UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-KSB

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|ý                                                                | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|---------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended: December 31, 2004                    
|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(I.R.S. Employer Identification No.)


Suite 801, 405 Park Avenue
New York, New York 10022(Address of principal executive offices and zip code)

Issuer's telephone number:(212) 317-8900

with a copy of all communications and correspondence to:

Paul Bork, Esq.
Foley Hoag LLP
155 Seaport Boulevard
Boston, Massachusetts 02210
(617) 832-1000

Securities registered pursuant to Section 12(b) of the Act:

Title of ClassNone

Name of each exchange on which registeredNot Applicable


Securities
Registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share(Title of class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o

The issuer's revenues for its most recent fiscal year were $2,335,408.

The
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) was: Not Applicable.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

As of March 28, 2005, there were 25,179,406 shares of the issuer's common stock outstanding.

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



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VISTULA COMMUNICATIONS SERVICES, INC.

FORM 10-KSB

TABLE OF CONTENTS

|PART I   |          |  |                                                                                                                 | 
|-------- | -------- |  | --------------------------------------------------------------------------------------------------------------- | 
|         | Item 1.  |  | Description of Business                                                                                         | 
|         | Item 2.  |  | Description of Property                                                                                         | 
|         | Item 3.  |  | Legal Proceedings                                                                                               | 
|         | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             | 
|PART II  |          |  |                                                                                                                 | 
|         | Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        | 
|         | Item 6.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                           | 
|         | Item 7.  |  | Financial Statements                                                                                            | 
|         | Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            | 
|         | Item 8a. |  | Controls and Procedures                                                                                         | 
|         | Item 8b. |  | Other Information                                                                                               | 
|PART III |          |  |                                                                                                                 | 
|         | Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act | 
|         | Item 10. |  | Executive Compensation                                                                                          | 
|         | Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                                                  | 
|         | Item 12. |  | Certain Relationships and Related Transactions                                                                  | 
|         | Item 13. |  | Exhibits                                                                                                        | 
|         | Item 14. |  | Principal Accountant Fees and Services                                                                          | 

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This annual report on Form 10-KSB contains forward-looking statements, which involve risks and uncertainties, such as our plans, objectives, expectations and
intentions. You can identify these statements by our use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," "continue," "plans," or their negatives or cognates.
Some of these statements include discussions regarding our future business strategy and our ability to generate revenue, income and cash flow. We wish to caution the reader that all forward-looking
statements contained in this Form 10-KSB are only estimates and predictions. Our actual results could differ materially from those anticipated as a result of risks facing us or
actual events differing from the assumptions underlying such forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Annual
Report on Form 10-KSB. We will not update these forward-looking statements unless the securities laws and regulations require us to do so.

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This Annual Report on Form 10-KSB contains trademarks and service marks of Vistula Communications Services, Inc. and its subsidiaries. Unless
otherwise provided in this Annual Report on Form 10-KSB, trademarks identified by  are trademarks of Vistula Communications Services, Inc. or its subsidiaries.
All other trademarks are the properties of their respective owners.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Business Development

Vistula Communications Services, Inc. ("VCS," the "Company," "we," or "us") was incorporated on September 22, 2003 under the laws of the State of
Delaware. On March 2, 2004, VCS acquired all of the issued and outstanding ordinary shares of Cardlink Services Limited, a company incorporated under the laws of Scotland ("Cardlink") and all
of the issued and outstanding ordinary shares of Vistula Limited, a company incorporated under the laws of England and Wales ("Vistula"). VCS issued an aggregate of 23,885,000 shares of common stock
to the former shareholders of Vistula and Cardlink in exchange for all of the shares of Cardlink and Vistula. VCS was originally incorporated under the name VCS, Inc. VCS changed its name to
Vistula Communications Services, Inc. on March 4, 2004.

Cardlink
was incorporated in February 1996 and was acquired by Mr. Rupert Galliers-Pratt, the chairman of our board of directors and our chief executive officer and
president, and members of his family in April, 2003 from Metromedia International Group Inc. (OTCBB: MMG). From the time of its acquisition by Mr. Galliers-Pratt through the date of the
share exchange with VCS, and following completion of the share exchange with VCS through the date of filing of this Form 10-KSB, Cardlink has been
inactive.

Vistula
was incorporated and commenced operations in August 2002. Since its incorporation in August 2002 through to the completion of the exchange of Vistula shares for
shares in VCS, Vistula was owned entirely by an entity controlled by Mr. Galliers-Pratt and his immediate family.

On
February 4, 2004, VCS incorporated a subsidiary, Vistula USA, Inc. ("Vistula USA"), under the laws of the State of Delaware. Vistula USA provides the U.S.-based
telecommunications switching services which were previously provided by Vistula.

On
March 15, 2005, we completed the purchase of certain telecommunications equipment (including two Sonus Networks switches) from MRS Partners LLC ("MRS") for $500,000 in cash,
725,000 shares of our common stock and a promissory note in the principal amount of $1,170,000 under the terms of our Asset Purchase Agreement with MRS dated January 4, 2004, as amended. Prior
to completion of this purchase we had been leasing this equipment from MRS.

Neither
VCS nor any of its subsidiaries have been involved in any bankruptcy or bankruptcy proceeding.

Our
principal executive offices are located at Suite 801, 405 Park Avenue, New York, New York 10022 and our telephone number and fax number at that office are
(212) 317-8900 and (212) 832-7563, respectively. We have offices in New York, London, England and Sandton, South Africa. Our principal Internet address is
www.vistula.com.

Business of the Issuer

We are a provider of value-added services and software to Tier 1 and Tier 2 telecommunications carriers and transit network operators throughout the world. We
currently have three principal subsidiaries: Vistula, Vistula USA and Cardlink, which is inactive.

During
the coming year we also expect to provide state-of-the-art software and high margin services to telecommunications carriers, services providers
and network operators throughout the world. We believe that our operating subsidiaries will occupy strong positions within the telecommunications market.

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We
have an experienced management team. Our executive officers have worked in the telecommunications industry for the past 15 years and have occupied senior executive positions in
a number of international carriers throughout the world.

Vistula and Vistula USA

Overview.Vistula and Vistula USA are aggregators of wholesale telecommunications services to Tier 1 and Tier 2
telecommunications carriers and providers of Internet-enabled voice services to telecommunication carriers, service providers and transit network operators throughout the world. Vistula and Vistula
USA are collectively referred to in this annual report as the "Vistula Companies," and sometimes individually as a "Vistula Company."

We
believe that, in the next year, the Vistula Companies' core product offering will be V-Cube, a uniquely featured Internet
Protocol-P-B-X, or "IP-PBX," that facilitates full contact communication services including voice, video, conferencing, call center, interactive voice
response systems, and multi/sub-domain and unified messaging across enterprise and public networks. Utilizing the V-Cube platform, Vistula offers a tailored
software platform developed by NetYantra that enables carriers, service providers and transit network operators to rapidly roll out a flexible range of managed Voice over Internet Protocol, or "VoIP,"
based product and service offerings to their customers.

The
Vistula Companies also have switching facilities in London and Los Angeles and interconnect agreements with suppliers and customers. We believe that the Vistula Companies are well
positioned to take advantage of the disruption and uncertainty in the wholesale telecommunications sector over the past five years, which resulted in the collapse of a significant number of
competitive wholesale service providers. We believe that profit margins have improved, providing significant opportunities for well managed and well financed wholesale carriers. Each of the Vistula
Companies owns all of its fixed equipment outright.

BackgroundVoice over Internet Protocol or "VoIP" Services.Whenever a telecommunications carrier wants to pass
or exchange telephone traffic with another carrier, both carriers have to interconnect their switches or networks. This has always been achieved either through a cable/fiber connection or through a
satellite link up. This connection can be very expensive with cost based on distance, size of connection (how many simultaneous calls it can carry) and the available infrastructure at each end of the
link. Additionally, circuits can take a long time (weeks) to be provisioned, often require long term commitments (12 months or more) and are specific to each carrier hook-up.

Voice
over Internet Protocol, or "VoIP", enables the transmission of voice packets over the Internet. Basically, VoIP digitizes voice into data packets, transmits them over the Internet
and reconverts them into voice at the call destination. VoIP technology enables carriers to hook into their local Internet
gateway, provide each other with their Internet address and then treat this link as if it was a traditional permanent cable/fiber or satellite circuit switched connection. This not only costs the
interconnecting carriers much less on a call by call basis, but a single link into the Internet can be used to connect to any number of different and changing carrier partners. This reduces the cost
to each carrier, reduces the risk associated with a minimum commitment to a particular circuit or fixed link, and increases the flexibility when interconnecting with customers and suppliers as a
single link into the Internet can be used to connect any number of customers or suppliers.

Although
VoIP technology has been available since the mid 1990s, it has been only recently that this technology and the Internet have evolved to provide cost-effective and
acceptable call quality and reliability, and interoperability with the signaling infrastructure of the existing circuit switched network. Following these advances in technology and the resulting
improvement in call quality, the recent emergence of VoIP has been rapid. For example, TeleGeography, a leading telecommunications advisory and research company, estimates that the use of VoIP for the
routing of international calls grew from 10 million minutes of international telephony traffic, or "MiTT," in 1997 to almost 22 billion

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MiTT
in 2003. Based on TeleGeography's estimates, international VoIP traffic represented approximately 11% of the estimated total international traffic of 198.3 billion MiTT in 2003.

As
a result of the cost and capacity efficiencies of VoIP and increasing user acceptance of the technology, more and more niche route suppliers will be available only through a VoIP
connection. We believe, supported by current experience, industry trends and recent advances in switching technology, that VoIP will become the predominant mechanism for carrier to carrier
interconnects.

BackgroundInternational Wholesale Telecommunications.Prior to any form of liberalization, international
telecommunications were provided by governmental agencies and regulated through the International Telecommunications Union or "ITU." The ITU established bilateral agreements between countries for the
termination of telephony traffic. These agreements contained three guiding mechanisms:



Each
telecommunications operator operated a half circuit network; calls passed from the originating operator to the terminating operator at a hypothetical mid-point.
End-to-end call completion thus involved two operators. To compensate the terminating operator for use of their half circuit international network and domestic facilities or
arrangements, the originating operator paid the terminating operator a fee. This settlement rate was usually (but not always) half of the "accounting rate" established for a particular route. Payment
was only made for the net balance of traffic between any two points.

Operators
were licensed to provide third country or overflow services and operate switched transit services for many years. Their commercial arrangements were governed by ITU regulations
and recommendations. Actual payment methods varied but were related to the accounting rate from the originating country to the receiving country.

Governments
addressed retail telecommunications as a state activity with an economic approach based upon the formulation: current year revenue = last year's
revenue + inflation + increases in cost base. As such, the cost of the "correspondent trading system" remained opaque.

Beneath
the correspondent trading system layer of the value chain was the physical infrastructure layer, upon which calls were routed. This was owned and operated by a consortium of
operators who were users of the infrastructure. For consortia investors, the investment provided a guaranteed return, as all operational costs were recovered from the operators who had leased
capacity. These leases were known as indefeasible rights of usage or "IRU." The right to own IRU was regulated by the government within each geographic region. This infrastructure had a rising cost
base over time and was effective in reducing the capital investment requirements of the operators for the provision of service. Additionally, operators sub-let capacity to each other to
enable direct routes on a "cost plus" basis, as opposed to full commercial value. This was known as "leased transit."

The
1980s and early 1990s were characterized by two major changes to the system of international telecommunications. The first change was the introduction of multiple common carriers in
some countries. Where there are multiple operators on a route, such as between the United States and the United Kingdom, a system of proportionate returns was put in to place. Proportionate returns
allow a distant end operator to send return traffic in proportion to the traffic that it receives. Thus if X has 80% market share on a route (with Y having the 20% balance) then X can expect to
receive 80% of incoming traffic from distant end operators. This system gave an incentive to each market player to maximize outgoing market share in order to maximize profitable return traffic, due to
the high value of above cost accounting rates.

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Additionally,
telecommunications regulators introduced the concept of "parallel accounting." Parallel accounting ensures that all international operators have access to the same
accounting rate in place on a particular route and prevents the operators from being discriminately charged by the far end operator. However, the introduction of proportionate returns and parallel
accounting also created a distortion in the international market that enabled the operators with low international route market shares to offer lower rates than the dominant operator. The ability of
these operators to offer lower rates created a competitive market for domestic international traffic coming from operators without international licenses who were looking for international call
termination. This put pressure upon the operators with the highest market share to decrease the accounting rates in order to minimize the competitive advantage of the new entrants to the market for
the international voice traffic owned by licensed operators that were without international termination capability.

The
second key development in international telecommunications was the introduction of resellers. Resellers are allowed to take the retail international private leased circuits of a
country's common carrier and resell the capacity to end users on a per minute basis. This was initially only available for closed user groups with a connection to the public switched telephone
network, or "PSTN", at one end. This was termed "on to off." The reseller capability was enhanced with the introduction of international simple resale, or "ISR", which allowed resellers to attract all
end-users with an "off to off" service equivalent to that offered by the common carrier.

The
result of such international liberalization was to create a new market, the "refile market," for international voice calls that required termination through the global network and
now had the option of several international network operators. This created international price competition between international network operators to enhance their outgoing route share and increase
the level of their proportionate returns. The size of the refile market grew considerably with the introduction of the callback mechanism through which the origination of a call was reversed. This
business was predominately centered in the United States. This dominance caused the radical growth of U.S. outgoing volumes and a further worsening of the imbalance of U.S.-based traffic, thus
increasing the level of payments made by the United States to the rest of the world. This led to governmental pressure upon countries to force the industry to reduce their accounting rates with the
United States and thus minimize these out-payments.

A
new business had been created that was not linked to the retail user and was directly related to the cost of call termination. This has increased the pressure for the reduction of
accounting rates with competing international operators attempting to create a market advantage through having the lowest accounting rates. This has fundamentally changed the culture that surrounded
the correspondent trading system from one of collaboration to confrontation. At the end of this phase, the value chain has become more complex, with many competitors at the retail level and the
competition between the network operators to terminate the retail traffic increasing.

This
model has been rapidly and radically evolving in the last decade. These changes have been driven by:



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We
believe that these factors have had, and will continue to have, the following effects on the international voice wholesale market:



International
telephony traffic continues to grow. According to TelcoResource, a telecommunications advisory and research company, in 1996, the volume of international
minutes carried over the public networks was approximately 80 billion MiTT, having a value of $34 billion in the wholesale market. TelcoResource estimates that the volume of MiTT carried
over public networks in 2002 was 178.7 billion MiTT, which would have had a value of $9 billion if the traffic had been solely terminated on fixed line networks. According to
TeleGeography, a leading telecommunications advisory and research company, the emergence of international traffic terminated on mobile networks increased the wholesale value of total international
traffic in 2002 to $11.7 billion. TeleGeography further estimates that the volume of international traffic terminating on mobile networks grew to 30% of total international call volume in 2003
from 26% in 2002.

The
increase in the value of the wholesale market due to the emergence of significant traffic terminating on mobile networks has resulted from the higher termination charges charged by
mobile operators, especially in Europe. According to TelcoResource, the mobile premium is illustrated in the UK where the termination charge on fixed networks at the end of 2004 was $0.0105 per MiTT,
compared to the UK wholesale termination charge on mobile networks of $0.1326 per MiTT.

According
to TelcoResource estimates of the costs of wholesale traffic to fixed network destinations in 2004, wholesale termination prices on fixed networks remain robust outside of
Europe and North America (where the average termination prices were approximately $0.0105 per MiTT and $0.0098 per MiTT in 2004, respectively), with average termination prices in eastern Europe
ranging from $0.076 per MiTT in Romania to $0.034 per MiTT in Russia; in Africa ranging from $0.4248 per MiTT for Guinea Bissau to $0.044 per MiTT for South Africa; in the Asia Pacific Region ranging
from $0.1734 per MiTT in Vietnam to $0.015 MiTT in New Zealand; and in Latin America from $0.17 per MiTT in Suriname to $0.018 per MiTT in Argentina.

The V-Cube IP-PBX Platform.The Vistula Companies' core product,
V-Cube, is a uniquely featured IP-PBX platform that facilitates full contact communication services including voice, video, conferencing, call center, interactive
voice response systems, and multi/sub-domain and unified messaging across enterprise and public networks. Utilizing the V-Cube platform, Vistula offers a tailored
software set that enables telecommunications carriers, service providers and transit network

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operators
to rapidly roll out a flexible range of managed VoIP-based product and service offerings to their customers.

Using
the V-Cube IP-PBX platform, telecommunication carriers will be able to offer VoIP and other value added services to their broadband, service
provider and Tier 1 customers. The V-Cube platform incorporates a real-time prepaid and post-paid billing engine enabling carriers to offer wholesale, retail,
channel and pre-paid billing options.

The
V-Cube IP-PBX also supports multi-domain capability where each customer will get a unique domain with optional web based administrative control
over their domain. The platform will enable individual users within an organization to get web access (or phone short cuts) to manage network calling features such as voice mail, call forwarding, and
call conferencing. V-Cube also supports voice recording and archiving of conversations and provides call detail records which will assist financial services organizations in
complying with regulatory record keeping and audit requirements.

The
V-Cube platform will enable service providers (including carriers offering VoIP and enhanced communication services bundled with core network technologies to
their service provider customers) to provide the following services to their respective customer bases:



Advantages of V-Cube

We believe that the V-Cube IP-PBX has the following advantages over similar IP-PBX offerings:



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The Vistula Companies' Wholesale Telecommunications Services.The Vistula Companies are independent suppliers of selective
wholesale telecommunications services to Tier 1 and Tier 2 telecommunications carriers around the world. The Vistula Companies currently provide direct and partner direct voice routes to some of the
world's leading telecommunications carriers. In addition to these existing services, the Vistula Companies intend to provide dedicated IP transport, bandwidth and co-location services to
these carriers. In particular, the Vistula Companies currently provide, or intend to provide, the services described below.

International Voice Services (including VoIP Services):

The Vistula Companies work in partnership with telecommunications companies worldwide to deliver voice traffic reliably and cost-effectively on simple
trade terms and via direct correspondent relationships. The Vistula Companies currently offer constant and committed capacity across all networks, with carrier-grade quality transport on both
switched-circuit minutes and VoIP on selected routes. All direct correspondent routes are backed up by target answer seizure ratios, or "ASR's," at carrier-grade level or above, and the connection
flexibility of the Vistula Companies means the carriers have a choice of landing traffic either in the United States or the United Kingdom.

The
Vistula Companies' international voice services are designed to meet the most challenging needs for capacity. This allows customers to enhance voice margins through
high-quality, low priced service without having to commit to investment in infrastructure at the network level. The Vistula Companies offer a high quality of service, project management
from installation through to completion, and customer support services available 24 hours a day, seven days a week, from Vistula's London-based network operations center to its international
voice services customers. The Vistula
Companies also offer a range of billing and payment options, and flexible contract terms to suit its customers' business roll-out plans.

We
recently purchased two Sonus Networks ("Sonus") VoIP switches, each of which is capable of running tens of thousands of simultaneous voice calls and hundreds of million of minutes of
traffic per month. Utilizing this equipment, Vistula USA is therefore not only able to link rapidly and at volume to suppliers and customers, but it will offer its own VoIP capability to carriers and
network operators who do not have such capability themselves.

Each
Sonus VoIP switch consists of two cascaded nodes. Each node has a fully redundant hardware structure which means that the nodes can be separated and appear as individual discrete
switches. If Vistula USA chooses, it can relocate one of the nodes to an alternate U.S. or U.K. location. The two combined switches are each populated with 27 VoIP DS3 43 megabit per second circuits.
Each DS3 contains 21 E1 2 megabit per second circuits. Each E1 circuit can accommodate 30 simultaneous voice calls. The traffic capacity of a switch is easily increased by adding further nodes to the
switch.

Vistula
USA has linked Vistula's existing billing engine to the Sonus VoIP switches such that it is able to maintain its present effective billing service. Call data records, or "CDRs",
are automatically drawn from the switches. Vistula USA can produce and accept bills on any basis and at any frequency. For example, each call may be billed on a minute, 30 second or one second minimum
with incremental six or one second units. Vistula USA may send bills out on a daily, weekly, bi-monthly or monthly basis. The billing system also allows for call quality statistics to be
easily produced.

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Features
of the Vistula Companies' wholesale international telecommunications services include:



Co-Location Services:

The Vistula Companies also intend to provide operational accommodation, technical expertise and management services for servers, routers, switches and
transmission equipment to ISPs, content owners, telecommunications operators, corporate data center providers and other bandwidth-intensive service providers. The Vistula Companies will offer a range
of co-location services, from basic, unmanaged rack spaces through to fully outsourced, dedicated suites, all in a secure communications environment. The Vistula Companies' facilities will
include:



The
Vistula Companies will also offer ancillary services including maintenance, project management, third party service coordination, space preparation and installation at competitive
rates and with a quality of service guarantee. Service providers will be able to take advantage of these co-location facilities, and connect to the Vistula Companies' global backbone
network across Europe, North America and Asia. As a vendor-independent supplier, each of the Vistula Companies will be able to procure and manage co-location facilities for customers
anywhere in the world. These ancillary services will include:



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VoIP Strategy

During the first quarter of 2005, we started to market, and in the second quarter of 2005 we expect to begin distribution of, the V-Cube
platform to telecommunications carriers, services providers and transit networks operators. In 2004, we acquired an exclusive license from the developer of the platform to market and distribute the
platform worldwide (except for India, where the licensor is based, and subject to certain pre-existing distribution and reseller agreements which the licensor has agreed to renew). The platform will
be offered as a hosted solution which will be installed on the servers of the relevant carrier or provider and which in turn will enable them to provide a wide range of hosted VoIP services to their
respective customers.

VoIP Services

We intend to utilize the VoIP capabilities and technology of the Vistula Companies to provide competitive carrier-to-carrier wholesale
voice services. We believe this represents a significant revenue opportunity for the Vistula Companies for two reasons:

First,
VoIP facilitates low cost and rapid access to traffic routes from all over the world at rates that will allow the Vistula Companies to maximize margins by wholesaling the routes
onwards to larger carriers.

Second,
as a new and evolving technology, there is little or no VoIP expertise or processes within the traditional large carriers and with internal resources and processes for building
their own VoIP platforms unclear, these large carriers are looking for VoIP facilities to be managed or externally provided. The Vistula Companies will offer VoIP as a technical solution for carriers
who do not have
their own VoIP capability. The Vistula Companies will build a VoIP linkage at the client's site connecting via the Internet into the Vistula Companies' VoIP facility. From this facility, the Vistula
Companies will route traffic for them, either by carrying the traffic on existing routes of the Vistula Companies or, where the carrier has their own route, the Vistula Companies will charge a
per-minute fee for using its VoIP gateway. In this latter case, each Vistula Company merely passes the traffic through its VoIP switch.

We
believe that the Vistula Companies can become leaders in VoIP carrier-to-carrier services due to the following factors:



Summary.We believe that the principal strengths of the Vistula Companies include:



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We
believe that the opportunities for well financed and well managed wholesale carriers will continue to develop in the future. We intend that the Vistula Companies will continue
partnering with telecommunications companies worldwide to deliver network, voice and IP services to their customers including Internet or multimedia service providers, established carriers, and new
market entrants.

Wholesale Voice Services Strategy

With well over two hundred countries and several call bands within those countries (including capital city, national and mobile bands), it is impossible for any
one telecommunications operator, no matter how large, to create or even identify the lowest cost or best quality routes to all destinations. The result is that all operators, including the world's
largest country carriers, will buy their international telephony routes on the open market. The success of aggregators such as the Vistula Companies operating in this field depends upon the ability of
the executives and staff within those companies to identify, create and run quality routes that can be marketed to other carriers.

We
plan to continue to build the capability of each of the Vistula Companies in the international wholesale voice call business through the continuing development of network
interconnects and commercial agreements that enable us to offer competitive call termination to our customers. We intend to:



The
Vistula Companies currently have approximately 30 interconnect agreements in place with Tier 1 and Tier 2 carriers in Europe and the Far East, including Telstra, KDDI, Qwest, Primus,
TeleGlobe, iBasis, NTT Europe and Bharti under which the Vistula Companies terminate mobile and fixed line international telephone traffic. The Vistula Companies source routes from joint venture
partners in the United States, Europe and Asia and have long-term relationships with a number of carriers within those routes. The operational experience of the Vistula Companies has
enabled them to secure profitable contracts with their carrier partners and we believe that the Vistula Companies are well positioned to take advantage of continually expanding demand for
international telephony minutes.

Our
management team has considerable experience in developing relationships with smaller niche market retail and wholesale telecommunications operators and global network operators,
delivering value to both parties. They also have extensive experience of working in the developing country markets of Asia and the Middle East. We see the key to success in delivering our strategy as
being the flexibility to rapidly deploy and develop wholesale solutions and in entering markets at an early stage in the life cycle.

The
Vistula Companies will offer public and private telephone operators and communications companies in emerging markets an opportunity to expand existing business and generate new
revenue streams. The Vistula Companies will enter into joint venture and partnership agreements with these operators and companies to enable them to capitalize upon the benefits of the liberalized
international telecommunications markets while enhancing their position within their own country.

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The
Vistula Companies intend to offer the following services to these operators and carriers:



The
Vistula Companies will draw upon the expertise of their senior management with a broad range of communications backgrounds. The Vistula Companies will also work with local partners
to develop in-country skills that enable companies to add value to their services with minimum investment costs.

International Managed Bandwidth Services:

In addition to the international voice services that they currently provide, the Vistula Companies have the capability to offer managed bandwidth services that
would provide their customers with a committed and constant availability of high-speed capacity between locations of the customers' choice. The Vistula Companies' vendor-independent status
could enable them to offer fully-managed, end-to-end services across all major satellite and cable systems that include a range of product options to enhance the data, voice,
and IP network services on a global basis. The Vistula Companies' service offerings portfolio could also include co-location services, end-user equipment provision and
maintenance, Internet transit connectivity,
and project management available 24 hours a day, seven days a week. Features of the Vistula Companies' managed bandwidth services could include:



IP Transit Connectivity Services:

The Vistula Companies could also offer their customers direct and uncongested access to the Internet. The Vistula Companies' arrangements and relationships with
some of the world's largest Internet backbone providers could provide superior broadband access to hundreds of ISPs across Europe and the United States, and could ensure that their customers'
multimedia content would be delivered quickly and completely. Features of these IP transit connectivity services could include:



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Cardlink

Cardlink has been inactive since it was first acquired by Mr. 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 Cardlink's operations and sales and marketing efforts. Cardlink will
offer an electronic top-up, or "ETU", software product suite which 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 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.

Industry BackgroundPrepaid Mobile Services.Throughout the world, with the exception of the United States, the
majority of private subscribers to mobile networks are "pay-as-you-go" customers. In the developed markets, these customers typically purchase "scratch cards" from
retail outlets that entitles them to a fixed amount of airtime. When the airtime has been used up, the customer purchases another scratch card in
order to put more airtime on his or her mobile phone. Scratch cards are normally sold through retail shops, gas stations and other retail outlets. This system is expensive and inefficient both from a
distribution and an administration perspective. Mobile operators do not like scratch cards because they have to be distributed to thousands of retail outlets and invariably cards get stolen or lost.
As a result, over the past two years, mobile operators have been trying to get "pay-as-you-go" customers to move from scratch cards to an ETU system.

In
the less developed telecommunication markets, ETU services are still in their infancy. In many of the larger emerging markets, "pay-as-you-go"
customers are still using scratch cards exclusively. We believe that the mobile operators in these markets would like to convert the majority of these customers to the use of ETU services.

Cardlink's ETU Software.Prior to its acquisition by Mr. Galliers-Pratt and his family in April 2003, Cardlink
had developed a software system which enabled prepaid telephone cards to have additional money credited to the card each time the user wished to "top-up" his or her account. Cardlink's ETU
software was first used in the United Kingdom in July 2001 and had previously provided ETU functionality for Vodafone, Orange, MMO2 and T-Mobile.

Cardlink's
ETU software allows the customer to purchase one card which can then be repeatedly used. The card looks exactly like a normal credit card. It is plastic and has a magnetic
strip on the back. The customer walks into a shop and purchases, for example, $20 of airtime and is given an electronic card. When the customer has used up his $20 worth of airtime, he or she goes
into a shop or gas station which is authorized to process ETU, purchases another $20 of airtime and hands over his or her card to the cashier. The cashier swipes the card through the point of sale
terminal (exactly the same way he or she would with a credit card) and the Cardlink software which has been installed on the terminal then notifies the mobile operator that the customer has purchased
another $20 worth of

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airtime.
The terminal prints out a receipt and the mobile operator sends a Short Message Service, or "SMS," message to the customer's mobile telephone confirming that the customer has another $20
worth of credit. Every time the customer wants to buy more credit, he or she goes through the same process and uses the same card.

The
Cardlink software is electronically installed on terminals. Point of sale terminals are connected to the processing bank's server by telephone line or cellular modem. When Cardlink
installs the software or modifies the product, it will merely transmit the enabling software to the point of sale terminals via their telephone connections in exactly the same way that software is
electronically transmitted from one computer to another computer. The cashier in the shop or gas station has to perform exactly the same function when processing the ETU as he or she does when
recording a credit card transaction.

The
Cardlink software can be adapted to enable mobile handsets to access the processing server via SMS messaging. This means that retailers can be signed up to host ETU services even if
they do not have a point of sale terminal installed on their premises.

We
intend that Cardlink will access a new market by entering into agreements with mobile operators to process payments for airtime using an ETU system. Each contract will provide for
payment by the operator of a monthly transactional fee to Cardlink for the use of the Cardlink software. This fee will be calculated as a percentage of the monthly revenues processed by Cardlink
during the term of the agreement.

Cardlink
will install the software on point of sale terminals located in retail premises or alternatively provide the software to the mobile operator who will then arrange for the
manufacture of an encrypted SIM card which can be installed in a mobile handset and distributed to the retailers who are contracted to host ETU services.

Cardlink
will manage and maintain the software and provide support 24 hours a day, seven days a week. Cardlink's development and maintenance engineers will initially be based in
the United Kingdom and the system will be electronically supported. Cardlink plans to establish a physical presence in each of the new markets accessed in order to provide a direct customer service
interface.

Cardlink's Strategy.We believe that Cardlink's business model has capacity for substantial growth over the next few years as
increasing numbers of mobile operators in the emerging markets install ETU systems as a method of processing payments for airtime.

Cardlink
will operate under a minimal cost base and while it is intended that Cardlink will provide support 24 hours a day, seven days a week, to manage and maintain the software,
we believe that the robust nature of the system will allow us to keep Cardlink's support costs low.

Our
goal is for Cardlink to access as many emerging markets as possible. We intend that Cardlink will focus on the markets of Latin America, North Africa, the Middle East and the
Confederation of Independent States, which are regions where mobile telephony is growing rapidly and "pay-as-you-go" customers are almost entirely dependent on
scratch cards for acquisition of additional airtime. We currently expect to use third parties to provide necessary software updates, maintenance and support for these activities.

Establishing the Vistula and Cardlink Brand Names.

In addition to the strategies discussed above, we believe that building awareness of the Vistula and Cardlink brands is important in establishing and expanding
the customer bases for the Vistula Companies and Cardlink. We intend to introduce marketing efforts to build these customer bases and create brand name recognition. We will use traditional media as
our revenues permit to attract new customers and advertise new and existing products and services.

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Competition

We face significant competition from companies providing similar IP-PBX and IP Centrex platforms. While we believe that the
V-Cube platform has significant advantages over these competitive technologies, some of our competitors, such as Broadsoft (which has raised greater than $60 million in
venture capital funding), have significant financial resources including significant investment from major private equity funds. Many of these competitors have also been in the market for considerably
longer than us and have significant existing customer bases.

The
market for wholesale voice telecommunication services is also extremely competitive, subject to changes in technology and is affected by the introduction of new products and
services. There are a significant number of "aggregators" or resellers providing similar services to the Vistula Companies operating in the international voice wholesale market including, BonNet,
Fewhurst, C2C, Total X, WaveCrest, TeleGlobe, ITX, iBasis, Reach and Qwest. Some of these competitors have significantly greater financial resources and more customers than we do. Some of these
resellers, including iBasis, TeleGlobe, ITX and Qwest, are also offering VoIP services to their customers.

Other
than Cointel, a telecommunications services company based in South Africa, we are not aware of any current competition that offers pre-pay software solutions in the
emerging markets that Cardlink intends to enter.

Intellectual Property Rights

We rely on trademark and copyright law, trade secret protection, and confidentiality, license and other agreements with our employees, customers, partners and
others to protect our intellectual property rights and the intellectual property rights of our licensors. Unauthorized use of our intellectual property or the intellectual property of our licensors by
third parties may damage our brands and reputation. Despite our precautions, third parties may obtain and use our intellectual property without authorization. In addition, the laws of some foreign
countries do not protect intellectual property to the same extent as do the laws of the United States.

We
cannot be certain that our services and products do not or will not infringe valid patents, copyrights, trademarks or other intellectual property rights held by third parties. We may
be subject to legal proceedings and claims by third parties from time to time relating to their intellectual property. Successful infringement claims against us could result in substantial monetary
liability or may materially disrupt and adversely affect our business.

Research and Development

Our limited research and development activities to date have been focused on the development of our internal software and billing platforms. We expect to pursue
further research and development with respect to new products and services, enhancements of existing products, such as the V-Cube IP-PBX platform, and the
development of additional features and functionality for our existing products.

Government Regulation

As an international telecommunications company, we are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Laws
and regulations applicable to the provision of telecommunications services, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate.

We
believe that wholesale business-to-business carriers such as the Vistula Companies are generally not subject to the same level of federal and local regulation
as common carriers providing traditional telecommunications services, especially with respect to Internet-based telephony services such as VoIP. Nonetheless, some aspects of the Vistula Companies'
operations, including our voice-based services,

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may
currently be, or become, subject to state and federal telecommunications regulations for telephony services governing licensing and tariffs, in addition to federal universal service funding
mechanisms. In particular, certain state regulatory agencies may have jurisdiction over the Vistula Companies' telephony applications when they are used to provide intrastate telecommunications
services. Generally, we must obtain and maintain certificates of authority and certain approvals from regulatory bodies in most states where we offer or plan to offer regulated services.

We
believe that the Internet-related services such as those currently provided or proposed to be provided by the Vistula Companies, including dedicated IP transport and Internet
telephony or VoIP services, and software platforms that facilitate such services (such as our V-Cube IP-PBX platform) are not presently considered
"telecommunications services" under the Telecommunications Act of 1996. Such services are generally not regulated in the United States by the Federal Communications Commission ("FCC") or state
agencies responsible for regulating the intrastate activities of telecommunications carriers. However, the FCC has formally begun to address the regulatory characterization of Internet telephony
services generally, including VoIP. Moreover, to the extent some of the transport and switching employed by the Vistula Companies' Internet telephony services are not wholly Internet-related, those
services may not be as lightly regulated as our wholly Internet-based services. Several state governments have also considered proceedings and petitions relative to the regulation of Internet-related
services.

Internationally,
the regulatory treatment of the Vistula Companies' current and proposed services varies widely and is subject to constant change, and there is no assurance that such
treatment will not be unduly burdensome. With respect to Internet telephony and VoIP, some countries currently impose little or no regulation on such services. Other countries regulate Internet
telephony services and VoIP services like traditional voice telephony services, requiring Internet telephony companies to obtain licenses, incorporate local subsidiaries, make universal service
contributions, and pay other taxes. Increased regulation of the Internet and/or Internet telephony providers in one or more countries could materially adversely affect our business.

In
general, the regulation of the telecommunications industry continues to change rapidly both domestically and globally. In the United States, telecommunications regulations on both the
federal and state levels are from time to time subject to judicial and administrative proceedings, as well as legislative and administrative hearings, in which proposals are made that, if adopted,
could change the manner in which our industry operates. We cannot predict the outcome of these proceedings or their impact on us. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on us, or that domestic or international regulations or third parties will not raise material issues that may adversely affect our business.

We
believe that we currently have all the regulatory licenses, approvals and consents necessary to conduct our business. However, we can give no assurance that we will be able to
maintain compliance with existing regulations or that laws or regulations enacted in the future will not hinder or prevent us from conducting our business. See "Government regulations may adversely
affect our business" under the section entitled "Factors Affecting Future Performance."

Employees

As of March 28, 2005, we had 2 full time employees, no part-time employees, and 11 consultants. Of our employees and consultants, 3 are engaged
in sales and marketing, 3 are in technology research and development, 5 are in general and administrative and 2 are in operations. None of our employees are represented by a union. We believe our
relationship with our employees and consultants is good.

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ITEM 2. DESCRIPTION OF PROPERTY

We maintain our principal executive offices at Suite 801, 405 Park Avenue, New York, New York 10022. Our principal office occupies approximately 250 square feet
of office space. We rent this office on a month-to-month tenancy at the rate of $4,000 per month under an agreement with Hermitage Capital Corp.

We
also have an office in London, England. These premises consist of approximately 3,500 square feet of office and warehouse space. Through August 2004 we leased these premises on
an informal rent-free basis. On August 23, 2004, Vistula entered into an agreement with Mossbarton Limited, a company controlled by Adam Bishop, one of our executive officers,
pursuant to which Mossbarton granted Vistula the right to use and occupy the premises for approximately $2,000 per month. This agreement had an initial term of six months and is renewable on a
month-to-month basis thereafter. Vistula may terminate the agreement upon thirty days written notice to Mossbarton. As these premises are scheduled for rehabilitation or
demolition, we are currently seeking to relocate this office.

We
also rent approximately 300 square feet in the London facility of Telehouse, a specialty telecommunications hotel and service provider. We pay approximately $8,500 per month for use
of this
facility and services provided by Telehouse. The Telehouse lease expires in August 2006. In addition, we have also entered into a co-location agreement pursuant to which we rent
approximately 400 square feet of space at 650 Grand Avenue in Los Angeles, California at a minimum monthly rental of $2,100. We anticipate that the fees for use of the Grand Avenue facility, including
the minimum rent, range between $2,500 and $3,000 per month depending on the level and nature of services used. The initial term of the co-location agreement terminated in
February 2005 and was automatically renewed for one year. We are currently engaged in negotiations for additional space at this location.

The
offices at Telehouse in London and 650 Grand Avenue in Los Angeles house our telecommunication switches. The switches are installed in rooms that are environmentally modified, cooled
and designed for switching equipment. These facilities have full battery backup for a full 24 hours in case of a power failure.

We
believe that our present facilities are adequate to meet our current needs. If new or additional space is required, we believe that adequate facilities are available at competitive
prices in the respective areas.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any legal proceedings the outcome of which, in the opinion of our management, would have a material adverse effect on our business,
financial condition, or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

No Public Market

There is no public market for our common stock. Our common stock is not listed on any securities exchange at the present time. We intend to approach authorized
market makers to have them apply to have the shares of our common stock listed on the OTC Bulletin Board. We intend eventually to seek listing of our common stock on a national securities exchange or
trading of our common stock on the Nasdaq Stock Market at such time as we qualify for such listing or trading. We can give no assurance that we will be able to find a market maker willing to obtain an
OTC Bulletin Board listing or that our common stock will be listed on a national securities exchange or traded on the Nasdaq Stock Market. Even if we obtain trading in our common stock, we are not
certain that any trading market will be sustained.

Number of Holders

As of March 28, 2005, we had 28 stockholders of record.

Dividends

We have never declared or paid cash dividends on our common stock, and we do not plan to pay any cash dividends in the foreseeable future. We currently intend to
retain any future earnings to finance our operations and future growth. Furthermore, we are currently prohibited from paying cash dividends to the holders of our common stock under the terms of the
convertible debentures we issued to several institutional and individual investors on February 18, 2005 and March 4, 2005. This restriction on the payment of dividends will remain in
effect until the debentures are repaid or converted in full.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Except for historical facts, the statements in this Annual Report are forward-looking statements. Forward-looking statements are merely our current predictions of
future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions
include those discussed below under the heading "Factors Affecting Future Performance." We assume no obligation to update our forward-looking statements to reflect new information or
developments.

For
purposes of the following discussion, all information is reported on a consolidated basis for VCS and its wholly owned subsidiaries, Vistula, Vistula USA and Cardlink.

Introduction

The following information should be read in conjunction with the financial statements and notes thereto in Part II, Item 7 of this Annual Report.

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"). We are in the process of establishing a subsidiary in South Africa. Through Vistula and Vistula USA, we currently provide
wholesale value-added telecommunications services

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(including
direct and partner voice routing services) to Tier 1 and Tier 2 telecommunication carriers and transit operators. Beginning in the first quarter of 2005, through Vistula and Vistula USA, we
began to market our V-Cube Voice over Internet Protocol, or "VoIP", IP-PBX software platform 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.

The
Vistula Companies began to actively market our V-Cube IP-PBX platform to carriers, transit network operators, large corporations, and SMEs in the
first quarter of 2005 and we expect to commence distribution of this product line during the second quarter of 2005. We expect this multiple feature VoIP platform, which will enable customers to
convert their existing 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. VCS acquired
Cardlink through the share exchange completed in March 2004 and we intend to reactivate and refocus the operations of Cardlink later in 2005. Cardlink will offer an electronic
top-up, or "ETU", software product suite which 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 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 currently expect to use third parties to provide necessary
software updates, maintenance and support for these activities.

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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. Our
revenue is derived primarily from fees charged to terminate voice services over our network. We recognize such revenue, net of reserves, when persuasive evidence of a sales arrangement exists,
delivery has occurred or services have been rendered, the sales price is fixed and determinable and collectibility is reasonably assured. We reserve for potential billing disputes at the time revenue
is recognized. Such disputes can result from disagreements with customers regarding the duration, destination or rates charged for each call. These revenue allowances are based on estimates derived
from factors that include, but are not limited to, historical results, analysis of credits issued, current economic trends and changes in demand. Amounts billed in advance of the service month are
recorded as deferred revenue and recognized as revenue as the underlying services are rendered.

Reciprocal
compensation is the amount paid by one carrier to complete particular calls on another local exchange carrier's network. Reciprocal compensation paid to and received from
other carriers is based on contractual fixed rate per minute charges. We apply the receipt of reciprocal compensation against the cost of reciprocal compensation and reflect the net amount as either
revenue (receipts greater than costs) or expense (costs greater than receipts) at each settlement date.

We
have entered into transactions such as buying, selling, swapping or exchanging capacity to complete and complement our network. In general, these transactions represent the exchange
of productive assets not held for sale in the ordinary course of business and, as such, do not result in the culmination of the earnings process. Accordingly, we do not recognize any revenue for these
types of transactions. We account for the exchange of a non-monetary asset based on the recorded amount of the non-monetary asset relinquished with no gain or loss recognized
in accordance with Accounting Principles Board (APB) Opinion No. 29,Accounting for Non-Monetary Transactions.

We
have reviewed and determined that our revenue recognition policy remains our critical accounting policy for the year ended December 31, 2004. We did not make any changes to
this policy during this period.

Results of Operations

Revenues for the year ended December 31, 2004 were $2,335,408, an increase of 88% over the $1,239,757 in revenues in fiscal 2003. We attribute this
increase to the addition of new Tier 1 and Tier 2 national and international carriers to our customer base, as well as an increase in revenues from our historical customer base. We expect revenue
levels to increase during 2005 as we continue to add carriers to our customer base and we begin to market and distribute our V-Cube product line.Cost of

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revenues
for the year ended December 31, 2004 were $2,248,128, an increase of 116% over the $1,040,605 in fiscal 2003. The increase in the cost of revenues 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 3.7% for the year ended December 31,
2004 from 16.1% for the year ended December 31, 2003. Despite our lower revenue levels in 2003, we experienced higher individual margins on the smaller number of contracts in existence during
that period. Also, during the fourth quarter of 2004, we were affected by price changes in the UK mobile market that effectively lowered our gross margins on this activity.

Selling,
general and administrative costs for the year ended December 31, 2004 were $3,761,768, an increase of 378% over the $787,769 in fiscal 2003. During the year ended
December 31, 2004, we incurred approximately $2,703,000 in non-cash expenses. These included, among others, $1,333,500 from the expensing of stock options granted and vested under
our Stock Incentive Plan; $999,000 of expenses paid or contributed by stockholders; and $189,000 in non-cash expenses for the granting of restricted shares of common stock for financial
advisory services provided by an investment-banking firm. Our operating expenses relating to accrued compensation, travel, technical consulting and marketing costs increased from the prior year as we
expanded our operations, including headcount, in penetrating new markets. In addition, we incurred increased legal and accounting expenses that were directly related to the acquisition and integration
of Vistula and Cardlink into VCS as well as substantial expense that we incurred in fiscal 2004 for legal, accounting and financial advisory services directly associated with our registration of our
equity securities 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. While we expect to continue to incur legal, accounting, and other fees associated with the
registration of shares under the Securities Exchange Act, we expect our routine fees to be significantly lower than those incurred to date.

Depreciation
and amortization expenses were $43,460 and $22,841 for the years ended December 31, 2004 and 2003, respectively.

During
the year ended December 31, 2004 our interest expense of approximately $121,000 was comprised almost entirely of imputed interest on a capital lease obligation we entered
into during 2004. There was no comparable arrangement during 2003.

For
the year ended December 31, 2004, we incurred a loss of $3,795,276 or $0.16 loss per common share, basic and diluted, as compared to a loss of $586,833, or $.03 per common
share, basic and diluted, for the year ended December 31, 2003.

Liquidity And Capital Resources

As of December 31, 2004, we had cash and cash equivalents of $3,221, which represents a decrease of 96% as compared to $88,644 at December 31, 2003.
Also, as of December 31, 2004, we had a working capital deficit of approximately $2,290,000, which represents an increase of the working capital deficit of approximately 567% over that at
December 31, 2003. Since our inception through December 31, 2004, we have generated operating losses of approximately $4,395,000. Accounts receivable at December 31, 2004 of
$55,991 decreased by 77% over the $244,213 in accounts receivable at December 31, 2003. Accounts payable and accrued expenses increased by $800,267 in 2004 over 2003 as we were unable to close
the private placement funding described in Note 13 to our consolidated financial statements until 2005. The $792,413 increase in Company expenses paid by stockholder recorded as due to
stockholder in 2004 over 2003 reflects our obligations paid by our principal stockholder that are expected to be repaid to this stockholder, principally from the proceeds of the private placement
funding that closed in March 2005.

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During
the years ended December 31, 2004 and 2003, one of our stockholders contributed services to the Company totaling $82,500 and $110,000, respectively. In addition, as
described in Note 10 to our consolidated financial statements, we issued common stock during 2004 to an investment bank for services rendered in the amount of $188,733. Also in 2004, we
received proceeds of $175,000 from the issuance of convertible notes payable to a related party as described in Note 6 to our consolidated financial statements.

Since
our inception, we have sustained our operations through funding provided by our Chairman, as well as contributed services by our Chairman and other stockholders. Our Chairman has
made various advances to us from a $3,000,000 credit facility established in the name of our Chairman, as well as from other of our Chairman's personal assets. As of December 31, 2004, our
Chairman had drawn approximately $262,000 under this facility to pay expenses incurred and accrued by us and our affiliates. Seven letters of credit in the aggregate amount of $1,442,000 have been
issued by the lender under the credit facility in favor of our vendors at the request of our Chairman. As of December 31, 2004, approximately $204,000 was undrawn and available under the credit
facility.

We
have made expenditures for capital equipment from our inception until December 31, 2004 of approximately $227,000, purchasing the telecommunications equipment necessary to
begin our business. This amount excludes the $1.8 million in telecommunications equipment reflected as a capital lease obligation with MRS Partners LLC described further below.

On
February 18, 2005 and March 4, 2005, we completed a private placement of convertible debentures and warrants to a group of sophisticated institutional and individual
investors. In the private placement, we sold convertible debentures in the aggregate principal amount of $8,400,000 and warrants to purchase an aggregate of 8,400,00 shares of our common stock. We
paid placement fees to the placement agent in the aggregate amount of $802,500 and we also issued to the placement agent a warrant to purchase up to 802,500 shares of our common stock at an initial
exercise price of $1.00 per share. The debentures accrue interest daily at a rate of 8% per annum, which interest is payable quarterly on each March 31, June 30, September 30 and
December 31 following the issue date. The final interest payment is due on the date of maturity of the debentures, the third anniversary of the issue date.

On
March 15, 2005 we completed the purchase of certain telecommunications equipment (including two Sonus Networks switches) from MRS Partners LLC ("MRS") for $500,000 in cash,
725,000 shares of our common stock and a promissory note for an aggregate principal amount of $1,170,000. Prior to the closing, we were leasing this equipment from MRS. Under the terms of the
promissory note, interest accrues daily at a rate of 8.25% and is payable monthly in arrears. Principal repayments of $150,000 are payable on September 30, 2005 and December 31, 2005.
The remaining principal and any unpaid interest is payable on the first anniversary of the closing of the purchase.

On
August 11, 2004, we 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 paid NetYantra $150,000 and will be required in the future to, among other things:



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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).

We
expect to pay the required interest and principal payments under the convertible debentures issued in our recent private placement and the promissory note issued to MRS as part of the
consideration for the purchase of equipment from MRS and the payments required under the NetYantra agreement, including 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 wholesale voice services and from the remaining proceeds from our recently completed convertible debenture and warrant financing.

We
believe that our available cash and cash equivalents, and the proceeds of the recent convertible debenture and warrant financing, will be sufficient to meet our working capital
requirements, including the funding of operating losses, and capital expenditure requirements for at least the next fiscal year, assuming that our business plan is implemented successfully.
Previously, 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 from a credit
facility established in the name of the stockholder and other of the stockholder's personal assets. In the event that we do not succeed in implementing our business plan, and do not otherwise raise
third-party capital, we will have to curtail certain expenditures, seek additional financing from our principal stockholder, or both in order to sustain operations. As noted above, the principal
stockholder has historically provided working capital advances, and has caused the lender to issue letters of credit in favor or certain vendors. While the stockholder is not obligated to provide
these working capital 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 2005 as
and if needed, until such time that our operations are self-sustaining or we raise additional external capital, as the case may be.

Our
plans for growth and expansion will require the need for additional capital in the future. As a result, we may have to rely upon the issuance of additional 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, 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.

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.

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. Vistula has agreed to provide this guaranty since the stockholder has to date advanced drawings under the credit facility to Vistula and its affiliates and
letters of credit have been issued under the facility in favor of vendors to Vistula and its affiliates to secure obligations of those entities to their vendors. In

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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.

Subsequent Events

Resignation of Christopher Burke.On February 8, 2005, Christopher Burke resigned as a director and Deputy Chairman,
and President and Chief Executive Officer, of the Company. The current Chairman of the Board, Rupert Galliers-Pratt was appointed as President and Chief Executive Officer of the Company to replace
Mr. Burke. Upon Mr. Burke's resignation, he agreed to relinquish 1,800,000 in vested stock options in exchange for a right to exercise all or any part of his remaining 200,000 stock
options for a period of 12 months from termination.

Convertible Debenture and Warrant Financing.On February 18, 2005 and March 4, 2005, we issued and sold
convertible debentures and warrants to certain sophisticated institutional and individual investors pursuant to a Securities Purchase Agreement between the Company and the investors. In the two
closings of the private placement under the Securities Purchase Agreement, we sold convertible debentures in the aggregate principal amount of $8,400,000 and warrants to purchase an aggregate of
8,400,00 shares of our common stock.

We
have granted registration rights with respect to the shares of common stock issuable upon conversion or exercise, as applicable, of the debentures and warrants sold in this financing
under the Registration Rights Agreement dated February 18, 2005.

The
placement agent for the private placement was IndiGo Securities, LLC ("IndiGo"). In connection with the two closings of the private placement, we paid placement fees in the aggregate
amount of $802,500 to the placement agent. At the second closing, we also issued to the placement agent a warrant to purchase up to 802,500 shares of our common stock at an initial exercise price of
$1.00 per share. The warrant, which expires on March 4, 2010, is on substantially the same terms as the warrants issued to the investors in the private placement.

The
debentures accrue interest daily at a rate of 8% per annum, which interest is payable quarterly on each March 31, June 30, September 30 and December 31
following the issue date. The final interest payment is due on the date of maturity of the debenture, the third anniversary of the issue date. In addition, on any date on which all or a portion of the
principal of a debenture is converted, all unpaid interest having accrued on such principal at the time of such conversion will become immediately payable. We are not permitted to prepay any portion
of the principal amount of any of the debentures without the prior consent of the holder thereof.

The
debentures are convertible at the option of the holders into shares of our common stock at any time at an initial conversion price of $.75 per share. Except in the case of certain
designated issuances, in the event we issue shares of common stock or common stock equivalents (i.e., securities convertible into, or exercisable or exchangeable for, shares of our common stock) at a
price per share (or in the case of common stock equivalents, a conversion, exercise or exchange price per share) below the then applicable conversion price of the debentures, the conversion price of
the debentures will be reduced to that lower price per share. Issuances that will not result in adjustment to the conversion price include issuances to employees, consultants, directors or officers
pursuant to a stock or option plan adopted by our board of directors, securities issued upon conversion of other securities outstanding prior to the date of issuance of the warrants, warrants issued
in connection with obtaining bank financing, common stock issued in connection with the settlement of claims, and securities issued in connection with acquisitions, joint ventures or other strategic
transactions.

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We
have agreed to certain restrictions under the terms of the debentures, including a prohibition on the payment of cash dividends to our stockholders while any of the debentures are
outstanding. Upon the occurrence of an event of default under the debentures, an amount equal to (i) 130% of the then outstanding principal amount, plus any accrued and unpaid interest thereon,
or (ii) the product of the then outstanding principal amount, plus any accrued and unpaid interest thereon, times the ratio obtained by dividing the conversion price of the debentures and the
market price of our common stock, whichever is greater, will, at the holder's option, become immediately due and payable in cash along with any other amounts, costs, expenses or liquidated damages
then due in respect of such debentures.
The ratio referred to in clause (ii) is to be calculated based on the conversion price in effect on the date of such default or the date the accelerated amount is paid in full (whichever is
less), and the market price of our common stock on the date of such default or the date the accelerated amount is paid in full (whichever is greater, such market price to be determined in accordance
with the terms of the debenture). Upon an event of a default, the interest rate on the debentures will also be increased to 18% per annum.

Events
of default under the debentures include failure to pay any amounts under the debentures when due, a material default under our other agreements with the investors or default in
our obligations under mortgage, credit facility or similar agreements, a material inaccuracy in the representations and warranties we made to the Investors in connection with the convertible debenture
and warrant financing, and the initiation of voluntary or involuntary bankruptcy proceedings against us.

The
common stock purchase warrants issued to the investors are exercisable for an aggregate of 8,400,000 shares of our common stock at an initial exercise price of $1.00. The warrants
have an expiration date of five years after the date of issuance. They contain a cashless exercise provision whereby the holder may pay the exercise price by having us withhold upon exercise shares
having a fair market value equal to the applicable aggregate exercise price if after the first anniversary of the date of issuance of the warrant there is no effective registration statement
registering, or no current prospectus available for, the resale of the shares issuable upon the exercise of the warrants. In the event this provision is used with respect to an exercise, we would
receive no proceeds from the sale of our common stock in connection with such exercise.

The
exercise price is subject to adjustment in the event of certain issuances of new securities. Specifically, except in the case of certain designated issuances, if we issue shares of
common stock or common stock equivalents (i.e., securities convertible into, or exercisable or exchangeable for, shares of our common stock) at a price per share (or in the case of common stock
equivalents, a conversion, exercise or exchange price per share) below the then applicable exercise price of the warrants, the exercise price of the warrants will be reduced to that lower price per
share. In the event of such an adjustment, the number of shares for which the warrants are exercisable will be increased such that the aggregate exercise price of the warrants after the adjustment
will equal the aggregate exercise price immediately prior to the adjustment. Issuances that will not result in adjustment to the exercise price include issuances to employees, consultants, directors
or officers pursuant to a stock or option plan adopted by our board of directors, securities issued upon conversion of other securities outstanding prior to the date of issuance of the warrants,
warrants issued in connection with obtaining bank financing, common stock issued in connection with the settlement of claims, and securities issued in connection with acquisitions, joint ventures or
other strategic transactions.

We
have agreed to register for resale under the Securities Act of 1933, as amended, the shares underlying the debentures and warrants pursuant to a Registration Rights Agreement between
us and the investors dated February 18, 2005. Specifically, we are required to file with the Securities and Exchange Commission no later than April 4, 2005 a registration statement
covering the resale of a number of shares of common stock equal to 125% of the shares issuable upon conversion and exercise in full of the debentures and warrants as of the date of filing of the
registration statement. The registration statement covering these shares must be declared effective by the Securities and Exchange

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Commission
no later than June 18, 2005. In the event we fail to file the registration statement or it is not declared effective within the timeframes specified by the Registration Rights
Agreement, we will be required to pay to the investors liquidated damages equal to 1.0% per month (but pro-rated on a daily basis for any period of less than a full month) of the aggregate
purchase price of the debentures and warrants until we file the delinquent registration statement or the registration statement is declared effective, as applicable.

Shortly
after the first closing of the private placement, we received a letter on behalf of Kevin Dann & Partners ("KDP"), a placement agent we had retained prior to our
engagement of IndiGo, demanding a placement fee of $227,000. The letter also included a claim that KDP would be entitled to additional fees in the event of future closings. In our response to this
letter, we denied any such liability to KDP.

Placement Agent Agreement.On February 15, 2005, we entered into an agreement with a placement agent, IndiGo
Securities, LLC ("IndiGo"), under which they provided services in connection with the convertible debenture and warrant financing and will provide ongoing consulting services to us. Under the terms of
the agreement, IndiGo received a placement fee equal to 10% or, in some cases, 5% of the purchase price paid by each investor (plus any expenses IndiGo incurs in connection with the financing) at each
of the closings described above. We have also agreed to pay IndiGo a consulting fee of $20,000 per month for the 12-month period ending February 17, 2006. We have a right to
terminate the agreement upon written notice after August 17, 2005. IndiGo may, at its option and in lieu of 50% of the cash consulting fee due for any month, accept warrants to purchase 10,000
shares of our common stock at an exercise price of $1.00 per share.

We
have agreed to indemnify IndiGo from claims arising in relation to the services it provides to us in connection with this agreement. We have also granted IndiGo a board observer right
which expires on February 14, 2007 or the first date on which at least two-thirds of the convertible debentures issued in our recently completed private placement (described above)
have been converted, whichever comes first.

MRS Partners LLC Purchase.We have recently completed the purchase of certain telecommunications equipment (including two
Sonus Networks switches) from MRS Partners LLC for $500,000 in cash, 725,000 shares of our common stock and a promissory note for an aggregate principal amount of $1,170,000. Under the terms of the
promissory note issued to MRS Partners LLC at the closing,
interest accrues daily at a rate of 8.25%, is payable monthly in arrears, and principal repayments of $150,000 are payable on both September 30, 2005 and December 31, 2005. The remaining
principal and any unpaid interest is payable on the first anniversary of the closing of the purchase.

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Factors Affecting Future Performance

We have a limited operating history; therefore, we may not be able to accurately forecast future results and operating losses in future periods could be greater than expected.

We commenced operations in September 2002. Thus, we have a limited operating history. As a result, it is difficult to accurately forecast our revenues and
we lack meaningful historical financial data upon which to base planned operating expenses. We may be unable to adjust our spending in a timely enough manner to compensate for any unexpected revenue
shortfall. Conversely, we might not be able to respond effectively to an unexpected increase in sales activities, should one occur. This inability could cause our net losses in a given quarter to be
greater than expected.

If we do not obtain a substantial amount of additional financing, we may have to curtail or suspend operations.

We may require additional financing in order to fund our operations and to carry out our business plan. We can give no assurance, however, that we will be able to
obtain such financing or that such financing will be available on satisfactory terms. To raise additional financing, we intend to pursue various possible financing options, including one or more
public offerings or private placements of equity securities. If we are unable to obtain additional financing, we may have to curtail or suspend operations.

We may continue to lose money on our operations.

We are not profitable. In the fiscal year ended December 31, 2004, we incurred a net loss of $3,795,276 and as of December 31, 2004, we had an
accumulated deficit of $4,394,997. We anticipate losses to continue for the foreseeable future.

We
can give no assurance that we will be able to operate profitably. In general, our ability to become profitable depends on our ability to generate and sustain substantially higher
revenues while maintaining reasonable expense levels. If we were to achieve profitability, we cannot give any assurance that we would be able to sustain or increase profitability on a quarterly or
annual basis in the future.

Our
efforts to operate profitably will depend on, among other things:



If we fail to establish the Vistula and Cardlink brands or to attract repeat customers, we may not be able to increase our revenues sufficiently to fund our operations.

We believe that we must develop and strengthen the Vistula and Cardlink brands, particularly because of the early stage of our development and the highly
competitive nature of our business. If we fail to establish the Vistula and Cardlink brands quickly, we will remain at a competitive disadvantage and may lose the opportunity to obtain a sufficient
number of customers. The development of the Vistula and Cardlink brands will depend largely on the success of our marketing efforts and our ability to provide consistent, high quality customer
experiences. We cannot be certain that we will be able to afford to conduct brand promotion activities sufficient to build awareness, or that such activities, if any, will be successful or will result
in increased revenues. If we do achieve increased revenues, we can give

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no
assurance that these revenues will be sufficient to offset the expenditures incurred in building our brands.

We currently derive a significant portion of revenue from a limited number of large contracts and customers, and, if we are unable to replace large contracts upon completion
and maintain customer relationships, we could have a significant decrease in our revenues which would negatively impact our results.

We have derived, and believe that we will continue to derive, a significant portion of our revenues in any given year from a limited number of large contracts. As
these contracts wind down to completion, we face the task of replacing such revenues with new projects and contracts. 82% of our revenues for the fiscal year ended December 31, 2004 was derived
from 4 customers and 79% of our revenues for the fiscal year ended December 31, 2003 was derived from 5 customers. Our inability to replace such revenues would cause a significant decrease in
our revenues and negatively affect our operating results.

We may experience significant fluctuations in our results as a result of uncertainties relating to our ability to generate additional revenues, manage our expenditures and
other factors, certain of which are outside of our control.

Our operating results have varied considerably in the past and are likely to vary considerably due to a number of factors, many of which are outside of our
control. The factors outside our control include, among others:



The
factors within our control include, among others:



Due
to the above factors, quarterly revenues, expenses and results of operations could vary significantly in 2005 and beyond.

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Our contracts typically contain provisions giving customers the ability to terminate their contracts under various circumstances and we may not be able to replace the revenues
from such contracts which may have an adverse effect on our revenues and operating results.

Our contracts typically have provisions that permit customers to terminate their contracts under various circumstances, including termination for convenience.
Termination of such contracts by the customers may result in further loss of revenues and cause us to incur legal and other expenses associated with our efforts to collect some or all of the amounts
we may be entitled to under such contracts. We also believe that intense competition and the current trend in the telecommunications industry contracting toward shorter-term contracts that
provide increased grounds for customer termination may result in increased frequency of customer termination or renegotiation. If large contracts, or a number of contracts that in the aggregate
account for a material amount of our revenues, are suspended for any significant length of time or terminated, we may encounter difficulty replacing such revenues and our revenues and operating
results would decline.

We may not be able to promptly reduce expenses in response to any decrease in our revenues, which would result in lower net margins.

We may not be able to reduce our expenses in order to timely correspond with any decrease in our revenues, including decreases resulting from delays, cancellation
or completion of existing contracts. Our failure to timely reduce our costs would decrease gross profits and increase our operating expenses. Efforts to reduce costs may include a restructuring of our
business, reduction in headcount, office closings and the reduction or elimination of other administrative functions. Costs of compliance with domestic and international regulations associated with
such headcount reductions, particularly in Europe, Asia and Africa, where we anticipate considerable growth, could be significant. Our efforts to reduce expenses could give rise to significant
accounting charges and the payment of certain separation or severance benefits. Efforts to reduce expenses and the corresponding compliance burdens would place considerable strain on our management,
legal and administrative functions.

If we are unable to collect receivables from development stage customers and other telecommunications companies, our operating results may be materially harmed.

We may perform services for development stage customers that carry a higher degree of financial risk for us. Our customers, established and development stage,
have been and may continue to be impacted by the tightening of available credit and general economic slowdown. As a result of these conditions, our customers may be unable to pay, or may delay
payment, for services performed by us. If we are not able to collect such amounts, we may be required to write-off significant accounts receivable and recognize bad debt expense.

The extent of our dependence on international operations may give rise to increased management challenges and could harm our results of operations.

Customers outside the United States accounted for approximately 72% of our revenues for the year ended December 31, 2004, and for approximately 58% of our
revenues for the year ended December 31, 2003. The multi-jurisdictional nature of our revenues exposes us to additional risks. Such risks include:



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The
level and timing of the demand for our services and products could also be affected by changes in the applicable industry regulatory environments in foreign countries, including
delays in deregulation or privatization affecting the pace at which licenses are awarded to telecommunication service providers.

Expansion
of our international operations may require significant expenditure of operating, financial and management resources and result in increased administrative and compliance costs
that could harm our results of operations. In addition, by expanding our international operations, our revenues and earnings may be significantly affected by political instability and other political
developments throughout the world, such as war and other international conflicts, civil unrest and local security concerns. Both the likelihood of such occurrences and their overall effect upon us
vary greatly from country to country and are not predictable.

Providing services outside the United States carries the additional risk of currency fluctuations and foreign exchange controls imposed by certain countries since many of our
non-U.S. projects are undertaken in local currency.

Although we generally incur project expenses in the same currency in which payments are received under the contract, we do not currently engage in additional
currency hedging activities to limit the risk of exchange rate fluctuations. Therefore, fluctuations in the currency exchange rate could have a negative impact on the profitability of our operations
particularly if: (i) we cannot incur project expenses in the same currency in which payments are received under the contract; and (ii) there is a negative impact when converting back to
U.S. dollars.

Our inability to anticipate or adapt to changes in technology may harm our competitive position, reputation and opportunities for revenue growth.

We operate in a highly competitive environment that is subject to rapid technological changes and the emergence of new technologies. Our future revenues depend
significantly upon the adoption and deployment by telecommunication customers of new technologies. Our success will depend on our ability to timely enhance our current product and service offerings to
keep pace with new technologies and the changing needs of our customers. If we are not successful in responding to technological changes, or industry or marketplace developments, our competitive
position, reputation and opportunities for revenue growth may be harmed.

We may not be able to hire or retain a sufficient number of qualified engineers and other employees to meet our customers' needs or maintain the quality of our services.

As a service business, our success depends significantly on our ability to attract, train and retain engineering, system deployment, managerial, marketing and
sales personnel who have excellent technical skills, particularly as technology changes, as well as the interpersonal skills crucial to fostering customer satisfaction. Competition for highly skilled
engineering, sales, marketing and support personnel is intense because there is a limited number of people available with the necessary technical skills and an understanding of the markets which we
serve. We may have difficulty recruiting and retaining qualified technical personnel. In addition to recruitment difficulties, we must fully and properly train our new employees. Increased competition
in the telecommunication industry is

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increasing
the level of specific technical experience and training required to compete in the marketplace. This process is costly and resource constraints may impede our ability to quickly and
effectively hire and train all of the personnel required to stay competitive in the marketplace.

Future acquisitions of new companies or technologies may result in disruption to our business and expose us to risks associated with acquisitions.

We may make future acquisitions of, or investments in, other companies or technologies. Any future acquisitions or investments may require debt or equity
financing, or the issuance of shares, which could be dilutive to our existing stockholders. In addition, our operating results may suffer as a result of any acquisition-related costs or impairment of
goodwill and other intangible assets acquired in connection with an acquisition. In addition, acquisitions could expose us to a number of other risks and challenges, including:



Any
of these and other factors could disrupt our business and harm our ability to achieve the anticipated benefits of an acquisition.

The consolidation of telecommunication service providers could adversely impact our business.

The telecommunications industry has been characterized by significant consolidation activity. This consolidation and the potential continuing trend towards future
consolidation within the telecommunications industry may lead to a greater ability among telecommunication service providers to provide a comprehensive range of network services, which could lead to a
reduction in demand for our services. Moreover, the consolidation of telecommunication service providers could reduce the number of our current or potential customers and increase the bargaining power
of our remaining customers that may adversely impact our business.

Government regulations may adversely affect our business.

Our products and services are subject to federal and state regulations in the United States and foreign regulations. We believe that we will be able to comply in
all material respects with the laws and regulations governing the telecommunication industry and our products and services, and that such laws will not have a material effect on our operations.
However, various foreign, federal and state agencies may propose new legislation that may adversely affect our business, financial condition and results of operations.

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If we fail to retain our key personnel and attract and retain additional qualified personnel, we might not be able to meet our customers' needs.

Our future success and our ability to sustain our revenue growth depend upon the continued service of our executive officers and other key personnel. The loss of
any of our key employees, in particular Rupert Galliers-Pratt, the chairman of our board and our president and chief executive officer, Adam Bishop, president of Vistula, and Mark Scully, president of
Vistula USA, could adversely affect our
ability to meet our customers' needs. We have entered into an employment agreement with Mr. Scully for a term of 18 months, which term commenced as of January 1, 2004. At present,
we do not have an employment agreement or any other agreement that obligates Messrs. Galliers-Pratt or Bishop to remain with us.

Our internal controls and procedures need improvement.

Our independent registered public accounting firm, Vitale, Caturano & Company, Ltd., advised us in connection with the completion of their audit for the year
ended December 31, 2004 that they had identified certain matters involving the operation of our internal controls that they consider to be a material weakness. See "Item 8A. Controls and
Procedures" elsewhere in this Form 10-KSB. We are in the process of implementing changes to respond to these matters, as well as evaluating, documenting and testing our internal controls in
anticipation of our required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Until we are able to effectively correct the identified material weakness, there could be a risk of
accounting errors, which could have an adverse affect on our operations or financial results. There is no guarantee that the changes we implement will be effective.

The management of our finances and the quality and timeliness of our financial reporting may be adversely affected if we are unable to increase the size and capabilities of our
internal administrative and finance function as our business grows.

We have engaged an outside accounting firm (other than our independent registered public accounting firm) to provide financial management and accounting services
on a temporary basis. If we are unable to continue to obtain sufficient financial management and accounting services on a cost-effective basis, our ability to effectively manage our
finances and the quality and timeliness of our financial reporting could be adversely affected.

We will not be successful if we do not grow our customer base beyond our initial customers.

Our future success will depend on our ability to attract additional customers beyond our current limited number. The growth of our customer base could be
adversely affected by:



If
we do not expand our customer base to include additional customers that use our services and products, our revenues will not grow significantly, or at all.

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If we do not respond rapidly to technological changes or to changes in industry standards, our products and services could become obsolete.

The market for our products and services is characterized by rapid technological change and frequent new product and service introductions. We may be unable to
respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing or marketing that could delay or prevent our development,
introduction or marketing of new products and services and enhancements. The introduction of new products and services by competitors, the market acceptance of products and services based on new or
alternative technologies or the emergence of new industry standards could render our existing or future products and services obsolete. If the industry standards adopted are different from those that
we have chosen to support, market acceptance of our products and services may be significantly reduced or delayed. If our products and services become technologically obsolete, we may be unable to
sell our products and services in the marketplace and generate revenues.

We will not retain customers or attract new customers if we do not anticipate and meet specific customer requirements and if our products and services do not adequately
interoperate with our customers' existing networks.

To achieve market acceptance for our products and services, we must effectively anticipate, and adapt in a timely manner to, customer requirements and offer
products and services that meet changing customer demands. Prospective customers may require product features and capabilities that our current products do not have. The introduction of new or
enhanced products also requires that we carefully manage the transition from older products in order to minimize disruption in customer ordering patterns and ensure that adequate supplies of new
products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or to effectively manage the transition from older
products, our ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers.

Many
of our customers will require that our products be designed to interface with their existing networks, each of which may have different specifications. Issues caused by an
unanticipated lack of interoperability may result in significant warranty, support and repair costs, divert the attention of our engineering personnel from our hardware and software development
efforts and cause significant customer relations problems. If our products do not interoperate with those of our customers' networks, installations could be delayed or orders for our products could be
cancelled, which would seriously harm our gross margins and result in loss of revenues or customers.

If we fail to compete successfully, our ability to increase our revenues or achieve profitability will be impaired.

Competition in the telecommunications market is intense. This market has historically been dominated by large companies. In addition, a number of smaller
companies, including BonNet, Fewhurst, C2C and Total X, have products and services that address similar market opportunities to that which we and our subsidiaries address. Many of these competitors
have also been in the market for longer than us and have larger existing customer bases. Some of these competitors, such as Broadsoft (which has raised greater than $60 million in venture
capital funding), have greater financial resources than we do, including investment from major private equity funds. Because this market is rapidly evolving, additional competitors with significant
financial resources may enter these markets and further intensify competition.

Many
of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial and other resources, including the ability to offer
financing

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programs.
If we are unable or unwilling to offer vendor-sponsored financing, prospective customers may decide to purchase products and services from one of our competitors who offers this type of
financing. Furthermore, some of our competitors are currently selling significant amounts of other products and services to our current and prospective customers. Our competitors' broad product
portfolios coupled with already existing relationships may cause our customers to buy our competitors' products and services.

To
compete effectively, we must deliver products and services that:



If
we are unable to compete successfully against our current and future competitors, we could experience price reductions, order cancellations, loss of revenues and reduced gross
margins.

Our business is exposed to the general conditions of the telecommunications market.

Our business is subject to global economic conditions, and in particular, market conditions in the telecommunications industry. Our operations could be adversely
affected if declines in capital spending from telecommunications service providers continue. If global economic conditions worsen, or if the prolonged slowdown in the telecommunications industry
continues, then we may experience adverse operating results.

The markets for wholesale voice services (particularly VoIP services) and pre-pay products are new and evolving and, if these markets do not develop as expected,
then it could have a material adverse effect on our business.

While we believe there is a significant growth opportunity in providing wholesale voice termination services (including VoIP services) and pre-pay
products to carriers and operators, there can be no assurances that these technologies will be widely accepted or that a viable market for our services and products will fully develop or be
sustainable. If these markets do not develop, or develop more slowly than expected, then we may not be able to sell our products or services in significant volume, or at all. Due to the intense
competition in these markets and with respect to VoIP services, the relatively recent introduction of this technology, there can be no assurance that we will succeed in these evolving marketplaces.

Intellectual property infringement claims against us or any of our subsidiaries, even without merit, could require us to enter into costly licenses or deprive us of the
technology we need.

Our industry is technology intensive. As the number of competitors in our target markets increases and the functionality of the products produced by such
competitors further overlaps, third parties may claim that the technology we develop or license infringes their proprietary rights. Any claims against us or any of our subsidiaries may affect our
business, results of operations and financial conditions. Any infringement claims, even those without merit, could require us to pay damages or settlement amounts or could require us to develop
non-infringing technology or enter into costly royalty or licensing agreements to avoid service implementation delays. Any litigation or potential litigation could result in product
delays, increased costs or both. In addition, the cost of litigation and the resulting distraction

33

---



of
our management resources could have a material adverse effect on our results of operations and financial condition. If successful, a claim of product infringement could deprive us of the technology
we need altogether.

Failure to protect our intellectual property rights could have a material adverse effect on our business.

Our success depends in part upon the protection of our proprietary products. We have taken steps that we believe are adequate to establish, protect and enforce
our intellectual property rights. We cannot assure you that these efforts will be adequate. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise
obtain rights to use our products or technology.

If our products contain defects, then our sales are likely to suffer, and we may be exposed to legal claims.

Our business strategy calls for the development of new products, services and enhancements which may from time to time contain defects or result in failures that
we did not detect or anticipate when introducing such products, services or enhancements to the market. In addition, the markets in which our products and services are used are characterized by a wide
variety of standard and non-standard configurations and by errors, failures and bugs in third-party platforms that can impede proper operation of our products and services. Despite product
testing by us, defects may still be discovered in some new products or enhancements after the products or enhancements are delivered to customers. The occurrence of these defects could result in
product returns, adverse publicity, loss of or delays in market acceptance of our products, delays or cessation of service to our customers or legal claims by customers against us.

To
the extent that contractual provisions that limit our exposure to legal claims are unenforceable or such claims are not covered by insurance, a successful products liability claim
could have a material adverse effect on our business, results of operations and financial condition.

We may be subject to litigation.

We may be subject to claims involving how we conduct our business or the market for or issuance of our common stock or other securities. Any such claims against
us may affect our business, results of operations and financial conditions. Such claims, even those without merit, could require us to pay damages or settlement amounts and would require a substantial
amount of time and attention from our senior management as well as considerable legal expenses. Although we do not anticipate that our activities would warrant such claims, there can be no assurances
that such claims will not be made.

34

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ITEM 7. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                            |                                                                                                 | Page
|------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----
|CONSOLIDATED FINANCIAL STATEMENTS FOR
VISTULA COMMUNICATIONS SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003 |                                                                                                 |     
|                                                                                                                                            | Report of Independent Registered Public Accounting Firm of Vitale, Caturano & Company, Ltd.     |     
|                                                                                                                                            | Consolidated Balance Sheets at December 31, 2004 and 2003                                       |     
|                                                                                                                                            | Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003            |     
|                                                                                                                                            | Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 2004 and 2003 |     
|                                                                                                                                            | Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003            |     
|                                                                                                                                            | Notes to Consolidated Financial Statements                                                      |     

35

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Shareholders of
Vistula Communications Services, Inc.

We
have audited the accompanying consolidated balance sheets of Vistula Communications Services, Inc. (a Delaware corporation) and its wholly-owned subsidiaries, as of
December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States.) Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vistula Communications Services, Inc.
and its wholly-owned subsidiaries as of December 31, 2004 and 2003, and the results of their operations and cash flows for each of the years then ended, in conformity with accounting principles
generally accepted in the United States.

/s/
VITALE, CATURANO & COMPANY, LTD.

Boston,
Massachusetts
March 29, 2005

36

---





VISTULA COMMUNICATIONS SERVICES, INC.        Consolidated Balance Sheets        December 31, 2004 and 2003

|                                      |                                                                                                                                                                                              | 2004                                        |           | 2003       |           
|------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ---------- | ----------
|ASSETS                                |                                                                                                                                                                                              |                                             |           |            |           
|Current assets:                       |                                                                                                                                                                                              |                                             |           |            |           
|                                      | Cash and cash equivalents                                                                                                                                                                    |                                             | $         | 3,221      |           
|                                      | Accounts receivable                                                                                                                                                                          |                                             |           | 55,991     |           
|                                      | Prepaid expenses and other current assets                                                                                                                                                    |                                             |           | 228,870    |           
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|                                      |                                                                                                                                                                                              | Total current assets                        |           |            | 288,082   
|Property and equipment, net           |                                                                                                                                                                                              |                                             | 1,997,621 |            |           
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|                                      |                                                                                                                                                                                              | Total assets                                |           | $          | 2,285,703 
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                                                                                                              |                                             |           |            |           
|Current liabilities:                  |                                                                                                                                                                                              |                                             |           |            |           
|                                      | Accounts payable                                                                                                                                                                             |                                             | $         | 537,660    |           
|                                      | Accrued expenses                                                                                                                                                                             |                                             |           | 1,044,343  |           
|                                      | Due to stockholder                                                                                                                                                                           |                                             |           | 801,630    |           
|                                      | Convertible promissory note to related party                                                                                                                                                 |                                             |           | 175,000    |           
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|                                      |                                                                                                                                                                                              | Total current liabilities                   |           |            | 2,558,633 
|Capital lease obligation              |                                                                                                                                                                                              |                                             | 1,971,167 |            |           
|Stockholders' deficit:                |                                                                                                                                                                                              |                                             |           |            |           
|                                      | Common stock, $0.001 par value, 100,000,000 and 40,000,000 shares authorized in 2004 and 2003, respectively; 24,454,406 and 23,885,000 issued and outstanding in 2004 and 2003, respectively |                                             |           | 24,454     |           
|                                      | Additional paid-in capital                                                                                                                                                                   |                                             |           | 2,608,581  |           
|                                      | Deferred compensation                                                                                                                                                                        |                                             |           | (399,000   | )         
|                                      | Accumulated deficit                                                                                                                                                                          |                                             |           | (4,394,997 | )         
|                                      | Cumulative translation adjustment                                                                                                                                                            |                                             |           | (83,135    | )         
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|                                      |                                                                                                                                                                                              | Total stockholders' deficit                 |           |            | (2,244,097
|                                      |                                                                                                                                                                                              |                                             |           |            |           
|                                      |                                                                                                                                                                                              | Total liabilities and stockholders' deficit |           | $          | 2,285,703 
|                                      |                                                                                                                                                                                              |                                             |           |            |           

37

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VISTULA COMMUNICATIONS SERVICES, INC.        Consolidated Statements of Operations        Years ended December 31, 2004 and 2003

|                                                      |                      | 2004 |            | 2003       |  
|----------------------------------------------------- | -------------------- | ---- | ---------- | ---------- | -
|Net revenues                                          |                      | $    | 2,335,408  |            | $
|Cost of revenues                                      |                      |      | 2,248,128  |            |  
|                                                      |                      |      |            |            |  
|                                                      | Gross profit         |      |            | 87,280     |  
|Selling, general and administrative expenses          |                      |      | 3,761,768  |            |  
|                                                      |                      |      |            |            |  
|                                                      | Loss from operations |      |            | (3,674,488 | )
|Interest income (expense)                             |                      |      | (120,788   | )          |  
|                                                      |                      |      |            |            |  
|                                                      | Net loss             |      | $          | (3,795,276 | )
|                                                      |                      |      |            |            |  
|Weighted-average basic and diluted shares outstanding |                      |      | 24,233,420 |            |  
|                                                      |                      |      |            |            |  
|Net loss per common share basic and diluted           |                      | $    | (0.16      | )          | $
|                                                      |                      |      |            |            |  

38

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VISTULA COMMUNICATIONS SERVICES, INC.        Consolidated Statements of Stockholders' Deficit

|                                                                          |  | Common Stock |  |   |        |  |   |           |   |   |            |   |   |            |  
|------------------------------------------------------------------------- |  | ------------ |  | - | ------ |  | - | --------- | - | - | ---------- | - | - | ---------- | -
|
|
|Balance, January 1, 2003                                                  |  | 2,000,000    |  | $ | 2,000  |  | $ | (1,998    | ) | $ |           |   | $ | (12,888    | )
|Issuance of common stock                                                  |  | 4,500,000    |  |   | 4,500  |  |   | (4,334    | ) |   |           |   |   |           |  
|Issuance of common stock pursuant to employment and consulting agreements |  | 17,385,000   |  |   | 17,385 |  |   | (16,768   | ) |   |           |   |   |           |  
|Contribution of services and payment of Company expenses by stockholders  |  |             |  |   |       |  |   | 421,376   |   |   |           |   |   |           |  
|Net loss                                                                  |  |             |  |   |       |  |   |          |   |   |           |   |   | (586,833   | )
|Change in cumulative translation adjustment                               |  |             |  |   |       |  |   |          |   |   |           |   |   |           |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|Balance, December 31, 2003                                                |  | 23,885,000   |  |   | 23,885 |  |   | 398,276   |   |   |           |   |   | (599,721   | )
|Contribution of services by stockholders                                  |  |             |  |   |       |  |   | 262,141   |   |   |           |   |   |           |  
|Issuance of common stock                                                  |  | 100,000      |  |   | 100    |  |   | 44,900    |   |   | (40,000    | ) |   |           |  
|Issuance of common stock pursuant to marketing and distribution agreement |  | 50,000       |  |   | 50     |  |   | 22,450    |   |   |           |   |   |           |  
|Issuance of common stock for services rendered                            |  | 419,406      |  |   | 419    |  |   | 188,314   |   |   |           |   |   |           |  
|Issuance of stock options                                                 |  |             |  |   |       |  |   | 1,692,500 |   |   | (1,692,500 | ) |   |           |  
|Amortization of deferred compensation                                     |  |             |  |   |       |  |   |          |   |   | 1,333,500  |   |   |           |  
|Net loss                                                                  |  |             |  |   |       |  |   |          |   |   |            |   |   | (3,795,276 | )
|Change in cumulative translation adjustment                               |  |             |  |   |       |  |   |          |   |   |           |   |   |           |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  
|Balance, December 31, 2004                                                |  | 24,454,406   |  | $ | 24,454 |  | $ | 2,608,581 |   | $ | (399,000   | ) | $ | (4,394,997 | )
|                                                                          |  |              |  |   |        |  |   |           |   |   |            |   |   |            |  

39

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VISTULA COMMUNICATIONS SERVICES, INC.        Consolidated Statements of Cash Flows        Years ended December 31, 2004 and 2003

|                                                        |                                                                             | 2004                                                                           |                         | 2003                                      |                                                    
|------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------- | ----------------------------------------- | ---------------------------------------------------
|Cash flows from operating activities:                   |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        | Net loss                                                                    |                                                                                | $                       | (3,795,276                                | )                                                  
|                                                        | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                |                         |                                           |                                                    
|                                                        |                                                                             | Depreciation                                                                   |                         |                                           | 43,460                                             
|                                                        |                                                                             | Loss on disposal of property and equipment                                     |                         |                                           | 43,300                                             
|                                                        |                                                                             | Contribution of services by stockholder                                        |                         |                                           | 82,500                                             
|                                                        |                                                                             | Payment of Company expenses by stockholders recorded as a capital contribution |                         |                                           | 179,642                                            
|                                                        |                                                                             | Company expenses paid by stockholder recorded as due to stockholder            |                         |                                           | 792,413                                            
|                                                        |                                                                             | Issuance of common stock for services rendered                                 |                         |                                           | 188,733                                            
|                                                        |                                                                             | Issuance of common stock pursuant to marketing and distribution agreement      |                         |                                           | 22,500                                             
|                                                        |                                                                             | Non-cash compensation expense                                                  |                         |                                           | 1,333,500                                          
|                                                        |                                                                             | Non-cash interest expense                                                      |                         |                                           | 115,334                                            
|                                                        |                                                                             | Changes in assets and liabilities:                                             |                         |                                           |                                                    
|                                                        |                                                                             |                                                                                | (Increase) decrease in: |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         | Accounts receivable                       |                                                    
|                                                        |                                                                             |                                                                                |                         | Prepaid expenses and other current assets |                                                    
|                                                        |                                                                             |                                                                                | Increase (decrease) in: |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         | Accounts payable                          |                                                    
|                                                        |                                                                             |                                                                                |                         | Accrued expenses                          |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           | Net cash (used in) provided by operating activities
|Cash flows from investing activities:                   |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        | Purchases of property and equipment                                         |                                                                                |                         | (68,459                                   | )                                                  
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           | Net cash used in investing activities              
|Cash flows from financing activities:                   |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        | Proceeds from issuance of common stock                                      |                                                                                |                         | 5,000                                     |                                                    
|                                                        | Proceeds from notes payable                                                 |                                                                                |                         | 175,000                                   |                                                    
|                                                        | Payments on due to stockholder                                              |                                                                                |                         | (55,385                                   | )                                                  
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           | Net cash provided by (used in) financing activities
|Effect of exchange rates on cash                        |                                                                             |                                                                                | (77,316                 | )                                         |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|Net (decrease) increase in cash and cash equivalents    |                                                                             |                                                                                | (85,423                 | )                                         |                                                    
|Cash and cash equivalents, beginning of period          |                                                                             |                                                                                | 88,644                  |                                           |                                                    
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|Cash and cash equivalents, end of period                |                                                                             | $                                                                              | 3,221                   |                                           | $                                                  
|                                                        |                                                                             |                                                                                |                         |                                           |                                                    
|Supplemental disclosure of cash flow information:       |                                                                             |                                                                                |                         |                                           |                                                    
|Cash paid for interest                                  |                                                                             | $                                                                              |                        |                                           | $                                                  
|Cash paid for taxes                                     |                                                                             | $                                                                              |                        |                                           | $                                                  
|Equipment acquired pursuant to capital lease obligation |                                                                             | $                                                                              | 1,855,835               |                                           | $                                                  
|Forgiveness of shareholder loan                         |                                                                             | $                                                                              |                        |                                           | $                                                  

40

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Vistula Communications Services, Inc.        Notes to Consolidated Financial Statements

1. NATURE OF ORGANIZATION

VCS, Inc. was incorporated on September 22, 2003 for the purpose of merging with two entities under common control, Vistula Limited (Vistula) and
Cardlink Services Limited (Cardlink). VCS, Inc. changed its name to Vistula Communications Services, Inc. on March 4, 2004; hereafter, Vistula Communications Services, Inc.
and its wholly-owned subsidiaries, as defined, are collectively referred to as "the Company."

Vistula
is a provider of telephone and internet call services throughout the world. Cardlink is currently an inactive company that plans to be a provider of prepayment processing
software to mobile network operators.

Pursuant
to the stock purchase agreement dated March 2, 2004, the Company exchanged 21,885,000 shares of common stock for the 21,885 outstanding shares of Cardlink, and 2,000,000
shares of common stock for the 1 outstanding share of Vistula. Prior to the share exchange, Cardlink was owned by a single control group, consisting of the Chairman of the Company's Board of Directors
(the Chairman), along with members of his immediate family (who with the Chairman collectively owned a majority of Cardlink) and other shareholders bound by contract to act in concert with the
Chairman with regards to the share exchange. Since its inception in August 2002, Vistula was owned entirely by an entity controlled by the Chairman and his immediate family.

The
Chairman and his immediate family acquired 98% of Cardlink from Metromedia International Telecommunications Inc. (MITI) on April 3, 2003 for $160. At the time of the
acquisition and through the date of the share exchange with the Company, Cardlink was a dormant shell company, with only nominal assets and no operations. In June 2003, the Chairman and his
immediate family distributed shares of Cardlink common stock to certain individuals and consultants. The distribution was designed
to provide the individuals and consultants a specific percentage in the Company on a post-share exchange basis. As a condition of the stock grants, these shareholders contractually agreed
to act in concert with the Chairman and his immediate family with respect to the share exchange with the Company. As a result, substantially all shares of both Cardlink and Vistula were controlled by
the Chairman and his immediate family. Accordingly, the share exchange was accounted for as a reorganization of entities under common control. Pursuant to this accounting method, the accounts of the
Company have been combined with those of Cardlink since April 3, 2003 and Vistula for all periods presented as if the entities were historically organized in a manner consistent with the share
exchange. The assets and liabilities of Cardlink and Vistula are recorded at historical cost and the Company's equity accounts reflect the historical equity accounts of Cardlink and Vistula, as well
as the par value of the Company shares issued in the share exchange.

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 2003 and was first drawn upon by the Chairman 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 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 December 31, 2004, the Chairman has drawn approximately $262,000 under this facility to pay expenses incurred and accrued by the Company. Seven letters of credit in the
aggregate amount of $1,442,000 have been issued by the lender under the credit facility in favor of vendors to the Company at the request of the Chairman. As of December 31, 2004, approximately
$204,000 was undrawn and available under the credit facility. The Company may obtain future advances from the Chairman from both the credit facility and the

41

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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 2005 as and if needed until such time that our
operations are self-sustaining or we raise additional external capital, as the case may be. See Note 13 for a description of third party funding that the Company has received
subsequent to December 31, 2004.

The
Company is subject to risks common to rapid growth technology-based companies, including a limited operating history, dependence on key personnel, the need to raise capital, rapid
technological change, competition from substitute products and larger companies, and the need for the successful development and marketing of commercial products and services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP). All significant intercompany accounts and transactions have been eliminated in consolidation.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.



The Company uses the United States dollar as its reporting currency; the British pound is the functional currency of two of its wholly-owned subsidiaries. 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 (losses) were immaterial for the years ended December 31, 2004 and 2003.



The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.



Accounts receivable are stated at the amount management expects to collect from outstanding balances. An allowance for doubtful accounts is provided for those
accounts receivable considered to be uncollectible based upon historical experience and management's evaluation of outstanding accounts receivable at the end of the year. Bad debts are written off
against the allowance when identified. At

42

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December 31,
2004 and 2003 the Company did not record an allowance for doubtful accounts, nor have there been any write-offs since inception.



Property and equipment is stated at cost. Additions and improvements are capitalized, and ordinary repairs and maintenance are charged to expense as incurred.

The
Company provides for depreciation expense using the straight-line method over the estimated useful lives of the assets as follows:

Asset Classification

Estimated Useful
LifeTelecommunications equipment

3-5 years




The Company's revenue is derived primarily from fees charged to terminate voice services over the Company's network. The Company recognizes such revenue, net of
reserves, when persuasive evidence of a sales arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed and determinable and collectibility is reasonably
assured. The Company reserves for potential billing disputes at the time revenue is recognized. Such disputes can result from disagreements with customers regarding the duration, destination or rates
charged for each call. These revenue allowances are based on estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued, current economic
trends and changes in demand. Amounts billed in advance of the service month are recorded as deferred revenue and recognized as revenue as the underlying services are rendered.

Reciprocal
compensation is the amount paid by one carrier to complete particular calls on another local exchange carrier's network. Reciprocal compensation paid to and received from
other carriers is based on contractual fixed rate per minute charges. The Company has one reciprocal compensation agreement whereby the Company and the counterparty buy and sell call termination
services to each other with periodic net cash settlements. The Company applies the receipt of reciprocal compensation against the cost of reciprocal compensation and reflects the net amount as either
revenue (receipts greater than costs) or expense (costs greater than receipts) at each settlement date.

The
Company has entered into transactions such as buying, selling, swapping or exchanging capacity to complete and complement its network. In general, these transactions represent the
exchange of productive assets not held for sale in the ordinary course of business and, as such, do not result in the culmination of the earnings process. Accordingly, the Company does not recognize
any revenue for these types of transactions. The Company accounts for the exchange of a non-monetary asset based on the recorded amount of the non-monetary asset relinquished
with no gain or loss recognized in accordance with Accounting Principles Board (APB) Opinion No. 29,Accounting for Non-Monetary
Transactions.



The Company has elected to account for its stock-based compensation plans under the intrinsic value method pursuant to APB No. 25, Accounting for Stock
Issued to Employees(APB 25), and related Interpretations, rather than the alternative fair value accounting provided under
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Non-Monetary Transactions.

43

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In
accordance with SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 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 option granted
to non-employees over the vesting period, with periodic remeasurement of fair value when applicable, which is generally the period of service. See Note 10 for options accounted for
in accordance with EITF No. 96-18.

SFAS
No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation, requires pro forma information regarding
net loss and net loss per share as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS No. 123. The fair value of the Company's stock
options used to compute pro forma net loss is the estimated fair value at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended
December 31, 2004:

Risk-free interest rate

3.55%Expected volatility

80%Expected lives

5 yearsExpected dividend




The
per-share, weighted-average grant date fair value of options granted during the year ended December 31, 2004 was $.39; no options were granted or
outstanding in 2003.

For
purposes of pro forma disclosures, the estimated fair value of the stock-based compensation is amortized over the vesting period of the award. Had compensation expense for the
Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of FAS 123, the Company's net loss and
net loss per share for the year ended December 31, 2004 would have been as follows:

Net loss attributable to common stockholders as reported

$
(3,795,276
)Add: Stock-based employee compensation expense included in reported net loss


1,333,500Deduct: Stock-based employee compensation expense determined under fair value based method


(1,445,736
)SFAS No. 123 Pro forma net loss

$
(3,907,512
)Basic and diluted net loss per shareAs reported

$
(0.16
)SFAS No. 123 Pro forma

$
(0.16
)




The Company accounts for income taxes in accordance with 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.



Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding
during the year. Diluted

44

---



earnings
per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year plus the number of additional common
shares that would have been outstanding if the potentially dilutive common shares had been issued. Dilutive securities include stock options, convertible debt and warrants. The Company's outstanding
stock options and warrants are not included in the calculation of loss per share because their inclusion would be antidilutive. As discussed in Note 1, the weighted average number of common
shares for 2003 is based on the number of shares issued in the share exchange for Vistula for all periods presented, plus the weighted average shares issued for Cardlink as if such shares were issued
on April 3, 2003.



The Company maintains its cash in bank deposit accounts, which at times, may exceed federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk on cash. The Company has not experienced significant losses related to accounts receivable of individual customers or
groups of customers in any particular industry or geographic area. At December 31, 2004 and 2003, the percentages of revenue and accounts receivable attributable to the Company's significant
customers were as follows:



Customer

Revenue

Accounts
ReceivableA

26
%
*B

24

47
%C

16

12D

12

*E

*

15F

*

13




Customer

Revenue

Accounts
ReceivableA

12
%
21
%B

11

18C

*

*D

28

17E

17

11F

11

*G

*

11


---

45

---





The Company reports its comprehensive income in accordance with SFAS No. 130,Reporting Comprehensive
Income, which requires presentation of the components of comprehensive earnings. Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Comprehensive income consists of cumulative translation adjustment for the years ended
December 31, 2004 and 2003.



The carrying value of the Company's financial instruments, which include cash, receivables and convertible debt, approximate fair value due to the short
maturities of those instruments.



On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) ("SFAS No. 123R"), Share-Based
Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based
Compensation. SFAS No 123R supersedes APB No. 25 and amends SFAS No. 95,Statement of Cash Flows. Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS No. 123R must be adopted
in fiscal periods beginning after December 15, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt SFAS
No. 123R on January 1, 2006.

SFAS
No. 123R permits public companies to adopt its requirements using one of two methods. A "modified prospective" method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma
disclosures either (a) all prior periods presented or (b) prior interim
periods of the year of adoption. The Company has yet to determine which method to use in adopting SFAS No. 123R.

As
permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No. 25's intrinsic value method. Accordingly, the
adoption of SFAS No. 123R's fair value method may have a significant impact on the Company's results of operations, although it will have no impact on the Company's overall financial position.
The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS
No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in
Note 2 to the Company's financial statements. The Company is currently evaluating the impact of the adoption of SFAS No. 123R on its financial position and results of operations,
including the valuation methods and support for the assumptions that underlie the valuation of the awards.

46

---



3. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2004 and 2003:

2004

2003Telecommunications equipment

$
2,068,946

$
172,781Lessaccumulated depreciation


71,325


22,841$
1,997,621

$
149,940


Depreciation
expense was $43,460 and $22,841 for the years ended December 31, 2004 and 2003, respectively.

4. 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 Company agreed to lease the equipment until it completed the purchase. The
agreement was amended on May 5, 2004. As a result of the amendment, the purchase price for the equipment was $1,670,000 and 725,000 shares of common stock and the agreement was extended through
April 1, 2005. The agreement was further amended on March 15, 2005, at which time the Company completed the purchase. In consideration for the equipment purchased, the Company paid
$500,000 in March 2005, issued 725,000 shares of common stock, and issued a promissory note for $1,170,000. The promissory note bears interest at 8.25% per annum and is payable monthly in
arrears. Principal payments of $150,000 are due on September 30, 2005 and December 31, 2005, with the balance of the principal ($870,000) due on March 15, 2006.

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

The
Company recorded the present value of the minimum lease payments as an asset of $1,855,835. The equipment was not placed in service during 2004. The future minimum lease payments
related to the capital lease is $2,000,000, which includes $144,165 related to interest. The Company recorded $115,332 related to interest expense on the capital lease for the year ended
December 31, 2004. The Company does not have any minimum sublease rental income related to the capital lease. There were no contingent rentals during the year ended December 31, 2004.

The
Company has deemed the May 5, 2004 amendment described above to be a modification of the lease pursuant to SFAS No. 13. As of May 5, 2004, the balance of the
asset and associated capital lease obligation was 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. Under certain circumstances, the cash portion of the obligation was convertible into the Company's common stock, at the
lessor's option. The Company accounted for
the conversion feature associated with the capital lease obligation included in the May 2004 amendment pursuant to EITF Issue No. 98-5,Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,as amended by EITF Issue No. 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments, whereby the Company measured the beneficial conversion feature on
the amendment date, but did not record any charge until the contingencies were resolved. Upon completion of the purchase in March 2005, the conversion feature expired, therefore no charge was
recorded. The promissory note does not include a conversion feature.

47

---





5. BALANCE SHEET DETAIL

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

2004

2003Prepaid royalties

$
150,000

$
Prepaid call termination charges


28,756


101,449Equipment rent


41,707


33,555Other


8,407


35,008$
228,870

$
170,012


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

2004

2003Professional fees

$
573,323

$
106,842Salary


167,500


Travel


107,767


Directors' fees


59,346


Printing


50,764


VAT payable


47,024


Rent


25,848


Deferred revenue





6,475Other


12,771


$
1,044,343

$
113,317


6. EQUITY



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 which 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 4,825,000 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
previously granted were forfeited. 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 December 31, 2004 for purposes of calculating stock compensation expense. The

48

---



Company
has reflected charges to earnings for the year ended December 31, 2004 of $593,500 for the compensation value of these options granted. At December 31, 2004, an additional
$399,000 of deferred compensation remains on the accompanying balance sheet that will be amortized over future periods as the underlying stock options vest.

On
May 5, 2004, the Company issued 75,000 options to purchase common stock to a director. The options have an exercise price of $0.05 and vest in five equal quarterly
installments. The Company has recorded the difference between the fair market value of the Company's stock and the exercise price as deferred compensation and will amortize to compensation expense
over the vesting period.

Information
with respect to activity under the Plan is as follows:

Stock Option Activity

Number of Options

Weighted-Average
Exercise Price Per ShareBalance at December 31, 2003



$
Options granted

6,325,000


.10Options forfeited

(1,500,000
)

Options exercised




Balance at December 31, 2004

4,825,000

$
.10


There
were 4,230,000 options exercisable at December 31, 2004. At December 31, 2004, the Company had 1,175,000 options available for future grant.

On
October 19, 2004, the Company granted 2,000,000 options to purchase common stock to its then newly-appointed chief executive officer. The options have an exercise price of $.10
per share and were fully vested upon grant. The Company recorded the difference between the fair market value of the Company's common stock and the exercise price as compensation expense in the fourth
quarter of 2004, resulting in a non-cash charge of $700,000. In February 2005 this officer resigned and agreed to relinquish 1,800,000 options in exchange for a right to exercise
all or any part of the remaining 200,000 options for a period of 12 months from termination.



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 has recorded the
difference between the fair market value of the Company's common stock and the $0.05 purchase price per share of these shares as compensation expense.



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,

49

---



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.

7. INCOME TAXES

The Company did not record a provision for federal, state or foreign income taxes for the years ended December 31, 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.

The
Company's combined effective income tax rate differed from the U.S. federal statutory income tax rate as set forth below:

2004

2003Income tax benefit computed at the federal statutory rate

(34
)%
(34
)%Foreign rate differential

4
%
4
%Non-deductible contributed services

2
%
22
%Change in valuation allowances

28
%
8
%Other


%

%Total


%

%


Significant
components of the Company's net deferred tax assets as of December 31, 2004 and 2003 were as follows:

Deferred
tax assets:

2004

2003Foreign loss carryforwards

$
1,059,941

$
49,638Deferred tax asset valuation allowance


(1,059,941
)

(49,638
)Total deferred tax assets

$


$



The
Company has gross foreign tax loss carryforwards of approximately $1,110,000 that are available to offset future liabilities for foreign income taxes. Substantially all of the
foreign tax losses are carried forward indefinitely, subject to certain limitations. A valuation allowance has been established for certain future foreign income tax benefits related to income tax
loss carryforwards and temporary tax adjustments based on an assessment that it is more likely than not that these benefits will not be realized. During the years ended December 31, 2004 and
2003,the valuation allowance increased by $1,010,303, and $49,638, respectively.

8. COMMITMENTS AND CONTINGENCIES



During September 2003, the Company entered into a services agreement with Telehouse International Corporation of Europe Limited (Telehouse) for the use of
certain equipment and services.

50

---



Future
minimum service commitments for the years ended December 31 are as follows:

2005

$
100,1832006


66,789$
166,972


Services
expense, classified as a cost of revenue in the accompanying consolidated statement of operations, under this agreement was $18,723 and $27,222 for the years ended
December 31, 2004 and 2003, respectively.

The
service agreement is also secured by a letter of credit that is personally guaranteed by the Chairman.



During 2003, the Company entered into a non-cancelable operating lease for certain equipment. The operating lease expired in August 2004 and
automatically renews for subsequent one-year periods, unless terminated by either party. Rent expense under this operating lease was $104,000 and $55,000 for the years ended
December 31, 2004 and 2003, respectively. During February and August 2004, the Company entered into two non-cancelable leases for office space in Los Angeles, California and
London, England, respectively. The London lease requires a minimum payment of approximately $2,000 per month and expired in January 2005. This agreement is renewable on a
month-to-month basis thereafter. The California lease requires a minimum payment of $2,100 per month and the initial term of the agreement expired in February 2005. The
lease was automatically renewed for a one year term. The Company recorded $14,500 of rent expense related to the California lease during the year ended December 31, 2004. Also, commencing in
March 2005, the Company established its principal executive offices in New York under a month-to-month tenancy at the rate of $4,000 per month under an agreement with
Hermitage Capital Corp.

Future
minimum lease commitments for these operating leases for the years ended December 31 are as follows:

2005

$
115,2002006


4,200$
119,400




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 other of the Chairman's personal assets. The
credit facility was established by the Chairman in February 2003 and was first drawn upon by the Chairman in May 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

51

---



Chairman.
The obligations of the Chairman under the credit facility are secured by certain property in which the Chairman has a beneficial interest. At December 31, 2004, the Chairman had 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 $1,442,000 have been issued by the
lender under the credit facility, of which $514,000 have been issued in favor of vendors to the Company and its affiliates at the request of the Chairman. The standby letters of credit were issued in
order to obtain credit from the Company's vendors. As of December 31, 2004, approximately $204,000 was undrawn and available under the credit facility and $2,796,000 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 2005 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. Although the Company did raise external capital subsequent to December 31, 2004 (see Note 13), there can
be no assurances that the Company can continue to 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 No. 45 (FIN 45) and determined the value to be immaterial to the financial statements and, as a result, no liability has been recorded.



In January 2004, the Company entered into employment and non-competition agreements with three key individuals. These agreements have initial
terms that began 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 annually provide for 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
December 31, 2004 no bonuses have been accrued or paid as such goals have not been met. If the Company elects to terminate the employees without cause, the

52

---



employees
are entitled to receive severance payments equal to six months of their salaries. Two of the employees resigned effective June 30, 2004, with no further amounts due to either
individual.



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
Company's V-Cube IP-PBX software platform 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 the Company by NetYantra,
the Company paid NetYantra $150,000 (the "Initial Payment") and 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 recorded the amount paid
pursuant to the Initial Payment, and will record the amount due pursuant to the 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 common stock or cash, is not creditable towards royalty commitments and will be expensed when and it if 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 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 was 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.

53

---



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.



Shortly after the first closing of the private placement described in Note 13, the Company received a letter on behalf of Kevin Dann & Partners
("KDP"), a placement agent we had retained prior to our engagement of IndiGo Securities, LLC (see Note 10), demanding a placement fee of $227,000. The letter also included a claim that
KDP would be entitled to additional fees in the event of future closings. In the Company's response to this letter, the Company denied any such liability to KDP.



The Company from time to time may become a party to various legal proceedings arising in the ordinary course of business. Management will evaluate these claims as
they arise with the assistance of legal counsel and will make accounting entries and disclosures as appropriate.

9. RELATED PARTY TRANSACTIONS



During the years ended December 31, 2004 and 2003 and for the period from inception (August 30, 2002) through December 31, 2002 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 $82,500 and $110,000 for these services during the years ended December 31, 2004 and 2003, respectively.



During the years ended December 31, 2004 and 2003, 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 $181,000 and $311,000 were recorded as expense and charged to additional paid-in capital for the
years ended December 31, 2004 and 2003, respectively. Expenses that are expected to be repaid of $801,630 and $64,602 are included in due to stockholder at December 31, 2004 and 2003,
respectively. The amounts due to stockholder do not bear interest.



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 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.

In
June 2003, the Company issued 17,385,000 shares of common stock to employees and consultants for services performed as discussed further in Note 1. The Company recorded
$617 of compensation expense related to the issuance of these shares.

54

---



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.

11. EARNINGS PER SHARE

The following table is the computation of basic and diluted earnings per common share computed in the manner described in Note 2 for the years ended
December 31, 2004 and 2003:

2004

2003Net loss available for common shares and assumed conversions

$
(3,795,276
)
$
(586,833
)Weighted-average basic and diluted common shares outstanding


24,233,420


18,413,750Net loss per common share basic and diluted

$
(0.16
)
$
(0.03
)


Options
to purchase 4,825,000 shares of common stock for the year ended December 31, 2004 have been excluded from the computation of net loss per share as their effect would have
been antidilutive.

12. GEOGRAPHIC AND SEGMENT INFORMATION

Financial information by geographic area for the years ended December 31, 2004 and 2003 was as follows:

2004

2003Net revenues:United States

$
700,946

$
515,120United Kingdom


1,356,325


139,546Europe (excluding U.K.)


278,137


585,091$
2,335,408

$
1,239,757Loss from operations:United States

$
(2,706,742
)
$
102,824United Kingdom


(803,064
)

(808,459
)Europe (excluding U.K.)


(164,682
)

117,018$
(3,674,488
)
$
(588,617
)Tangible long-lived assets:United States

$
1,855,835

$
United Kingdom


141,786


149,940Europe (excluding U.K.)





$
1,997,621

$
149,940


55

---



The
Company is currently managed through one business segment, namely, the Vistula Companies. This includes Vistula Limited and Vistula USA, Inc. which are aggregators of
wholesale telecommunications services to Tier 1 and Tier 2 telecommunications carriers. The Vistula Companies have switching facilities in London and Los Angeles and interconnect agreements with
suppliers in these locations. As described in Note 1, Cardlink has been inactive since being acquired by the Chairman and his immediate family and therefore does not currently represent an
active business segment.

13. SUBSEQUENT EVENTS

On February 18, 2005 and March 4, 2005, the Company completed two closings of a private placement of convertible debentures and warrants to a group
of sophisticated institutional and individual investors. In the two closings of the private placement, the Company sold convertible debentures in the aggregate principal amount of $8,400,000 and
warrants to purchase an aggregate of 8,400,00 shares of common stock. In connection with the two closings of the private placement, the Company paid placement fees to the placement agent in the
aggregate amount of $802,500. At the second closing, the Company also issued to the placement agent a warrant to purchase up to 802,500 shares of common stock at an initial exercise price of $1.00 per
share. The debentures accrue interest daily at a rate of 8% per annum, which interest is payable quarterly on each March 31, June 30, September 30 and December 31 following
the issue date. The final interest payment is due on the date of maturity of the debentures, the third anniversary of the issue date. The Company is currently in the process of finalizing its
accounting for issuance of the convertible debentures and warrants, and expects that as a result of the application of APB No. 14,Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants, EITF Issue No. 98-5 and EITF Issue No. 00-27, it will allocate a significant portion of the
proceeds to the warrant and the beneficial conversion feature. This will result in non-cash charges in future periods as the Company amortizes the resulting original issue discount over
the life of the convertible debentures.

On
March 15, 2005, the agreement to purchase certain equipment as described in Note 4 above was amended, at which time the Company completed the purchase of this equipment.
In consideration for
the equipment purchased, the Company paid $500,000 in March 2005, issued 725,000 shares of common stock, and issued a promissory note for $1,170,000. The promissory note bears interest at 8.25%
per annum and is payable monthly in arrears. Principal payments of $150,000 are due on September 30, 2005 and December 31, 2005, with the balance of the principal ($870,000) due on
March 15, 2006.

56

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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 8A. CONTROLS AND PROCEDURES

Company management, including our chief executive officer and chief financial officer, have evaluated our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Form 10-KSB. Based on that evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective, except as discussed below, to ensure that the information we are required to
disclose in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission rules and forms.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including cost limitations, the possibility of human error, judgments and assumptions regarding
the likelihood of future events, and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.

Our
independent registered public accounting firm, Vitale, Caturano & Company, Ltd., advised us in connection with the completion of their audit for the year ended December 31,
2004 that they had identified certain matters involving the operation of our internal controls that they consider to be a material weakness. A "material weakness" is a reportable condition in which
the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by errors in amounts that would be material in
relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Vitale,
Caturano & Company's conclusion that we need to reassess our existing finance organization resource requirements and re-evaluate the design and operating effectiveness of certain
controls surrounding the financial statement close process was based on several adjustments that were made in
the course of the audit process, some of which occurred late in the audit process, and issues relating to the timely communication of information and documentation necessary to yield proper accounting
consideration and recording. Among the issues identified or addressed late in the audit process were accounting for stock option arrangements, prepaid royalties, severance accruals, certain revenue
contracts, reconciling and verifying shareholder loans, cutoff of accounts payable, and preparing complete financial statements with footnote disclosures.

The
matters identified in the Vitale, Caturano & Company letter have been reviewed with management and with the Audit Committee. Management believes that the material weakness identified
in the Vitale, Caturano & Company letter is attributable in significant part to the early development stage of the Company, capital constraints resulting from our inability to obtain financing during
the year ended December 31, 2004, and our lack of full-time internal accounting and finance personnel.

We
are in the process of implementing changes to respond to these matters on an immediate and a longer-term basis. The immediate responsive actions being taken include recruiting to
increase staffing levels in certain areas of the finance organization. We have also implemented an automated accounting system for our U.S. operations. In addition, we have been engaged in an ongoing
process of identifying, documenting and testing our internal controls in anticipation of our required compliance with Section 404 of the Sarbanes-Oxley Act at the end of fiscal 2006. Changes
have been made and will be made to our internal controls as a result of these efforts.

Other
than as described above, there have been no changes in our internal control over financial reporting during the quarter ended December 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 8B. OTHER INFORMATION

None.

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

Our current directors and executive officers are:

|Name                  |  | Age |  | Positions Held                                              
|--------------------- |  | --- |  | ------------------------------------------------------------
|Rupert Galliers-Pratt |  | 53  |  | Chief Executive Officer, President and Chairman of the Board
|George R. Vaughn      |  | 51  |  | Chief Financial Officer, Assistant Treasurer and Secretary  
|Adam Bishop           |  | 44  |  | President, Vistula Limited                                  
|Mark Scully           |  | 47  |  | President, Vistula USA, Inc.                                
|J. Marcus Payne       |  | 52  |  | Director(1)(2)(3)                                           
|Kevin West            |  | 40  |  | Director                                                    
|Anthony Warrender     |  | 54  |  | Director(1)(2)(3)                                           

---

Rupert Galliers-Pratt.Mr. Galliers-Pratt has served as chairman of our board of directors since our
inception.He served as our President and Chief Executive Officer from our inception until September 1, 2004 and resumed service in those
capacities on February 8, 2005. He also serves as chairman of the board of directors of our subsidiaries, Vistula Limited, Vistula USA, Inc. and Cardlink Services Limited. He was one of
the founding shareholders of Vistula Limited, which we acquired in March 2004. Mr. Galliers-Pratt has served as chairman of Vistula Limited since its incorporation in August 2002.
From 1996 through July 2002, he was a private investor. From 1992 through 1995, he served as chairman and chief executive officer of Petersburg Long Distance Inc. During that time,
Mr. Galliers-Pratt was responsible for establishing ZAO PeterStar, which is the dominant Competitive Local Exchange Carrier in St. Petersburg and Altel, which was the first cellular operator in
Kazakhstan. In addition to Petersburg Long Distance Inc., he has served on the board of directors of a number of listed companies in the United Kingdom and the United States including Optical
Care (Bermuda) Limited and Symposium Telecom Inc.

Mr. Galliers-Pratt
was censured by the London Stock Exchange on July 24, 1996 for inadvertently failing to disclose in a document prepared in connection with the admission
of Optical Care (Bermuda) Limited on the U.K. Alternative Investment Market, details of all his then current directorships and details of his then past directorships of companies that had gone into
receivership or liquidation within 12 months of his being a director. When Mr. Galliers-Pratt became aware of the fact that these omissions had been made, he notified the London Stock
Exchange immediately and compiled a
detailed list of the omissions. In its public announcement of his censure, the London Stock Exchange accepted that the omissions were the result of error rather than being deliberate. Our board of
directors has considered these matters in their entirety and believes that Mr. Galliers-Pratt is a fit and proper person to serve as the chairman of our board of directors and as our chief
executive officer.

George R. Vaughn.Mr. Vaughn was appointed interim chief financial officer, assistant treasurer and secretary of VCS
on June 30, 2004. In 1995, Mr. Vaughn founded Vaughn & Associates, P.C., a professional services organization that provides interim and part-time chief financial
officer, outsourced financial management, and tax advisory services for emerging and established businesses. From 1990 to 1995, Mr. Vaughn was chief financial officer of XRL, Inc., a
venture capital-backed manufacturer of semiconductor capital equipment, which was sold in 1995. Mr. Vaughn is a certified public accountant

58

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and
is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. Mr. Vaughn has over twenty-five years of
accounting, finance and operations experience. Mr. Vaughn holds a B.S. in Business Administration from Stonehill College.

J. Marcus Payne.Mr. Payne has served as a member of our board of directors since our inception. Mr. Payne is a
senior partner and managing director of Parrington Associates Limited. Parrington provides consulting and management expertise to its clients in their international telecom ventures. In 1988,
Mr. Payne founded InnerAsia Consulting Group, the predecessor to Parrington. Mr. Payne received a law degree from the Law School of The University of Western Ontario in London, Ontario,
Canada. Mr. Payne is a member of our audit committee, compensation committee and nominating committee.

Kevin West.Mr. West has served as a member of our board of directors since our inception. Mr. West joined
Vodafone Retail in the United Kingdom in May 1998 and since that time has held various senior Information Technology roles within Vodafone's U.K. organization. Until March 2002,
Mr. West served as the director of Business Systems for Vodafone U.K. In October 2002, he was appointed to lead Business Systems Development, which combined all the various IT functions
across the Vodafone U.K. organization. He currently represents Vodafone U.K. on the Vodafone Global CIO Council, which is responsible for setting Information Technology direction and strategy across
the Vodafone organization. Prior to joining Vodafone in 1998, Mr. West held senior IT positions for Superdrug Stores PLC, which is part of the Kingfisher Group, and with IBM and British
Telecom. Mr. West studied Telecommunications at Merton College in the United Kingdom.

Anthony Warrender.Since 1983, Mr. Warrender has been the president of Warrender Associates, Inc., a private
financial consultancy and investment business based in Virginia. Prior to 1983, Mr. Warrender was a Vice President (investment banking) of J. Henry Schroder Corporation in New York. He has also
served since 1987 as an executive director and chief financial officer of Taylor, Harris Insurance Services, Ltd, a privately-owned equine insurance agency. From October 1997 through
November 2002, he
also served as a non-executive director and chairman of the audit committee of the board for Oxus Mining PLC, a gold and base metals mining company operating in Central
Asia.Mr. Warrender graduated with a M.A. from Christ Church, Oxford and is a Fellow of the Institute of Chartered Accountants in England and
Wales. Mr. Warrender is a member of our audit committee, compensation committee and nominating committee.

Mark Scully.Mr. Scully has served as the chief executive officer and president of Vistula USA, Inc. from its
inception in February 2004. Mr. Scully has significant experience as a senior executive in the telecommunications industry. From February 2001 through December 2003, he was
the president and chief executive officer of TelcoXchange Network, Inc., an international voice and data carrier primarily serving the Asian market. From February 2001 through
December 2002, he also served as a director of Boathouse Communications Partners LLC, a hybrid private equity and senior management consultancy firm focused on telecommunications and technology
ventures. From March 1997 through June 2000, Mr. Scully served as the chief financial officer of New Global Telecom, a telecommunications services company providing, installing
and managing international telecommunications networks. From October 1994 through December 1996, he served as president and chief operating officer of US Wats, Inc., a regional
interexchange telecommunications company and from November 1987 through October 1994, served as chief financial officer of Call America Business Communications, a regional interexchange
and enhanced telecommunication services provider. Mr. Scully holds a Masters degree in International Business Administration from the Monterey Institute of International Studies and a Bachelors
degree from Pennsylvania State University.

Adam Bishop.Mr. Bishop has served as the president and chief executive officer of Vistula Limited, a wholly owned
subsidiary of VCS, since its inception in September 2002. Mr. Bishop has significant experience as a senior executive in the international telecommunications industry. From 1991

59

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to
1996, Mr. Bishop was a senior executive at British Telecom PLC. From 1997 to December 2001, Mr. Bishop served as the chief executive officer of Telemonde Inc., a
provider of international bandwidth and fiber pipes. Mr. Bishop also served as a director of Symposium Telecom Inc., a U.S. listed telecommunications company. Mr. Bishop has spent
over 20 years in the international communications field. Mr. Bishop graduated from London University with a degree in Physics.

Our
directors hold office until the next annual meeting of stockholders or until their successor is elected and qualified or until his or her earlier resignation or removal.

Each
executive officer serves at the discretion of the board of directors and holds office until his or her successor is elected and qualified or until his or her earlier resignation or
removal. There are no family relationships among any of our directors and executive officers.

Committees of the Board of Directors

The board of directors currently has three standing committees. The board of directors has an audit committee which is responsible for overseeing all of our
financial and legal and regulatory compliance functions, including matters relating to the appointment and activities of our independent registered public accounting firm, audit plans and procedures,
various accounting and financial reporting issues and changes in accounting policies, and reviewing the results and scope of the audit and other services provided by our independent registered public
accounting firm. The audit committee has adopted a written charter.

The
board of directors also has a compensation committee responsible for determining the compensation of our executive officers. The compensation committee also intends to adopt a
written charter. The board of directors has also established a nominating committee. The purpose of the nominating committee is to identify individuals qualified to become members of the board, to
recommend director nominees for each annual meeting of stockholders and nominees for election to fill any vacancies on the Board of Directors and to address related matters.

Currently,
two of our outside directors, Mr. Warrender and Mr. Payne, serve as members of the Audit Committee, the Compensation Committee and the Nominating Committee.
Although the Board of Directors has not determined that any member of the Audit Committee is an "audit committee financial expert," as defined in the rules adopted by the Securities and Exchange
Commission, the Board of Directors has determined that each Audit Committee member has sufficient knowledge in financial and auditing matters to discharge the responsibilities of the Audit Committee.

Code of Ethics

The Board has approved and we have adopted a Code of Business Conduct and Ethics (the "Code"), applicable to all of our directors, officers and employees. The
Audit Committee is responsible for reviewing and approving or rejecting all requested waivers to the Code, as such waiver(s) may apply to the Company's Chief Executive Officer, Chairman, principal
financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to post our Code of Business Conduct and Ethics to our website
(http://www.vistula.com) as soon as practicable, and until such time, we undertake to provide any person without charge, upon request, a copy of the Code. Persons interested in obtaining a copy of the
Code are directed to send a written request to the Company at the following address: Suite 801, 405 Park Avenue, New York, New York 10022, Attn: Audit Committee.

Section 16(a) Beneficial Ownership Reporting

Section 16(a) of the Securities and Exchange Act of 1934 requires the Company's Officers and Directors and persons who own more than ten percent (10%) of a
registered class of the Company's

60

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equity
securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Such Officers, Directors, and stockholders are required by SEC regulations
to furnish the Company with copies of all such reports that they file.

Based
solely on a review of the Forms 3, 4 and 5, and amendment thereto and written representations provided to us, we believe that during the fiscal year ended December 31, 2004,
the following reporting persons filed late reports:



ITEM 10. EXECUTIVE COMPENSATION

Director Compensation

We pay our non-employee directors an annual fee of $25,000. The non-employee directors will also receive a fee of $1,000 for any regular
or special meeting attended, or $500 for each telephonic meeting in which the director participated, for any meeting in excess of five meetings in any year. The meeting fees for the first five
meetings of a year will be included within the annual fee paid to the director.

We
also pay each non-employee director who serves as the chair of the audit committee an additional annual fee of $10,000 and each non-employee director who
serves as the chairman of the compensation and nominating committees an annual fee of $5,000. The other non-employee members of these committees will receive an annual fee of $2,500 for
serving on the committee. The non-employee directors will also receive a fee of $600 for any regular or special meeting of a committee attended, or $300 for each telephonic meeting of a
committee in which the director participated, for any meeting in excess of three meetings in any year. The meeting fees for the first three meetings of a year will be included within the annual
committee fee paid to the directors.

Directors
who are not employees may also receive stock option grants under our option plan. We will also reimburse directors for out-of-pocket expenses incurred
in attending board and committee meetings and undertaking certain matters on our behalf. If one of our non-employee directors spends a day outside of his or her own office in furtherance
of our business, we will pay the director a per diem payment of $1,000. Directors who are our employees will not receive separate fees for their services as directors.

61

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Executive Officer Compensation

Summary Compensation Table

The following table provides summary information concerning the compensation earned by our chief executive officer and our other executive officers for services
rendered for the fiscal years ended December 31, 2004, December 31, 2003 and December 31, 2002.

|                                                                                                |  |                |  |   |             |     |   | Long-Term
Compensation | 
|----------------------------------------------------------------------------------------------- |  | -------------- |  | - | ----------- | --- | - | ---------------------- | 
|
|
|
|Rupert Galliers-Pratt
President, Chief Executive Officer and Chairman of the Board of Directors |  | 2004
2003
2002 |  | $ | 0
0
0       |     | $ | 0
0
0                  | 
|George R. Vaughn
Chief Financial Officer, Assistant Treasurer and Secretary                     |  | 2004
2003
2002 |  |   | 54,809
0
0  | (3) |   | 0
0
0                  | 
|Adam Bishop
President, Vistula Limited                                                          |  | 2004
2003
2002 |  |   | 27,500
0
0  | (4) |   | 0
0
0                  | 
|Mark Scully
President, Vistula USA, Inc.                                                        |  | 2004
2003
2002 |  |   | 120,000
0
0 | (5) |   | 0
0
0                  | 
|Christopher S. Burke (1)
President and Chief Executive Officer                                  |  | 2004
2003
2002 |  |   | 0
0
0       |     |   | 0
0
0                  | 

---

62

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Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

|Name                  |  | Number of
Securities Underlying Options/SARs
Granted(#) |  | Percent of Total
Options/SARs
Granted to
Employees in Fiscal Year |   | Exercise or Base Price($/Sh) |     | Expiration Date
|--------------------- |  | ------------------------------------------------------- |  | ----------------------------------------------------------------- | - | ---------------------------- | --- | ---------------
|Rupert Galliers-Pratt |  | 0                                                       |  |                                                                  |   |                              |    |                
|George R. Vaughn      |  | 0                                                       |  |                                                                  |   |                              |    |                
|Adam Bishop           |  | 0                                                       |  |                                                                  |   |                              |    |                
|Mark Scully           |  | 2,750,000                                               |  | 58                                                                | % | $                            | .10 |                
|Christopher S. Burke  |  | 2,000,000                                               |  | 42                                                                | % | $                            | .10 |                



On January 1, 2004, we entered into an employment agreement with Mark Scully, the president of Vistula USA and one of our named executive officers. The
employment agreement was amended and restated on May 5, 2004. The amended and restated employment agreement has a term of 18 months. The terms of his employment agreement provide that
Mr. Scully will receive a base salary at a monthly rate of $10,000 and he will be entitled to an annual bonus based on Vistula USA meeting certain performance milestones based on its gross
profit margin. Mr. Scully will also receive a severance payment equal to six months of base salary if he is terminated without cause by Vistula USA.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

At the close of business on March 28, 2005, there were issued and outstanding 25,179,406 shares of our common stock. The following table provides
information regarding beneficial ownership of our common stock as of March 28, 2005 by:



The
persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of shares listed as beneficially
owned does not constitute an admission of beneficial ownership. Shares beneficially owned include shares that may be purchased through the exercise of options that vest within 60 days of
March 28, 2005.

Shares Beneficially OwnedName/Address of Beneficial OwnerNumber

PercentRupert Galliers-Pratt(1)
Mawley Hall, Cleobury Mortimer
Worcestershire, DY14 8PN, United Kingdom;

13,410,000

53.3
%Executive Management Services Limited
Palm Chambers No.4
Fishlock Road
Road Town
Tortola, British Virgin Islands

9,000,000

35.7
%


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Oneta Associates, Inc.
The Pasea Estate
Road Town
Tortola, British Virgin Islands

6,200,000

24.6
%Gryphon Master Fund L.P.
100 Crescent Court
Suite 490
Dallas, Texas 75201

2,333,332

8.5
%Mark Scully(2)
859 Ophir Peak Road
Incline Village,
Nevada 89451

2,200,000

8.0
%George Galliers-Pratt
Mawley Hall, Cleobury Mortimer
Worcestershire, DY14 8PN, United Kingdom

1,350,000

5.4
%Adam Bishop(3)
44 Kenilworth Road
London W1H 6LT, United Kingdom

500,000

2.0
%J. Marcus Payne(4)
5315 N. Clark Street
Chicago, Illinois 60640

175,000

*Anthony Warrender(5)
4392 Carrington Road
Markham, Virginia 22643

160,000

*Kevin West(6)
52 Briavels Court, Downs Hill Rd
Epsom, Surrey, KT18 5HP, United Kingdom

100,000

*George R. Vaughn(7)
639 Granite Street
Braintree, MA 02184

0

*Christopher Burke
Greenmarsh Farm
Bix, Henley-on-Thames Oxon, UK, RG9 4Ry

200,000

*All current directors and executive officers as a group (7 persons)

16,545,000

60.3
%


---

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth certain information as of December 31, 2004, regarding securities authorized for issuance under our equity compensation
plans, including individual compensation arrangements.

|Plan Category                                              |       | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights |           | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |     | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
|---------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders     |       | 4,825,000                                                                                   |           | $                                                                           | .10 |                                                                                             
|Equity compensation plans not approved by security holders |       |                                                                                            |           |                                                                             |    |                                                                                             
|                                                           |       |                                                                                             |           |                                                                             |     |                                                                                             
|                                                           | Total |                                                                                             | 4,825,000 |                                                                             | $   | .10                                                                                         
|                                                           |       |                                                                                             |           |                                                                             |     |                                                                                             

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

One of our subsidiaries, Vistula Limited, has agreed to unconditionally guarantee the obligations of one of our principal stockholders under a credit facility
established in the name of the stockholder. For more information, see "PART II, Item 6. Management's Discussion and Analysis of Financial Condition and Results of
OperationsOff-Balance Sheet Arrangements."

On
March 2, 2004, we purchased all of the issued and outstanding ordinary shares of Cardlink and all of the issued and outstanding ordinary shares of Vistula. We issued an
aggregate of 23,885,000 shares of common stock to the former shareholders of Vistula and Cardlink in exchange for all of the shares of Cardlink and Vistula. Mr. Rupert-Galliers-Pratt, the
chairman of our board and our president and chief executive officer, and his affiliates, controlled Vistula and Cardlink prior to this transaction.

On
May 5, 2004, we sold 100,000 shares of our common stock to Mr. Anthony Warrender, one of our directors, for a total consideration of $5,000. On May 5, 2004, we
also issued an option to purchase 75,000 shares of our common stock to Mr. Warrender.

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On
May 5, 2004, we issued an option to purchase 1,250,000 shares of our common stock to Mr. Mark Scully, one of our named executive officers. VCS and our wholly owned
subsidiary, Vistula USA, are parties to an amended and restated employment agreement with Mr. Scully pursuant to which Mr. Scully is employed as the president of Vistula USA, Inc.
Pursuant to the amended and restated employment agreement, we are obligated to issue an additional option to Mr. Scully to purchase up to 1,500,000 shares of our common stock. For more
information regarding these options and this employment agreement, see "Item 10. Executive Compensation."

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, 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, 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.

ITEM 13. 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 20, 2004.                                                                                                            
|4.1(3)         |  | Form of 8% Convertible Debenture                                                                                                                                                                                                 
|4.2(3)         |  | Form of Common Stock Purchase Warrant                                                                                                                                                                                            
|4.3(4)         |  | Promissory note issued on March 15, 2005 by Vistula Communications Services, Inc. to MRS Partners LLC.                                                                                                                           
|10.1(1)(5)     |  | Vistula Communications Services, Inc. 2004 Stock Incentive Plan.                                                                                                                                                                 
|10.2(1)(5)     |  | 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.                                                  
|               |  |                                                                                                                                                                                                                                  

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|10.3(1)(5) |  | 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)(5) |  | 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)(5) |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Mark Scully.                                                                                             
|10.6(1)(5) |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Edward DeMent.                                                                                           
|10.7(1)(5) |  | Non-Statutory Stock Option, dated as of May 5, 2004, by and between Vistula Communications Services, Inc. and Eric Pomeroy.                                                                                            
|10.8(1)    |  | Telehouse FM Services Agreement, dated as of September 3, 2003, by and between Vistula Limited and Telehouse International Corporation of Europe Limited.                                                              
|10.9(1)    |  | Preferred Partner Agreement, dated as of December 16, 2003, by and between Vistula Limited and Telstra Europe Limited.                                                                                                 
|10.10(1)   |  | Resale Agreement, dated as of September 4, 2003, by and between Vistula Limited and Telstra Europe Limited.                                                                                                            
|10.11(1)   |  | Reciprocal International Telecommunications Services Carrier Agreement, dated as of January 20, 2004, by and between Vistula Limited and SwissFone Inc.                                                                
|10.12(1)   |  | Service Agreement, dated as of September 1, 2003, by and between Vistula Limited and iBasis Global, Inc.                                                                                                               
|10.13(1)   |  | Qwest Wholesale Services Agreement, dated as of February 27, 2004, by and between Vistula Limited and Qwest Communications Corporation.                                                                                
|10.14(1)   |  | Reciprocal Telecommunications Services Agreement, dated as of January 23, 2004, by and between Vistula Limited and Teleglobe International Ltd.                                                                        
|10.15(1)   |  | Primus Telecommunications Limited Carrier Services Agreement, dated as of February 16, 2004, by and between Vistula Limited and Primus Telecommunications Limited.                                                     
|10.16(1)   |  | Reciprocal Telecommunications Services Agreement, dated as of December 2, 2002, by and between Vistula Limited and Bharti Telesonic Ltd.                                                                               
|10.17(1)   |  | International Switched Telecommunications Services Agreement, dated as of August 8, 2003, by and between Vistula Limited and Elitetele SA.                                                                             
|10.18(1)   |  | Global IP Network Service Agreement, dated as of February 10, 2004, by and between Vistula Limited and NTT Europe Ltd.                                                                                                 
|10.19(1)   |  | Reciprocal International Carrier Service Agreement, dated as of April 15, 2004, by and between Vistula Limited and KDDI America, Inc.                                                                                  
|10.20(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.                                                  
|10.21(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.
|           |  |                                                                                                                                                                                                                        

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|10.22(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23(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.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.24(2) |  | Letter Agreement, dated September 9, 2004, by and between NetYantra Inc., NetYantra India Pvt. Ltd. and Vistula Communications Services, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.25(3) |  | Securities Purchase Agreement dated February 18, 2005 by and among Vistula Communications Services, Inc. and Bushido Capital Master Fund, L.P., Oxford Capital Management, LLC, Stratford Partners, L.P., Gryphon Master Fund, L.P., Little Wing, L.P.,
Gamma Opportunity Capital Partners L.P., GSSF Master Fund, L.P., Tradewinds Fund Ltd., Professional Traders Fund, LLC DKR SoundShore Oasis Holding Fund Ltd., DKR SoundShore Strategic Holding Fund Ltd., Michael S. Urban and Sherry Urban, Murray
Chernick, Scott A. Craven, Valor Capital Management, LP, Keith Barksdale, and Edward Neugeboren.                               
|10.26(3) |  | Registration Rights Agreement dated February 18, 2005 by and among Vistula Communications Services, Inc. and Bushido Capital Master Fund, L.P., Oxford Capital Management, LLC, Stratford Partners, L.P., Gryphon Master Fund, L.P., Little Wing, L.P.,
Gamma Opportunity Capital Partners L.P., GSSF Master Fund, L.P., Tradewinds Fund Ltd., Professional Traders Fund, LLC DKR SoundShore Oasis Holding Fund Ltd., DKR SoundShore Strategic Holding Fund Ltd., Michael S. Urban and Sherry Urban, Murray
Chernick, Scott A. Craven, Valor Capital Management, LP, Keith Barksdale, and Edward Neugeboren.                               
|10.27(3) |  | Placement Agent Agreement dated February 15, 2005 by and between Vistula Communications Services, Inc. and IndiGo Securities, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.28(3) |  | Escrow Agreement dated February 18, 2005 by and among Vistula Communications Services, Inc., IndiGo Securities, LLC, Feldman Weinstein LLP, Bushido Capital Master Fund, L.P., Oxford Capital Management, LLC, Stratford Partners, L.P., Gryphon Master
Fund, L.P., Little Wing, L.P., Gamma Opportunity Capital Partners L.P., GSSF Master Fund, L.P., Tradewinds Fund Ltd., Professional Traders Fund, LLC DKR SoundShore Oasis Holding Fund Ltd., DKR SoundShore Strategic Holding Fund Ltd., Michael S. Urban
and Sherry Urban, Murray Chernick, Scott A. Craven, Valor Capital Management, LP, Keith Barksdale, and Edward Neugeboren.
|10.29(4) |  | Second Amendment to Asset Purchase Agreement dated as of March 15, 2005, by and between Vistula Communications Services, Inc., MRS Partners LLC, Manuel Vierra, Pepper Snyder, Steven Ziswassser, Seymour Ziswasser and Kirk Rossman.                                                                                                                                                                                                                                                                                                                                                                                                      
|21.1(1)  |  | List of Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|31.1*    |  | Certification by Rupert Galliers-Pratt 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.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|32.1* |  | Certification by Rupert Galliers-Pratt 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.     

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Aggregate fees for professional services rendered for the Company by Vitale, Caturano & Company, Ltd. for the years ended December 31, 2004
and December 31, 2003, were:

2004

2003Audit

$
98,000

$
98,800Audit Related


39,000


15,000Tax





All Other





Total

$
137,000

$
113,800


The
Audit fees for the years ended December 31, 2004 and 2003 were for professional services rendered for the audits of the consolidated financial statements of the Company and
statutory audits and reviews.

The
Audit Related fees for the years ended December 31, 2004 and 2003 were for professional services rendered in connection with consents and assistance with review of
registration statements filed with the Securities and Exchange Commission ("SEC"), for consultations concerning financial accounting and reporting standards, and audits of business combinations.

The
percentage of hours expended on Vitale, Caturano & Company, Ltd.'s engagement to audit our financial statements that were performed by other than Vitale, Caturano &
Company, Ltd.'s full-time permanent employees did not exceed 50%.

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Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

At present, it is the practice of our board of directors to approve each engagement for audit or non-audit services before we engage our independent
registered public accounting firm to provide those services. Our board of directors has established pre-approval policies and procedures in accordance with SEC regulations, describing the
specific audit, audit-related, tax and all other services that have been pre-approved by the board of directors. The term of any general pre-approval is 12 months from
the date of pre-approval, unless our board of directors specifically provides for a different period. Our board will annually review the pre-approval policies and procedures
and the services that may be provided by our independent registered public accounting firm, and will revise the list of pre-approved services from time to time based on subsequent
determinations.

None
of the services provided by our independent registered public accounting firm for the year ended December 31, 2004 was obtained in reliance on the waiver of the
pre-approval requirement afforded in SEC regulations.

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SIGNATURES

In accordance with Section 13 or 15(d) 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.
| |  | -------------------------------------
| |  | By:                                  
| |  | Date: March 31, 2005                 

In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

| |  | By:                  |  | /s/RUPERT GALLIERS-PRATTRupert Galliers-Pratt
Title: President, Chief Executive Officer and Chairman of the Board of Directors
| |  | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
| |  | Date: March 31, 2005
| |  | By:                  |  | /s/GEORGE R. VAUGHNGeorge R. Vaughn
Title: Chief Financial Officer                                                            
| |  | Date: March 31, 2005
| |  | By:                  |  | /s/J. MARCUS PAYNEJ. Marcus Payne
Title: Director                                                                             
| |  | Date: March 31, 2005
| |  | By:                  |  | /s/ANTHONY WARRENDERAnthony Warrender
Title: Director                                                                         
| |  | Date: March 31, 2005
| |  | By:                  |  | Kevin West
Title: Director                                                                                                    
| |  | Date:               

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