Use these links to rapidly review the documentTable of Contents



U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended: September 30, 2004           
|OR                                                           
|o                                                             | 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 000-50758

---

VISTULA COMMUNICATIONS SERVICES, INC.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization) |  | 20-0734966(IRS Employer
Identification No.)
|---------------------------------------------------------------------- |  | -------------------------------------------

40 Portman Square, 4th Floor
London W1H 6LT
United Kingdom(Address of principal executive offices and zip code)

+44 (0) 20 7486 4900(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 ý    No o

As of November 12, 2004, there were 24,454,406 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

Transitional
Small Business Disclosure Format (Check
one): Yes o    No ý



---





VISTULA COMMUNICATIONS SERVICES, INC.

FORM 10-QSB

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004



|                                     |                                                                       | Page                                                                                                                           
|------------------------------------ | --------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------
|Facing Page                          |                                                                       |                                                                                                                                
|Table of Contents                    |                                                                       | 1                                                                                                                              
|PART I.    FINANCIAL INFORMATION(*): |                                                                       | 2                                                                                                                              
|                                     | Item 1.    Financial Statements                                       |                                                                                                                                
|                                     |                                                                       | Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003                                         
|                                     |                                                                       | Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2004 and September 30, 2003 (unaudited)
|                                     |                                                                       | Consolidated Statements of Stockholders' Deficit for the Nine Months ended September 30, 2004 (unaudited)                      
|                                     |                                                                       | Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2004 and September 30, 2003 (unaudited)          
|                                     |                                                                       | Notes to Consolidated Financial Statements                                                                                     
|                                     | Item 2.    Management's Discussion and Analysis or Plan of Operations |                                                                                                                                
|                                     | Item 3.    Controls and Procedures                                    |                                                                                                                                
|PART II.    OTHER INFORMATION        |                                                                       | 23                                                                                                                             
|                                     | Item 5.    Other Information                                          |                                                                                                                                
|                                     | Item 6.    Exhibits and Reports on 8-K                                |                                                                                                                                
|SIGNATURES                           |                                                                       | 26                                                                                                                             

---

1

---





PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

VISTULA COMMUNICATIONS SERVICES, INC.Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003

|                                      |                                                                                                                                                                                  | September 30,
2004          |           | December 31,
2003 |           
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------- | ----------------- | ----------
|
|ASSETS                                |                                                                                                                                                                                  |                             |           |                   |           
|Current assets:                       |                                                                                                                                                                                  |                             |           |                   |           
|                                      | Cash and cash equivalents                                                                                                                                                        |                             | $         | 7,201             |           
|                                      | Accounts receivable                                                                                                                                                              |                             |           | 282,116           |           
|                                      | Prepaid expenses and other current assets                                                                                                                                        |                             |           | 231,855           |           
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|                                      | Total current assets                                                                                                                                                             |                             |           | 521,172           |           
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|Property and equipment, net           |                                                                                                                                                                                  |                             | 1,999,439 |                   |           
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|                                      |                                                                                                                                                                                  | $                           | 2,520,611 |                   | $         
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                                                                                                  |                             |           |                   |           
|Current liabilities:                  |                                                                                                                                                                                  |                             |           |                   |           
|                                      | Accounts payable                                                                                                                                                                 |                             | $         | 795,743           |           
|                                      | Accrued expenses                                                                                                                                                                 |                             |           | 862,549           |           
|                                      | Due to stockholder                                                                                                                                                               |                             |           | 29,373            |           
|                                      | Note payable                                                                                                                                                                     |                             |           | 175,000           |           
|                                      | Capital lease obligation                                                                                                                                                         |                             |           | 1,942,334         |           
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|                                      |                                                                                                                                                                                  | Total current liabilities   |           |                   | 3,804,999 
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|Stockholders' deficit:                |                                                                                                                                                                                  |                             |           |                   |           
|                                      | Common stock, $0.001 par value, 100,000,000 shares authorized, 24,454,406 and 23,885,000 and issued and outstanding as of September 30, 2004 and December 31, 2003, respectively |                             |           | 24,454            |           
|                                      | Additional paid-in capital                                                                                                                                                       |                             |           | 1,908,582         |           
|                                      | Deferred compensation                                                                                                                                                            |                             |           | (597,500          | )         
|                                      | Accumulated deficit                                                                                                                                                              |                             |           | (2,613,279        | )         
|                                      | Cumulative translation adjustment                                                                                                                                                |                             |           | (6,645            | )         
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|                                      |                                                                                                                                                                                  | Total stockholders' deficit |           |                   | (1,284,388
|                                      |                                                                                                                                                                                  |                             |           |                   |           
|                                      |                                                                                                                                                                                  | $                           | 2,520,611 |                   | $         
|                                      |                                                                                                                                                                                  |                             |           |                   |           

See
accompanying notes to unaudited consolidated financial statements.

2

---





VISTULA COMMUNICATIONS SERVICES, INC.Consolidated Statements of Operations for the Three and Nine Months  ended September 30, 2004 and September 30, 2003

|                                          |                      | Three Months Ended
September 30, |            | Nine Months Ended
September 30, |  
|----------------------------------------- | -------------------- | -------------------------------- | ---------- | ------------------------------- | -
|
|
|Net revenues                              |                      | $                                | 513,563    |                                 | $
|Cost of revenues                          |                      |                                  | 468,091    |                                 |  
|                                          |                      |                                  |            |                                 |  
|                                          | Gross profit         |                                  |            | 45,472                          |  
|General and administrative expenses       |                      |                                  | 599,481    |                                 |  
|                                          |                      |                                  |            |                                 |  
|                                          | Loss from operations |                                  |            | (554,009                        | )
|Other income                              |                      |                                  | (31,220    | )                               |  
|                                          |                      |                                  |            |                                 |  
|                                          | Net loss             |                                  | $          | (585,229                        | )
|                                          |                      |                                  |            |                                 |  
|Weighted-average basic shares outstanding |                      |                                  | 24,416,363 |                                 |  
|                                          |                      |                                  |            |                                 |  
|Net loss per common share                 |                      | $                                | (0.02      | )                               | $
|                                          |                      |                                  |            |                                 |  

See
accompanying notes to unaudited consolidated financial statements.

3

---





VISTULA COMMUNICATIONS SERVICES, INC.Consolidated Statements of Stockholders' Deficit for the Nine Months ended September 30, 2004        (unaudited)

|                                                                  |  | Common Stock |  |   |        |  |   |           |  |   |          |   |   |            |  
|----------------------------------------------------------------- |  | ------------ |  | - | ------ |  | - | --------- |  | - | -------- | - | - | ---------- | -
|
|
|Balance, December 31, 2003                                        |  | 23,885,000   |  | $ | 23,885 |  | $ | 398,276   |  | $ |         |   | $ | (599,721   | )
|                                                                  |  |              |  |   |        |  |   |           |  |   |          |   |   |            |  
|Contribution of services by stockholders                          |  |              |  |   |        |  |   | 262,142   |  |   |          |   |   |            |  
|Issuance of common stock                                          |  | 100,000      |  |   | 100    |  |   | 44,900    |  |   |          |   |   |            |  
|Deferred stock compensation expense associated with stock options |  |              |  |   |        |  |   | 992,500   |  |   | (992,500 | ) |   |            |  
|Amortization of deferred stock compensation                       |  |              |  |   |        |  |   |           |  |   | 395,000  |   |   |            |  
|Issuance of common stock for services rendered                    |  | 419,406      |  |   | 419    |  |   | 188,314   |  |   |          |   |   |            |  
|Issuance of common stock for marketing and distribution agreement |  | 50,000       |  |   | 50     |  |   | 22,450    |  |   |          |   |   |            |  
|Net loss                                                          |  |              |  |   |        |  |   |           |  |   |          |   |   | (2,013,558 | )
|Change in cumulative translation adjustment                       |  |              |  |   |        |  |   |           |  |   |          |   |   |            |  
|                                                                  |  |              |  |   |        |  |   |           |  |   |          |   |   |            |  
|Balance, September 30, 2004                                       |  | 24,454,406   |  | $ | 24,454 |  | $ | 1,908,582 |  | $ | (597,500 | ) | $ | (2,613,279 | )
|                                                                  |  |              |  |   |        |  |   |           |  |   |          |   |   |            |  

See accompanying notes to unaudited consolidated financial statements.

4

---





VISTULA COMMUNICATIONS SERVICES, INC.Consolidated Statements of Cash Flows for the Nine Months  ended September 30, 2004 and September 30, 2003

|                                                     |                                                                             | Nine Months Ended September 30,                                     |               
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------
|
|
|Cash flows from operating activities:                |                                                                             |                                                                     |               
|                                                     | Net loss                                                                    |                                                                     | $             
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                     |               
|                                                     |                                                                             | Depreciation                                                        |               
|                                                     |                                                                             | Services contributed by shareholders                                |               
|                                                     |                                                                             | Company expenses paid by stockholder recorded as due to stockholder |               
|                                                     |                                                                             | Company expenses paid by stockholder                                |               
|                                                     |                                                                             | Services paid for by issuance of common stock                       |               
|                                                     |                                                                             | Non cash financing charge                                           |               
|                                                     |                                                                             | Non cash compensation expense                                       |               
|                                                     |                                                                             | Non cash interest expense                                           |               
|                                                     |                                                                             | Loss on disposal of property and equipment                          |               
|                                                     |                                                                             | Changes in assets and liabilities:                                  |               
|                                                     |                                                                             |                                                                     | (Increase) in:
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     | Increase in:  
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|Cash flows from investing activities:                |                                                                             |                                                                     |               
|                                                     | Purchases of property and equipment                                         |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|Cash flows from financing activities:                |                                                                             |                                                                     |               
|                                                     | Payments on due to stockholder                                              |                                                                     |               
|                                                     | Proceeds from note payable                                                  |                                                                     |               
|                                                     | Proceeds from issuance of common stock                                      |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|                                                     |                                                                             |                                                                     |               
|Effect of exchange rates on cash                     |                                                                             |                                                                     | 8,942         
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                                     | (81,443       
|Cash and cash equivalents, beginning of period       |                                                                             |                                                                     | 88,644        
|                                                     |                                                                             |                                                                     |               
|Cash and cash equivalents, end of period             |                                                                             | $                                                                   | 7,201         
|                                                     |                                                                             |                                                                     |               
|Supplemental disclosure of cash flow information:    |                                                                             |                                                                     |               
|                                                     | Cash paid for interest                                                      |                                                                     | $             
|                                                     |                                                                             |                                                                     |               
|                                                     | Cash paid for taxes                                                         |                                                                     | $             
|                                                     |                                                                             |                                                                     |               
|                                                     | Equipment acquired pursuant to capital lease obligation                     |                                                                     | $             
|                                                     |                                                                             |                                                                     |               
|                                                     | Non cash forgiveness of due to stockholder                                  |                                                                     | $             
|                                                     |                                                                             |                                                                     |               

See
accompanying notes to unaudited consolidated financial statements.

5

---





VISTULA COMMUNICATIONS SERVICES, INC.        NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS        September 30, 2004

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Vistula Communications Services, Inc. (Vistula or the Company) have been prepared in
accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-QSB and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the results for the interim periods have been included. The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Interim results are not necessarily
indicative of results to be expected for the entire fiscal year ending December 31, 2004. These unaudited financial statements should be read in conjunction with the audited financial
statements and related notes thereto included in the Company's audited annual financial statements for the fiscal year ended December 31, 2003. Those audited financial statements are included
in the Company's registration statement on Form 10-SB, which has been filed with the Securities and Exchange Commission (SEC).

The
Company has adopted the United States dollar as its reporting currency, although the British pound is the functional currency of its wholly owned operating subsidiaries. For
reporting purposes, assets and liabilities of the Company's international operations are translated into U.S. dollars at exchange rates that are in effect on the balance sheet date and equity accounts
are translated at historical exchange rates. Income and expense items are translated at average exchange rates, which are in effect during the year. Translation adjustments are accumulated in other
comprehensive loss as a separate component of stockholders' deficit in the consolidated balance sheet. Transaction gains and
losses are included in other income in the consolidated statements of operations. Transaction gains (losses) were immaterial for the three and nine months ended September 30, 2004 and 2003.

(2) Stock-Based Compensation

Statement of Financial Accounting Standard (SFAS) No. 123,Accounting for Stock-Based Compensationrequires
the measurement of the fair value of stock options and warrants to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
Employees,and elect the disclosure-only alternative under SFAS No. 123, as amended by Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for Stock-Based
Compensation.

Common
stock options granted have been valued using the Black-Scholes option pricing model prescribed by SFAS No. 123. The weighted average assumptions used for the nine month
period ended September 30, 2004 are as follows:

Risk-free interest rate

3.95%Expected dividend yield

0Expected lives

5 yearsExpected volatility

80%


6

---



The
following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value based method had been applied to all outstanding and unvested awards for
each of the nine-month periods ended September 30, 2004 and 2003, respectively.

9/30/04

9/30/03Net Loss: As Reported

($
2,013,558
)
($
252,649
)Stock compensation expense included in net loss


395,000


Stock compensation expenses determined using fair value method for all awards


(443,513
)

Pro Forma

($
2,062,071
)
($
252,649
)Loss Per Share (Basic): as reported

($
0.08
)
($
0.02
)Pro Forma

($
0.09
)
($
0.02
)Loss Per Share (Diluted): as reported

($
0.08
)
($
0.02
)Pro Forma

($
0.09
)
($
0.02
)


In
accordance with Emerging Issues Task Force (EITF) 96-18,Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring,
or in Connection with Selling Goods or Services, the Company records compensation expense equal to the fair value of the options granted to non-employees over the
vesting period, which is generally the period of service. See Note 10 for options accounted for in accordance with EITF 96-18.

(3) Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for
Income Taxes. Under SFAS No. 109, deferred tax assets or liabilities are computed based on the difference between the financial statements and income tax basis of assets
and liabilities, and net operating loss carryforwards, using the enacted tax rates. Deferred income tax expense or benefit is based on changes in the asset or liability from period to period. The
Company did not record a provision for Federal, state or foreign income taxes for the three and nine months ended September 30, 2004 and 2003 because the Company has experienced losses since
inception. The Company has not recorded a benefit for deferred tax assets as their realizability is uncertain.

7

---



(4) Balance Sheet Detail

Accrued expenses at September 30, 2004 and December 31, 2003 consisted of the following:

September 30,
2004

December 31,
2003Accrued professional fees

$
538,253

$
106,842Salary


120,000


Travel


108,382


VAT payable


55,978


Rent


28,876


Deferred revenue





6,475Other


11,060


$
862,549

$
113,317


Prepaid
expenses and other current assets at September 30, 2004 and December 31, 2003 consisted of the following:

September 30,
2004

December 31,
2003Prepaid call termination charges

$


$
101,449Receivable from contract sales representative


116,310


35,008Prepaid royalties


50,000Prepaid equipment rent


65,545


33,555$
231,855

$
170,012


The
receivable from contract sales representative represents the advance of a placement fee to an agent of the Company that is expected to be earned within the next year. If the
placement fee is not earned, the advance will be repaid to the Company.

(5) Comprehensive Income (Loss)

For the three and nine-months ended September 30, 2004 and 2003, respectively, the components of other comprehensive loss consisted of the
Company's net loss and foreign currency translation adjustments. Comprehensive loss was $579,600 and $117,007 for the three months ended September 30, 2004 and 2003, respectively, and
$2,004,234 and $261,885, for the nine-months ended September 30, 2004 and 2003, respectively.

(6) Net Loss Per Share

Basic net loss per share is computed by dividing net loss for the period by the weighted average number of common shares outstanding during the period. Diluted
net loss per share is computed by dividing net loss by the weighted average number of common shares plus the dilutive effect of outstanding stock options. As there was a net loss for both the three
and nine-month periods ending September 30, 2004, 2,825,000 outstanding stock options were excluded from the calculation of diluted

8

---



earnings
per share because they were anti-dilutive. There were no stock options outstanding for any other period presented.

(7) Stock Incentive Plan

In February 2004, the board of directors adopted the 2004 Stock Incentive Plan (the "Plan"). Under the Plan, the Company may grant incentive stock options,
non-statutory stock options and restricted stock that aggregate 6,000,000 shares of the Company's common stock. The Board has the authority to select the employees, officers, directors,
consultants and advisors to whom options are granted and determine the terms of each option, including (i) the number of shares of common stock subject to the option, (ii) when the
option becomes exercisable, (iii) the option exercise price, which, in the case of incentive stock options, must be at least 100% (110% in the case of incentive stock options granted to a
stockholder owning in excess of 10% of the Company's common stock) of the fair market value of the common stock as of the date of grant and (iv) the duration of the option, which may be up
to 10 years or provided that incentive stock options issued to a stockholder owning in excess of 10% of the Company's common stock, may not have a term of more than five years.

Options
for a total of 2,825,000 shares have been granted under the Plan. On June 30, 2004 two employees terminated their employment with the Company. As a result, 1,500,000
options were terminated. Pursuant to an employment agreement, another employee has a contractual right to the grant of the terminated options. The Company has therefore treated all options as
outstanding at September 30, 2004 for the purposes of calculating stock compensation expense. The Company has reflected pre-tax charges to earnings in the three-month periods ended
September 30, 2004 and 2003 of $41,000 and $0, respectively, and in the nine-month periods ended September 30, 2004 and 2003 of $395,000 and $0, respectively, for the
compensation value of the options granted. At September 30, 2004, an additional $597,500 of deferred compensation remains on the accompanying balance sheet that will be amortized over future
periods as the underlying stock options vest.

(8) Employment Agreements

In January 2004, the Company entered into employment and non-competition agreements with three key individuals. The agreements were amended and
restated in May 2004. These agreements have initial terms that begin on January 1, 2004 and end between March 2005 and June 2005 and may be renewed for successive annual
terms if both the Company and the employee agree in writing. The agreements provide for annual salaries totaling $300,000, as well as bonuses totaling $285,000 if certain Company performance goals are
achieved as defined in the agreement. As of September 30, 2004 no bonuses have been accrued as such goals have not been met. If the Company elects to terminate the employees without cause, the
employees are entitled to receive severance payments equal to six months of their salaries. Two of the employees resigned as of June 30, 2004. Based on new severance agreements with these
employees, the Company has recorded an aggregate compensation charge of approximately $72,000 upon termination for the nine-month period ended September 30, 2004.

9

---



(9) Related Party Transactions

Contributed
Services

During
the year ended December 31, 2003 certain stockholders contributed services to the Company. Pursuant to Staff Accounting Bulletin Topic 5T (SAB.T.5T), the Company recorded
compensation and a corresponding credit to additional paid in capital of approximately $110,000 for these services during the period ended December 30, 2003.

The
Company recorded compensation of $82,500 for the nine months ended September 30, 2004 and 2003 and $27,500 for the three months ended September 30, 2004 and 2003, with
corresponding credits recorded in additional paid-in capital.

Expenses
Paid By Stockholder

The
Chairman and another stockholder paid certain legal, accounting and operating expenses on behalf of the Company. Pursuant to SAB.T.5T, expenses not expected to be repaid of
approximately $311,000 were recorded as expense and charged to additional paid in capital for the year ended December 31, 2003. The Company recorded expenses related to legal, accounting and
operating expenses paid for by the Chairman and another stockholder of $24,632 and $179,642 for the three and nine months ended September 30, 2004, and $143,377 and $284,464 for the three and
nine months ended September 30, 2003. Expenses that are expected to be repaid of $29,373 and $64,602 are included in due to stockholder at September 30, 2004 and December 31,
2003, respectively. The amounts due to stockholder do not bear interest.

Sale
of Common Stock

On
May 5, 2004, the Company sold 100,000 shares of common stock to a director at $0.05 per share for total proceeds of $5,000. The Company recorded $40,000 as compensation expense
at that time based on the difference between the fair market value of the Company's common stock ($0.45) and the $0.05 purchase price per share of these shares.

(10) Investment Banking Agreement

In October 2003, the Company entered into a service agreement with an investment bank. Pursuant to the agreement, the Company issued 419,406 shares of
common stock to the investment bank in lieu of
service fees in May 2004. The Company recorded $188,733 as administrative expense upon issuance of these shares in accordance with EITF No. 96-18, Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.

(11) Asset Purchase

In January 2004, the Company signed an agreement to purchase certain equipment from another entity in exchange for $2,000,000, less any fees, costs and
expenses incurred by the Company to re-certify or re-license such assets by June 30, 2004. The agreement was amended on May 5, 2004. As a result of the amendment,
the purchase price for the equipment is now $1,670,000 and 725,000 shares of common stock and the agreement has been extended through April 1, 2005. Under the agreement, the

10

---



seller
has the right to use all or part of the cash portion of the purchase price for the equipment to purchase shares of the Company's common stock at a price per share equal to:



In
the event the Company does not close on the purchase of the equipment by April 1, 2005, the Company will be required to pay a fee equal to $20,000 per month calculated from
May 5, 2004 through April 1, 2005.

The
Company has accounted for the agreement as a capital lease in accordance with SFAS No. 13Accounting for Leases.

As
of September 30, 2004 the Company has recorded the present value of the minimum lease payments as an asset of $1,855,835. The future minimum lease payments related to the
capital lease is $2,000,000 which includes $144,165 related to interest. The Company recorded $28,833 and $86,499 related to interest expense on the capital lease for the three and
nine-month periods ended September 30, 2004, respectively. The Company does not have any minimum sublease rental income related to the capital lease. There were no contingent
rentals during the three months ended September 30, 2004.

The
Company has deemed the amendment described above to be a modification of the lease pursuant to Statement of Financial Accounting Standards No. 13 Accounting for Leases. As of May 5, 2004 the
balance of the asset and associated capital lease obligation will be adjusted by an amount equal to
the difference between the present value of the future minimum lease payments under the modified agreement and the present balance of the obligation, with no resulting gain or loss recognized. The
Company accounted for the new conversion feature associated with the capital lease obligation pursuant to EITF Issue No. 98-5,Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratiosas amended by EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible
Instruments, whereby the Company will measure the beneficial conversion feature
on the amendment date but will not record any charge until the contingencies are resolved.

11

---



(12) Commitments and Contingencies

Since its inception, the Company has sustained its operations through funding provided by the Chairman, as well as contributed services by the Chairman and other
stockholders. The Chairman has made various advances to the Company from a $3,000,000 credit facility established in the name of the Chairman, as well as from other of the Chairman's personal assets.
The credit facility was established by the Chairman in February of 2003 and was first drawn upon by the Chairman in May of 2003. Borrowings are payable upon demand. Interest accrues at the bank's base
rate plus 2% for the first $300,000 of borrowings and at the bank's base rate plus 5% on all additional borrowings. Under the credit facility, the lender may issue standby letters of credit for the
benefit of third parties at the
request of the Chairman. The obligations of the Chairman under the credit facility are secured by certain property in which the Chairman has a beneficial interest. As of November 16, 2004, the
Chairman has drawn approximately $262,000 under this facility to pay expenses incurred and accrued by the Company and its affiliates. Seven letters of credit in the aggregate amount of $1,380,000 have
been issued by the lender under the credit facility of which $492,000 have been issued in favor of vendors to the Company and its affiliates at the request of the Chairman. As of November 16,
2004, approximately $347,000 was undrawn and available under the credit facility and $2,653,000 was outstanding. The Company may obtain future advances from the Chairman from both the credit facility
and the Chairman's other personal assets in order to meet certain working capital needs. The Chairman may also cause the lender under the credit facility to issue standby letters of credit in favor of
one or more of the Company's vendors to secure the Company's obligations to such vendor or vendors. While the Chairman is not obligated to provide these advances to the Company or to cause the lender
to issue standby letters of credit in favor of the Company's vendors, the Company expects the Chairman to continue providing funds for operations in 2004 as and if needed, until such time that the
Company raises external capital. In the absence of external capital, the Company will continue to be dependent on the Chairman to fund existing operations and provide growth capital. There can be no
assurances that the Company can raise such capital on acceptable terms, if at all.

The
credit facility is secured by certain property in which the Chairman has a beneficial interest. The credit facility is guaranteed by the Company's wholly owned subsidiary, Vistula
Limited. The lender under the credit facility requested that Vistula Limited provide the guarantee as a condition to providing the facility since it was anticipated that a portion of the drawings
under the facility would be advanced to, or used to pay expenses of, Vistula Limited. Vistula shall be required to perform its obligations under the guarantee in the event that the Chairman fails to
pay to the lender any amounts payable under the credit facility when due. The maximum amount of future payments the guarantor could be required to make under the guarantee is $3,000,000, plus
interest, fees, costs and expenses payable to the lender under the credit facility. The guarantee shall continue in effect until all of the obligations and liabilities of the Chairman under the credit
facility have been paid or satisfied in full. The Company has no recourse provisions that would enable it to recover monies from third parties with respect to amounts it is required to pay under the
guarantee. The Company does not have any collateral it could obtain to recover amounts paid under the guarantee. The Company evaluated the fair value of the guarantee in accordance with Financial
Accounting Standards Board Interpretation Number 45 (FIN 45) and determined the value to be immaterial to the financial statements and, as a result, no liability has been recorded.

12

---



(13) Notes Payable

On July 2, 2004, the Company entered into a note subscription agreement with the J. Rothschild Assurance Self Invested Personal Pension Plan No. 2,
the sole beneficiary of which is the Company's Chairman, chief executive officer and president, Mr. Rupert Galliers-Pratt. The note subscription agreement was amended and restated on
August 11, 2004. Under the amended and restated note subscription agreement, the Company issued and sold to Mr. Galliers-Pratt's pension plan a convertible
promissory note in the principal amount of $125,000 on July 12, 2004 and the Company issued and sold to the pension plan a convertible promissory note in the principal amount of $50,000 on
August 11, 2004. Both convertible promissory notes have a one-year term, accrue interest at the rate of 7% per annum and are convertible into shares of the Company's common stock at
the price of $1.50 per share.

(14) Distribution and Marketing Agreement

On August 11, 2004, the Company entered into a distribution and marketing agreement with NetYantra Inc. and NetYantra India Pvt. Ltd.
(collectively, "NetYantra") pursuant to which NetYantra grants to the Company the exclusive worldwide rights (other than in India where NetYantra is headquartered and subject to certain existing
distribution agreements) to market and distribute the V-Cube IP-PBX software platform developed by NetYantra to Tier 1 carriers, telecommunications equipment
manufactures, internet service providers, large corporations, SMEs and other business entities and individual retail customers. Under the distribution and marketing agreement, in consideration for the
marketing and distribution rights granted to the Company by NetYantra, the Company is required to:



Amounts
paid by the Company pursuant to the Initial Payment and the Second Payment are creditable against future royalty commitments. Accordingly, the Company will record amounts paid
pursuant to the Initial Payment and Second Payment as prepaid royalties, and will expense such prepaid amounts as royalties accrue. Should the Company fail to make any of these payments, NetYantra may
terminate the agreement.

In
addition, in the event that the Company's common stock is quoted or traded on a stock market on or before the first anniversary of the agreement, the Company must also issue to
NetYantra shares of the Company's common stock having a market value of $1,000,000 based on the opening price of the Company's common stock on the first day of trading (or, at the Company's option,
pay to NetYantra a cash payment of $1,000,000 instead of issuing such shares). Should the Company fail to issue these shares, or make the cash payment, NetYantra may terminate the agreement. This
payment, whether in
the form of stock or cash, is not creditable towards royalty commitments and will be expensed when and if it becomes payable.

During
the three months ended September 30, 2004, the Company paid NetYantra $50,000 towards the required Initial Payment under the Agreement. On September 9, 2004,
NetYantra agreed to extend the date by which the Company was required to pay the remainder of the Initial Payment until

13

---



October 15,
2004. In consideration for this extension, the Company agreed to pay to NetYantra an additional payment of $25,000 and to issue to NetYantra 50,000 shares of the Company's common
stock, valued at $.45 per share, the fair value of the Company's common stock on that date. The additional payment of cash and stock is not creditable towards future royalties and was expensed. The
remaining portion of the Initial Payment and the additional payment of $25,000 were paid on behalf of the Company by one of its stockholders on October 8, 2004 and will be recorded as a
contribution to capital in the fourth quarter of 2004. The Company issued the 50,000 shares to NetYantra on October 1, 2004.

The
Agreement is for an initial term of five years. NetYantra may elect to terminate the exclusivity granted to the Company under the Agreement after a period of two years for any
reason.

(15) Subsequent Events

On October 19, 2004, the Company granted 2,000,000 options to purchase common stock to its chief executive officer. The options have an exercise price of
$.10 and were fully vested upon grant. The Company will record the difference between the fair market value of the Company's stock and the exercise price as compensation expense in the fourth quarter.

14

---





Item 2. Management's Discussion and Analysis or Plan of Operations.

Introduction

The following information should be read in conjunction with the financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with
Management's Discussion and Analysis and Results of Operations contained in our Registration Statement on Form 10-SB, File No. 000-50758, as amended.

Cautionary Statements

We do not provide forecasts of our future financial performance. However, from time to time, information provided by us or statements made by our employees may
contain "forward-looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report that are not historical facts constitute forward-looking
statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve substantial risks and uncertainties. You can
identify these statements by forward-looking words such as "may", "will", "expect", "anticipate", "believe", "estimate", "continue", and similar words. You should read forward-looking statements
carefully because they: (1) discuss our future expectations; (2) contain projections of our future operating results or financial condition; or (3) state other "forward-looking"
information. Various factors described below, as well as any other instances of cautionary language in this Quarterly Report, refer to or provide examples of risks, uncertainties and events that may
cause our actual results to be materially different than the expectations described in our forward-looking statements. You should be aware that the occurrence of any of the events or factors described
below and elsewhere in this Quarterly Report could materially and adversely affect our business. All forward-looking statements included in this Quarterly Report are based on information available to
us on the date hereof, and we assume no obligation to update any such forward-looking statements.

Each
forward-looking statement should be read in conjunction with the financial statements and notes thereto in Part I, Item 1, of this Quarterly Report and with the information
contained in Item 2, together with Management's Discussion and Analysis and Results of Operations contained in our Registration Statement on Form 10-SB, File
No.000-50758, as amended, including but not limited to the section therein entitled "Factors Affecting Future Performance."

In
addition to the risks and uncertainties faced generally by participants in the telecommunication industry, we face the following risks and uncertainties:



15

---





Because
of the foregoing and other factors, we may experience material fluctuations in our future operating results on a quarterly or annual basis which could materially adversely affect
our business, financial condition and operating results.

16

---



Overview

Vistula Communications Services, Inc. ("VCS", the "Company" or "we") currently has three subsidiaries: Vistula Limited ("Vistula"), Vistula
USA, Inc. ("Vistula USA") and Cardlink Services Limited ("Cardlink"). Through Vistula and Vistula USA, we currently provide wholesale value-added telecommunications services (including direct
and partner voice routing services) to Tier 1 and Tier 2 telecommunication carriers and transit operators. Beginning in the fourth quarter of 2004, through Vistula and Vistula USA, we expect to market
and distribute the V-Cube Voice over Internet Protocol, or "VoIP", software platform developed by NetYantra to telecommunications carriers, Internet service providers, or
"ISPs", large corporations and small and medium enterprises, or "SMEs", throughout the world.

Through
our Cardlink subsidiary, which is currently inactive, we plan to market and distribute electronic top-up software, which enables prepayment for services provided by
mobile telephone operators, and associated services to Tier 1 and Tier 2 telecommunications carriers and transit network operators throughout the world. Cardlink has developed a software product suite
that enables mobile operators to electronically process prepayments from "pay-as-you-go" mobile phone customers.

Vistula and Vistula USA

Vistula and Vistula USA are aggregators of wholesale telecommunications services to Tier 1 and Tier 2 telecommunications carriers and transit network operators.
Vistula and Vistula USA are collectively referred to as the "Vistula Companies." The Vistula Companies have switching facilities in London and Los Angeles and interconnect agreements with suppliers
and customers in these locations. We believe that the Vistula Companies are especially well positioned to take advantage of the disruption and uncertainty in the telecommunications sector over the
past three years. The collapse of a significant number of competitive wholesale service providers has meant that profit margins have improved significantly and we believe the opportunity for well
managed and well financed wholesale carriers such as the Vistula Companies is significant. Neither of the Vistula Companies has any debt and, other than the equipment which we currently lease from MRS
Partners and which we have agreed to purchase on or before April 1, 2005, each of the Vistula Companies owns all of its fixed equipment outright.

The
Vistula Companies expect to commence marketing and distribution of the V-Cube software platform to Tier 1 carriers, transit network operators, large
corporations, and SMEs in the fourth quarter of 2004. We expect this multiple feature VoIP platform, which will enable customers to convert their existing traditional PBX phone systems to provide VoIP
capability without the need for significant investment in new hardware, will provide the Vistula Companies with a highly competitive VoIP solution.

Cardlink

Cardlink has been inactive since it was first acquired by Mr. Rupert Galliers-Pratt and certain members of his family in April 2003. Following the
acquisition of Cardlink by VCS through the share exchange completed in March 2004, VCS intends to reactivate and refocus the operations of Cardlink. Cardlink will offer an electronic
top-up, or "ETU", software product suite that will enable mobile operators to electronically process prepayments from "pay-as-you-go" customers.
Cardlink's products will allow these customers to "electronically top-up" their accounts with the mobile operator. We believe that the market for these prepayment services is expanding
both in the developed and in the underdeveloped regions in the world and we believe that Cardlink's ETU product will be of significant value as new mobile operators throughout the world seek to adopt
this technology.

We
believe that the potential for providing ETU services in markets where the adoption and use of mobile telephony is growing rapidly will create significant opportunities and
long-term growth

17

---



potential
for Cardlink. We intend that Cardlink will typically receive a percentage of the total mobile revenues transacted through the Cardlink system. As a result, Cardlink will be a beneficiary of
any increase in mobile telephony revenues without any investment of capital in building infrastructure. We believe that Cardlink's ETU software will be one of the most robust and complete ETU systems
in the market.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles
require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at
the time that these estimates, judgments
and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported
amounts of revenues and expenses during the periods presented. Those estimates and judgments are based on management's historical experience, the terms of existing agreements, our observance of trends
in the industry, information that we obtain from our customers and outside sources, and on various other assumptions that management believes to be reasonable and appropriate under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material
differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected.

The
significant accounting policy that we believe is most critical in fully understanding and evaluating our reported financial results is our policy regarding revenue recognition which
is discussed in detail in our Registration Statement on Form 10-SB filed with the Securities and Exchange Commission. We have reviewed and determined that our revenue recognition
policy remains our critical accounting policy for the three months ended September 30, 2004. We did not make any changes to this policy during this period.

Results of Operations

Revenues for the three-month period ended September 30, 2004 increased by 76% over the comparable period in fiscal 2003 to $513,563. Revenues for the
nine-month period ended September 30, 2004 increased by 193% over the comparable period in fiscal 2003 to $2,329,571. We attribute this directly to the addition of new Tier 1 and
Tier 2 national and international carriers to our customer base as well as the increase in revenues from our historical customer base.

Cost
of revenues increased to $468,091 for the three-month period ended September 30, 2004, a 121% increase as compared to the same period in fiscal 2003. The increase in the cost
of revenues for the period reflects higher costs associated with our growing business including the purchase of additional minutes from our suppliers that we subsequently sell to our customers. Gross
margins decreased to 8.9% during the period from 27.6% for the similar period a year ago as, in the prior year, we experienced higher individual margins on the smaller number of contracts in existence
during that period. We anticipate that future gross profit margins should approximate 8% in accordance with industry standards and norms. During the three months ended September 30, 2004, we
added one new interconnect agreement with an international carrier.

Cost
of revenues increased to $2,173,093 for the nine-month period ended September 30, 2004, a 216% increase as compared to the same period in fiscal 2003. The
increase in the cost of revenues for the period reflects higher costs associated with our growing business including the purchase of additional minutes from our suppliers that we subsequently sell to
our customers. For the nine-month period ended September 30, 2004, our gross profit margin decreased to 6.7% as compared to 13.6% for

18

---



the
same period in 2003 as, despite our lower revenue levels in 2003, we experienced higher individual margins on the smaller number of contracts in existence during that period. We believe we can
maintain a gross profit margin in excess of 8% while concentrating on our revenue growth.

General
and administrative costs increased by 206.0% to $599,481 for the three-month period ended September 30, 2004, as compared to the same period in fiscal 2003. General and
administrative costs increased by 520.1% to $2,081,159 for the nine-month period ended September 30, 2004, as compared to the same period in fiscal 2003. During the
nine-month period ended September 30, 2004, we incurred approximately $1,070,000 in non-cash expenses. These include, among others, $395,000 from the expensing of
employee stock options granted under our Stock Incentive Plan that vested during the period, and $188,000 in non-cash expenses for the granting of restricted shares of common stock for
financial advisory services provided by an investment banking firm. In addition, we have incurred approximately $578,000 in legal and accounting expenses including substantial legal and accounting
expenses associated with the registration of our equity securities under the Securities Exchange Act and compliance with our reporting obligations under the Securities Exchange Act. On May 12,
2004, we filed a registration statement on Form 10-SB with the Securities and Exchange Commission. On July 12, 2004, our registration statement on
Form 10-SB became effective.

Depreciation
and amortization expenses were $11,307 for the three-month period ending September 30, 2004 and $31,877 for the nine-month period ending the same date.
Property and equipment are carried at cost. We provide for depreciation expense using the straight-line method over the estimated useful lives of the equipment of 3 to 5 years.

During
the three and nine-month periods ended September 30, 2004, we recorded $28,284 and $84,852 of interest expense related to capital lease obligations.

The
charge for expensing non-cash employee compensation for stock options was $41,000 for the three-month period ending September 30, 2004 and $395,000 for the
nine-month period ending September 30, 2004. Prior to 2004, no options had been awarded to key employees.

For
the three months ending September 30, 2004, we incurred a loss of $585,229 or approximately $0.02 loss per common share, basic and diluted. For the nine-month
period ending September 30, 2004, we incurred a loss of $2,013,558, or approximately $0.08 loss per common share, basic and diluted.

Liquidity And Capital Resources

As of September 30, 2004, we had cash and cash equivalents of approximately $7,000 and a working capital deficit of approximately $3,284,000. This
represents a decrease in cash and cash equivalents of 92% and an increase in working capital deficit of 856% from December 31, 2003. Since our inception through September 30, 2004, we
have generated losses of approximately $2,613,000. Accounts receivable were approximately $282,000 at September 30, 2004, an increase of approximately 16% from December 31, 2003.

We
have made expenditures for capital equipment from our inception until September 30, 2004 of approximately $142,000, purchasing the telecommunications equipment necessary to
begin our business.

We
have agreed to purchase certain telecommunications equipment (including two Sonus Networks switches) from MRS Partners, LLC for $1,670,000 in cash and 725,000 shares of our common
stock. Pending the completion of this purchase, which must occur on or prior to April 1, 2005, we are leasing this equipment from MRS Partners.

We
plan to make the $1,670,000 cash payment due to MRS Partners for purchase of the telecommunications equipment out of capital raised through the private placement of our equity

19

---



securities
occurring before April 1, 2005. Under the asset purchase agreement with MRS Partners, the $1,670,000 payment is not due until the earlier to occur of the following:



Since
we expect that we will have raised at least $3,000,000 in capital prior to making the $1,670,000 cash payment to MRS Partners, we anticipate that the cash payment to MRS Partners
will not have an adverse impact on our future financial condition.

We
have entered into a distribution and marketing agreement with NetYantra Inc. and NetYantra India Pvt. Ltd. (collectively, "NetYantra") pursuant to which NetYantra grants
to VCS the exclusive worldwide rights (other than in India where NetYantra is headquartered and subject to certain existing distribution agreements) to market and distribute the
V-Cube IP-PBX software platform developed by NetYantra to Tier 1 carriers, telecommunications equipment manufacturers, internet service providers, large
corporations, SMEs and other business entities and individual retail customers. Under the distribution and marketing agreement, in consideration for the marketing and distribution rights granted to us
by NetYantra, we will be required to, among other things:



Amounts
paid by the Company pursuant to the Initial Payment of $150,000 and the Second Payment are creditable against future royalty commitments. Accordingly, the Company will record
amounts paid pursuant to the initial payment and Second Payment as prepaid royalties, and will expense such prepaid amounts as royalties accrue. Should the Company fail to make any of these payments,
NetYantra may terminate the agreement.

In
addition, in the event that the Company's common stock is quoted or traded on a stock market on or before the first anniversary of the agreement, the Company must also issue to
NetYantra shares of the Company's common stock having a market value of $1,000,000 based on the opening price of the Company's common stock on the first day of trading (or, at the Company's option,
pay to NetYantra a cash payment of $1,000,000 instead of issuing such shares). Should the Company fail to issue these shares, or make the cash payment, NetYantra may terminate the agreement. This
payment, whether in the form of stock or cash, is not creditable towards royalty commitments and will be expensed when and if it becomes payable.

During
the three months ended September 30, 2004, the Company paid NetYantra $50,000 towards the required Initial Payment under the agreement. On September 9, 2004,
NetYantra agreed to extend the date by which the Company was required to pay the remainder of the Initial Payment until October 15, 2004. In consideration for this extension, the Company agreed
to pay to NetYantra an additional payment of $25,000 and to issue to NetYantra 50,000 shares of the Company's common stock, valued at $.45 per share, the fair value of the Company's
common stock on that date. The

20

---



additional
payment of cash and stock is not creditable towards future royalties and was expensed. The remaining portion of the Initial Payment and the additional payment of $25,000 were paid on behalf
of the Company by one of its stockholders on October 8, 2004 and will be recorded as a contribution to capital in the fourth quarter of 2004. The Company issued the 50,000 shares to
NetYantra on October 1, 2004.

We
expect to pay the required Second Payment and the $1,000,000 payment (in the event we are required to issue shares of our common stock having a market value of $1,000,000 to NetYantra
and we elect to make this payment instead of issuing these shares) from revenues derived from the V-Cube platform, from future advances provided by one of our stockholders as described
more fully below and/or from the proceeds from one or more private placements of our equity or debt securities.

One
of our principal stockholders has made various advances to the Company from a $3,000,000 credit facility established in the name of the stockholder and from other of the
stockholder's personal assets. The credit facility was established by the stockholder in February 2003 and first drawn upon by the stockholder in May 2003. Under the credit facility, the
lender may issue standby letters of credit for the benefit of third parties at the request of the stockholder. The obligations of the stockholder under the credit facility are secured by certain
property in which the stockholder has a beneficial interest. As of November 16, 2004, the stockholder has drawn approximately $262,000 under this facility to pay expenses incurred and accrued
by VCS and its affiliates, including Vistula, and seven letters of credit in the aggregate amount of $1,489,000 have been issued by the lender under the credit facility of which $492,000 have been
issued in favor of vendors of VCS and its affiliates at the request of the stockholder. As of November 16, 2004, approximately $347,000 was undrawn and available under the credit facility. We
may obtain future advances from this stockholder from both the credit facility and the stockholder's other personal assets in order to meet certain working capital needs. The stockholder may also
cause the lender under the credit facility to issue standby letters of credit in favor of one or more of our vendors to secure our obligations to such vendor or vendors. While the stockholder is not
obligated to provide these advances to us or to cause the lender to issue standby letters of credit in favor of our vendors, we expect the stockholder to continue providing funds for operations in
2004 as and if needed, until such time that we raise external capital.

We
believe that our available cash and cash equivalents, credit available from one of our stockholders and the proceeds of the sale of securities to new investors will be sufficient to
meet our working capital requirements, including operating losses, and capital expenditure requirements for at least the next fiscal year, assuming that our business plan is implemented successfully.
However, we intend to use capital and debt financing as needed to supplement the cash flows received through the successful operations of our business. Currently our primary sources of capital have
been the revenues generated from interconnect agreements with our customers and advances made by one of our principal stockholders. Subsequent to September 30, 2004, through November 4,
2004, this principal stockholder has advanced approximately $400,000 to the Company.

In
addition, we believe that we will need to raise additional capital through the private placement of our equity securities within the next 12 to 18 months in order to support
the planned growth of our business. Additional financing may not be available when needed or, if available, such financing may not be on terms satisfactory to us or completed in a timely manner. In
the absence of external capital, we will continue to be dependent upon our principal stockholder to fund existing operations and provide growth capital.

To
date, inflation has not had a material impact on our financial results. There can be no assurance, however, that inflation will not adversely affect our financial results in the
future.

As
discussed above, our plans for growth and expansion will involve the need for additional capital. As a result, we may have to rely heavily upon the issuance of debt or equity
securities in order to continue to grow our business as well as to fund the negative cash flow we have experienced to date

21

---



and
may experience in the future as a result of these activities. If additional funds are raised through the issuance of equity securities, our existing stockholders may experience significant
dilution. In the absence of achieving profitable operations in future periods, obtaining additional capital through asset sales, securing a revolving credit facility, debt or equity offerings, or a
combination of the foregoing, we may encounter liquidity difficulties. No assurance can be given that we will be able to raise additional capital when needed, or at all, or that such capital, if
available, will be on acceptable terms.

Off-Balance Sheet Arrangements

One of our subsidiaries, Vistula, has agreed to unconditionally guarantee the obligations of one of our principal stockholders under a $3,000,000 credit facility
established in the name of the stockholder which is described in more detail under the heading "Liquidity and Capital Resources." Vistula has agreed to provide this guaranty since it is anticipated
that the stockholder will advance drawings under the credit facility to Vistula or its affiliates or that letters of credit will be issued under the facility in favor of vendors to Vistula or its
affiliates to secure obligations of those entities to their vendors. In light of the circumstances surrounding the guaranty, including the fact that the obligations of the stockholder under the credit
facility are secured by significant assets in which the stockholder has a beneficial interest, we believe that the potential liability and obligations of Vistula under this guaranty are not reasonably
likely to have a material current or future effect on our financial condition, results of operations, liquidity or capital resources.

Item 3. Controls and Procedures.

As required under the Sarbanes-Oxley Act of 2002, our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly Report. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we
record, process, summarize and report the information we must disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, within the time periods specified in the
SEC's rules and forms. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were reasonably effective.

During
the three month period ended September 30, 2004, there were no changes in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

22

---





PART II. Other Information

Item 5. Other Information.

Entry into a Material Definitive Agreement.

On August 11, 2004, we entered into a distribution and marketing agreement with NetYantra pursuant to which NetYantra grants to the Company the exclusive
worldwide rights (other than in India where NetYantra is headquartered and subject to certain existing distribution agreements) to market and distribute the V-Cube
IP-PBX software platform developed by NetYantra to Tier 1 carriers, telecommunications equipment manufacturers, internet service providers, large corporations, SMEs and other business
entities and individual retail customers. Under the distribution and marketing agreement, in consideration for the marketing and distribution rights granted to us by NetYantra, we are required to:



In
addition, in the event that our common stock is quoted or traded on a stock market on or before the first anniversary of the agreement, we must also issue to NetYantra shares of our
common stock having a market value of $1,000,000 based on the opening price of our common stock on the first day of trading (or, at our option, pay to NetYantra a cash payment of $1,000,000 instead of
issuing such shares).

During
the three months ended September 30, 2004, the Company paid NetYantra $50,000 towards the required Initial Payment under the agreement. On September 9, 2004,
NetYantra agreed to extend the date by which the Company was required to pay the remainder of the Initial Payment until October 15, 2004. In consideration for this extension, the Company agreed
to pay to NetYantra an additional payment of $25,000 and to issue to NetYantra 50,000 shares of the Company's common stock, valued at $.45 per share, the fair value of the Company's common stock on
that date. The additional payment of cash and stock is not creditable towards future royalties and was expensed. The remaining portion of the Initial Payment and the additional payment of $25,000 were
paid on behalf of the Company by one of its stockholders on October 8, 2004 and will be recorded as a contribution to capital in the fourth quarter of 2004. The Company issued the 50,000 shares
to NetYantra on October 1, 2004.

The
agreement is for an initial term of five years. NetYantra may elect to terminate the exclusivity granted to VCS under the agreement after a period of two years for any reason.

Issuance of Convertible Promissory Notes

On July 2, 2004, we entered into a note subscription agreement with the J. Rothschild Assurance Self Invested Personal Pension Plan No.2, the sole
beneficiary of which is our chairman, Mr. Rupert Galliers-Pratt. The note subscription agreement was amended and restated on August 11, 2004. Under the amended and restated note
subscription agreement, we issued and sold to Mr. Galliers-Pratt's pension plan a convertible promissory note in the principal amount of $125,000 on July 12, 2004 and we issued and sold
to the pension plan a convertible promissory note in the principal amount of $50,000 on August 11, 2004. Both convertible promissory notes have a one-year term, accrue interest at
the rate of 7% per annum and are convertible into shares of our common stock at the price of $1.50 per share. The proceeds from the issuance and sale of the convertible promissory notes were used by
us for general working capital purposes.

23

---



Amendment to Certificate of Incorporation.

On July 21, 2004, we filed an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 40,000,000
shares to 100,000,000 shares and to authorize 10,000,000 shares of our undesignated preferred stock. Pursuant to Section 228 of the General Corporation Law of the State of Delaware, we obtained
the written consent of our stockholders to the amendment following approval by our board of directors on June 30, 2004.

Item 6. Exhibits and Reports of Form 8-K.

(a) Exhibits.

|Exhibit
Number |  | Exhibit Description                                                                                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)         |  | Asset Purchase Agreement, dated as of January 5, 2004, by and between VCS, Inc. and MRS Partners LLC.                                                                                                                            
|2.2(1)         |  | Amendment and Indemnification Agreement, dated as of May 5, 2004, by and between Vistula Communications Services, Inc., MRS Partners LLC and Manuel Vierra, Pepper Snyder, Steven Ziswasser, Seymour Ziswasser, and Kirk
Rossman.
|3.1(1)         |  | Certificate of Incorporation filed with the Delaware Secretary of State on September 22, 2003.                                                                                                                                   
|3.2(1)         |  | Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on January 23, 2004.                                                                                                         
|3.3(1)         |  | Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on March 4, 2004.                                                                                                            
|3.4(1)         |  | Bylaws adopted on September 22, 2003.                                                                                                                                                                                            
|3.5(1)         |  | Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on July 21, 2004.                                                                                                            
|10.1(1)        |  | Vistula Communications Services, Inc. 2004 Stock Incentive Plan.                                                                                                                                                                 
|10.2(1)        |  | Amended and Restated Employment and Noncompetition Agreement, dated as of May 5, 2004, by and between Vistula Communications Services, Inc., Vistula USA, Inc. and Mark Scully.                                                  
|10.3(1)        |  | Amended and Restated Employment and Noncompetition Agreement, dated as of May 5, 2004, by and between Vistula Communications Services, Inc., Vistula USA, Inc. and Eric Pomeroy.                                                 
|10.4(1)        |  | Amended and Restated Employment and Noncompetition Agreement, dated as of May 5, 2004, by and between Vistula Communications Services, Inc., Vistula USA, Inc. and Edward DeMent.                                                
|10.5(1)        |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Mark Scully.                                                                                                       
|10.6(1)        |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Edward DeMent.                                                                                                     
|10.7(1)        |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Eric Pomeroy.                                                                                                      
|10.8(1)        |  | Reciprocal International Carrier Service Agreement, dated as of April 15, 2004, by and between Vistula Limited and KDDI America, Inc.                                                                                            
|10.9(1)        |  | Distribution and Marketing Agreement, dated as of August 11, 2004, by and between NetYantra Inc., NetYantra India Pvt. Ltd. and Vistula Communications Services, Inc.                                                            
|10.10(1)       |  | Amended and Restated Note Subscription Agreement, dated as of August 11, 2004, by and between J. Rothschild Assurance Self Invested PPP#2 F/B/O Rupert Anthony Galliers-Pratt and Vistula Communications Services,
Inc.          
|               |  |                                                                                                                                                                                                                                  

24

---



|10.11(1) |  | Convertible Promissory Note, dated as of July 12, 2004, issued to J. Rothschild Assurance Self Invested PPP#2 F/B/O Rupert Anthony Galliers-Pratt in the principal amount of $125,000.                                             
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12(1) |  | Convertible Promissory Note, dated as of August 11, 2004, issued to J. Rothschild Assurance Self Invested PPP#2 F/B/O Rupert Anthony Galliers-Pratt in the principal amount of $50,000.                                            
|10.13*   |  | Letter Agreement, dated September 9, 2004, by and between NetYantra Inc., NetYantra India Pvt. Ltd. and Vistula Communications Services, Inc.                                                                                      
|31.1*    |  | Certification by Christopher S. Burke pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Vistula Communications Services, Inc.                            
|31.2*    |  | Certification by George R. Vaughn pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, relating to Vistula Communications Services, Inc.                                
|32.1*    |  | Certification by Christopher S. Burke pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Vistula
Communications Services, Inc.
|32.2*    |  | Certification by George R. Vaughn pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, relating to Vistula
Communications Services, Inc.    

---

(b) Reports on Form 8-K.

On September 8, 2004, we filed a current report on Form 8-K regarding the election of Christopher S. Burke as a director and Deputy
Chairman of our board of directors and the appointment of Mr. Burke as our President and Chief Executive Officer, in each case effective as of September 1, 2004.

25

---





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.

|                        |  | Vistula Communications Services, Inc.
|----------------------- |  | -------------------------------------
|Date: November 19, 2004 |  | By:                                  

26

---