425,681			400,113

Income / (Loss) from operations		16,865			(110,877	)

Other income (expense)
Interest income		-			-
Other income		304			56
Interest expense		(43,012	)		(66,055	)
Abandonment loss					(15,815	)
Charge for inducements related to stock issued to convertible note holders		-			-
Amortization of discount on convertible notes – outside investors		-			-
Amortization of discount on convertible notes – related parties		-			-
Credit (charge) for estimated liquidated damages		-			-
Total other income (expense)		(42,708	)		(81,814	)

Net Income / (Loss)	$	(25,843	)	$	(192,691	)

Basic & diluted net income / (loss) per share	$	0.00		$	(0.01	)

Weighted average shares outstanding – basic and diluted		18,022,605			17,422,605

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

CISTERA NETWORKS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

	Preferred Stock				Common Stock				Additional paid-in capital		Accumulated deficit			Total stockholders’ equity (deficit)
	Shares		Amount		Shares		Amount
Balance March 31, 2010 (audited)		-	$	-		18,022,605	$	18,023	$	19,541,214	$	(21,561,756	)	$	(2,002,519	)
Net income / (loss)												(25,843	)		(25,843	)
Balances June 30, 2010 (unaudited)		-	$	-		18,022,605	$	18,023	$	19,541,214	$	(21,587,599	)	$	(2,028,362	)

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

CISTERA NETWORKS, INC. & SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended June 30
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss)	$	(25,843	)	$	(192,691	)
Adjustments used to reconcile net loss to net cash used in operating activities:
Charge for inducement to convert debt to convertible promissory notes		-			-
Amortization of discount on convertible promissory notes – outside investors		-			-
Amortization of discount on convertible promissory notes – related parties		-			-
Charge (credit) for estimated liquidated damages – outside investors		-			-
Share-based compensation		-			-
Abandonment Loss		-			15,815
Gain of disposition of assets		-			3,149
Depreciation and amortization		74,706			97,660
Changes in operating assets and liabilities:
Accounts receivable		3,279			56,307
Related party receivables		-			-
Inventory		15,600			8,932
Prepaid expenses		22,582			(21,031	)
Accounts payable		(6,194	)		41,425
Related party payables		-			-
Accrued sales commissions		-			-
Other accrued liabilities		(18,163	)		42,037
Deferred revenue		(38,400	)		26,768
Other long-tem liabilities		-			714
Net cash used in operating activities		27,567			79,085

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of intangible assets		(32,112	)
Purchase of property and equipment, net		(2,087	)		(882	)
Net cash used in investing activities		(34,199	)		(882	)

CASH FLOWS FROM FINANCING ACTIVITIES:

Payments on other notes payable and capital lease		-			(8,386	)
Net cash provided by financing activities		-			(8,386	)

Net increase (decrease) in cash and cash equivalents		(6,632	)		69,817
Cash and cash equivalents at beginning of year		12,954			1,493
Cash and cash equivalents at end of year	$	6,322		$	71,310

CISTERA NETWORKS, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)

	Three months ended June
	2010		2009

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the year for:
Interest	$	-	$	8,435
Income taxes

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Conversion of convertible promissory notes and related accrued interest and accrued liquidated damages to common stock
Conversion of accounts payable and other accrued liabilities to convertible promissory notes
Conversion of accrued liabilities to common stock
Transfer of inventory to equipment

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

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Cistera Networks, Inc. (“Cistera” the “Company” or “we”) and its wholly-owned subsidiary have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual audited consolidated financial statements, and reflect all adjustments, consisting only of normal, recurring adjustments necessary for a fair presentation in accordance with US GAAP. The results of operations for interim period presented are not necessarily indicative of the operating results for the full year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2010 (the “2009 10-K”).

Significant Accounting Policies

The Company prepares its financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2010 10-K.

Recently Issued Accounting Pronouncements

In April 2009, the FASB updated ASC 820 to provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have decreased significantly. ASC 820 also provides guidance on identifying circumstances that indicate a transaction is not orderly. The implementation of ASC 820 did not have a material effect on the Company’s financial statements.

In April 2009, the FASB updated ASC 825 regarding interim disclosures about fair value of financial instruments. ASC 825 requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. The implementation of ASC 825 did not have a material effect on the Company’s financial statements.

In April 2009, the FASB updated ASC 320 for proper recognition and presentation of other-than-temporary impairments. ASC 320 provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. The implementation of ASC 320 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB created the Accounting Standards Codification, which is codified as ASC 105. ASC 105 establishes the codification as the single official non-governmental source of authoritative accounting principles (other than guidance issued by the SEC) and supersedes and effectively replaces previously issued GAAP hierarchy framework. All other literature that is not part of the codification will be considered non-authoritative. The codification is effective for interim and annual periods ending on or after September 15, 2009. The Company has applied the codification, as required, beginning with the 2009 Form 10-K. The adoption of the codification did not have a material impact on the Company’s financial position, results of operations or cash flows.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

In June 2009, the FASB updated ASC 855, which established principles and requirements for subsequent events. This guidance details the period after the balance sheet date which the Company should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which the Company should recognize events or transactions occurring after the balance sheet date in its financial statements and the required disclosures for such events. ASC 855 is effective for interim and annual periods ending after June 15, 2009. The implementation of ASC 855 did not have a material effect on the Company’s financial statements.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-13 (ASU 2009-13), which provided an update to ASC 605. ASU 2009-13 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting in multiple-deliverable arrangements. The amendments in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is currently evaluating the impact that this update will have on its Financial Statements.

Balance Sheet Accounts

Accounts receivable are comprised of the following:

	June 30, 2010		March 31, 2010

Non-factored Accounts Receivable		185,704		188,983
Total accounts receivable	$	185,704	$	188,983

Accrued liabilities are comprised of the following:

	June 30, 2010		March 31, 2010

Accrued expenses	$	131,375	$	148,484
Reserve for litigation contingency		650,000		650,000
Accrued compensation and payroll taxes		257,312		299,663
Accrued Interest		435,600		395,075
Other		144,250		143,478
Total Accrued liabilities	$	1,618,537	$	1,636,700

Other long-term liabilities are comprised of the following:

	June 30, 2010		March 31, 2010

Deferred rent	$	45,722	$	45,722
	$	45,722	$	45,722

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Earnings per Share

Basic earnings (loss) per share is based on the weighted average number of common shares outstanding.

Diluted earnings (loss) per share is computed using the weighted average number of common shares outstanding plus the number of common shares that would be issued assuming exercise or conversion of all potentially dilutive common stock equivalents. The Company had approximately 6.6 million and 6.5 million potentially dilutive common stock equivalents (in the form of stock options and stock purchase warrants) outstanding as of June 30, 2010 and 2009, respectively. These potentially dilutive common stock equivalents have been excluded from the diluted share calculations for the three months ended June 30, 2010 and 2009, respectively, as they were anti-dilutive as a result of the net losses incurred for those periods. Accordingly, basic shares equal diluted shares for all periods presented.

Accounts receivable and 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.

The Company is subject to credit risk from accounts receivable with its customers. The Company’s accounts receivable are due from both governmental and commercial entities. Credit is extended based on evaluation of the customers’ financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due.

The Company assesses potential reserves against its accounts receivable by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay their obligations to the Company and economic and industry conditions. Based on these factors, the Company has concluded that an allowance for doubtful accounts as of June 30, 2010 and March 31, 2010 is not required.

As of June 30, 2010, the Company receives approximately 28.6% of its gross revenues from its top three re-sellers. This represents an increase in concentration of business from the 18% reported for the year ended March 31, 2010.

Reclassifications

Certain reclassifications have been made in the fiscal year 2009 financial statements to conform to the fiscal year 2010 presentation.

NOTE 2 - FINANCIAL CONDITION

The accompanying consolidated financial statements have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2010, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The “going concern” explanatory paragraph resulted from, among other things, the substantial losses from operations we have incurred since inception, our liquidity position and the net loss of $0.339 million for the year ended March 31, 2010.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

The Company maintained a factoring facility with Allied Capital Partners, L.P. (“Allied”) for up to $1,500,000 of the Company’s customer accounts receivable. The facility allows for an advance rate up to 85.88% and initial factoring charges are 1.75% of the total accounts receivable balance. An additional funding agreement became effective in November of 2008 allowing for the factoring of support renewals at an advance rate of 50.88% and initial factoring charges of 1.75% of the total accounts receivable balance. Advances made by Allied are collateralized by 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 two years with an automatic one-year renewal thereafter.

On December 10th 2009, the factoring facility was terminated by mutual agreement. We believe that the cost of this facility outweighed the benefits to the Company. In addition, by terminating this facility, we expect to save over $135,000 annually.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The Company is currently negotiation restructuring of this debt.

NOTE 3 – DEBT

As of June 30, 2010, the Company had $793,426 of principal, accrued interest of $435,600 and accrued liquidated damages of $177,402 outstanding on its PP1 Notes and PP2 Notes. The PP1 Notes bear interest at an annual rate of 8%, compounded quarterly. The December PP2 Notes and the April PP2 Notes bear interest at an annual rate of 18%, compounded quarterly.

PP1 Notes and Warrants

On December 13, 2004, the Company issued and sold an aggregate of $1,146,000 in principal amount of PP1 Notes, and PP1 Warrants to purchase 1,146,000 shares of our common stock. Of the $1,146,000 in principal, the Company received cash of $1,004,000, and $142,000 in principal amount of the PP1 Notes was issued in connection with the cancellation of an equal amount of the Company’s outstanding obligations.

The PP1 Notes bear interest at the rate of 8% per annum, compounded quarterly on each March 31, June 30, September 30 and December 31 anniversary that they are outstanding (each, an interest compounding date). The outstanding principal 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 occurred.

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

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

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

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

The PP1 Warrants have a term of five years and are exercisable at an exercise price of $1.30 per share. Subject to an effective registration statement covering the resale of the shares of common stock issuable upon exercise of the PP1 Warrants, the Company may, upon thirty days prior written notice, redeem the PP1 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.

During the quarter ended September 30, 2007, the Company elected to compensate PP1 Note holders who had opted to convert debt into shares of common stock, which remained unregistered with the SEC as of the date the PP1 Notes became due and payable on December 13, 2006. The amount offered to, and accepted by, the shareholders was $135,825, payable in the form of additional shares of common stock. In August 2007, the company recorded a charge and liability for the impending issuance of this stock. On January 11, 2008, the Company issued 134,462 shares of common stock at the agreed upon conversion rate of $1.01, and paid $19 in cash for fractional shares in settlement of this liability. At March 31, 2010, there was $51,850 of principal and $40,119 of interest due on the PP1 Notes.

PP2 Notes and Warrants

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

The PP2 Notes bear interest at the rate of 8% per annum, compounded quarterly on each March 31, June 30, September 30 and December 31 anniversary that they are outstanding (each, an interest compounding date). The outstanding principal and all accrued interest become due and payable two years from the date of the PP2 Notes. The outstanding principal and accrued interest are convertible into shares of common stock at a fixed rate of $0.75 per share. The PP2 Notes may be converted, in whole or in part, at the option of the PP2 Note holder on any interest compounding date occurring after the effective date of a registration statement covering the resale of shares of common stock to be issued upon conversion of the PP1 Notes.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

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

The Company may prepay the PP2 Notes in whole or in part, upon thirty days prior written notice to note holders; provided that partial prepayments may be made only in increments of $10,000 and, provided further, that the PP1 Note holders may convert the amount of the proposed prepayment into shares of our common stock at any time.

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

For the twelve months ended March 31, 2009 and 2008, the Company recorded $1,434,353 and $1,532,511 respectively, of amortization of debt discounts associated with the PP2 Notes. For the twelve months ended March 31, 2009 the total amortization charge included $747,357 for the write-off of unamortized debt discounts related to the conversion of $2,470,156 in principal of PP2 Notes under the Company’s Short Term Investment Incentive Plan (the “STIIP”).

At March 31, 2010, there was $741,576 of principal, accrued interest of $354,955 and accrued liquidated damages of $177,402 outstanding on its PP2 Notes.

STIIP

Under the STIIP, which commenced on June 9, 2008, the Company temporarily modified the terms of its outstanding PP1 Notes, PP2 Notes, PP1 Warrants and PP2 Warrants. During the period beginning June 9, 2008 through June 24, 2008 (the “Conversion Period”), the conversion prices of the PP1 Notes and PP2 Notes, which were $1.00 and $0.75 per share, respectively, were reduced to $0.53 per share. In addition, the exercise prices for the PP1 Warrants and the PP2 Warrants, which were $1.30 and $1.00 per share, respectively, were reduced to $0.40 per share. Under the STIIP, certain PP2 Note holders converted $3,240,290, comprised of $2,470,156 in principal and $770,134 in accrued interest and liquidated damages into approximately 6.2 million shares of the Company’s common stock at the reduced conversion price.

Also under the STIIP, certain PP1 and PP2 Warrant holders exercised approximately 2.3 million PP1 and PP2 Warrants at an exercise price of $0.40 per share. All PP1 and PP2 Warrant holders who exercised their warrants also received three additional warrants (the “Bonus Warrants”) for every ten warrants exercised. The Bonus Warrants were exercisable during the Conversion Period at an exercise price of $0.30 per share, and if not exercised on or before such date, the exercise price for such Bonus Warrants was increased to $0.60 per share. A total of 507,675 Bonus Warrants were exercised at $0.30 per share. The bonus warrants were valued using the Black-Scholes option pricing model (“Black-Scholes model”) and a charge and a corresponding credit to additional paid-in capital were recorded for the June 30, 2008 and September 30, 2008 quarters in the amounts of $36,125 and $131,631, respectively. The bonus warrants expire on April 6, 2012. The total cash proceeds received from the exercises of the PP1, PP2 and Bonus Warrants was approximately $844,000.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

The Company accounted for the reduction in the conversion prices of the PP2 Notes under the STIIP in accordance with ASC 470 (formerly FASB Statement No. 84, “Induced Conversions of Convertible Debt an amendment of APB Opinion No. 26” (“SFAS 84”)). Accordingly, the Company calculated and recorded an inducement charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $931,893 for the fair value of common stock issued based on the reduced price in excess of the fair value of the common stock issuable pursuant to the original conversion price.

The Company accounted for the reduction in the exercise price of the PP1 and PP2 Warrants exercised under the STIIP in accordance with the guidance in ASC 718 and 505 (formerly SFAS 123(R), “Share-based payment” (“SFAS 123R”) and FASB Staff Position No. FSP FAS 123(R)-6, “Technical Corrections of FASB Statement No. 123(R)”) for a modification due to a short-term inducement. Accordingly, the Company recorded a charge and a corresponding credit to additional paid-in capital in the June 30, 2008 quarter in the amount of $202,743 for the difference between the fair value of the PP1 and PP2 Warrants immediately before and after the modification multiplied by the number of PP1 and PP2 Warrants that were exercised during the Conversion Period of the STIIP. The fair value of the PP1 and PP2 Warrants were calculated using the Black-Scholes model. The total non-cash charge recorded for the inducement on the PP2 Notes and the reduction in exercise price on the PP1 and PP2 Warrants was $1,134,216.

Registration payment arrangements

Effective April 1, 2007, the Company adopted ASC 815 (formerly FASB Staff Position No. EITF 00-19-2 “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”)), which was applicable to the accounting for the liquidated damages on the PP2 Notes. Upon adoption, the Company recorded a cumulative effect of an accounting change entry (i.e., a charge to the beginning balance of the accumulated deficit) as of April 1, 2007 for the combination of: 1) the reclassification of the Warrants from derivative liabilities to equity securities (based on the criteria as outlined under EITF 00-19 “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF 00-19”)), and 2) a contingent liability for probable future payment of liquidated damages (based on the Company’s best estimate as of the date of adoption, which was through March 31, 2008). The amount of the contingent liability recorded was approximately $289,000. The difference between the Warrants as measured on the date of adoption of FSP EITF 00-19 and their original recorded value was approximately $466,000, and, as stated above, was included in the charge to the beginning balance of the accumulated deficit. The total cumulative effect of this accounting change was $755,000.

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

As of March 31, 2008, the Company estimated and accrued $671,342 related to liquidated damages related to the PP2 Notes and concluded that this amount was the maximum pay-out required. Under the STIIP, certain PP2 Note holders, comprising approximately 70% of the original principal of PP2 Notes, converted their outstanding PP2 Notes at a reduced price of $0.53. On June 30, 2008, the Company executed an agreement with the institutional investor in the PP2 offering that had the contractual right to liquidated damages. In exchange for the waiver from the investor, the Company issued to the investor 58,777 shares of its common stock. The agreement terminated any assessment of liquidated damages beyond June 24, 2008. For the three months ended June 30, 2008, the Company recorded a charge and credit to additional paid-in capital for the fair value of these shares issued in the amount of $22,041.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

The Company’s total debt as of March 31, 2010, all of which is current, is as follows:

PP1 and PP2 Notes:
Principal	$	793,426
Accrued interest		435,600
Accrued estimated liquidated damages		177,402
		1,406,428
Less: unamortized discount		-
		1,406,428
Other notes payable		78,676
Total	$	1,485,104

NOTE 4 – COMMITMENTS AND CONTINGENCIES

The Company and certain of its current and former officers and directors are defendants in litigation pending in Dallas, Texas, styled KINGDON R. HUGHES VS. GREGORY T. ROYAL, CYNTHIA A. GARR, JAMES T. MILLER, JR., CHARLES STIDHAM, CNH HOLDINGS COMPANY D/B/A CISTERA NETWORKS AND XBRIDGE SOFTWARE, INC.; Cause No. DV05-0600-G; G-134th District Court, Dallas County, Texas. The plaintiff has alleged a number of complaints against the defendants, including breach of fiduciary duty, misappropriation of corporate opportunities, fraud, fraudulent inducement, breach of contract, tortuous interference with contract, fraudulent transfer, and shareholder oppression arising in connection with the license agreement between the Company and XBridge in May 2003 and the acquisition of XBridge by the Company in May 2005. The parties held a mediation conference in April 2006 and have come to an understanding with respect to the principal elements of a potential settlement. The Company is currently in the process of negotiating definitive settlement agreements. In accordance with ASC 450 (formerly SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”)), we recorded a contingent liability in the amount of $650,000 as of March 31, 2008 related to the outstanding litigation. As of June 30th, 2010, the Company believes that this amount represents the best estimate of a potential settlement.

NOTE 5 - RELATED PARTY TRANSACTIONS

On December 4, 2008, an employee advanced the Company $25,000 for the period through December 31, 2008. In consideration for this advance, the Company issued to the employee 25,000 common stock purchase warrants that were immediately exercisable at $0.40 per share and have a five-year life. The Company calculated the fair value of the warrants using the Black-Scholes model and recorded a charge in the amount $4,100 for the December 2008 quarter. As of December 31, 2008, the entire obligation remained outstanding and began to accrue interest at 8% per annum. The obligation is due upon demand. During the year ended March 31, 2010, this obligation was paid in full.

On December 1, 2009, the Company entered into a professional services agreement with Blue Kiwi Group Ltd. This agreement provides for the services of Mr Royal to act as Company Board Member and CEO of the Company. The consideration is $150,000 per annum for a period of two years. The agreement is attached as exhibit 10.4.

On December 9, 2009, the Company issued an Unsecured Promissory Note for $13,942.38 to Gregory Royal being unpaid expense claims for years 2008, 2009 and 2010. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.

On December 9, 2009, the Company issued an Unsecured Promissory Note for $64,733.76 to Gregory Royal being unpaid portion of salary for calendar year 2009. Mr. Royal took voluntary partial salary deferral for that calendar period of approx forty percent (40%) of his salary. The note is for two (2) years at an interest rate of prime plus one and one half percent (1.5%) per annum.

CISTERA NETWORKS, INC. & SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 6 – REVERSE/FORWARD SPLIT

Effective May 13, 2009, the Company completed a reverse stock split of our common stock followed immediately by a forward stock split of our common stock (the "Reverse/Forward Stock Split"). As a result of the Reverse/Forward Stock Split, stockholders owning fewer than 3 shares of our common stock will be cashed out at a price of $.14 per share, and the holdings of all other stockholders will remain unchanged. The reverse/forward stock split resulted in the cancellation of 805 fractional shares. The stock split reduced the number of shares outstanding from 18,023,410 to 18,022,605. All references to common stock in the financial statements have been changed to reflect the stock split.

NON-GAAP DISCLOSURES

EBITDA, excluding special items, which represents earnings (excluding the impact of certain nonrecurring items on our results) before depreciation and amortization, interest and financing expenses, income taxes, and cumulative effect of a change in accounting principle, net, is a supplemental measure of performance that is not required by, or presented in accordance with, U.S. GAAP. We present EBITDA, excluding special items, because we consider it an important supplemental measure of our operations and financial performance. We believe EBITDA, excluding special items, is more reflective of our operations as it provides transparency to investors and enhances period-to-period comparability of our operations and financial performance. EBITDA, excluding special items, should not be considered as an alternative to net income determined in accordance with U.S. GAAP.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In many but not all cases you can identify forward-looking statements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will” and “would” or the negative of these terms or other similar expressions. These forward-looking statements include statements regarding our expectations, beliefs, or intentions about the future, and are based on information available to us at this time. We assume no obligation to update any of these statements and specifically decline any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Actual events and results could differ materially from our expectations as a result of many factors, including those identified in this report. We urge you to review and consider those factors, and those identified from time to time in our reports and filings with the SEC, for information about risks and uncertainties that may affect our future results. All forward-looking statements we make after the date of this filing are also qualified by this cautionary statement and identified risks. Additional risk factors are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009 and our other reports filed with the SEC, to which reference should be made.

EXECUTIVE SUMMARY AND RECENT BUSINESS DEVELOPMENTS

Revenues increased from $644,173 for period ending June 30, 2010 from $457,967 for period ending 30 June, 2009.

This represents a 40% increase in revenues as compared to the same quarter in the prior year, due to the improving macro economic environment. However the business investment has not returned to previous levels prior to the global economic crisis and we predict that this situation will continue into the immediate future. Nonetheless the company continues to focus on revenue generating activity around our three core markets; Federal, Public Safety and Healthcare.

Operating Income for period ending June 30, 2010 increased to $16,865 from a loss for period ending June 30, 2009 of $110,877.

Earnings before Interest, Depreciation and Amortization, and Taxes (EBITDA) were positive $90,736 or 14% of revenue. This represents an increase of $299,273 over period ending June 30, 2009.

Operating expenses, excluding depreciation and amortization increased from $302,453 in the period ending June 30 2009 quarter to $351,810 for the period ending June 30 2010. General Administration expenses increased from $151,750 for June 2009 quarter to $236,790 for the period ending June 30 2010 due to a payroll adjustment made in the for the period ending June 30 2009.

The company now has significant control over costs and believes that it is in a strong position to grow profitability with the improvement in the market conditions.

Change in Presentation of Amortization of Intellectual Property

The Amortization of Intellectual Property has moved to Cost of Revenues from Operating Expenses from this period reflecting a decrease in Depreciation Amortization and and a corresponding increase in Cost of Revenues. This in turn has reduced the Gross Margin by approximately 10% when viewed against prior periods.

RESULTS OF OPERATIONS

Selected Consolidated Statements of Operations Data

The following tables present consolidated statements of operations data for the three months ended June 30, 2010 and 2009 based on the percentage of revenue for each line item, as well as the dollar and percentage change of each of the items.

Results of Operations for the Three Months Ended June 30, 2010

Compared to the Three Months Ended June 30, 2009

	Three months ended June 30,
	2010	%	2009	%
	2010	%	2009	%

Revenues
Convergence solutions	$329,907	51%	$189,143	41%
Professional services	24,172	4%	35,504	8%
Support and maintenance	290,094	45%	233,320	51%
Total revenues	644,173	100%	457,967	100%

Cost of revenues
Convergence solutions	128,912	20%	103,013	22%
Professional services	42,500	7%	47,718	10%
Support and maintenance	30,215	5%	18,000	4%
Total cost of revenues	201,627	31%	168,731	37%

Gross Profit	442,546	69%	289,236	63%

Operating expenses
Sales and marketing	65,056	10%	57,497	12%
Software development	74,755	12%	29,149	6%
Engineering and support	43,151	7%	64,057	13%
General and administrative	236,790	37%	151,750	33%
Depreciation and amortization	5,929	1%	97,660	21%
Total operating expenses	425,681	66%	400,113	87%

Income / (Loss) from operations	16,865	3%	(110,877)	-24%

Other income (expense)
Interest income	-	0%	-	0%
Other income	304	0%	56	0%
Interest expense	(43,012)	-7%	(66,055)	-14%
Abandonment loss	-	0%	(15,815)	-3%
Charge for inducements related to stock issued to convertible note holders	-	0%	-	0%
Amortization of discount on convertible notes – outside investors	-	0%	-	0%
Amortization of discount on convertible notes – related parties	-	0%	-	0%
Credit (charge) for estimated liquidated damages	-	0%	-	0%
Total other income (expense)	(42,708)	-7%	(81,814)	-18%

Net Income / (Loss)	$(25,843)	-4%	$(192,691)	-42%

Basic & diluted net income / (loss) per share	$0.00		$(0.01)

Weighted average shares outstanding – basic and diluted	18,022,605		17,422,605

Revenue

Revenue for the quarter ended June 30, 2010 increased $186,206 or approximately 40% from the comparable prior year quarter primarily due to deferred projects being bought forward as well as stronger maintenance renewals.

Gross Profit and Gross Margin

Gross profit for the quarter ended June 30, 2010 increased $153,310 or approximately 52% from the comparable prior year quarter primarily due to increased revenue. Gross margin increased in the June 2010 quarter as compared to the June 2009 quarter to 69% from 63%. This increase was primarily due to increases in the higher margin revenue categories of convergence solutions and support and maintenance, offset by lower margins on professional services as a result of the timing of completion of certain project service engagements.

Additionally Amortization of Intellectual Property is now treated as Cost of Goods Sold for the amount of $67,942. This has the effect of reducing the Gross Margin by approx 10% when viewed against prior periods.

Operating Expenses

Operating expenses increased from $400,113 in the June 2009 quarter to $425,687 in the June 2010 quarter, a increase of $25,574 or approximately 6%. The increase was due to a payroll adjustment made in the June 2009 quarter.

Interest Expense

Interest expense for the June 2010 quarter decreased $23,043 from the June 2009 quarter primarily due to the decrease in the PP2 Notes as a result of the conversions completed in the fiscal 2010 year. This also reflects the elimination of the factoring facility.

Liquidity and Capital Resources

The unaudited consolidated financial statements contained in this report have been prepared in conformity with US GAAP (except with regard to omission of certain disclosures within interim financial statements, as permitted by the SEC), which contemplate our continuation as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary if we were unable to continue as a going concern. However, the report of our independent registered public accounting firm on our consolidated financial statements, as of and for the year ended March 31, 2010, contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. The “going concern” explanatory paragraph resulted from, among other things, the substantial losses from operations we have incurred since inception, our liquidity position and net loss of $0.339 million for the year ended March 31, 2010.

Accordingly, as of June 30, 2010, the recoverability of a major portion of the recorded asset amounts is dependent on our continuing operations, which in turn is dependent on our ability to maintain our current financing arrangements and our ability to become profitable in our future operations through generating higher revenues or lowering operating costs, or a combination of the two. These factors raise substantial doubt about our ability to continue as a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if we were unable to continue as a going concern.

Our primary source of working capital liquidity was a factoring facility we have with Allied Capital Partners, L.P. (“Allied”), which allows for cash advances of up to $1,500,000 on our customer accounts receivable, subject to the approval of Allied of the customer and the type of product or service that is invoiced. The facility allows for an advance rate up to 85.88% and initial factoring charges are 1.75% of the total accounts receivable balance. An additional funding agreement became effective in November of 2008 allowing for the factoring of support renewals at an advance rate of 50.88% and initial factoring charges of 1.75% of the total accounts receivable balance. Advances made by Allied are collateralized by our accounts receivable, chattel paper, general intangibles, supporting obligations, inventory and proceeds thereof.

On December 10th 2009, both parties mutually agreed to terminate the factoring facility. The company believes that the cost of this facility outweighed the benefits to the company. The company expects to save over $135,000 annually from the termination of this facility.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of that date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, of which approximately $1.1 million is due in April 2009, or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The capital markets are extremely challenging at this time and there can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient. We are also actively exploring other strategic alternatives.

As of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes (the “April PP2 Notes”). As of that date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. We will need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. The capital markets are extremely challenging at this time and there can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient.

Cash and Cash Flows

Our cash and cash equivalents at June 30, 2010 were $6,322. For the three months ended June 30, 2010, net cash provided by operations was $27,567. The primary use of cash was to pay down Accrued Liabilities in the amount of $52,702.

Contractual Obligations

Our current material contractual obligations are our current and former corporate office leases and the principal, accrued interest and accrued liquidated damages under our PP1 and PP2 Notes.

Critical Accounting Policies

We prepare our financial statements in accordance with US GAAP. The accounting policies most fundamental to understanding our financial statements are those relating to recognition of revenue, our use of estimates and the accounting for convertible debt and warrants. For a detailed discussion on the application of these accounting policies, see Note 2 to our audited consolidated financial statements contained in our 2010 10-K.

Research and Development – Software Development

Research and development expenditures are generally expensed as incurred. ASC 985 (formerly SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have been insignificant. Thereafter, all software production costs shall be capitalized and subsequently reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized based on current and future revenue for each product with an annual minimum equal to the straight-line amortization over the remaining estimated economic life of the product. Our capitalization of software development for quarter ending June 30, 2010 was $32,112.

Recently Issued Accounting Pronouncements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide this information.

Item 4(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer, who is also currently our interim Chief Financial Officer (the “Certifying Officer”), to allow timely decisions regarding required disclosures.

In April 2009, and for fiscal year ending March 31, 2010, the company embarked on a complete restructuring in response to the Global economic crisis. With this restructuring, the company also embarked on a complete overhaul of all operational processes and procedures with particular attention on management and financial accounting areas of the business. On April 1, 2010, the company moved to a new and more sophisticated accounting system and overhauled the financial processes to (a) verify the underlying historical information, and if necessary make adjustments and (b) improve the speed and efficacy on which final accounting and review processes are made. The company in fiscal year 2010 also retained a management accountant specifically tasked with validating and improving financial controls.

Although a number of significant changes have been made to the financial operations, the Certifying Officer determined that these changes were not significantly completed in order to verify the effectiveness of the design and operation of our disclosure controls and procedures for the reporting period. It is expected that these changes will be completed in the fiscal year ending March 31, 2011.

As of June 30, 2010, we carried out an analysis, under the supervision and with the participation of our management, including our Certifying Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. As a result of this analysis, our Certifying Officer concluded that our disclosure controls and procedures and internal controls over financial reporting continued to be not effective and identified remediation measures to be implemented.

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

1.	Financial Reporting, including technical accounting surrounding complex accounting transactions

2.	Order Entry Accounting & Reporting

3.	Debt/Equity Accounting & Compliance

4.	Cash & Other Working Capital Management

5.	Compensation Accounting & Administration

6.	Other Assets & Liability Account Management

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

Inherent Limitations of Internal Controls

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

We may need to raise additional capital to fund our operations. Our ability to continue as a going concern is potentially doubt and we may not be successful in generating revenue and gross profit at levels sufficient to cover our operating costs and cash investment requirements.

We will need to renegotiate or extend the currently outstanding PP2 Notes and related interest.

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes. In addition, as of April 5, 2009, we were in default of approximately $1,100,000 of principal and accrued interest on certain PP2 Notes. Currently, we are accruing interest on these PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. There can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient.

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

None

Item 3. Defaults Upon Senior Securities

As of December 30, 2008, we were in default on approximately $148,000 of principal and accrued interest on certain PP2 Notes (the “December PP2 Notes”). As of this date, we began to accrue interest on the December PP2 Notes at a default rate of 18% per annum, which is the maximum allowable rate as stipulated under the PP2 Note purchase agreement. In addition, as of April 5, 2009, we were in default on approximately $1,100,000 of principal and accrued interest on certain PP2 Notes. As of this date, we began to accrue interest on the April PP2 Notes at a default rate of 18% per annum. We will likely need to renegotiate the payment or conversion of the principal and interest due on all of the PP2 Notes, or raise additional capital, or a combination of the two. If we need to raise additional capital it could be in the form of equity or debt, or a combination of the two. There can be no assurance that we will be successful in raising additional funds and, if so, on favorable terms or that the cost savings or required new capital will be sufficient.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

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

32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.1 Press release dated August 13, 2010.

SIGNATURE

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

	CISTERA NETWORKS, INC.


Date: August 13, 2010	/s/ Gregory T. Royal
	Gregory T. Royal
	Chief Executive Officer and interim
	Chief Financial Officer

	(Principal Executive, Financial and
	Accounting Officer)

Cistera Networks, Inc. 10-Q