**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the Fiscal Year Ended: December 31, 2006**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**




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





**Title
                of Class**
              None
            **Name
                of each exchange on which registered**
              Not
                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 x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B 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. x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.)


Yes o No x




The
      issuer’s revenues for its most recent fiscal year were $1,091,899.




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: $3,051,297.




**APPLICABLE
      ONLY TO CORPORATE REGISTRANTS**




As
      of
      April 6, 2007, there were 66,964,898 shares of the issuer's common stock
      outstanding.




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












**VISTULA
      COMMUNICATIONS SERVICES, INC.**





**FORM
      10-KSB**





**TABLE
      OF CONTENTS**





**PART
                I**Item
                1.
            
            Description
                of Business
            2Item
                2.
            
            Description
                of Property
            9Item
                3.
            
            Legal
                Proceedings
            10Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            10**PART
                II**
            
            
            10Item
                5.
            
            Market
                for Common Equity and Related Stockholder Matters and Small Business
                Issuer Purchases of Equity Securities
            10Item
                6.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            11Item
                7.
            
            Financial
                Statements
            32Item
                8.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            33Item
                8a.
            
            Controls
                and Procedures
            33Item
                8b.
            
            Other
                Information
            33**PART
                III**Item
                9.
            
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            34Item
                10.
            
            Executive
                Compensation
            36Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            40Item
                12.
            
            Certain
                Relationships and Related Transactions
            42Item
                13.
            
            Exhibits
            42Item
                14.
            
            Principal
                Accountant Fees and Services
            48










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.








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 Ô are
      trademarks of Vistula Communications Services, Inc. or its subsidiaries. All
      other trademarks are the properties of their respective owners.










1




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**Issuer’s
      Structure**





Vistula
      Communications Services, Inc. (“VCS,” the “Company,” “Vistula Companies,” “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 ). Since its
      acquisition by VCS
      in
      March 2004, Cardlink
      has been inactive. We expect to dissolve Cardlink by the end
      of
      2007.




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.




In
      2005,
      VCS established Vistula Communications Services SA (Pty) Ltd. (“Vistula SA”), a
      company incorporated under the laws of South Africa and which is 60% owned by
      VCS. Vistula
      SA has not generated any revenue and we
      expect to
      dissolve Vistula
      SA before
      the end of 2007.





On
      October 11, 2006, VCS acquired 100% of the outstanding
      shares of Goodman Blue Limited (“Goodman Blue”), a company incorporated under
      the laws of England and Wales,
      for 2,500,000 shares of our common stock,
      subject to an option to require the Company to repurchase the shares of common
      stock for an aggregate purchase price of $2,500,000





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 and
      London, England. 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.  Our
      goal
      is to provide state-of-the-art software and high-margin services to
      telecommunications carriers, service providers, network operators, and large
      scale distributors. Our
      principal business is carried out through our wholly-owned subsidiaries, Vistula
      and Goodman Blue.





*Voice
      over Internet Protocol Services.* Our core
      product offering is the V-CubeTM, 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.
      Through the V-CubeTM platform, we offer a tailored software set that enables
      carriers, service providers, transit network operators, and large information
      technology (“IT”) distributors to roll out a range of managed Voice over
      Internet Protocol, or “VoIP,” based product and service offerings to their
      customers. Our recently acquired Order-to-Cash (“O2C”) software portal is being
      used, as described below, to automate the sign-up and delivery of the V-CubeTM
product to our customers.




2


VoIP
      enables the transmission of voice packets over the
      Internet by converting voice into data, transmitting the
      data over the
      Internet, and then reconverting the
      data 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 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 to the Internet can be
      used
      to connect to any number of different and changing carrier
      partners.





We
      face
      significant competition from companies providing similar IP-PBX and IP Centrex
      platforms. While we believe that the V-CubeTM platform has significant advantages
      over these competitive technologies, some of our competitors, such as Broadsoft,
      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 we have and possess significant existing customer
      bases.





However,
      we believe that our V-CubeTM offering has several advantages, including the
      following:




·
            It
                is a comprehensive solution supporting an extensive set of features
                and
                services including voice, video, Short Message Service (“SMS”), fax,
                instant messaging, presence management, email, interactive voice
                response,
                conferencing, and unified communications with real time prepaid and
                post-paid billing;




·
            It
                is flexible enough to provide carriers and service providers with
                the
                ability to create new services and features to enable them to respond
                to
                changing customer requirements (including number of users) and market
                demands; and




·
            It
                enables faster delivery of personalized services, such as multi-level
                administrative access for the management of internal
                extensions.




During
      the fourth quarter of 2006, we completed the development of an internal consumer
      VoIP portal that sits in front of the V-CubeTM engine to deliver a low cost
      consumer VoIP service for our telecommunication (“Telco”) and Internet Service
      Provider (“ISP”) clients to launch into their markets. This product comprises a
      no-touch registration, sign-up and payment system to enable our clients’
customers to become VoIP telephony users. The service is specifically designed
      for single user consumers rather than the full business IP-PBX. This adds an
      important product capability to our portfolio and one that will be sold
      alongside the full V-CubeTM IP-PBX to all our customers.




*O2C* *.* On
      October 11, 2006, we acquired Goodman Blue, which develops software systems
      to
      automate the delivery of complex multi-tiered products through web portals
      that
      guide clients through sign-up, delivery, implementation and billing. We use
      this
      software as an ordering and provisioning portal for the V-CubeTM product which
      establishes an automated sign-up and installation process for V-CubeTM customers.
      This software allows for installations of up to several thousand new users
      each
      month in comparison to previous capabilities of several hundred users each
      month
      without this software portal. As well as interfacing to Vistula’s V-CubeTM
platform the O2C portal also interfaces to and interacts with billing and
      business process systems that already exist within a client’s business. Due to
      the unique nature of each customer’s IT environment, there is often development
      work required, for which Goodman Blue receives fees, before the portal is
      operational for the customers.




*Wholesale
      Voice Services.* We
      have a
      switching facility in Los Angeles which allowed us to terminate wholesale voice
      services. On
      January 31, 2007, a piece of the Los Angeles based equipment failed, rendering
      the equipment inoperable, and has not been repaired as of the date of this
      Form
      10-KSB. Management is in the process of evaluating the cost to repair this
      equipment. We plan to repair the failed equipment when the Company secures
      revenue to be passed through this switching facility and can allocate funds
      to
      make necessary repairs. Effective
      as of January 1, 2007, our switching equipment in London (“UK Lucent Switch”) was sold to
      a
      third party in
      exchange for three years of free use of the switch, and for the buyer to assume
      all costs associated with the switching facility . The
      wholesale voice services being provided from the Los
      Angeles equipment were re-routed to the London switching equipment. The sale of the London switch
      does
      not effect the level of revenues recorded by Vistula as we continue to run
      wholesale voice services through the switching facility under our
      agreements.




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. As
      a result operators, including the world’s largest country carriers tend
      to buy
      their international telephony routes on the open market. The potential 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. Because
      executives and staff have been focused on the commercialization of the
      V-CubeTM product offering, and due to the working capital limitations
      that we have been experiencing since our inception, we have experienced decreases in revenue from quarter to quarter over the 2006 fiscal
      year from our wholesale voice services as a stand alone business, and expect
      further decreases in revenue from wholesale voice services as a stand alone
      business into the 2007 fiscal year.




3




**Material
      Developments in 2006**




On
      October 11, 2006, the Company completed the acquisition of Goodman Blue, see
      Note 6 to the financial statements included in Item 7. The acquisition
      was made pursuant to a share purchase agreement (the “Purchase Agreement”) with
      the sole stockholder of Goodman Blue. Pursuant to the Purchase Agreement, the
      Company purchased all of
      the outstanding shares of Goodman Blue for consideration consisting of 2,500,000
      shares of the Company’s common stock, $.001 par value per share subject to an
      option to require the Company to repurchase the shares for an
      aggregate purchase price of $2,500,000 in certain circumstances. Immediately
      following the closing, we sold Goodman Blue customer contracts to a third party
      for a price equal to the asset value with the purchaser of the customer
      contracts and entered into an agreement to provide support services for the
      contracts sold for a minimum period of eighteen months at an annual rate of
      approximately $900,000.




On
      June
      7, 2006, the Company completed the acquisition of certain assets of NetYantra
      Inc. and NetYantra India Pvt Ltd. (collectively, “NetYantra”) for an aggregate
      purchase price of $ 8,800,000 in cash, 14,000,000 shares
      of the Company’s common stock (the “Share Consideration”) and the outstanding
      prepaid amount ($399,189) for royalties due on future net revenues that were paid
      under the terms of the distribution and marketing agreement described in Notes
      12 and 13 to the financial statements included in Item 7. The acquisition was
      made pursuant to an asset purchase agreement by and amon g
      Vistula
      and NetYantra dated April 28, 2006, as amended on May 11, 2006 and further
      amended on June 7, 2006 (the “Purchase Agreement”). The acquired assets include
      NetYantra’s VoIP IP-PBX platform software and associated intellectual property.
      The Company had previously distributed this software as its V-CubeTM VoIP IP-PBX
      platform offering under the distribution and marketing agrement with NetYantra
      described in Notes 12 and 13 to the financial statements included in Item
      7.




On
      May
      22, 2006, the
      Company sold 16,300,000 units consisting of one share of common stock and eight-tenths of one warrant to
      acquire one share of common stock. The
      effective purchase price of the
      units was $1.00 per unit. In exchange for the units sold, the Company received
      gross cash proceeds of $16,300,000. The Company issued warrants for 13,040,000
      common stock shares exercisable until May 22, 2011
      at
      an exercise price of $1.00 per share. CRT
      Capital Group LLC (“CRT”) acted as the placement agent in connection with the
      offering. The aggregate commissions
      payable to CRT in connection with the private placement were approximately
      $978,000. In addition, the Company issued warrants to CRT to
      purchase 1,467,000 shares of common stock similar to those sold to the
      investors. The
      Company realized net proceeds from the sale of units, after deducting placement
      agent fees and expenses, of approximately $15,200,000. The Company used a
      portion of these proceeds to purchase the software and intellectual property
      rights of NetYantra’s V-CubeTM IP-PBX platform as described above ($ 8,800,000 );
      pay
      the outstanding principal, interest and fees related to the revolving credit
      agreement with Indigo Investments I LLC described below ($ 1,500,000 );
      and
      pay the outstanding principal and interest related to a promissory note for
      equipment to MRS Partners LLC ($ 800,000 ).




On
      March
      30, 2006 the Company entered into a revolving credit agreement with Indigo
      Investments I LLC that provided for up to $5,000,000 in advances to be available
      to the Company. Upon the closing of this credit facility, $1,250,000 was
      advanced to the Company. Outstanding principal under this credit facility bore interest at a rate of
      1.5%
      per month .
      In
      addition, the Company was required to pay the lender a 2.25% commitment fee
      on
      the total amount of the credit facility and issue the lender a five-year warrant
      to purchase up to 500,000 shares of common stock at an exercise price of $1.50
      per share. The exercise price of the warrant is subject to adjustment in certain
      circumstances. All outstanding principal and interest
      on the credit facility plus the commitment fee, as well as an early repayment
      fee equal to 2.25% of the total amount of the credit facility was paid upon the
      closing of the financing described above .




**Material
      Developments** **in
      2007**




On
      April
      6, 2007 we completed a convertible note and
      warrant financing
      for gross
      proceeds of $2,500,000 which will be used in part for payments due to existing creditors
      and
      funding our working capital needs. The notes are convertible into common shares
      at a conversion price of $1.00 per share. The
      investors were also issued a
      total of 2,500,000 warrants to purchase common stock ,
      which
      expire in five years, and have an exercise price of $1.00 per share. We
      paid
      fees of $ 56,000 and
      issued warrants to
      purchase 1,400,000 shares of our common stock ,
      with
      similar terms to the warrants issued to the investors, to placement
      agents. As part of the financing, Executive Management Services Limited (“EMS”),
      an entity of which Mr. Galliers-Pratt is a beneficiary, is transfering an
      aggregate of 5,000,000 shares of our common stock to the investors subsequent
      to
      the closing .




On
      February 2, 2007, Vistula signed a distribution agreement with Northamber PLC
      (“Northamber”) to sell its IP-PBX solutions to customers of Northamber in the
      United Kingdom. Northamber
      is a
      long established and large trade-only distributor of IT products and equipment in the
      UK .
      Northamber will offer a hosted IP-PBX product using our V-CubeTM platform. The
      hosted IP-PBX product will be sold via Northamber's network
      of 6,000 distributors and master
      agents in the
      UK. Under the agreement we will host the service and provide Tier 2 and Tier
      3
      level support to Northamber's distributors and customers. The first V-CubeTM customer
      of Northamber is expected to be procured in the second quarter of 2007. We will
      receive an installation fee and an annual license
      fee from the distributor for each customer when the customer begins using the
      V-CubeTM services. The fee will be based on blocks of user licenses
      sold.




4




**Vistula,
      Vistula USA** **,
      and Goodman Blue**




*Overview.* Vistula,
      Vistula USA, and Goodman Blue 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, transit network operators, and distributors who distribute our
      V-CubeTM product to their customers. Vistula, Vistula USA, and Goodman Blue are
      collectively referred to in this annual report as the “Vistula Companies,” and
      sometimes individually as a “Vistula Company.”





The
      Vistula Companies’ core product offering is the V-Cube Ô ,
      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 Ô platform, developed by NetYantra
      and the O2C software
      portal, developed by Goodman Blue, Vistula offers a tailored software platform
      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. We
      entered into a distribution agreement with Northamber in February 2007 to
      distribute our hosted IP-PBX solution to its customers and we expect
      the first IP-PBX customers
      to be installed and operational in the
      second quarter of 2007.





The
      Vistula Companies have a switching facility in Los Angeles, which is inoperable
      as of the date of this Form 10-KSB, and free unlimited use of a switching
      facility in London through December 31, 2009, from the sale of our UK Lucent
      Switch, and interconnect agreements with suppliers and customers through direct
      and partner direct voice routes. If and when we repair the switch in Los
      Angeles, we expect to offer the use of these switching facilities at competitive
      rates to our V-CubeTM customers.




*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.





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
      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 and 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. A few examples are that
      on
      February 13, 2007, USA Today cited JupiterResearch as reporting that VoIP
      claimed approximately 150,000 users in 2002, increasing to approximately
      8,600,000 by the end of 2006, and that JupiterResearch expects approximately
      22,500,000 users by 2010. Datamonitor, a leading provider of online database
      and
      analysis services for key industry sectors, including technology, has reported
      recent studies that show that the VoIP market in Europe is expected to be worth
      GBP 1.4 billion in 2008, up from GBP 1.09 billion in 2005. IDC, a premier global
      provider of market intelligence, advisory services, and events for the
      information technology, telecommunications, and consumer technology markets
      reported through a white paper on VoIP stating its research has found that
      28%
      of large enterprises in Europe and the US have already adopted converged
      technologies and this will expand
      by
      2008 to 74%. In the UK, a British Telecom (“BT”) Convergence Report dated
      November 2005 found that 37% of UK small
      and
      medium enterprises, or “ SMEs ,” have
      adopted a fully converged network strategy and that a quarter of the UK SMEs
      that haven’t adopted a converged network plan to do so
      in the next two years.





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.





*The
      V-Cube* *Ô* *IP-PBX Platform.* The
      Vistula Companies’ core product, V-Cube Ô ,
      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 Ô platform, Vistula offers a tailored software set that enables telecommunications
      carriers, service providers and transit network operators to rapidly roll out
      a
      flexible range of managed VoIP-based product and service offerings to their
      customers. Under a distribution agreement with Northamber ,
      one of
      the most recognized distributors of telephony products in the United Kingdom,
      Vistula offers a hosted IP-PBX
      solution to the distributor for its customers.





5





Using
      the
      V-Cube Ô 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 and,
      through a hosted IP-PBX platform and a distribution agreement, Vistula will
      offer the V-CubeTM to customers in the United Kingdom and via similar channels to
      other international markets. The V-Cube Ô platform
      incorporates a real-time prepaid and post-paid billing engine enabling carriers
      to offer wholesale, retail, channel and pre-paid billing options.





In
      order
      to support our customers in acquiring and managing clients we have developed
      two
      portals. The “MyService” portal is an IP-PBX management portal that allows
      customers and sales channels to manage their PBXs (or clusters of PBXs) on
      a day
      to day basis. The “My Order” portal is a derivative of the Goodman Blue O2C
      system that allows clients to order and configure new IP-PBXs on-line. Both
      these portals are expected to go into operation under the distribution agreement with
      Northamber in the
      second quarter of 2007 .





The
      V-Cube Ô 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 Ô 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 Ô 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:





·
            Wholesale
                and retail voice minutes, national and international VoIP, Public
                Switched
                Telephone Network (“PSTN”) termination through standards-based gateways or
                partner service providers allowing for the exchange of VoIP
                minutes;





·
            Optional
                integration with existing customer PBX for VoIP-enabling PBX
                extensions;





·
            Prepaid
                and post-paid calling;





·
            Voice
                mail and voice mail email services;





·
            Conferencing
                services including conference bridge and scheduled conference
                applications; and





·
            Automatic
                call distribution, interactive voice response services, and dialer
                services (including an extensive set of features and reporting
                capabilities to support customer care
                centers).





*Advantages
      of V-Cube* *Ô*




·
            *The
                V-Cube**Ô**is the most comprehensive solution available in the market
                today.*The V-Cube platform supports an extensive set of features and services
                including voice, video, SMS, fax, instant messaging, presence management,
                email, interactive voice response, conferencing, and unified
                communications with real time prepaid and post-paid
                billing.





·
            *The
                V-Cube**Ô**is the only IP-PBX offering 3 dimensional scalability.*The V-CubeÔis
                the telecommunications industry’s first 5 GL (5th generation language)
                telecommunications platform. Its unique building block structure
                provides
                carriers and service providers with the ability to instantly create
                new
                services and features, enabling them to respond to changing customer
                requirements (including number of users) and market
                demands.





·
            *The
                V-Cube**Ô**platform enables multi-tiered network administration and
                customization.*The V-Cube platform enables faster delivery of personalized services.
                It
                allows customers to have multi-level administrative access for managing
                their internal extensions, users and services and end users to personalize
                and manage their individual accounts (for example, by logging in
                to view
                call data records (“CDR”), personalize call features and to review call
                flows).




6




·
            *The
                V-Cube**Ô**IP-PBX does not require proprietary hardware.*The V-CubeÔplatform does not rely upon any proprietary hardware and easily integrates
                with and supports third party databases and standards-based devices
                and
                legacy network equipment.





·
            *The
                V-Cube**Ô**provides a multi-tiered voice failover mechanism at process, server
                and
                cluster levels.*In
                the event of a hardware or network failure, a conference automatically
                switches over to an alternate routing across the Internet and/or
                the
                inherent back-up servers without the participants getting dropped.
                The
                V-CubeÔplatform enables high network availability and fault tolerance through
                hot
                swappable cluster configurations, media proxies and remote office
                sustainability components.





*The
      Vistula Companies* *O2C* *Software Portal.* On
      October 11, 2006, the Vistula Companies acquired Goodman Blue Limited (“Goodman
      Blue”), a United Kingdom company, and the developer of the O2C software
      portal. Goodman Blue develops software systems to
      automate the
      delivery of complex multi-tiered products through web portals that guide clients
      through sign-up, delivery, implementation and billing. When this portal is
      applied to our V-CubeTM product it enables several thousand user installations
      per month compared to several hundred installations without the portal and
      will
      allow us to meet the potential demand of the distributor for its customers
      in
      the United Kingdom and the potential volumes of new customers often demanded
      by
      Tier 1 carriers.





*Strategy* *of
      the Vistula Companies.*





*VoIP
      Strategy*





We
      began
      marketing the V-Cube Ô platform
      to telecommunications carriers, service providers and transit networks operators
      in 2005. In June 2006 we purchased the V-CubeTM software and intellectual
      property from the developer, which was previously being marketed and distributed
      under an exclusive license from the developer of the platform we acquired in
      2004, which allowed us 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 is being offered as a hosted solution to 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,
      and is being offered through a distributor in the United Kingdom.




In
      February 2007, Vistula signed a distribution agreement with Northamber to sell
      its IP-PBX solutions to customers of Northamber in the United Kingdom.
      Northamber is a
      long established and large trade-only distributor of IT products and equipment in the
      UK .
      Northamber will offer a hosted IP-PBX product using our V-CubeTM platform. The
      hosted IP-PBX product will be sold via Northamber's network of 6,000
      distributors and master
      agents in the
      UK. Under the agreement we will host the service and provide Tier 2 and Tier
      3
      level support to Northamber's distributors and customers. The first V-Cube customer
      of Northamber is expected to be procured in the second quarter of 2007. We will
      receive an installation fee and an annual license fee from the distributor
      for
      each customer when the customer begins using the V-CubeTM services. The fee will
      be based on blocks of user licenses sold.




We
      will
      use the O2C platform, developed by Goodman Blue, to automate the delivery of the V-CubeTM
product to the customers of Northamber. This platform enables several thousand
      user installations per month to meet the potential demand of the Northamber
      for
      its customers in the United Kingdom and the potential volumes of new customers
      often demanded by Tier 1 and Tier 2 carriers.





During
      2005 and 2006, we entered into several distribution and marketing agreements
      with telecommunications carriers in the United Kingdom, United States,
      Argentina, Mexico, and Venezuela as well as a pilot agreement in the United
      States. These agreements provide the carriers with a license to distribute user
      licenses for the V-CubeTM product to their customers in return for a monthly fee.
      Vistula collects a monthly fee from the carrier based on the number of
      individual user licenses at the various carrier’s customers who are using the
      VoIP services provided by the carrier through the use of the V-CubeTM platform
      and in some circumstances may also provide wholesale voice services to the
      carrier for a fee. We have not generated significant revenue from these
      agreements as we are dependent upon the individual carrier’s ability to
      effectively market and distribute the VoIP product. Although we will continue
      to
      enter into these types of agreements in the future, we are pursuing a strategy
      to generate revenues by contracting directly with telephony distributors, such
      as Northamber.





During
      the fourth quarter of 2006, we completed the development of a consumer VoIP
      portal that sits in front of the V-CubeTM to deliver a low cost consumer VoIP
      service for our telco and ISP clients to launch into their markets. This product
      comprises a no-touch registration, sign-up and payment system that enables
      our
      client’s customers to become VoIP telephony users. The service is specifically
      designed for single user consumers rather than the full business IP-PBX. This
      adds an important product capability to our portfolio and one that will be
      offered alongside the full V-CubeTM IP-PBX to all our customers. We currently are
      running a pilot program with a potential customer in the United States using
      the
      consumer VoIP portal .




7





*Wholesale
      Voice Services Strategy*





The
      company remains capable of providing wholesale voice services to customers,
      however, over the past year we have experienced diminishing revenues from these
      services as an independent source of revenue due to the focus of management
      on
      the commercialization of the V-CubeTM product offering and the working capital
      limitations which the Company has experienced and continues to experience.
      We
      plan on continuing to provide these services under the remaining interconnect
      agreements which do not require significant administrative effort on the
      Company’s behalf. We plan to offer wholesale voice services to customers as part
      of the V-CubeTM product package.




**Competition**





We
      face
      significant competition from companies providing similar IP-PBX and IP Centrex
      platforms. While we believe that the V-Cube Ô platform
      has significant advantages over these competitive technologies, some of our
      competitors, such as Broadsoft, Sylantro and NetCentrex, 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, Gamma Telecom,
      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.




**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 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
      research and development activities to date have been focused on the development
      of enhancements of our existing products, such as our V-CubeTM IP-PBX platform,
      new products, such as the consumer VoIP product, our internal software and
      billing platforms, and recently , development of the O2C software
      portal acquired in October 2006. We expect to pursue further research and
      development with respect to new products and services, enhancements of existing
      products, the O2C software
      portal, and the development of additional features and functionality for our
      existing products to the
      extent our cash position permits .





**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, 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.





8


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 Ô 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
      April 6, 2007, we had 19 full-time employees, 2 part-time employees, and 7
      consultants. Of our employees and consultants, 6 are engaged in sales and
      marketing, 5 are in technology research and development, 8 are in general and
      administrative and 9 are in operations. None of our employees are represented
      by
      a union. We believe our relationship with our employees and consultants is
      good.





**ITEM
      2. DESCRIPTION OF PROPERTIES**





We
      maintain our principal executive offices at Suite 801, 405 Park Avenue, New
      York, New York 10022. Our principal office occupies approximately 1,300 square
      feet of office space pursuant to a sublease that we entered into as of November
      1, 2005. The sublease has a term of 24 months and requires us to pay rent
      of approximately
      $6,500 per month. We made a
      payment on April 11, 2007, for outstanding rent payments for February and March
      2007 which were previously delinquent.





We
      also
      have an office in London, England occupying approximately 1,600 square feet of office space with a monthly cost
      of approximately
      $5,200 through December
      31, 2008.





Our
      subsidiary, Goodman
      Blue is
      located in Grantham, United Kingdom. We entered
      into a lease on
      November 3, 2006 for
      approximately 2,800 square feet of office space at
      a cost
      of about $4,000 a month. The lease expires on November 3, 2008.





We
      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 $4,000. The fees for use of the Grand Avenue facility,
      including the minimum rent, generally range between $4,000 and $6,500 per month
      depending on the level and nature of services used. The current term of the
      co-location agreement is through April 2007. This
      office houses our
      telecommunication switches. The switches are installed in rooms that are
      environmentally modified, cooled and designed for s witching
      equipment. These facilities have full battery backup for 24 hours in case of
      a
      power failure. As of the date of this Form 10-KSB we are delinquent in rent
      payments related to this facility.





9


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**





None.





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES**





**Market
      Information**





Our
      common stock has been quoted on the OTC Bulletin Board by The National
      Association of Securities Dealers, Inc. under the symbol “VSTL” since July 21,
      2005. Prior to that date there was no public market for our common stock. The
      following table provides, for the periods indicated, the high and low bid prices
      for our common stock.





**FISCAL
                YEAR 2005**
            
            **High**
            
            **Low**Third
                quarter (beginning July 21, 2005)
            
            $
            2.15
            
            $
            1.25Fourth
                quarter
            
            $
            2.20
            
            $
            1.15**FISCAL
                YEAR 2006**First
                quarter
            
            $
            1.42
            
            $
            1.05Second
                quarter
            
            $
            1.34
            
            $
            0.90Third
                quarter
            
            $
            1.19
            
            $
            0.65Fourth
                quarter
            
            $
            0.79
            
            $
            0.17





These
      over-the-counter market quotations reflect inter-dealer prices, without retail
      mark-up, mark-down or commission, and may not represent actual
      transactions.





**Number
      of Holders**





On
      December 31, 2006, we had approximately 64 holders of record of our common
      stock. This number does not include stockholders for whom shares were held
      in a
“nominee” or “street” name.





**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 our outstanding debt instruments. This restriction
      will
      remain in effect until the debentures and notes are repaid or converted in
      full.




10




**Compensation
      Plans**





The
      following table sets forth certain information as of December 31, 2006,
      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
            
            
            11,712,300
            
            $
            1.24
            
            
            5,977,700Equity
                compensation plans not approved by security holders
            
            
            _
            
            
            _
            
            
            _**Total**
            
            
            11,712,300
            
            $
            1.24
            
            
            5,977,700




*Amendment
      to 2004 Stock Incentive Plan.* On
      December 23, 2005, the board of directors approved an increase, from 8,000,000
      to 15,000,000, in the number of shares of common stock authorized under the
      Plan, on April 11 and 12, 2006 the board of directors approved an additional
      increase, from 15,000,000 to 18,000,000, and on June 21, 2006 the board of
      directors approved an additional increase, from 18,000,000 to 20,000,000, in
      the
      number of shares of common stock authorized under the Plan. The shareholders
      of
      the Company ratified these amendments to the Plan on July 17, 2006.





**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS AND PLAN 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 subsidiaries.





**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”) has four wholly-owned subsidiaries: Vistula Limited (“Vistula”), Vistula USA, Inc.
      (“Vistula USA”), Goodman Blue Limited (“Goodman Blue”) and
      Cardlink Services Limited (“Cardlink”), and has one subsidiary that is 60%
      owned, Vistula Communications Services SA (Pty) Ltd. (“Vistula SA” )
      (of
      these, principal operations are carried out through Vistula, Vistula USA and
      Goodman Blue as the other subsidiaries are dormant ).
      Through Vistula, Vistula USA and Goodman Blue we currently provide value-added
      telecommunications services (including direct and partner voice routing
      services) to Tier 1 and Tier 2 telecommunication carriers and transit operators.
      Beginning in the first quarter of 2005, through Vistula, Vistula USA, and
      Vistula SA we began to market our V-Cube Ô Voice
      over Internet Protocol, or “VoIP,” IP-PBX software platform to
      telecommunications carriers, ISPs, large
      corporations and SMEs, throughout the world. The V-CubeTM platform is a uniquely feature-rich IP-PBX,
      that facilitates full contact communication services including voice, video,
      conferencing, call center, multi/sub-domain and unified messaging across both
      enterprise and public networks.





We
      expect
      to dissolve Cardlink and Vistula SA by the end of 2007.
      Since its
      acquisition by VCS
      in
      March 2004, Cardlink
      has been inactive. Vistula
      SA has not generated any revenue .





11




***Vistula,
      Vistula USA, and Goodman Blue***





Vistula,
      Vistula USA, and Goodman Blue are aggregators of wholesale telecommunications
      services to Tier 1 and Tier 2 telecommunications carriers and transit network
      operators. Vistula, Vistula USA, and Goodman Blue are collectively referred
      to
      as the “Vistula Companies.” We believe the Vistula Companies are well positioned
      to deliver VoIP telephony services to Tier 1 and Tier 2 telecommunications
      carriers and transit network operators. The
      Vistula Companies have switching facilities in London and interconnect
      agreements with suppliers and customers which will be available for our V-CubeTM
customers for their traffic termination needs and by which we will continue
      to
      provide direct and partner direct voice routes.





The
      Vistula Companies began to actively market our V-Cube Ô IP-PBX
      platform to carriers, transit network operators, large corporations, and SMEs
      in
      the first 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 competitive and reliable VoIP
      solution.





In
      February 2007, Vistula signed a distribution agreement with Northamber to sell
      its IP-PBX solutions to customers of Northamber in the
      United Kingdom. As discussed in the Factors Affecting Future Performance, we
      are
      dependent upon Northamber’s historical proven success rate to be equally
      successful in the distribution of our V-CubeTM product to their
      customers.




**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.





We
      believe that the following accounting policies reflect our more significant
      judgments and estimates used in the preparation of our financial statements.




**Revenue
      Recognition.** Our
      revenue is derived primarily from fees charged to terminate voice services
      over
      our network and contracted services to support software licenses. 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 or the dispute
      is
      known. 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* .





**Convertible
      Debt.**The Company applies Accounting Principles Board Opinion Number 14
      (“APB 14”), *Accounting for Convertible Debt and Debt Issued with Stock
      Purchase Warrants*, when recording debt with conversion features and when
      issuing warrants to purchase its common stock. When debt is issued which is
      convertible to equity at the option of the holder, no portion of the proceeds
      is
      accounted for as attributable to the conversion feature, and is recorded as
      a
      liability. The warrants to purchase the Company's stock have been determined
      to
      be detachable warrants as the holder of the debt and warrants may convert the
      debt or exercise the warrant without affecting the other instrument. The
      fair-value of the warrants issued is determined as of the date of the issuance
      by using a Black-Scholes pricing model. The value is then used as a discount
      to
      the convertible debt and is amortized to interest expense over the term of
      the
      convertible debt to the maturity date, or is accelerated proportionally if
      the
      debt is converted at the option of the holder prior to the maturity date.




12




**Stock-Based
      Compensation.** ** Commencing
      on January 1, 2006 we began applying the provisions of Statement of Financial
      Accounting Standards (SFAS) No. 123R, *Share
      Based Payment* ,
      or SFAS
      123R, in accounting for stock-based compensation. SFAS 123R requires measurement
      of the cost of employee services received in exchange for an award of equity
      instruments based on the grant-date fair value of the award. That cost is
      recognized over the period during which an employee is required to provide
      service in exchange for the award (usually the vesting period). Prior to January
      1, 2006, we followed Accounting Principles Board (APB), Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      or APB
      25, and related interpretations, in accounting for our stock-based compensation
      plans, rather than the alternative fair-value method provided for under SFAS
      No.
      123, *Accounting
      for Stock-Based Compensation* ,
      or SFAS
      123. In the notes to our financial statements  included
      in Item 7, we provide pro-forma disclosures in accordance with SFAS 123. We
      account for transactions in which services are received from non-employees
      in
      exchange for equity instruments based on the fair value of such services
      received or of the equity instruments issued, whichever is more reliably
      measured, in accordance with SFAS 123 and the Emerging Issues Task Force (EITF)
      Issue 96-18, *Accounting
      for Equity Instruments That Are Issued to Other than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ,
      or EITF
      96-18.




Accounting
      for equity instruments granted or sold by us under APB 25, SFAS 123, SFAS 123R
      and EITF 96-18 requires fair-value estimates of the equity instrument granted
      or
      sold. If our estimates of the fair value of these equity instruments are too
      high or too low, our expenses may be over- or understated. For equity
      instruments granted or sold in exchange for the receipt of goods or services,
      we
      estimate the fair value of the equity instruments based upon consideration
      of
      factors that we deem to be relevant at that time. Because shares of our common
      stock were not publicly traded prior to July 21, 2005, market factors
      historically considered in valuing stock and stock option grants included
      comparative values of public companies discounted for the risk and limited
      liquidity provided for in the shares we are issuing; prior valuations of stock
      grants and the effect of events that occurred between the time of such grants;
      economic trends; and the comparative rights and preferences of the security
      being granted compared to the rights and preferences of our other outstanding
      equity.




Prior
      to
      July 21, 2005, the fair value of our common stock was determined by our board
      of
      directors contemporaneously with the grant. In the absence of a public trading
      market for our common stock, our board of directors considered numerous
      objective and subjective factors in determining the fair value of our common
      stock. At the time of option grants and other stock issuances, our board of
      directors considered the status of private and public financial markets;
      valuations of comparable private and public companies; the likelihood of
      achieving a liquidity event such as an initial public offering; our existing
      financial resources; our anticipated continuing operating losses and increased
      spending levels required to meet our business plan; dilution to common
      stockholders from anticipated future financings; and a general assessment of
      future business risks.




**Impairment
      of Long Lived Assets.** In
      accordance with Statement of Financial Accounting Standards No. 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* ,
      the
      Company reviews its long-lived assets whenever events or changes in
      circumstances indicate that the carrying amount of such assets may not be
      recoverable. If the carrying amount of an asset or group of assets exceeds
      its
      net realizable value, the asset will be written down to its fair value.





**Intangible
      Assets.** Intangible assets are carried at cost less accumulated amortization, which
      is
      calculated on a straight-line basis over their estimated economic life. The
      Company reviews intangible assets for impairment whenever events or changes
      in
      circumstances indicate that the carrying amount may not be recoverable.




**Results
      of Operations**





Years
      ended December 31, 2006 and 2005





Revenues
      for the year ended December 31, 2006 were $1,091,899, an increase of 29.9%
      over
      the $840,457 in revenues in fiscal 2005. Revenues for 2006 from customers located
      outside the U.S. increased by approximately 179% from 2005. The increase in
      the
      twelve-month period ended December 31, 2006 is primarily attributable to the
      acquisition of Goodman Blue Limited, a UK entity, for which $229,891 in revenues
      were recognized for services provided under a contract agreement to support
      our O2C software
      portal. Revenues for the year ended December 31, 2006 for telecommunications
      increased by $21,551, an increase of 2.5% over the $840,457 in revenues for
      telecommunications in 2005. The increase is primarily attributable to wholesale
      revenues from UK customers offset by the loss of one wholesale revenue traffic
      route in our UK operations. Minimal
      revenue has been recognized for the V-CubeTM product offering although we
      commenced the V-CubeTM product offering in the UK, Venezuela, and Argentina.




13


Cost
      of
      revenues for the year ended December 31, 2006 were $1,325,806, an increase
      of
      31.5% over the $1,008,227 in fiscal 2005. This increase relates to the
      acquisition of Goodman Blue Limited for which $159,725 in costs were recorded
      for services provided under a contract agreement to support our O2C software
      portal. An increase of $157,854 in costs recorded in wholesale costs from UK
      customers was also experienced. Engineering costs classified as cost of revenues
      for the year ended December 31, 2006 of $174,081 decreased 26.0% as compared
      to
      the same period in fiscal 2005. The decrease is mainly due to expenditures
      pertaining to staff support of the wholesale business.




Gross
      margin decreased to (21.4%) for the year ended December 31, 2006 from (20.0%)
      for the year ended December 31, 2005. During 2006 the acquisition of Goodman
      Blue resulted in an increase in margin of $70,166 for contracted services to
      support our O2C software
      portal, offset by the loss of one high margin wholesale revenue traffic route
      in
      our UK operations. Other wholesale business customers in the UK generated
      minimal increases in gross margin.





Selling,
      general and administrative costs for the year ended December 31, 2006 were
      $12,899,861, an increase of 22.6% over the $10,519,779 in fiscal 2005. During
      the year ended December 31, 2006, we incurred increased compensation for
      employees. Increases for employees were due in part to hiring a Chief Operating
      Officer in January 2006, a full-time Chief Financial Officer in August 2006,
      and
      in April 2006 a new Chief Executive Officer who later became President of one
      of
      our subsidiaries, and left the Company in December 2006. Other increases
      experienced were for the expense of options granted during the year related
      to
      consultants; consultants fees, due in part to engineers who provided services
      to
      support the V-CubeTM software from the developer of the software; insurance and
      rents. We also experienced non-cash increases in compensation expense due to
      the
      issuance of stock options  to
      employees, directors and officers ;
      $1,875,000 non-cash expense for the issuance of 1,500,000 shares per the Indigo
      advisory agreement as described in Note 15 to the financials statements included
      in Item 7, offset by a decrease of $1,000,000 non-cash expense for the issuance
      of 500,000 shares per the NetYantra agreement described in Note 12 to the
      financial statements included in Item 7. During 2006 the acquisition of Goodman
      Blue resulted in increased expenses including rent, insurance, and office
      expenses .
      The
      increases were offset by decreases in promotional and marketing expenses,
      professional fees and travel expenses.





Depreciation
      and amortization expenses for the year ended December 31, 2006 were $3,425,027,
      an increase of 1,455.9% over the $220,133 in fiscal 2005. During the year ended
      December 31, 2006, we recorded increased depreciation for additional equipment
      purchased, as described in Note 3 to the financial statements included in Item
      7, and a full year of depreciation on telecommunications equipment in the US.
      During the year ended December 31, 2006, we began to record amortization
      expenses for the purchase of our V-CubeTM software as described in Note 13 to the
      financial statements included in Item 7, the acquisition of our O2C software
      as described in Note 6 to the financial statements included in Item 7, and
      the
      amortization for the license acquired for our consumer product as described
      in
      Note 3 to the financial statements included in Item 7, which was fully impaired
      as described below.





Research
      and development expenses for the year ended December 31, 2006 were $364,342,
      an
      increase of 1,090.2% over the $30,612 in fiscal 2005. During the year ended
      December 31, 2006, we incurred increased expenses for a team of consultants
      who
      developed the V-CubeTM software platform. We incur expenses each month for
      development work by this team of consultants for the next version of the V-CubeTM
software platform to be distributed which is expected to include new feature
      sets and reporting functions. We also incur research and development expenses
      for the O2C portal development work being performed. The O2C portal will work
      along-side the V-CubeTM platform and allow an automated sign-up and delivery
      process for customers which we expect to enable us to sign-up a significantly
      greater number of users each month in comparison to the more manual process
      of
      customer installations without the portal.





During
      the year ended December 31, 2006 net interest expense of approximately
      $1,226,000 was comprised of amortization of capitalized finance fees,
      amortization of the debt discount for the debentures held, interest on the
      convertible debentures as per the terms stated in Note 11 to the financial
      statements included in Item 7, interest on the small business loan as per the
      terms stated in Note 10 to the financial statements, and interest on a
      promissory note as per the terms stated in Note 10 to the financial statements
      included in Item 7, net of interest income received on cash balances as a result
      of the financing described in Note 14 to the financial statements included
      in
      Item 7. Net interest expense for the year ended December 31, 2005 of
      approximately $1,244,000 was comprised of amortization of capitalized finance
      fees, amortization of the debt discount for the debentures held, interest on
      the
      convertible debentures as per the terms stated in Note 11 to the financial
      statements included in Item 7, and imputed interest on a capital lease
      obligation we entered into during 2004, net of interest income received on
      cash
      balances as a result of the financing described in Note 11 to the financial
      statements included in Item 7.




14


For
      the
      year ended December 31, 2006, we incurred a loss of $19,530,105 or $0.38 loss
      per common share, basic and diluted, as compared to a loss of $12,182,002 or
      $0.45 loss p er
      common
      share, basic and diluted, for the year ended December 31, 2005.





**Impairments**





Two
      impairments of
      assets which
      totaled $1,380,552 were recorded as at December 31, 2006, while there were
      no
      impairments recorded for fiscal 2005. The impairments recorded for December
      31,
      2006, were for our telecommunications switching equipment in the US for
      approximately $1,233,000 and for our consumer product
      of approximately $151,000 as described in Note 3 to the financial statements
      included in Item 7 .





The
      impairment to our telecommunications equipment, on our balance sheet as
      property, plant and equipment, in the US was recorded due to management’s
      expectation that future revenues to be provided directly from this equipment
      did
      not justify the then current carrying value of the equipment. Management does
      not expect significant revenue growth from this equipment due to prior
      unsuccessful efforts to establish large volumes of terminated wholesale traffic
      routes within the US market which would have enabled future revenues as well
      as
      management’s decision not to hire staff to actively pursue wholesale traffic
      termination revenues for this equipment. Management used then current asking
      prices for similar used equipment to determine the fair market value of this
      equipment.





We
      have
      also recorded a 100% impairment for the license purchased for our consumer product
      of approximately $151,000 as described in Note 3 to the financial statements
      included in Item 7. As of the date of this 10-KSB, we have completed the
      development of an internal product which is expected to replace the consumer product.
      We had recorded minimal revenues which resulted from this license during the
      fiscal year ended December 31, 2006. The licensed consumer product
      requires additional monthly support fees. Management has decided to cease
      solicitation of revenues under this license agreement until our internally
      developed product is ready for sale to customers. There is no material impact
      to
      any of our financial statements resulting from the cessation of revenues from
      this licensed consumer product.





Management
      also considered the value of the equipment used for wholesale traffic
      termination it owns in the United Kindom and determined that as of December
      31,
      2006, no impairment was necessary due to future cash revenues anticipated from
      this equipment.





Management
      also considered its intangible assets, the V-CubeTM software and intellectual
      property, and its recently acquired O2C software
      portal, and determined no impairment was necessary due to future cash revenues
      anticipated from these assets.





**Liquidity
      And Capital Resources**





As
      of
      December 31, 2006, we had cash and cash equivalents of $195,223, which
      represents a decrease of $357,904 over the $553,127 at December 31, 2005. Also,
      as of December 31, 2006, we had a working capital deficit of approximately
      $4,682,127, which represents an increase in the working capital deficit of
      approximately 1,268% from that at December 31, 2005. The decrease in cash and
      cash equivalents and increase in working capital deficit are principally
      reflective of cash used in operations and a liability of $2,500,000 recorded
      for
      the October 11, 2006 acquisition of Goodman Blue Limited as described in Note
      1
      to the financial statements included in Item 7. Since our inception through
      December 31, 2006, we have generated operating losses of approximately
      $36,100,000. The Company’s current assets and current liabilities at December
      31, 2006 were $776,619 and $5,458,746, respectively. The current liabilities
      include a liability of $2,500,000 to the seller of Goodman Blue Limited whereby
      the seller may exercise an option to require the Company to re-purchase
      2,500,000 common shares for $1.00 per common share. The consolidated financial
      statements do not include any adjustments relating to the recoverability of
      assets and satisfaction of liabilities that might be necessary should the
      Company be unable to continue as a going concern. The Company's continuation
      as
      a going concern is dependent upon its ability to generate sufficient cash flow
      to meet its obligations on a timely basis, to comply with the terms of its
      financing arrangements, to obtain additional financing as may be required,
      and
      ultimately to attain profitability. To address these issues in part, the Company
      raised $2,500,000 in gross proceeds on April 6, 2007, which will be used to
      satisfy a portion of the Company’s outstanding payables and to fund working
      capital requirements for the launch of the V-CubeTM product through a United
      Kingdom distributor, Northamber. The Company is dependent upon
      Northamber to meet its forecasted sales figures to its customers for the second,
      third, and fourth quarters of 2007, in order to meet the Company’s cash needs
      during these quarters. In order for Northamber to be successful in meeting
      its
      forecasts the Company must be able to support the demand for large
      volumes of new user installations from Northamber and their customers. The
      Company is
      in the
      process of revising its budget and financial forecast for the remainder of
      2007
      as more fully described
      below .
      This
      budget and
      financial forecast, when revised, will anticipate that
      the
      distribution arrangement with Northamber will generate a majority
      of the Company’s revenue and
      that the
      Company will be
      able to
      develop and implement cost controls, including the successful
      negotiation of significant reductions and delayed payments of material amounts owed to
      creditors, in order to conserve cash. However, there is no assurance
      that the
      Company will be able to generate sufficient funds from the sales by the
      distributor and sufficient savings from its development and implementation
      of
      cost controls to conserve cash to continue as a going concern.




15




Net
      cash
      used in operating activities during 2006 of $6,709,864 decreased by $1,071,994
      over the $7,781,858 used in operating activities during 2005 primarily due
      to a
      net loss of $19,530,105, offset by non-cash charges of $3,246,178 for
      compensation, $1,875,000 for shares issued to Indigo Ventures LLC (“Indigo”)
      under an advisory agreement as described in Note 15 to the financial statements
      included in Item 7, $642,790 for the issuance of warrants related to the
      financings described below, $1,380,552 for the impairment of assets as described
      in Note 3 to the financial statements included in Item 7, and $688,998 for
      interest related to the convertible debenture financing described further below.





In
      addition, prepaid expenses and other current assets at December 31, 2006 of
      approximately $313,352 decreased approximately 70% from the $1,045,795 at
      December 31, 2005, due to the prepayment of royalties under the NetYantra
      agreement being allocated as part of the purchase price of the
      V-CubeTM software platform as described in Note 13 to the financial statements
      included in Item 7; the expensing of professional services that were rendered
      during 2006 that were paid in
      our common stock; maintenance for the equipment described in Note 3 to the
      financial statements included in Item 7; and expensing the prepayments for
      software development, value added tax, call termination charges, insurance
      and
      rents. Accounts receivable at December 31, 2006 were approximately $158,000,
      an
      increase of approximately 20% from December 31, 2006. Accounts payable and
      accrued expenses at December 31, 2006 increased approximately $1,392,000 from
      December 31, 2005 levels as a result of increases in accrued payroll and related
      costs, accrued interest on the debentures as described in Note 11 to the
      financial statements included in Item 7, and increased accrued professional
      fees.





Net
      cash
      used in investing activities during 2006 of
      $8,056,341 increased by $7,331,310 over the $725,031 used in investing
      activities during 2005 due to the cash portion paid of $8,800,000 for the
      purchase of the V-CubeTM software and intellectual property as described in Note
      13 to the financial statements included in Item 7, offset by decrease in
      expenditures for telecommunications equipment used in our business.





Net
      cash
      provided by financing activities during 2006 of $14,409,138 increased by
      $5,300,214 over the $9,108,924 provided by financing activities during 2005.
      On
      May 22, 2006 we raised $15,244,165 in net proceeds through the sale of equity
      and issued 13,080,000 five-year warrants, exercisable at $1.00 per common
      share ,
      pursuant to the equity sale, as described further below. A portion of the
      proceeds from the sale of equity was used to pay the amount due on the notes
      payable of $870,000 to MRS Partners LLC, also described further
      below.





We
      acquired approximately $457,000 in cash through the acquisition of Goodman
      Blue
      on October 11, 2006 described in Note 6 to the financial statements included
      in
      Item 7. The cash acquired has been used in part to pay for outstanding
      liabilities of Goodman Blue at the time of the acquisition, including the note
      payable described in Note 10 to the financial statements included in Item 7.





During
      the years ended December 31, 2006 and 2005 no services were contributed to
      the
      Company by our stockholders.





Since
      our
      inception, we have sustained our operations through loans,
      debt and equity financings, funding
      provided by our Chairman and contributed services by our Chairman and other stockholders .





*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 ,
      we sold
      convertible debentures in the aggregate principal amount of $8,400,000,
      convertible into common stock of the Company at $0.75 per share, and warrants
      to
      purchase an aggregate of 8,400,000 shares of our common stock, at an exercise
      price of $1.00 per share. These warrants expire five years after the issue
      date.




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 interest payments due on
      December 31, 2006 and  on March
      31, 2007 were not paid until April 9, 2007. We received a waiver from each
      of
      the holders of the debentures for any late fee due or possible event of
      default in
      connection with
      the two
      late
      payments of interest .
      See
      Note 11 to the
      financial statements included in Item 7.




16




Through
      April 6, 2007, $2,100,000 in outstanding principal amount of convertible
      debentures has been converted into 2,799,993 shares of common stock, reducing
      the amount of interest required to be paid in future periods.




*Warrant
      Exercise Agreements.* In
      October 2005, we entered into several warrant
      exercise agreements with
      holders of warrants issued in the debenture
      financing described above. Pursuant
      to these agreements, we issued to these holders replacement common
      stock purchase warrants exercisable for a number of shares equal to the number
      of shares they purchased upon exercise of the warrants issued to them in the debenture
      financing .
      These replacement warrants
      have an exercise price of $1.50 per share. We received aggregate proceeds of
      $3,190,499 in connection with the exercise of the prior warrants, and issued the
      replacement warrants, which expire five years after the issue date, to purchase an aggregate
      of 3,190,499 shares of our common stock (plus an additional warrant, which
      expires five years after the issue date, to purchase 159,525 shares of common
      stock to a placement agent who assisted with the transaction). As
      a
      condition for each debenture holder executing a
      waiver for the
      April 6, 2007 financing as discussed herein, the Company agreed to reduce
      the exercise
      price of the
      replacement warrants to $1.00 per
      share and
      provide the same anti-dilution protection as contained
      in the warrants
      issued in connection with the debenture
      financing.




*Common
      Stock and Warrant Financing.* On May
      22,
      2006, the Company sold 16,300,000 units consisting of one share of common stock
      and eight-tenths of one warrant to acquire one share of common stock. The
      effective purchase price of the units was $1.00 per unit. In exchange for the
      units sold, the Company received gross cash proceeds of $16,300,000. The Company
      issued warrants for 13,040,000 common stock shares exercisable until May 22,
      2011 at an exercise price of $1.00 per share. CRT Capital Group LLC (“CRT”)
      acted as the placement agent in connection with the offering. The aggregate
      commissions payable to CRT in connection with the private placement were
      approximately $978,000. In addition, the Company issued warrants to CRT to
      purchase 1,467,000 shares of common stock similar to those sold to the
      investors. The Company realized net proceeds from the sale of units, after
      deducting placement agent fees and expenses, of approximately $15.2 million.
      The
      Company used a portion of these proceeds to purchase the software and
      intellectual property rights of NetYantra’s V-CubeTM IP-PBX platform
      ($8,800,000); pay the outstanding principal, interest and fees related to the
      revolving credit agreement with Indigo Investments I LLC ($1,500,000); and
      pay
      the outstanding principal and interest related to a promissory note for Sonus
      switching equipment located in Los Angeles to MRS Partners LLC
      ($800,000).





*Acquisition
      of Goodman Blue.* On October
      11, 2006, VCS acquired 100% of the outstanding shares
      of Goodman Blue for consideration
      consisting of 2,500,000
      shares of our common stock being
      issued to Scott
      Goodwin, the sole shareholder of Goodman Blue, subject to an option to require the Company to
      repurchase the shares of common stock for an aggregate purchase price of
      $2,500,000. We
      recorded the total purchase price of $2,562,643, which includes acquisition
      costs of $62,643, as intangible assets for the O2C software of $2,077,777 and
      as
      several customer contracts which were valued at $484,866. Management determined
      that the O2C asset will be amortized over a five year estimated useful life
      beginning on October 11, 2006. At December 31, 2006 the net carrying value
      of
      this O2C intangible asset was $1,978,600. Amortization expense for the
      twelve-months ended December 31, 2006 was $99,177.  We
      have
      recorded the acquisition of Goodman Blue as a liability of $2,500,000 at
      December 31, 2006, in the expectation that Goodwin will require the Company
      to
      repurchase the shares .
      The purchase
      agreement, as
      amended , provides
      that: (i) Goodwin shall have the option to require us to purchase 1,400,000
      of
      the consideration
      shares for a
      total aggregate cash consideration of $1,400,000 (the “First Put Option”); and
      (ii) Goodwin shall have the option to require us to purchase 1,100,000 of the consideration
      shares for a
      total aggregate cash consideration of $1,100,000 (the “Second Put Option”). The
      First Put Option may only be exercised in the period commencing on February
      1,
      2007 and ending on April
      27,
      2007. The Second Put Option may only be exercised in the period commencing
      on
      August 1, 2007 and ending on August 31, 2007. The
      terms of our currently outstanding debentures and notes prohibit the redemption
      of shares of our common stock without the debt holders consent.





On
      October 12, 2006, Goodman
      Blue sold its
      customer contracts list .
      As part
      of the sale of these customer contracts the Company guaranteed the return of
      the
      sale price in future revenues from the contract by April 1, 2007. As at December
      31, 2006, the guaranteed amount of future revenues from the customer contracts
      sold yet to be secured by the buyer and for which the Company was obligated
      to
      pay was approximately $296,000.
      Based on information provided, as of April 1, 2007, t he
      buyer
      secured revenues greater than the amounts guaranteed and the Company is no
      longer obligated for any return of the sale price.




As
      of
      December 31, 2006, Goodman
      Blue is
      obligated to pay approximately $204,000 in principal amount under a Small
      Firms Loan Guarantee Scheme from
      HSBC
      Bank plc . The
      loan accrues
      interest at a rate of 3.0% above the lender ’s
      base
      interest rate of 4.5% as at December 31, 2006, and is payable in equal
      monthly installments of approximately
      $20,000 ( which
      is
      exclusive of interest )  until
      November 7, 2007, the maturity date. The loan is guaranteed by the
      Secretary of State in the United Kingdom and
      the borrower pays a
      guarantee premium at an annual rate of 2% on the loan to the
      Secretary of State.




*Converible
      Note and Warrant Financing.* On
      April
      6, 2007 we completed a convertible note and warrant financing for gross proceeds
      of $2,500,000 which will be used in part for payments due to existing creditors
      and funding our working capital needs. The notes are convertible into common
      shares at a conversion price of $1.00 per share. The investors were also issued
      a total of 2,500,000 warrants to purchase common stock, which expire in five
      years, and have an exercise price of $1.00 per share. We paid fees of $56,000
      and issued warrants to purchase 1,400,000 shares of our common stock, with
      similar terms to the warrants issued to the investors, to placement agents.
      As
      part of the financing, Executive Management Services Limited (“EMS”), an entity
      of which Mr. Galliers-Pratt is a beneficiary, is transfering an aggregate of
      5,000,000 shares of our common stock to the investors subsequent to the closing.




17




We
      have
      made cash expenditures for capital equipment and software from our inception
      until December 31, 2006 of approximately $11,640,000 purchasing the
      telecommunications equipment necessary to operate our business, including the
      cash payment of $8,800,000 pursuant to the purchase of the V-CubeTM software and
      intellectual property, as described in Note 13 to the financial statements
      included in Item 7.




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.





*Budget
      and Financial Forecasts for the Remainder of 2007*




The
      following disclosure includes certain statements, budgets, estimates,
      projections and other forward-looking statements with respect to the anticipated
      future performance of Vistula Communications Services, Inc. The statements,
      budgets, estimates, projections and other forward-looking statements, which
      have
      not been reviewed or examined by the Company’s independent auditors, are based
      upon various assumptions by management made on a reasonable basis and in good
      faith that may not prove to be correct. Such assumptions are inherently subject
      to significant uncertainties and contingencies, many of which are beyond the
      Company’s control. No assurance is given, that the Company can or will attain
      such results. Actual results are likely to vary, perhaps materially, from the
      Company’s projections due, at least in part, to the “Factors Affecting Future
      Performance” set forth below.




In
      the
      course of their due diligence, the purchasers of the Company’s convertible notes
      and warrants discussed with the Company’s management the planned use of proceeds
      and the plan for operating the Company subsequent to the closing. These
      purchasers were provided with budgetary information and financial forecasts
      which were included in the disclosure schedules incorporated into the definitive
      investment documentation and filed with the Company’s Form 8-K dated April 9,
      2007 which reported on the closing of that transaction.




That
      budgetary information contemplated that the gross proceeds of the sale of the
      convertible notes and warrants would be $3,000,000 rather than the $2,500,000
      actually raised and that the closing would have occurred before the end of
      the
      first quarter of 2007 rather than at the end of the first week of the second
      quarter. As a result of these variances and the continuing negotiation by
      management with trade creditors and service providers to extend payment terms
      and/or grant discounts and compromise obligations, the Company is in the process
      of reformulating and adjusting the operating budget and financial forecasts
      for
      the remainder of 2007.




The
      Company believes that, irrespective of the actual adjustments made, the material
      implications of the budget are as follows:




·
            Following
                the closing and the payment of expenses associated with the financing
                and
                the payments of past due interest on the Company’s 8% convertible
                debentures $254,800, past due trade payables and taxes in the United
                States and the United Kingdom as described more fully below under
                “Non-Compliance Items,” and current amounts due, such as payroll, of
                $1,243,000 were made. As a result the Company had cash available
                of
                approximately $1,002,000 as of the date of this
                10-KSB;




·
            The
                Company expects to generate net revenues of approximately $830,000,
                $2,900,000 and $3,000,000 in the second, third and fourth quarters
                of
                2007, respectively;




·
            The
                Company expects to incur selling, general and administrative expenses
                of
                approximately $1,300,000 in each of the remaining quarters of
                2007;




·
            The
                Company expects to have net cash positions of approximately $0, $1,000,000
                and $2,500,000 at the end of the second, third and fourth quarters
                of
                2007, respectively; and




·
            Despite
                the indicated cash positions, for financial reporting purposes, the
                Company will continue to show net losses in each of these three quarters
                of 2007 and for the year as a whole due to non-cash items of
                loss.




18


All
      of
      these forecasts are based on projections of revenue generated through the
      Company’s arrangement with Northamber to distribute our V-CubeTM product, which
      had been expected to commence in April 2007. The Company believes the delay
      in
      completing the convertible note and warrant financing will result in a delay
      in
      revenue generations through the Northamber arrangement until later in the second
      quarter, although the estimate of revenue for the second quarter is still
      achievable. However, failure to generate such revenue in the amount and in
      the
      timeframe contemplated in the forecast will directly and adversely effect the
      Company’s ability to continue its current operations without raising additional
      capital or obtaining further accommodations from trade creditors and service
      providers.




As
      identified below in Other Arrangements and Obligations, *Non-* *Compliance
      Items* ,
      the
      Company paid the debenture holders interest outstanding as per the waivers
      received from
      the
      outstanding debenture holders as described in Note 11 to the financial
      statements included in Item 7, and made payments to various creditors. The
      remaining balance of approximately $1,002,000 is expected to be used for working
      capital purposes and for payment towards outstanding creditor balances which
      management is currently negotiating for relief or delays in payment, in order
      to
      conserve cash, until the Company begins to collect cash for the sales of the
      V-CubeTM product from the Northamber distribution agreement. The
      majority of the revenues in the Budget are assumed to be from the Northamber
      distribution agreement and are expected to begin to be recognized during the
      second quarter of 2007. In the event the Company does not recognize revenues
      and
      collect cash as it has forecasted in the Budget during the second quarter of
      2007, additional financing will be required or the business may have to curtail
      certain operations.





**Other
      Arrangements and Obligations**





*V-CubeTM
      Distribution Arrangements*





On
      February 2, 2007, Vistula Limited signed a distribution agreement with
      Northamber to sell
      its IP-PBX solutions to customers of Northamber in the United Kingdom.
      Northamber will offer a hosted IP-PBX product using our V-CubeTM platform. The
      hosted IP-PBX product will be sold via Northamber's network
      of 6,000 distributors and master
      agents in the
      UK. Under the agreement , we will
      host the service and provide Tier 2 and Tier 3 level support to Northamber's
      distributors and customers. Northamber is a
      long established and large trade-only distributor of IT products and equipment in the
      UK .
      We
      expect the revenues from this distribution to be a significant provider of
      operational cash for our business.




On
      June
      7, 2006, the Company completed the acquisition of certain assets of NetYantra
      for an aggregate purchase price of $ 8,800,000 in cash, 14,000,000 shares
      of the Company’s common stock and
      the
      outstanding prepaid amount ($399,189) for royalties due on future net revenues
      that was paid under the terms of the distribution and marketing agreement between
      the Company and NetYantra. The
      acquired assets include NetYantra’s VoIP IP-PBX platform software and associated
      intellectual property. The Company had previously distributed this software
      as
      its V-CubeTM VoIP IP-PBX platform offering under a distribution and marketing agreement with NetYantra.




The
      terms
      of the Purchase Agreement required the Company and NetYantra to use commercially
      reasonable efforts to negotiate and execute within sixty (60) days following
      the
      closing of the acquisition a license and revenue agreement, a services agreement
      and an executive employment agreement. Also, the terms of the Purchase Agreement
      prohibit, during the term of the services agreement and for 12 months
      thereafter, the Company and NetYantra from soliciting for hire, directly or
      indirectly, an employee, subcontractor or consultant of the other party, without
      that other party’s written consent.




19


On
      August
      3, 2006, the Company and NetYantra agreed to a 30 day extension to negotiate
      and
      execute a license and revenue agreement, a services agreement, and an executive
      employment agreement. Although a mutually satisfactory services agreement has
      not been executed as yet, NetYantra has been performing services for the Company
      since June 7, 2006. We made cash payments of $463,968 for the services provided
      from June 7, 2006 to November 30, 2006. The cost of the services performed
      during December 2006 were accrued as of December 31, 2006.




In
      connection with the Purchase Agreement, the Company entered into a Registration
      Rights Agreement dated as of June 7, 2006 with NetYantra US (the “Registration
      Rights Agreement”) which provides NetYantra US with certain registration rights
      with respect to the shares being issued to NetYantra US pursuant to the Purchase
      Agreement (“Registrable Securities”). Under the terms of the Registration Rights
      Agreement, if at any time after the earlier of (i) the second anniversary of
      the
      date of that agreement or (ii) the date on which a persons or persons acting
      in
      concert who are not shareholders of the Company as at the date of that agreement
      acquire in a transaction or series of related transactions an aggregate of
      at
      least thirty percent (30%) of the then outstanding shares of common stock of
      the
      Company, the Company receives a request from NetYantra US that it requests
      a
      registration with respect to the Registrable Securities then outstanding, then
      the Company shall as soon as practicable, and in any event within forty-five
      (45) days after the date such request
      is given by NetYantra US, file a registration statement under the Securities
      Act, covering all Registrable Securities then outstanding. NetYantra US also
      has
      the right to request that the Registrable Securities be registered if the
      Company proposes to register any of its stock or other securities under the
      Securities Act in connection with the public offering of such securities solely
      for cash.




The
      Company recorded the acquisition of the V-CubeTM IP-PBX platform software and
      associated intellectual property as an intangible asset in June 2006 at a total
      of $26,279,189 ($8,800,000 million in cash, 14,000,000 shares at $1.22 per
      share, and the outstanding prepaid royalty amount of $399,189). The Company
      has
      determined that the asset will be amortized over a five year estimated useful
      life beginning on July 1, 2006, which coincides with the first V-CubeTM product
      launch by one of the Company’s customers. At December 31, 2006 the net carrying
      value of this intangible asset was $23,651,270. Amortization expense for the
      period ended December 31, 2006 was $2,627,919.




On
      December 13, 2005, we entered into a Consultant, Representative and Professional
      Services Agreement with Quest Telecommunications, Inc. (“Quest”). Under this
      agreement, we have appointed Quest as an independent advisor and our exclusive
      representative in the geographic areas of Vietnam, Cambodia, Malaysia and Turkey
      (and any other areas to which we and Quest agree in writing). Under this
      agreement, we paid Quest $50,000 in consideration for Quest’s assistance
      relating to the execution by us and Saigon Post and Telecommunications Services
      Corporation (“SPT”) of a memorandum of understanding and pilot license agreement
      with respect to the V-CubeTM. The pilot license agreement, which we entered into
      on October 15, 2005, permitted SPT to use the V-CubeTM platform for evaluation
      and testing purposes on a royalty-free basis from November 15, 2005 through
      February 15, 2006. We entered into a distribution and marketing agreement with
      SPT with respect to the V-CubeTM on July 3, 2006. Upon signing this agreement, we
      are obligated to issue to Quest 300,000 shares of our common stock and to pay
      to
      Quest $150,000 in cash, plus a continuing commission of thirty percent of the
      license fees we receive from SPT in connection with the licensing and
      distribution of the V-CubeTM in the above-mentioned geographic areas (net of
      sales, use and value added taxes, if any, payable by us in connection with
      such
      license fees). Although the agreement with SPT has been signed, the Company
      does
      not expect to pay the $150,000 in cash or continuing commission of thirty
      percent of the license fees we receive from SPT, and therefore the $150,000
      due
      has not been recorded in the financial statements.




*Non-Compliance
      Items*




Delaware
      Franchise Tax. VCS and Vistula USA did not file and pay the Delaware franchise
      tax due on March 1, 2007. We have filed the required return and made aggregate
      payments of approximately $18,600 to bring each entity into good standing as
      of
      April 10, 2007.




Tax
      Returns. VCS and Vistula USA did not file and pay for the tax return extensions
      to the Internal Revenue Service or the states of New York and Massachusetts
      due
      on March 15, 2007. On April 10, 2007 the extensions and payments in aggregate
      of
      approximately $2,100 were mailed to the respective tax authorities. We will
      pay
      any late fees, expected to be minimal, related to the late filings when
      invoiced.




20


Debenture
      interest payments. VCS did
      not
      timely pay the quarterly interest payments that were due on December 31, 2006
      and March 31, 2007 to the holders of VCS’ outstanding 8% convertible debentures .
      We paid
      these outstanding interest payments on April 9, 2007 and received a waiver
      from
      each of the debenture holders for any late fee due or possible event of default
      in connection with the two late payments of interest.




Inland
      Revenue in United Kingdom. Vistula Limited was not in good standing due to
      approximately $20,000 in
      amounts being due for Pay-As-You-Earn (“PAYE”) taxes, equivalent to the United
      States taxes on salaries including FICA and Medi-care, and Goodman Blue Limited
      was not in good standing due to approximately $62,000 in
      amounts being due for PAYE. On April 10, 2007, payments by Vistula Limited
      for
      approximately $29,000 and by Goodman Blue Limited for approximately $62,000 ,
      brought
      each entity
      into good standing.




*Financial
      Advisory Services*




On
      January 27, 2006, we entered into a financial advisory agreement with Indigo
      Ventures LLC (“Indigo”) in which we appointed Indigo as our financial advisor to
      advise, consult with, and assist us in various matters. On November 27, 2006,
      the Company sent a notice to Indigo indicating that the Company would not renew
      the Agreement. Therefore, the Agreement ended on January 27, 2007.




The
      Company entered into another financial advisory agreement on January 30, 2007
      with Indigo for a bridge financing. In connection with the convertible note
      and
      warrant financing, Indigo agreed to terminate the January 30, 2007 financial
      advisory agreement and waive any fees under that agreement in return for
      reimbursement of legal and travel expenses of $49,182 and for the Company’s
      acknowledgement that $117,000 in connection with services previously rendered
      under the advisory agreement entered into on January 27, 2006, remain
      outstanding and that this amount is payable upon the earlier of (i) the sale
      of
      the company, (ii) a capital raise of at least $5,000,000 or (iii) the date
      when
      the Company has sufficient cash flow available from its operations.




*Employment
      Agreements*




Effective
      December 15, 2006, John Keith Markley resigned from the board of directors
      of
      VCS and from his position as president of Vistula USA for personal reasons. As
      a
      result of Mr. Markley’s resignation and pursuant to the Employment Agreement
      dated as of April 11, 2006, between the Company and Mr. Markley, as amended
      by
      the Amendment to Employment Agreement dated August 1, 2006 and in accordance
      with an Agreement and General Release between the Company and Mr. Markley dated
      as of December 15, 2006, the Company is required to pay Mr. Markley $290,000
      over twelve (12) months, in accordance with the Company’s current payroll
      practices; provided, that the Company and Mr. Markley agree that these amounts
      constitute “nonqualified deferred compensation” within the meaning of Section
      409A of the Internal Revenue Code of 1986, as amended, and the regulations
      promulgated thereunder. This amount was accrued as of December 31, 2006. Also,
      Mr. Markley will continue to be covered under the Company’s medical plans for a
      period of twelve (12) months following his resignation, provided that Mr.
      Markley shall continue to be responsible for his portion of such payments via
      applicable withholdings.




Recently
      Issued Accounting Pronouncements




In
      February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      Amendment to FASB Statement No. 115* (SFAS
      159). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. SFAS 159 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007. Earlier
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided that the entity also elects to apply the
      provisions of SFAS 157. The Company is currently evaluating the effect of this
      standard on its future reported financial position and results of operations.




In
      September 2006, the Securities and Exchange Commission ("SEC") issued Staff
      Accounting Bulletin No. 108, "Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff believes
      that registrants should quantify errors using both the balance sheet and income
      statement approach when quantifying a misstatement that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108 is
      effective for our fiscal year ending December 31, 2006. The initial adoption
      of
      this statement did not an impact on the Corporation's results of operations,
      financial position or cash flows.




21




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (SFAS
      157), to define fair value, establish a framework for measuring fair value
      in
      generally accepted accounting principles and expand disclosures about fair-value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007 and interim periods within those fiscal
      years, with earlier application allowed. The Company is currently evaluating
      the
      effect of this standard on its future reported financial position and results
      of
      operations.




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes -an interpretation of FASB Statement No.
      109* (FIN
      48). The interpretation contains a two-step approach to recognizing and
      measuring uncertain tax positions accounted for in accordance with SFAS No.
      109, *Accounting
      for Income Taxes* .
      The
      first step is to evaluate the tax position for recognition by determining if
      the
      weight of available evidence indicates that it is more likely than not that
      the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. The company is still assessing the impacts of the adoption of FIN
      48.




In
      June
      2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
      (“EITF”) related to EITF Issue No. 06-3, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)* (“EITF
      06-3”). EITF 06-3 concludes that the presentation of any tax assessed by a
      governmental authority that is both imposed on and concurrent with a specific
      revenue-producing transaction between a seller and a customer, and may include,
      but is not limited to, sales, use, value added, and some excise taxes on either
      a gross basis (included in revenues and costs) or a net basis (excluded from
      revenues) is an accounting policy that should be disclosed. In addition, for
      any
      such taxes that are reported on a gross basis, an entity should disclose the
      amounts of those taxes in interim and annual financial statements for each
      period for which an income statement is presented if those amounts are
      significant. The provisions of EITF 06-3 should be applied to financial reports
      for interim and annual reporting periods beginning after December 15, 2006,
      with
      earlier adoption permitted. The Company does not believe that the adoption
      of
      EITF 06-3 will have a material impact on its financial position or results
      of
      operations.




In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments* — *an
      amendment of FASB Statements No. 133 and 140* (SFAS
      155), to simplify and make more consistent the accounting for certain financial
      instruments. SFAS 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      to
      permit fair-value remeasurement for any hybrid financial instrument with an
      embedded derivative that otherwise would require bifurcation, provided that
      the
      whole instrument is accounted for on a fair-value basis. SFAS 155 amends SFAS
      No. 140, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      to
      allow a qualifying special-purpose entity to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS 155 applies to all financial instruments acquired
      or
      issued after the beginning of an entity's first fiscal year that begins after
      September 15, 2006, with earlier application allowed. This standard is not
      expected to have a significant effect on the Company’s future reported financial
      position or results of operations.




Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 154, *Reporting
      Accounting Changes in Interim Financial Statements* (‘‘SFAS
      154’’) *,* which
      replaces APB Opinion No. 20, *Accounting
      Changes,* and
      SFAS
      No. 3, *Reporting
      Accounting Changes in Interim Financial Statement.* SFAS
      154
      changed the requirements for the accounting for and reporting of a change in
      accounting principle. SFAS 154 applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions. When a pronouncement includes specific transition provisions, those
      provisions should be followed. The adoption of SFAS 154 had no impact to the
      financial position or results of operations.





**Subsequent
      Events**





Effective
      as of January 1, 2007, the Company sold its
      UK Lucent Switch used in the Company’s wholesale voice services business in
      exchange for the buyer (i) assuming the co-location lease and all associated
      costs, including, without limitation the costs of the circuits, power, and
      running the switching equipment (ii) operating the Switch, (iii) allowing the
      Company to use the switch for three years at no cost to the Company and (iv)
      assuming any billing processes previously performed by one of the Company’s
      employees, who will continue to be available to the Company.





On
      April
      6, 2007, we completed a private placement of convertible notes and warrants
      pursuant to a securities purchase agreement with
      certain accredited investors .
      The investors purchased convertible notes in the aggregate principal amount of $2,500,000
      and
      warrants to purchase up to an aggregate of 2,500,000 shares of our common stock
      at $1.00 per share. The private placement resulted in gross proceeds to us
      of
      $2,500,000. The investors will
      also receive an aggregate of 5,000,000 shares of our common stock, which shares
      will be transferred from EMS, an entity of which Mr. Galliers-Pratt, is a
      beneficiary, to the investors ,
      EMS is
      receiving no consideration for the transfer. See
      Note
      19 to the financial statements included
      in Item 7 for a
      complete description of this private placement and the terms of the convertible
      notes and warrants.




22


In
      connection with the closing of the convertible note and warrant financing,
      we
      paid placement agent fees in the amount of $56,000 in cash and warrants to
      purchase 1,400,000 shares of our common stock at $1.00 per share, which warrants
      expire in five years.  We
      have
      agreed to indemnify the principal placement agent from claims arising in
      relation to the services it provides to us.





On
      February, 2, 2007, Vistula Limited signed a distribution agreement with
      Northamber to
      sell
      its IP-PBX solutions to customers of Northamber in the United Kingdom.
      Northamber will
      offer a hosted IP-PBX product using our V-CubeTM platform. The hosted IP-PBX
      product will be sold via Northamber’s network
      of 6,000 distributors and master
      agents in the
      UK. Under the agreement , we will
      host the service and provide Tier 2 and Tier 3 level support to Northamber’s
      distributors and customers. Northamber is a
      long established and large trade-only distributor of IT products and equipment in the
      UK .
      We
      expect the revenues from this distribution to be a significant provider of
      operational cash for out business.




On
      February 12, 2007, we entered into a Supplemental Agreement with Scott Lee
      Goodwin (“Goodwin”), the seller and former shareholder of Goodman Blue, to amend
      the put option such that
      Goodwin shall have the option to require us to purchase 1,400,000 of the shares
      for a total aggregate cash consideration of $1,400,000 during the
      period commencing on February 1, 2007 and ending on April 27, 2007 at 5:00pm
      EST and
      Goodwin shall have the option to require us to purchase
      1,100,000 of the shares for a total aggregate cash consideration of $1,100,000
      during the period commencing on August 1, 2007 and ending on August 31, 2007. The
      terms
      of our currently outstanding debentures and notes prohibit the redemption of
      shares of our common stock without the debt holders consent.




On
      February 5, 2007, we granted options to purchase common
      stock to the persons and in the amounts that follow:




**Officers
                and Directors**
            
            **Shares**Ian
                Cope
            
            20,000Jared
                P. Taylor
            
            50,000Nick
                Topham
            
            25,000




We
      also
      granted additional options to purchase up to 20,000 shares of common stock
      to
      certain other employees. All of the above options have an exercise price of
      $0.32 per share which represents the closing price of our common stock on
      February 2, 2007 and
      an
      expiration date of February 5, 2017. The options were granted as compensation
      for employment or director services, as applicable. The options are immediately
      exercisable with respect to 25% of the total option shares purchaseable
      thereunder. Thereafter, the options will vest and become exercisable for an
      additional 25% on the last day of each year after the date of grant, so that
      the
      options shall be fully vested on the third anniversary of the date of grant.
      All
      of the above options will accelerate in full upon a change of control. The
      options granted to Ian Cope and Jared Taylor and certain other employees are
      evidenced by an agreement in the form of the incentive stock option agreement.




**Factors
      Affecting Future Performance**





***Our
      immediate future revenues and cash flow are dependent upon one distributor
      in
      the United Kingdom.***





On
      February 2, 2007, we signed a distribution agreement with Northamber to sell
      our
      IP-PBX solutions to customers of Northamber in the United Kingdom. Northamber
      will offer a hosted IP-PBX product using Vistula's V-CubeTM platform. The hosted
      IP-PBX product will be sold via Northamber's network of 6,000 distributors
      and
      Master Agents in the UK. We are dependent upon Northamber’s historical proven
      success rate to be equally successful in the distribution of our V-CubeTM product
      to their customers. If we are unable to successfully launch a hosted IP-PBX
      network for Northamber to use for its customers, the Company’s expected revenues
      and expected future cash flows may not be met.





***If
      we do not obtain a substantial amount of additional*** ***financing*** ***and/or concessions from creditors*** ***,*** ***we may have to curtail or suspend operations.***





We
      believe we will 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.





23




***We
      may not be able to accurately forecast future
      results.***




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.





***We
      may continue to lose money on our operations.***





We
      are
      not profitable. In the fiscal year ended December 31, 2006, we incurred a net
      loss of $19,530,105 and as of December 31, 2006, we had an accumulated deficit
      of $36,107,104. 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:





·
            The
                success Northamber as a distributor of the V-CubeTM
                product;





·
            Developing
                the Vistula and Goodman Blue brands, through marketing and other
                promotional activities;





·
            Expanding
                our product and services offerings;





·
            Developing
                marketing and distribution relationships with strategic business
                partners;





·
            Expanding
                general and administrative functions to support any growth that may
                occur;
                and





·
            Establishing
                and developing customer and carrier relationships in the
                telecommunications industry.





***If
      we fail to establish the Vistula and Goodman Blue 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 Goodman Blue 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
      Goodman Blue 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 Goodman Blue 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 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
      contracts and customers, and if we are unable to replace 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 contracts. As these
      contracts wind down to completion, we face the task of replacing such revenues
      with new projects and contracts. 86% of our revenues for the fiscal year ended
      December 31, 2006 was derived from four customers and 89% of our revenues for
      the fiscal year ended December 31, 2005 was derived from four customers. Our
      inability to replace such revenues would cause a significant decrease in our
      revenues and negatively affect our operating results.





24




***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
                timing of receipt of new contracts;





·
            The
                length of our sales cycles;





·
            Competitive
                pricing pressures;





·
            The
                commencement, completion or termination of contracts during any particular
                reporting period;





·
            Fluctuations
                in demand for our services;





·
            The
                commencement of services by a
                customer;





·
            Services
                furnished by other providers;





·
            The
                availability of new contracts sufficient to generate significant
                additional revenues to replace revenues associated with contracts
                that are
                nearing or at completion; and





·
            Telecommunications
                market conditions and economic conditions
                generally.





The
      factors within our control include, among others:





·
            The
                amount of sales and marketing expenses and general and administrative
                expenses we incur;





·
            The
                timing of our expansion into new markets, through acquisitions or
                otherwise;





·
            Changes
                in the prices of products or services we offer;
                and





·
            Attracting
                qualified professionals in a timely manner and retaining
                them.





Due
      to
      the above factors, quarterly revenues, expenses and results of operations could
      vary significantly in 2007 and beyond.





***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.





25




***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 any 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 41% of our revenues for
      the year ended December 31, 2006, and for approximately 19% of our revenues
      for
      the year ended December 31, 2005. The multi-jurisdictional nature of our
      revenues exposes us to additional risks. Such risks include:





·
            The
                effects of terrorism;





·
            The
                general economic and political conditions in each
                country;





·
            The
                effect of applicable foreign tax structures, including tax rates
                that may
                be higher than tax rates in the United
                States;




·
                Tariff
                    and trade regulations;




·
            Difficulties
                in obtaining local business licenses or
                approvals;





·
            Management
                of a geographically diverse organization;
                and





·
            Difficulties
                and increased expenses in complying with a variety of foreign laws
                and
                regulations, including labor, employment and immigration laws where
                failure to comply could expose us to substantial fines and penalties
                and a
                reduction in our available
                workforce.





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.





26




***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 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:





·
            Diversion
                of management’s attention and
                resources;





·
            Potential
                loss of key employees and customers of the acquired
                companies;


·
              Difficult
                    and costly integration of
                    operations;


·
            Lack
                of experience operating in the geographic market or industry sector
                of the
                acquired business;





·
            Adverse
                effects on existing business
                relationships;





·
            Risks
                associated with entering markets in which we have limited or no prior
                experience;





·
            An
                increase in our expenses and working capital requirements;
                and





·
            Exposure
                to unanticipated contingent liabilities of acquired
                companies.





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.





27




***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.





***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, or Adam Bishop,
      president of Vistula Limited and Goodman Blue Limited could adversely affect
      our
      ability to meet our customers’ needs. We have entered into a consulting
      agreement for services to be rendered by Rupert Galliers-Pratt with an entity
      affiliated with Rupert Galliers-Pratt for a term of 24 months, which term
      commenced as of August 17, 2005. At present, we do not have an employment
      agreement with Adam Bishop.





***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 certain financial management and accounting services
      on a part-time basis to supplement the services provided by our own finance
      and
      administrative staff. 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:





·
            Customer
                unwillingness to implement our products and
                services;





·
            Any
                delays or difficulties that we may incur in completing the development
                and
                introduction of our planned products or product
                enhancements;





·
            New
                product or service introductions by our
                competitors;





·
              Any
                  failure of our products to perform as expected;
                  or




·
            Any
                difficulty we may incur in meeting customers’ delivery
                requirements.





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.





***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.





28




***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 our competitors, such as
      Broadsoft, 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 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:





·
            Provide
                extremely high reliability and
                quality;





·
            Scale
                easily and efficiently;





·
            Interoperate
                with existing network designs;





·
            Provide
                effective network management;





·
            Are
                accompanied by comprehensive customer support and professional services;
                and





·
            Provide
                a cost-effective solution for
                customers.





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.





29




***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 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 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. ** However
      the complexity and nature of the software is such that it would be just as
      difficult for a company to steal, copy and understand our software as it would
      be to re-write the whole package.





***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.





***Compliance
      with changing corporate governance and public disclosure regulations may result
      in additional expense.***




Keeping
      abreast of, and in compliance with, changing laws, regulations and standards
      relating to corporate governance, public disclosure and internal controls,
      including the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event
      we seek and are approved for listing on a registered national securities
      exchange, the stock exchange rules will require an increased amount of
      management attention and external resources. We intend to continue to invest
      all
      reasonably necessary resources to comply with evolving standards, which may
      result in increased general and administrative expense and a diversion of
      management time and attention from revenue-generating activities to compliance
      activities. Beginning with our annual report for the fiscal year ending December
      31, 2007 we will be required to include a report of our management on internal
      control over financial reporting. Further, in our annual report for the fiscal
      year ending December 31, 2008 we will be required to include an attestation
      report of our independent registered public accounting firm on internal control
      over financial reporting.




30




***Our
      executive officers, directors and principal stockholders have substantial
      holdings, which could delay or prevent a change in corporate control favored
      by
      our other stockholders.***




Our
      directors, officers and 5% stockholders beneficially own, in the aggregate,
      approximately 61.3% of our outstanding voting stock. The interests of our
      current officers and directors may differ from the interests of other
      stockholders. Further, our current officers and directors may have the ability
      to significantly affect the outcome of all corporate actions requiring
      stockholder approval, including the following actions:




·
            the
                election of directors;




·
            the
                amendment of charter documents;




·
            issuance
                of blank-check preferred or convertible stock, notes or instruments
                of
                indebtedness which may have conversion, liquidation and similar features,
                or effecting other financing arrangements;
                or




·
            the
                approval of certain mergers and other significant corporate transactions,
                including a sale of substantially all of our assets, or merger with
                a
                publicly-traded shell or other company.




***Our
      common stock could be further diluted as the result of the issuance of
      additional shares of common stock, convertible securities, warrants or
      options.***




In
      the
      past, we have issued common stock, convertible securities and warrants in order
      to raise money. We have also issued options as compensation for services and
      incentive compensation for our employees and directors. We have a substantial
      number of shares of common stock reserved for issuance upon the conversion
      and
      exercise of these securities. Our issuance of additional common stock,
      convertible securities, options and warrants could affect the rights of our
      stockholders, and could reduce the market price of our common
      stock.




***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.




31




**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, 2006 AND 2005****Report
                of Independent Registered Public Accounting Firm**
            
            
            **F-1****Consolidated
                Balance Sheets at December 31, 2006 and 2005**
            
            
            **F-2****Consolidated
                Statements of Operations for the Years Ended December 31, 2006 and
                2005**
            
            
            **F-3****Consolidated
                Statements of Stockholders’ Equity (Deficit) for the Years Ended December
                31, 2006 and 2005**
            
            
            **F-4****Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2006 and
                2005**
            
            
            **F-5****Notes
                to Consolidated Financial Statements**
            
            
            **F-6**




32





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Shareholders


Vistula
      Communications Services, Inc.


New
      York,
      NY





We
      have
      audited the accompanying consolidated balance sheets of Vistula Communications
      Services, Inc. as of December 31, 2006 and 2005, and the related consolidated
      statement of operations, stockholders’ deficit and cash flows for the years then
      ended. These consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      consolidated 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 these audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting amounts and disclosures in
      the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall presentation of the financial statements. 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. at December 31, 2006 and 2005 and the results of their operations
      and their cash flows for the years then ended in conformity with accounting
      principles generally accepted in the United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As more fully described in Note 1, the Company
      has experienced recurring operating losses and has a working capital deficit
      at
      December 31, 2006. The Company is working on various alternatives to improve
      the
      Company’s financial resources which are also described in Note 1. Absent the
      successful completion of one or more of these alternatives, the company’s
      operating results will increasingly become uncertain. These conditions raise
      substantial doubt about the Company’s ability to continue as a going concern;
      however, the financial statements do not include any adjustments to reflect
      the
      possible future effects on the recoverability and classification of assets
      or
      the amounts and classification of liabilities that may result from the outcome
      of this uncertainty.





As
      discussed in Note 2, effective January 1, 2006, the Company adopted Statement
      of
      Financial Accounting Standards No. 123(R), “Share Based Payment”.






/s/
      PKF


Certified
      Public Accountants


A
      Professional Corporation


New
      York,
      New York


April
      13,
      2007


F-1


**VISTULA
      COMMUNICATIONS SERVICES, INC.**


**Consolidated
      Balance Sheets**


**December
      31, 2006 and 2005**





**2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            195,223
            
            $
            553,127Accounts
                receivable
            
            
            157,517
            
            
            130,748Prepaid
                expenses and other current assets
            
            
            313,352
            
            
            1,045,795Assets
                held for sale
            
            
            110,527
            
            
            —Total
                current assets
            
            
            776,619
            
            
            1,729,670Property
                and equipment, net
            
            
            444,999
            
            
            2,362,373Deferred
                financing costs
            
            
            330,476
            
            
            613,742Intangible
                assets
            
            
            25,629,870
            
            
            —Other
                assets
            
            
            20,254
            
            
            57,272Total
                assets
            
            $
            27,202,218
            
            $
            4,763,057**LIABILITIES
                AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            1,039,875
            
            $
            398,841Accrued
                expenses
            
            
            1,379,113
            
            
            628,154Shares
                subject to put option
            
            
            2,500,000
            
            
            —Deferred
                revenue
            
            
            160,685
            
            
            —Convertible
                promissory note to related party
            
            
            175,000
            
            
            175,000Note
                payable
            
            
            204,073
            
            
            870,000Total
                current liabilities
            
            
            5,458,746
            
            
            2,071,995Convertible
                debentures
            
            
            5,830,634
            
            
            5,424,902Total
                liabilities
            
            
            11,289,380
            
            
            7,496,897Commitments
                and contingenciesStockholders’
                equity (deficit):Preferred
                stock, $0.001 par value, 10,000,000 shares authorized; no shares
                issued
                and outstanding
            
            
            —
            
            
            —Common
                stock, $0.001 par value, 200,000,000 and 100,000,000 shares authorized;
                66,964,898 and 31,914,898 issued and outstanding in 2006 and 2005,
                respectively
            
            
            66,964
            
            
            31,914Additional
                paid-in capital
            
            
            52,089,738
            
            
            13,975,077Deferred
                compensation
            
            
            —
            
            
            (13,422
            )Accumulated
                deficit
            
            
            (36,107,104
            )
            
            (16,576,999
            )Cumulative
                translation adjustment
            
            
            (136,760
            )
            
            (150,410
            )Total
                stockholders’ equity (deficit)
            
            
            15,912,838
            
            
            (2,733,840
            )Total
                liabilities and stockholders’ equity (deficit)
            
            $
            27,202,218
            
            $
            4,763,057





See
      accompanying notes to audited consolidated financial statements.


F-2





**VISTULA
      COMMUNICATIONS SERVICES, INC.**


**Consolidated
      Statements of Operations**


**Years
      ended December 31, 2006 and 2005**


**2006**
              
              **2005**Revenues:Telecommunications
              
              $
              862,008
              
              $
              840,457Contracted
                  services
              
              
              229,891
              
              
              —Total
                  revenues
              
              
              1,091,899
              
              
              840,457Cost
                  of revenues:Telecommunications
              
              
              1,166,081
              
              
              1,008,227Contracted
                  services
              
              
              159,725
              
              
              —Total
                  cost of revenues
              
              
              1,325,806
              
              
              1,008,227Gross
                  (loss) profit
              
              
              (233,907
              )
              
              (167,770
              )Operating
                  expenses:Selling,
                  general and administrative expenses
              
              
              12,899,861
              
              
              10,519,779Depreciation
                  and amortization
              
              
              3,425,027
              
              
              220,133Impairments
              
              
              1,380,552
              
              
              —Research
                  and development
              
              
              364,342
              
              
              30,612Total
                  operating expenses
              
              
              18,069,782
              
              
              10,770,524Loss
                  from operations
              
              
              (18,303,689
              )
              
              (10,938,294
              )Interest
                  expense, net
              
              
              (1,226,416
              )
              
              (1,243,708
              )Net
                  loss
              
              $
              (19,530,105
              )
              $
              (12,182,002
              )Weighted-average
                  basic and diluted shares outstanding
              
              
              52,052,134
              
              
              26,822,678Net
                  loss per common share basic and diluted
              
              $
              (0.38
              )
              $
              (0.45
              )





See
      accompanying notes to audited consolidated financial statements.


F-3





**VISTULA
      COMMUNICATIONS SERVICES, INC.**


**Consolidated
      Statements of Stockholders’ Equity (Deficit)**




**Common
                Stock****Shares**
            
            **Amount**
            
            **Additional**
              **Paid-In**
              **Capital**
            
            **Deferred
                Compensation**
            
            **Accumulated**
              **Deficit**
            
            **Cumulative**
              **Translation**
              **Adjustment**
            
            **Total**
              **Stockholders’**
              **Equity
                (Deficit)**
            
            **Comprehensive**
              **Loss**Balance,
                January 1, 2005
            
            
            24,454,406
            
            
            24,454
            
            
            2,608,581
            
            
            (399,000
            )
            
            (4,394,997
            )
            
            (83,135
            )
            
            (2,244,097
            )
            
            (3,862,442
            )Issuance
                of common stock
            
            
            910,000
            
            
            910
            
            
            574,464
            
            
            —
            
            
            —
            
            
            —
            
            
            575,374Issuance
                of stock options
            
            
            —
            
            
            —
            
            
            1,814,840
            
            
            (1,814,840
            )
            
            —
            
            
            —
            
            
            —Amortization
                of deferred stock compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            2,200,418
            
            
            —
            
            
            —
            
            
            2,200,418Issuance
                of warrants with convertible debentures
            
            
            —
            
            
            —
            
            
            1,780,844
            
            
            —
            
            
            —
            
            
            —
            
            
            1,780,844Issuance
                of warrant pursuant to consulting agreement
            
            
            —
            
            
            —
            
            
            29,913
            
            
            —
            
            
            —
            
            
            —
            
            
            29,913Issuance
                of common stock pursuant to debenture conversions
            
            
            2,799,993
            
            
            2,800
            
            
            1,530,292
            
            
            —
            
            
            —
            
            
            —
            
            
            1,533,092Issuance
                of common stock pursuant to warrant exercises
            
            
            3,190,499
            
            
            3,190
            
            
            3,027,784
            
            
            —
            
            
            —
            
            
            —
            
            
            3,030,974Issuance
                of warrants pursuant to inducement of warrant exercises
            
            
            —
            
            
            —
            
            
            1,200,199
            
            
            —
            
            
            —
            
            
            —
            
            
            1,200,199Issuance
                of common stock pursuant to marketing and distribution agreement
            
            
            500,000
            
            
            500
            
            
            999,500
            
            
            —
            
            
            —
            
            
            —
            
            
            1,000,000Exercise
                of stock options
            
            
            60,000
            
            
            60
            
            
            2,940
            
            
            —
            
            
            —
            
            
            —
            
            
            3,000Compensation
                expense associated with options issued to non-employees
            
            
            —
            
            
            —
            
            
            405,720
            
            
            —
            
            
            —
            
            
            —
            
            
            405,720Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (12,182,002
            )
            
            —
            
            
            (12,182,002
            )
            
            (12,182,002
            )Change
                in cumulative translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (67,275
            )
            
            (67,275
            )
            
            (67,275
            )Balance,
                December 31, 2005
            
            
            31,914,898
            
            $
            31,914
            
            $
            13,975,077
            
            $
            (13,422
            )
            $
            (16,576,999
            )
            $
            (150,410
            )
            $
            (2,733,840
            )
            $
            (12,249,277
            )Application
                of deferred compensation against additional paid-in
                capital
            
            
            —
            
            
            —
            
            
            (13,422
            )
            
            13,422
            
            
            —
            
            
            —
            
            
            —Issuance
                of common stock
            
            
            31,800,000
            
            
            31,800
            
            
            34,167,365
            
            
            —
            
            
            —
            
            
            —
            
            
            34,199,165Exercise
                of stock options
            
            
            750,000
            
            
            750
            
            
            74,250
            
            
            —
            
            
            —
            
            
            —
            
            
            75,000Issuance
                of stock options
            
            
            —
            
            
            —
            
            
            3,246,178
            
            
            —
            
            
            —
            
            
            —
            
            
            3,246,178Issuance
                of warrants pursuant to consulting agreements
            
            
            —
            
            
            —
            
            
            231,945
            
            
            —
            
            
            —
            
            
            —
            
            
            231,945Issuance
                of warrants pursuant to revolving credit facility
            
            
            —
            
            
            —
            
            
            410,845
            
            
            —
            
            
            —
            
            
            —
            
            
            410,845Issuance
                of common stock on acquisition
            
            
            2,500,000
            
            
            2,500
            
            
            2,497,500
            
            
            —
            
            
            —
            
            
            —
            
            
            2,500,000Reclassification
                for shares subject to put option
            
            
            —
            
            
            —
            
            
            (2,500,000
            )
            
            —
            
            
            —
            
            
            —
            
            
            (2,500,000
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (19,530,105
            )
            
            —
            
            
            (19,530,105
            )
            $
            (19,530,105
            )Change
                in cumulative translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            13,650
            
            
            13,650
            
            
            13,650Balance,
                December 31, 2006
            
            
            66,964,898
            
            $
            66,964
            
            $
            52,089,738
            
            $
            —
            
            $
            (36,107,104
            )
            $
            (136,760
            )
            $
            15,912,838
            
            $
            (19,516,455
            )




See
      accompanying notes to audited consolidated financial
      statements.


F-4





**VISTULA
      COMMUNICATIONS SERVICES, INC.**


**Consolidated
      Statements of Cash Flows**


**Years
      ended December 31, 2006 and 2005**


**2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (19,530,105
              )
              $
              (12,182,002
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
                  and amortization
              
              
              3,425,027
              
              
              220,133Non-cash
                  expense pursuant to financial advisory agreements
              
              
              1,875,000
              
              
              —Issuance
                  of common stock pursuant to marketing and distribution
                  agreement
              
              
              —
              
              
              1,000,000Non-cash
                  compensation expense
              
              
              3,246,178
              
              
              2,659,944Non-cash
                  interest expense
              
              
              688,998
              
              
              672,223Non-cash
                  impairment of assets
              
              
              1,380,552
              
              
              —Non-cash
                  expense on warrant inducement
              
              
              —
              
              
              1,200,199Issuance
                  of warrant pursuant to consulting agreement
              
              
              231,945
              
              
              29,913Issuance
                  of warrant pursuant to revolving credit facility
              
              
              410,845
              
              
              —Changes
                  in assets and liabilities, net effects of acquisition:(Increase)
                  decrease in:Accounts
                  receivable
              
              
              119,588
              
              
              (74,757
              )Prepaid
                  expenses and other current assets, net
              
              
              412,008
              
              
              (752,503
              )Increase
                  (decrease) in:Accounts
                  payable
              
              
              747,295
              
              
              (138,819
              )Accrued
                  expenses
              
              
              129,103
              
              
              (416,189
              )Deferred
                  revenue
              
              
              153,702
              
              
              —Net
                  cash used in operating activities
              
              
              (6,709,864
              )
              
              (7,781,858
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (198,058
              )
              
              (725,031
              )Purchase
                  of software and intellectual property
              
              
              (8,800,000
              )
              
              —Acquisition
                  of subsidiary’s cash
              
              
              456,851
              
              
              —Proceeds
                  from sale of customer contracts
              
              
              484,866
              
              
              —Net
                  cash used in investing activities
              
              
              (8,056,341
              )
              
              (725,031
              )Cash
                  flows from financing activities:Net
                  proceeds from issuance of common stock
              
              
              15,244,165
              
              
              —Proceeds
                  from bridge revolving credit agreement
              
              
              1,250,000
              
              
              —Proceeds
                  provided by stockholder
              
              
              30,000
              
              
              —Payments
                  on due to stockholder
              
              
              (30,000
              )
              
              (801,630
              )Proceeds
                  from exercise of stock options
              
              
              75,000
              
              
              3,000Payment
                  of notes payable
              
              
              (910,027
              )
              
              (100,000
              )Payment
                  on bridge revolving credit agreement
              
              
              (1,250,000
              )
              
              —Proceeds
                  from issuance of convertible debentures
              
              
              —
              
              
              7,452,873Proceeds
                  from warrant exercises
              
              
              —
              
              
              3,030,974Payment
                  of capital lease obligation
              
              
              —
              
              
              (476,293
              )Net
                  cash provided by financing activities
              
              
              14,409,138
              
              
              9,108,924Effect
                  of exchange rates on cash
              
              
              (837
              )
              
              (52,129
              )Net
                  (decrease) increase in cash and cash equivalents
              
              
              (357,904
              )
              
              549,906Cash
                  and cash equivalents, beginning of year
              
              
              553,127
              
              
              3,221Cash
                  and cash equivalents, end of year
              
              $
              195,223
              
              $
              553,127**Supplemental
                  disclosure of cash flow information:**Cash
                  paid for interest
              
              $
              454,674
              
              $
              577,083Cash
                  paid for taxes
              
              $
              —
              
              $
              16,894**Supplemental
                  disclosure of non-cash financing activities:**Issuance
                  of common stock pursuant to financial advisory agreement
              
              $
              1,875,000
              
              
              —Issuance
                  of common stock warrant pursuant to consulting agreement
              
              $
              231,945
              
              
              —Issuance
                  of common stock warrant pursuant to revolving credit
                  facility
              
              $
              410,845
              
              
              —Issuance
                  of common stock pursuant to software and intellectual
                  property
              
              $
              17,080,000
              
              
              —Reclassification
                  of prepaid royalties to purchase of intangible asset
              
              $
              399,189
              
              
              —Company
                  expenses paid directly by and returned directly to
                  stockholder
              
              $
              75,000
              
              
              —Purchase
                  of acquired company for software and intellectual property
              
              $
              2,562,643
              
              
              —Issuance
                  of common stock pursuant to purchase of assets under capital lease
                  obligation
              
              
              —
              
              $
              324,874Issuance
                  of common stock pursuant to purchase of assets
              
              
              —
              
              $
              75,000Issuance
                  of common stock pursuant to consulting agreement
              
              
              —
              
              $
              130,000Issuance
                  of common stock pursuant to employment agreement
              
              
              —
              
              $
              45,500Issuance
                  of note payable pursuant to purchase of assets under capital lease
                  obligation
              
              
              —
              
              $
              970,000Issuance
                  of common stock pursuant to debenture conversions
              
              
              —
              
              $
              1,533,092Issuance
                  of common stock warrants in connection with convertible debenture
                  financing
              
              
              —
              
              $
              184,844Reduction
                  in fixed assets and related indebtedness pursuant to modification
                  of asset
                  purchase agreement
              
              
              —
              
              $
              200,000





See
      accompanying notes to audited consolidated financial statements.


F-5





**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. On September 15, 2006, Vistula Telecom Limited
      (“VTL”) was established as a wholly-owned subsidiary. On October 11, 2006,
      Vistula Communications Services, Inc. acquired 100% of the ordinary shares
      of
      Goodman Blue Limited (“Goodman Blue”). Hereafter, Vistula Communications
      Services, Inc. its wholly-owned subsidiaries and 60% owned subsidiary in South
      Africa, Vistula Communications Services SA (Pty) Ltd. (“Vistula SA”), as
      defined, are collectively referred to as “the Company.”





The
      Company is a provider of telephone and internet call services throughout the
      world. Goodman Blue develops software systems to automate the delivery and
      billing of telephone service features. Cardlink has been inactive since the
      incorporation of the Company, Vistula SA has not generated any revenue and
      both
      are expected to be dissolved in the 2007 calendar year.




Goodman
      Blue develops software systems to automate the delivery of complex multi-tiered
      products through web portals that guide clients through sign-up, delivery,
      implementation and billing. The Company uses this software as an ordering and
      provisioning portal for the V-CubeTM product and categorizes this software under
      the descriptive name O2C .




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.





On
      October 11, 2006, the Company completed the acquisition of all of the
      outstanding shares of Goodman Blue and issued 2,500,000 shares of the Company’s
      common stock (“Shares”), $.001 par value per share to Scott Lee Goodwin
      (“Goodwin”), the sole stockholder of Goodman Blue, subject to an option to
      require the Company to repurchase the Shares for an aggregate purchase price
      of
      $2,500,000 in certain circumstances. The Company has issued a share certificate
      to Goodwin for 2,500,000 common stock shares, but has recorded the acquisition
      of Goodman Blue as a liability of $2,500,000 in accordance with the provisions
      of Statement of Financial Accounting Standard (SFAS) No. 150, *Accounting
      for Certain Financial Instruments with Characteristics of Both Debt and
      Equity* .
      The
      purpose of the acquisition was to acquire the software portal developed by
      Goodman Blue called O2C .
      See
      Note 6.





Since
      its
      inception, the Company has sustained its operations through debt and equity
      financings, funding provided by the Chairman and contributed services by the
      Chairman and other stockholders. The Chairman has made various advances to
      the
      Company from the use of credit facilities, guaranteeing loans, and from his
      personal finances, to assist the Company in its operations since the Company’s
      inception.




F-6





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.





The
      accompanying consolidated financial statements have been prepared on a going
      concern basis which contemplates the realization of assets and the satisfaction
      of liabilities in the normal course of business. As shown in the accompanying
      consolidated financial statements, the Company incurred a net loss of
      $19,530,105 for the year ended December 31, 2006 and had an accumulated deficit
      of $36,107,104 at December 31, 2006. Further, the Company had cash of $195,223
      and a working capital deficit at December 31, 2006 of $4,792,654. These factors
      among others may indicate that the Company will be unable to continue as a
      going
      concern.





The
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability of assets and satisfaction of liabilities that might be necessary
      should the Company be unable to continue as a going concern. The Company's
      continuation as a going concern is dependent upon its ability to generate
      sufficient cash flow to meet its obligations on a timely basis, to comply with
      the terms of its financing arrangements, to obtain additional financing as
      may
      be required, and ultimately to attain profitability. To address these issues
      in
      part, the Company raised $2,500,000 in gross proceeds on April 6, 2007, which
      will be used to satisfy a portion of the Company’s outstanding payables and to
      fund working capital requirements for the launch of the V-CubeTM product through
      a United Kingdom distributor, Northamber . The
      Company made payments from the proceeds received on April 6, 2007, to certain
      employees, consultants and officers relating for employment and consulting
      services, respectively, which were deemed delinquent on April 6, 2007 and April
      10, 2007. The
      Company is dependent upon Northamber to meet its forecasted sales figures to
      its
      customers for the second, third, and fourth quarters of 2007, in order to meet
      the Company’s cash needs during these
      quarters. In order for Northamber to be successful the Company must be able
      to
      meet the voluminous demands of Northamber and their customers. The Company
      describes in the Liquidity and Capital Resources discussion in the Management
      Discussion and Analysis of Item 6 that the majority of the revenue in the
      Company’s immediate future is expected to be from the Northamber distribution
      agreement and anticipates the Company’s ability to develop and implement cost
      controls, including the expectation that the Company will be able to
      successfully negotiate significant reductions and delayed payments of material
      amounts owed to creditors, in order to conserve cash. However, there is no
      assurance that the Company will be able to generate sufficient funds from the
      sales by the distributor and sufficient savings from its development and
      implementation of cost controls to conserve cash to continue as a going
      concern.





**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




*Basis
      of Presentation*





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.




*Use
      of Estimates*





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.




*Foreign
      Currency*





The
      Company uses the United States dollar as its reporting currency; the British
      pound is the functional currency of three 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' equity (deficit) in the
      consolidated balance sheet. Transaction gains (losses) were immaterial for
      the
      years ended December 31, 2006 and 2005.




*Cash
      and Cash Equivalents*





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




F-7




*Accounts
      Receivable*





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 December 31, 2006 and 2005 the Company did not record an
      allowance for doubtful accounts. During the year ended December 31, 2006 the
      Company wrote-off $40,162 of deposits determined not collectible.





*Property
      and Equipment*





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 Life**Telecommunications
                equipment
            
            
            3-5
                yearsFurniture,
                fixtures and office equipment
            
            
            3-5
                years





*Deferred
      Financing Costs*





Deferred
      financing costs are amortized over the term of the convertible debentures.




*Intangible
      Assets*





Intangible
      assets are carried at cost less accumulated amortization. The Company reviews
      intangible assets for impairment whenever events or changes in circumstances
      indicate that the carrying amount may not be recoverable.





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





**Intangible
                Asset Classification**
            
            **Estimated
                Useful Life**Software
                and intellectual property
            
            
            5
                years




*Deferred
      Revenue*





Deferred
      revenue is recorded when cash is collected as a pre-payment for wholesale voice
      services and when cash is collected for contracted services not yet provided.
      These items are recognized as revenue when voice services have been terminated
      over the Company’s network or contracted services have been provided.





*Revenue
      Recognition*





The
      Company’s revenue is derived primarily from fees charged to terminate voice
      services over the Company’s network and contracted services to support software
      licences. 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 or the dispute is known. 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.




F-8





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* .




*Stock-Based
      Compensation*





Commencing
      on January 1, 2006 the Company began applying the provisions of Statement of
      Financial Accounting Standards (SFAS) No. 123R, *Share
      Based Payment* ,
      or SFAS
      123R, in accounting for stock-based compensation. SFAS 123R requires measurement
      of the cost of employee services received in exchange for an award of equity
      instruments based on the grant-date fair value of the award. That cost is
      recognized over the period during which an employee is required to provide
      service in exchange for the award (usually the vesting period). Prior to January
      1, 2006, the Company followed Accounting Principles Board (APB), Opinion No.
      25, *Accounting
      for Stock Issued to Employees* ,
      or APB
      25, and related interpretations, in accounting for stock-based compensation
      plans, rather than the alternative fair-value method provided for under SFAS
      No.
      123, *Accounting
      for Stock-Based Compensation* ,
      or SFAS
      123. In the notes to the financial statements, the Company provides pro-forma
      disclosures in accordance with SFAS 123. The Company accounts for transactions
      in which services are received from non-employees in exchange for equity
      instruments based on the fair value of such services received or of the equity
      instruments issued, whichever is more reliably measured, in accordance with
      SFAS
      123R and the Emerging Issues Task Force (EITF) Issue 96-18, *Accounting
      for Equity Instruments That Are Issued to Other than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* ,
      or EITF
      96-18.




Accounting
      for equity instruments granted or sold under APB 25, SFAS 123, SFAS 123R and
      EITF 96-18 requires fair-value estimates of the equity instrument granted or
      sold. If the Company’s estimates of the fair value of these equity instruments
      are too high or too low, the Company’s expenses may be over- or understated. For
      equity instruments granted or sold in exchange for the receipt of goods or
      services, the Company estimates the fair value of the equity instruments based
      upon consideration of factors deemed to be relevant at that time. Because shares
      of the Company’s common stock were not publicly traded prior to July 21, 2005,
      market factors historically considered in valuing stock and stock option grants
      included comparative values of public companies discounted for the risk and
      limited liquidity provided for in the shares being issued; prior valuations
      of
      stock grants and the effect of events that occurred between the time of such
      grants; economic trends; and the comparative rights and preferences of the
      security being granted compared to the rights and preferences of other
      outstanding equity.




Prior
      to
      July 21, 2005, the fair value of the Company’s common stock was determined by
      the Company’s board of directors contemporaneously with the grant. In the
      absence of a public trading market for the Company’s common stock, the Company’s
      board of directors considered numerous objective and subjective factors in
      determining the fair value of the Company’s common stock. At the time of option
      grants and other stock issuances, the Company’s board of directors considered
      the status of private and public financial markets; valuations of comparable
      private and public companies; the likelihood of achieving a liquidity event
      such
      as an initial public offering; the Company’s existing financial resources;
      anticipated continuing operating losses and increased spending levels required
      to meet the Company’s business plan; dilution to common stockholders from
      anticipated future financings; and a general assessment of future business
      risks.




*Impairment
      of Long Lived Assets*





In
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-lived Assets* ,
      the
      Company reviews its long-lived assets whenever events or changes in
      circumstances indicate that the carrying amount of such assets may not be
      recoverable. If the carrying amount of an asset or group of assets exceeds
      its
      net realizable value, the asset will be written down to its fair value. Assets
      held for sale are reported at the lower of their carrying amount or fair value
      less costs to sell.





*Income
      Taxes*





The
      Company accounts for income taxes in accordance with SFAS 109, *Accounting
      for Income Taxes.* Under
      SFAS 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.




F-9




*Earnings
      (Loss) Per Share*





Basic
      earnings (loss) per share is computed by dividing net loss available to common
      stockholders by the weighted average number of common shares outstanding during
      the year. Diluted earnings per share is computed by dividing net loss 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, convertible debentures and
      warrants are not included in the calculation of loss per share because their
      inclusion would be antidilutive.




*Concentration
      of Credit Risk and Significant Customers*





The
      Company maintains its cash in bank deposit accounts, which at times, may exceed
      federally insured limits or may not be federally insured. 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, 2006 and 2005, the percentages of revenue and accounts receivable
      attributable to the Company’s significant customers were as
      follows:




2006




**Customer**
            
            **Revenue**
            
            **Accounts**
              **Receivable**A
            
            
            42
            %
            
            24
            %B
            
            
            25
            
            
            56C
            
            
            12
            
            
            *D
            
            
            *
            
            
            15




2005




**Customer**
            
            **Revenue**
            
            **Accounts**
              **Receivable**A
            
            
            68
            %
            
            43
            %B
            
            
            12
            
            
            *C
            
            
            *
            
            
            24D
            
            
            *
            
            
            *E
            
            
            *
            
            
            15





*  Customer
      represents less than 10% of total.




F-10


*Comprehensive
      Income(Loss)*





The
      Company reports its comprehensive income (loss) in accordance with SFAS 130, *Reporting
      Comprehensive Income* ,
      which
      requires presentation of the components of comprehensive earnings. Comprehensive
      income (loss) 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 (loss) consists of cumulative translation
      adjustment and net loss for the years ended December 31, 2006 and
      2005.




*Fair
      Value of Financial Instruments*





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





*Research
      and Development*





Research
      and development costs are charged to expense as incurred.





*Advertising
      Expense*





Advertising
      costs are charged to expense as incurred.





*Reclassifications*





Certain
      reclassifications have been made to the 2005 financial statements to conform
      with the 2006 presentation.





*Recently
      Issued Accounting Standards*




In
      February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      159, *The
      Fair Value Option for Financial Assets and Financial Liabilities - Including
      an
      Amendment to FASB Statement No. 115* (SFAS
      159). SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. SFAS 159 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007. Earlier
      adoption is permitted as of the beginning of a fiscal year that begins on or
      before November 15, 2007, provided that the entity also elects to apply the
      provisions of SFAS 157. The Company is currently evaluating the effect of this
      standard on its future reported financial position and results of operations.




In
      September 2006, the Securities and Exchange Commission ("SEC") issued Staff
      Accounting Bulletin No. 108, "Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the
      effects of the carryover or reversal of prior year misstatements should be
      considered in quantifying a current year misstatement. The SEC staff believes
      that registrants should quantify errors using both the balance sheet and income
      statement approach when quantifying a misstatement that, when all relevant
      quantitative and qualitative factors are considered, is material. SAB 108 is
      effective for our fiscal year ending December 31, 2006. The initial adoption
      of
      this statement did not an impact on the Corporation's results of operations,
      financial position or cash flows.




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (SFAS
      157), to define fair value, establish a framework for measuring fair value
      in
      generally accepted accounting principles and expand disclosures about fair-value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007 and interim periods within those fiscal
      years, with earlier application allowed. The Company is currently evaluating
      the
      effect of this standard on its future reported financial position and results
      of
      operations.




In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes -an interpretation of FASB Statement No.
      109* (FIN
      48). The interpretation contains a two-step approach to recognizing and
      measuring uncertain tax positions accounted for in accordance with SFAS No.
      109, *Accounting
      for Income Taxes* .
      The
      first step is to evaluate the tax position for recognition by determining if
      the
      weight of available evidence indicates that it is more likely than not that
      the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. The company is still assessing the impacts of the adoption of FIN
      48.





F-11




In
      June
      2006, the FASB ratified the consensus reached by the Emerging Issues Task Force
      (“EITF”) related to EITF Issue No. 06-3, *How
      Taxes Collected from Customers and Remitted to Governmental Authorities Should
      Be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)* (“EITF
      06-3”). EITF 06-3 concludes that the presentation of any tax assessed by a
      governmental authority that is both imposed on and concurrent with a specific
      revenue-producing transaction between a seller and a customer, and may include,
      but is not limited to, sales, use, value added, and some excise taxes on either
      a gross basis (included in revenues and costs) or a net basis (excluded from
      revenues) is an accounting policy that should be disclosed. In addition, for
      any
      such taxes that are reported on a gross basis, an entity should disclose the
      amounts of those taxes in interim and annual financial statements for each
      period for which an income statement is presented if those amounts are
      significant. The provisions of EITF 06-3 should be applied to financial reports
      for interim and annual reporting periods beginning after December 15, 2006,
      with
      earlier adoption permitted. The Company does not believe that the adoption
      of
      EITF 06-3 will have a material impact on its financial position or results
      of
      operations.




In
      February 2006, the FASB issued SFAS No. 155, *Accounting
      for Certain Hybrid Financial Instruments* — *an
      amendment of FASB Statements No. 133 and 140* (SFAS
      155), to simplify and make more consistent the accounting for certain financial
      instruments. SFAS 155 amends SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      to
      permit fair-value remeasurement for any hybrid financial instrument with an
      embedded derivative that otherwise would require bifurcation, provided that
      the
      whole instrument is accounted for on a fair-value basis. SFAS 155 amends SFAS
      No. 140, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* ,
      to
      allow a qualifying special-purpose entity to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS 155 applies to all financial instruments acquired
      or
      issued after the beginning of an entity's first fiscal year that begins after
      September 15, 2006, with earlier application allowed. This standard is not
      expected to have a significant effect on the Company’s future reported financial
      position or results of operations.




Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 154, *Reporting
      Accounting Changes in Interim Financial Statements* (‘‘SFAS
      154’’) *,* which
      replaces APB Opinion No. 20, *Accounting
      Changes,* and
      SFAS
      No. 3, *Reporting
      Accounting Changes in Interim Financial Statement.* SFAS
      154
      changed the requirements for the accounting for and reporting of a change in
      accounting principle. SFAS 154 applies to all voluntary changes in accounting
      principle. It also applies to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions. When a pronouncement includes specific transition provisions, those
      provisions should be followed. The adoption of SFAS 154 had no impact to the
      financial position or results of operations.





**3.
      PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following:





**December
                31,****2006**
            
            **2005**Telecommunications
                equipment
            
            $
            964,208
            
            $
            2,534,960Furniture,
                fixtures, and office equipment
            
            
            136,507
            
            
            111,2521,100,715
            
            
            2,646,212Less—accumulated
                depreciation
            
            
            (655,716
            )
            
            (283,839
            )$
            444,999
            
            $
            2,362,373





Depreciation
      expense was $697,931 and $220,133 for the years ended December 31, 2006 and
      2005, respectively.





During
      the fourth quarter of 2006 management determined that the carrying value of
      two
      assets would not be fully recoverable. The Company recognized an impairment
      of
      $1,232,512 at December 31, 2006 on its wholesale telecommunications equipment
      located in Los Angeles used for call termination services due to uncertain
      future revenues from this equipment. As of December 31, 2006 the carrying value
      as adopted to reflect the then fair market value of this equipment of $152,952.
      The depreciation on this equipment will continue through the originally
      estimated useful life of the equipment on a straight-line basis using the
      carrying value as at December 31, 2006 as the gross asset value. The Company
      also recognized an impairment for 100% of the net carrying value of $150,851
      for
      a telecommunications software license previously marketed as our consumer VoIP
      product for which minimal revenue had been recorded as of December 31, 2006.
      The
      Company is developing its own consumer VoIP product and decided not to incur
      additional monthly costs to support the consumer VoIP software license.




F-12





**4.
      Assets Held For Sale**





The
      Company’s wholesale voice services switching equipment (“Switch”) located in the
      United Kingdom which the Company uses to provide its wholesale voice services
      to
      its customers has been recorded as Assets Held for Sale at December 31, 2006.
      Management recognized the decrease in wholesale voice traffic experienced during
      each quarter of fiscal year 2006, mainly due to its difficulty making timely
      payments to vendors related to wholesale voice traffic, which results in
      decreased margins and the Company’s ability to meet its fixed costs for this
      equipment. The Company anticipated difficulty in meeting the obligations of
      the
      lease payments for the co-location facility in London and associated costs
      of
      operating this equipment for the first quarter of 2007. Management determined
      that due to the decrease in margins the Company would benefit more through
      savings by exiting the obligations under the terms of the leasing facility
      and
      costs to operate the equipment, than it would benefit from the margins from
      wholesale voice services. The management of the voice services has previously
      been provided by a consulting services company. It was agreed the Company would
      sell the Switch to the consultant who managed the voice services for the Company
      in exchange for the consultant assuming the obligations under the co-location
      lease and all associated costs, including the costs of the circuits, power,
      and
      running the switching equipment; operating the Switch; allowing the Company
      to
      use the Switch for three years at no cost to the Company; and assuming any
      billing processes previously performed by the Company, all of which would be
      retro-actively effective to January 1, 2007. The agreement to sell the Switch
      was executed on April 13, 2007. The savings to the Company as a result of the
      consultant assuming the obligations under the co-location lease and associated
      costs are expected to be approximately $11,000 per month from January 2007
      through August 2007. Under the terms agreed the Company will continue to have
      use of the equipment at no fee for three years and continue to provide wholesale
      voice services to its customers. Although the Company expects decreased revenues
      from the wholesale voice services, those decreases will not be attributable
      to
      the sale of the equipment. The Company has determined the fair value of the
      asset to be approximately $88,000, equal to the savings it will experience
      due
      to the exit of the lease and operating costs of the equipment. The carrying
      value of the asset at December 31, 2006 was $110,527.





**5.
      INTANGIBLE ASSETS**





The
      Company recorded the acquisition of the V-CubeTM IP-PBX platform software and
      associated intellectual property as an intangible asset in June 2006 amounting
      to $26,279,189 ($8,800,000 in cash, 14,000,000 shares at $1.22 per share, and
      the outstanding prepaid royalty amount of $399,189). The asset will be amortized
      over a five year estimated useful life beginning on July 1, 2006, which
      coincides with the first V-CubeTM product launch by one of the Company’s
      customers. At December 31, 2006 the net carrying value of this intangible asset
      was $23,651,270. Amortization expense for the period ended December 31, 2006
      was
      $2,627,919.





On
      October 11, 2006, the Company completed the acquisition of Goodman Blue and
      recorded the acquisition of the O2C software as an intangible asset in October
      2006 amounting to $2,077,777, including acquisition costs of $62,643, and
      certain customer contracts valued at $484,866. The customer contracts were
      sold
      on October 12, 2006 for $484,866 which was the determining amount for the
      recording of the asset. The O2C asset will be amortized over a five year
      estimated useful life beginning on October 11, 2006. At December 31, 2006 the
      net carrying value of the O2C intangible asset was $1,978,600. Amortization
      expense for the year ended December 31, 2006 was $99,177.





The
      amortization for future years is expected to be $5,671,393 for each of the
      years
      2007 through 2010, and $2,944,297 for 2011.





**6** . **BUSINESS
      ACQUISITION**




On
      October 11, 2006, the Company acquired all of the assets of Goodman Blue Limited
      (“Goodman Blue”), a UK company which develops software systems to solve complex
      business management problems. The acquisition has been accounted for as a
      purchase in accordance with Statement of Financial Accounting Standards (“SFAS”)
      No. 141, *Business
      Combinations* ,
      and
      accordingly, the acquired assets and liabilities have been recorded at fair
      value.




The
      total
      purchase price for the acquisition was $2,562,643. The acquisition was made
      pursuant to a share purchase agreement with Scott Lee Goodwin (the “Purchase
      Agreement”), the sole stockholder of Goodman Blue. In accordance with the
      Purchase Agreement, the Company purchased all of the outstanding shares of
      Goodman Blue from Mr. Goodwin (the “Shares”) for consideration consisting of
      2,500,000 shares of the Company’s common stock, $.001 par value per share,
      subject to an option to require the Company to repurchase the Shares for an
      aggregate purchase price of $2,500,000 in certain circumstances. In addition,
      the Company incurred $62,643 of direct transaction costs related to the
      acquisition.




F-13




The
      results of operations of Goodman Blue and the estimated fair market values
      of
      the acquired assets and liabilities have been included in the consolidated
      financial statements from the date of the acquisition. The components of the
      aggregate cost of the transaction are as follows:


Shares
                subject to mandatory redemption
            
            $
            2,500,000Transaction
                costs
            
            
            62,643Total
            
            $
            2,562,643




The
      current allocation of the purchase price to assets acquired and liabilities
      assumed and various finite lived intangible assets and is based on a preliminary
      valuation. The purchase price for the Goodman Blue transaction was allocated
      to
      assets purchased and liabilities assumed based on their estimated fair values
      determined by management as follows:




**Estimated**
              **Amortizable
                Life**Tangible
                assets:Cash
            
            $
            456,851Accounts
                receivable
            
            
            129,089Prepaid
                expenses
            
            
            6,422Property
                and equipment
            
            
            9,259
            
            
            3
                yearsIntangible
                assets:O2Csoftware
            
            
            2,077,777
            
            
            5
                yearsCustomer
                contracts (*)
            
            
            484,866
            
            
            2
                yearsTotal
                assets
            
            
            3,164,264Liabilities:Accounts
                payable and accrued expenses
            
            
            (368,884
            )Note
                payable — current
            
            
            (213,342
            )Note
                payable — long-term
            
            
            (19,395
            )Total
                liabilities
            
            
            (601,621
            )Total
                purchase price
            
            $
            2,562,643




(*)
      This
      was subsequently sold to Telstra on October 12, 2006 for $484,866.




F-14




In
      accordance with the purchase method of accounting, the operating results of
      Goodman Blue have been included in the Company’s consolidated operating results
      since the acquisition date, October 11, 2006. If the operating results of
      Goodman Blue had been included since the beginning of the period for years
      ended
      December 31, 2006 and 2005, the pro forma unaudited results of operations of
      the
      Company would be as follows:




**Year
                  Ended**
                **December
                  31,****2006**
              
              **2005
                  *****(unaudited)**Net
                  sales
              
              $
              2,521,204
              
              $
              3,303,418Net
                  loss
              
              
              (19,405,524
              )
              
              (12,106,320
              )Basic
                  and Diluted net loss per share
              
              $
              (0.37
              )
              $
              (0.45
              )Weighted
                  average shares used in computing basic and diluted net loss per
                  common
                  share
              
              
              52,052,134
              
              
              26,822,678


*
      Due to
      the different fiscal period ends for the Company and Goodman Blue, the
      historical results for 2005 have been arrived at by using the Goodman Blue
      results, which were derived from the audited financial statements for the fiscal
      year ended October 31, 2005.





**7.
      BALANCE SHEET DETAIL**





Prepaid
      expenses and other current assets consisted of the following at December 31,
      2006 and 2005:





**2006**
            
            **2005**Rent
            
            $
            110,353
            
            $
            62,736Value
                added tax
            
            
            60,930
            
            
            77,043Insurance
            
            
            53,259
            
            
            44,610Non-trade
                receivables
            
            
            42,678
            
            
            164,472Prepaid
                call termination charges
            
            
            33,713
            
            
            44,446Prepaid
                royalties
            
            
            —
            
            
            399,899Professional
                services
            
            
            —
            
            
            121,694Software
            
            
            —
            
            
            77,436Maintenance
                agreement
            
            
            —
            
            
            40,370Other
            
            
            12,419
            
            
            13,089$
            313,352
            
            $
            1,045,795





Accrued
      expenses consisted of the following at December 31, 2006 and 2005:





**2006**
            
            **2005**Professional
                fees
            
            $
            598,820
            
            $
            313,897Salary
            
            
            384,257
            
            
            141,983Interest
            
            
            158,743
            
            
            17,693Termination
                costs
            
            
            90,040
            
            
            60,924Value
                added tax
            
            
            51,660
            
            
            —Travel
            
            
            34,331
            
            
            33,415Repairs
                and maintenance
            
            
            15,047
            
            
            —Directors’
                fees
            
            
            12,300
            
            
            20,200Printing
            
            
            10,750
            
            
            14,655Rent
            
            
            —
            
            
            8,514Other
            
            
            23,165
            
            
            16,873$
            1,379,113
            
            $
            628,154




F-15




**8.
      EQUITY**




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based
      Payment* (“SFAS
      123R”), using the modified-prospective-transition method. Under this transition
      method, compensation cost recognized for the year ended December 31, 2006
      includes: (a) compensation cost for all stock-based payments granted, but not
      yet vested as of January 1, 2006, based on the grant-date fair value estimated
      in accordance with the original provisions of SFAS No. 123, *Accounting
      for Stock Based Compensation* ,
      and (b)
      compensation cost for all stock-based payments granted subsequent to January
      1,
      2006, based on the grant-date fair value estimated in accordance with the
      provisions of SFAS 123R. Results for prior periods have not been restated.
      For
      stock options granted to non-employees, the Company recognizes compensation
      expense in accordance with the requirements of Emerging Issues Task Force
      (“EITF”) No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* .
      EITF
      96-18 requires that companies recognize compensation expense based on the
      estimated fair value of options granted to non-employees over their vesting
      period, which is generally the period during which services are rendered by
      such
      non-employees. The fair value of unvested non-employee stock awards is
      re-measured at each reporting period.




Prior
      to
      January 1, 2006, consistent with the provisions of Accounting Principles Board
      Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      25”), the Company recorded deferred compensation in the stockholders’ deficit
      section of the consolidated balance sheet when stock options were granted at
      an
      exercise price that was less than the fair value of the underlying common stock
      at the date of grant. These amounts were recognized as stock-based compensation
      expense over the vesting period. Effective January 1, 2006, as provided in
      SFAS
      123R, the Company has reversed the unamortized deferred compensation for the
      unvested portions of stock option grants awarded prior to the effective date
      of
      SFAS 123R, applying the balance to additional paid-in capital.




*Stock
      Incentive Plan*




** In
      February 2004, the board of directors adopted the 2004 Stock Incentive Plan
      (the
“Plan”). The Plan initially covered 6,000,000 shares of the Company’s common
      stock issuable upon exercise of incentive stock options and non-statutory stock
      options and in connection with grants of restricted stock. The Plan was amended
      by the Board on June 3, 2005 to, among other things, increase the number of
      shares available for options or restricted stock grants from 6,000,000 to
      8,000,000. The shareholders of the Company approved the amendment to the Plan
      on
      July 14, 2005. On December 23, 2005, the board of directors approved an
      increase, from 8,000,000 to 15,000,000, in the number of shares of common stock
      authorized under the Plan, on April 11 and 12, 2006 the board of directors
      approved an additional increase, from 15,000,000 to 18,000,000, and on June
      21,
      2006 the board of directors approved an additional increase, from 18,000,000
      to
      20,000,000, in the number of shares of common stock authorized under the Plan.
      The shareholders of the Company ratified these amendments to the Plan on July
      17, 2006.




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
      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, in the case of incentive stock
      options issued to a stockholder owning in excess of 10% of the Company’s common
      stock, five years.




As
      a
      result of the January 1, 2006 adoption of SFAS 123R and stock compensation
      expense related to options granted to non-employees, the Company recognized
      $3,246,178 in stock-based compensation expense for the fiscal year ended
      December 31, 2006.




The
      following table summarizes amounts charged to expense for stock-based
      compensation related to employee and director stock option grants and
      stock-based compensation recorded in connection with stock options and
      restricted stock awards granted to non-employee consultants:





**Fiscal
                Year**
              **Ended**
              **December
                31, 2006**Employee
                and director stock option grants:Selling,
                general and administrative
            
            $
            2,851,924Non-employee
                consultants stock option grants andrestricted
                stock awards:Selling,
                general and administrative
            
            
            394,254Total
                stock-based compensation
            
            $
            3,246,178




F-16




The
      following table illustrates the effect on net loss and net loss per share had
      the Company applied the fair value recognition provisions of SFAS 123R in the
      fiscal year ended 2005. For purposes of this pro-forma disclosure, the value
      of
      the options is estimated using the Black-Scholes option-pricing model and
      amortized to expense over the options’ vesting periods.




**Fiscal
                Year**
              **Ended**
              **December
                31, 2005**Net
                loss as reported
            
            $
            (12,182,002
            )Add:
                Stock compensation expense included in net loss
            
            
            2,200,418Deduct:
                Stock compensation expense determined under fair value based
                method
            
            
            (2,817,773
            )Pro-forma
                net loss
            
            $
            (12,799,357
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (0.45
            )Pro-forma
            
            $
            (0.48
            )




The
      fair
      value of each stock award is estimated on the grant date using the Black-Scholes
      option-pricing model based on the assumptions noted in the following
      table:




**Fiscal
                Year Ended December 31,****2006**
            
            **2005**Expected
                volatility
            
            
            80
            %
            
            80
            %Risk-free
                interest rate
            
            
            4.29
                - 5.04
            %
            
            3.95
                - 4.43
            %Expected
                life (years)
            
            
            5
            
            
            5Forfeitures
            
            
            0
            %
            
            0
            %Dividend
            
            
            None
            
            
            None




Volatility
      is determined based on the Company’s estimate of fluctuation in its common stock
      price and its review of comparable public company data due to the limited amount
      of time that the Company’s common stock has been publicly traded. The expected
      life of stock options granted is based on the Company’s estimate of when options
      will be exercised in the future as there have been limited stock option
      exercises to date. The expected life is generally applied to one group as a
      whole as the Company does not expect substantially different exercise or
      post-vesting termination behavior amongst its employee population. The risk-free
      interest rate is based on the U.S. Treasury yield curve in effect at the time
      of
      grant commensurate with the expected life assumption.




The
      Company is using the straight-line attribution method to recognize stock-based
      compensation expense. The amount of stock-based compensation recognized during
      a
      period is based on the value of the portion of the awards that are ultimately
      expected to vest. SFAS 123R requires forfeitures to be estimated at the time
      of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates. The term “forfeitures” is distinct from
“cancellations” or “expirations” and represents only the unvested portion of the
      surrendered option. The Company has applied an annual forfeiture rate of 0%
      to
      all unvested options as of December 31, 2006 as the Company believes that
      forfeitures to date are not representative of likely future forfeitures. This
      analysis will be re-evaluated quarterly and the forfeiture rate will be adjusted
      as necessary. Ultimately, the actual expense recognized over the vesting period
      will be for only those shares that vest.




On
      July
      28, 2006, the Company granted Jared Taylor, who became Chief Financial Officer
      on August 1, 2006, an incentive stock option to purchase up to 200,000 shares
      of
      the Company’s common stock. The option has an exercise price of $0.65 per share,
      representing the fair market value of its common stock, on the date of grant.
      The option vests in four equal annual installments of 50,000 shares commencing
      on the first anniversary date of the date of option grant and thereafter on
      each
      subsequent anniversary of the date of option grant until fully vested. The
      options will accelerate in full upon a change of control of the Company (as
      defined in his option agreement).




F-17




On
      April
      12, 2006, the Company granted stock options to purchase 1,270,000 shares of
      common stock to certain consultants, employees, and directors.




All of
      the
      options have an exercise price of $1.25 per share and an expiration date of
      April 12, 2016. The options were granted as compensation for consulting,
      employment or director services, as applicable. The options became vested as
      to
      25% of the total number of option shares upon shareholder ratification of the
      increase in the number of shares authorized under the Company’s 2004 Stock
      Incentive Plan to at least 18,000,000 shares, which occurred on July 17, 2006.
      Thereafter, the options will become vested as to an additional 6.25% of the
      total number of option shares in quarterly installments beginning on September
      30, 2006.




Effective
      December 15, 2006, John Keith Markley resigned from the board of directors
      of
      VCS and from his position as president of Vistula USA. As a result of Mr.
      Markley’s resignation and pursuant to the Employment Agreement dated as of April
      11, 2006, as described below, Mr. Markley may exercise up to 778,050 common
      share options at any time until December 15, 2007.




On
      April
      11, 2006, the Company granted stock options to Mr. Markley to purchase 3,052,000
      shares of common stock. Mr. Markley was also granted on that day an option
      to
      purchase 948,000 shares of common stock contingent upon the approval by the
      Company’s stockholders of an increase in the number of shares available for
      options on restricted stock grants to at least 16,000,000 shares. As per the
      amendment to Mr. Markley’s employment described in Note 15, a portion of his
      option to purchase 948,000 shares of commons stock which entitled him to
      purchase 500,000 shares has been cancelled. The remaining 448,000 shares subject
      to this option have an exercise price of $1.18 per share and an expiration
      date
      of April 11, 2016. Each option vests with respect to one-sixth of the total
      number of shares subject to the option six months after the date of grant.
      Each
      option continues to vest with respect to an additional one thirty-sixth of
      the
      total number of shares subject to the option on a monthly basis thereafter
      until
      fully vested. Had Mr. Markley not resigned as described above, the options
      would
      have accelerated in full upon a change of control of the Company or a
      termination without cause (as defined in the employment agreement).




On
      December 23, 3005, the Company granted stock options to purchase 6,350,000
      shares of common stock to certain consultants, employees, and
      directors.




All
      of
      the stock options have an exercise price of $1.50 per share and an expiration
      date of December 23, 2015. The stock options were granted as compensation for
      consulting, employment or director services, as applicable. The options became
      vested as to 25% of the total number of option shares upon stockholder
      ratification of the increase in the number of shares authorized under the
      Company’s 2004 Stock Incentive Plan to at least 15,000,000, which occurred on
      July 17, 2006. Thereafter, the options will become vested as to an additional
      6.25% of the total number of option shares in quarterly installments beginning
      on September 30, 2006.




As
      the
      stock options granted on April 12, 2006 (1,270,000 shares), April 11, 2006
      (948,000 shares, less 500,000 shares cancelled) and December 23, 2005 (6,350,000
      shares) were contingent upon stockholder approval of an increase in the number
      of shares authorized under the Company’s 2004 Stock Incentive Plan, which
      occurred on July 17, 2006, these amounts have been reflected as stock options
      granted as of July 17, 2006 in accordance with the provisions of SFAS
      123R.




Using
      the
      Black-Scholes option-pricing model, the weighted average grant-date fair value
      of options granted during the fiscal year ended December 31, 2006 was $0.76
      and
      the weighted average grant-date fair value of the options granted during the
      fiscal year ended December 31, 2005 was $1.52.




F-18




A
      summary
      of stock option activity as of December 31, 2006 and 2005, and changes during
      the fiscal years then ended, is presented below:




**Options**
              **Outstanding**
            
            **Weighted-**
              **average**
              **Exercise
                Price**
            
            **Weighted-average**
              **Remaining**
              **Contracted
                Term in**
              **Years**
            
            **Aggregate**
              **Intrinsic**
              **Value****(1)**Outstanding
                at December 31, 2004
            
            
            4,825,000
            
            $
            0.10Granted
            
            
            2,188,000
            
            $
            0.58Cancelled
            
            
            (1,800,000
            )
            $
            0.10Exercised
            
            
            (60,000
            )
            $
            0.05Outstanding
                at December 31, 2005
            
            
            5,153,000
            
            $
            0.31
            
            
            5.9
            
            $
            5,825,860Granted
            
            
            12,735,000
            
            $
            1.34Cancelled
            
            
            (5,425,700
            )
            $
            0.74Exercised
            
            
            (750,000
            )
            $
            0.10Outstanding
                atDecember
                31, 2006
            
            
            11,712,300
            
            $
            1.24
            
            
            8.9
            
            $
            2,850Exercisable
                at $0.05 to $1.00 at December 31, 2006
            
            
            15,000
            
            $
            0.05
            
            
            2.3
            
            $
            2,850Exercisable
                at $0.45 at December 31, 2006
            
            
            1,780,750
            
            $
            0.45
            
            
            8.5
            
            $
            —Exercisable
                at $1.18 at December 31, 2006
            
            
            928,050
            
            $
            1.18
            
            
            9.3
            
            $
            —Exercisable
                at $1.25 at December 31, 2006
            
            
            488,750
            
            $
            1.25
            
            
            9.3
            
            $
            —Exercisable
                at $1.30 to $1.42 at December 31, 2006
            
            
            455,834
            
            $
            1.32
            
            
            9.0
            
            $
            —Exercisable
                at $1.50 at December 31, 2006
            
            
            2,443,750
            
            $
            1.50
            
            
            9.0
            
            $
            —Total
                Exercisable at December 31, 2006
            
            
            6,112,134
            
            $
            1.11
            
            
            8.9
            
            $
            2,850




(1)
      The
      aggregate intrinsic value in this table was calculated based on the positive
      difference between the closing market price of the Company’s common stock at the
      end of the respective period ($0.24) and the exercise price of the underlying
      options.




During
      the fiscal year ended December 31, 2006, the total intrinsic value of options
      exercised (i.e., the difference between the market price at date of exercise
      and
      the price paid by the employee to exercise the options) was $937,500 and the
      total amount of cash received from exercise of these options was $75,000. The
      total grant-date fair value of stock options that vested during the fiscal
      year
      ended December 31, 2006 was $3,103,511.




As
      of
      December 31, 2006, there was $3,621,704 of total unrecognized compensation
      cost
      related to unvested share-based awards. This cost is expected to be recognized
      over a weighted average period of 2.5 years. The Company expects 5,600,166
      shares subject to unvested options to vest in the future.




*Common
      Stock*





On
      October 11, 2006, the Company completed the acquisition of Goodman Blue from
      Scott Lee Goodwin (“Goodwin”), the sole stockholder of Goodman Blue. Pursuant to
      the Purchase Agreement, the Company agreed to purchase all of the outstanding
      shares of Goodman Blue from Goodwin for consideration consisting of 2,500,000
      shares of the Company’s common stock, $.001 par value per share subject to an
      option to require the Company to repurchase the Shares for an aggregate purchase
      price of $2,500,000 in the event that on February 1, 2007 (or the next trading
      day) the closing price for the Company’s common stock as quoted on the OTC
      Bulletin Board is less than $1.00. In the event that Goodwin fails to deliver
      notice to the Company by 5:00 pm Eastern Standard Time on the tenth business
      day
      following February 1, 2007 (or the next day which the Company’s common stock is
      traded), any right for Goodwin to exercise the option shall be deemed to have
      lapsed. On February 12, 2007, Goodwin and the Company agreed to amend the
      Purchase Agreement as described in Note 19. As of December 31, 2006, the option
      by Goodwin to require the Company to repurchase the 2,500,000 shares had not
      been presented to the Company. The Company expects that it will have to
      repurchase the 2,500,000 shares and therefore has excluded the 2,500,000 shares
      from its total outstanding shares as of December 31, 2006, and has recorded
      the
      repurchase price for the shares of $2,500,000 as a liability as at December
      31,
      2006. Under the terms of the Purchase Agreement, the Company granted Goodwin
      certain piggy back registration rights with respect to the Shares.





On
      May
      22, 2006, the Company entered into a stock and warrant purchase agreement with
      23 accredited investors whereby the Company sold 16,300,000 units consisting
      of
      one share of common stock and eight-tenths of one warrant to acquire one share
      of common stock. The purchase price of the units was $1.00 per unit. In exchange
      for the units sold, the Company received gross cash proceeds of $16,300,000.
      The
      Company issued warrants for 13,040,000 common stock shares, exercisable until
      May 22, 2011 at an exercise price of $1.00 per share. On May 22, 2006, the
      Company’s common stock as traded on the OTC Bulletin Board closed at $1.24. See
      Note 14.




F-19





On
      July
      17, 2006, the stockholders of the Company approved an amendment to the Company’s
      Certificate of Incorporation to increase to 200,000,000 the number of shares
      of
      common stock, par value $.001, the Company is authorized to issue. The Amendment
      became effective on July 18, 2006 upon the filing of the Amendment with the
      Delaware Secretary of State’s office.





Also
      on
      July 17, 2006, the stockholders of the Company ratified an amendment to the
      Company’s 2004 Stock Incentive Plan to increase the number of shares available
      for issuance thereunder to 20,000,000 shares.





*Issuance
      of Convertible Promissory Notes to Related Party*





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, 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 convertible promissory notes in the principal amounts of $125,000
      and $50,000 on July 12, 2004 and on August 11, 2004, respectively. 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. On August 11, 2005, the pension plan confirmed
      its
      earlier agreement to extend the maturity date of both promissory notes until
      December 31, 2005. On December 15, 2005, the pension plan confirmed its earlier
      agreement to extend the maturity date of both promissory notes until June 30,
      2006. On June 30, 2006, the pension plan confirmed its earlier agreement to
      extend the maturity date of both promissory notes until December 31, 2006.
      On
      December 31, 2006, the pension plan confirmed its earlier agreement to extend
      the maturity date of both promissory notes until June 30, 2007.





**9.
      INCOME TAXES**





The
      Company did not record a provision for federal, state or foreign income taxes
      for the years ended December 31, 2006 and 2005 because the Company has
      experienced losses since inception. The Company has not recorded a benefit
      for
      deferred tax assets as its 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:





**2006**
            
            **2005**Income
                tax benefit computed at the federal statutory rate
            
            
            (34
            )%
            
            (34
            )%Foreign
                rate differential
            
            
            15
            %
            
            4
            %Non-deductible
                contributed services
            
            
            —
            %
            
            —
            %Change
                in valuation allowances
            
            
            19
            %
            
            30
            %Other
            
            
            —
            %
            
            —
            %Total
            
            
            —
            %
            
            —
            %





Significant
      components of the Company’s net deferred tax assets as of December 31, 2006 and
      2005 were as follows:





Deferred
      tax assets:





**2006**
            
            **2005**Net
                operating loss carryforwards
            
            $
            9,312,855
            
            $
            2,109,000Foreign
                loss carryforwards
            
            
            1,307,408
            
            
            1,687,000Deferred
                tax asset valuation allowance
            
            
            (10,620,263
            )
            
            (3,796,000
            )Total
                deferred tax assets
            
            $
            —
            
            $
            —





As
      of
      December 31, 2006, the Company had U.S. net operating loss carryforwards of
      approximately $27,391,000, which begin to expire in 2024 for federal purposes.
      The Company also has gross foreign tax loss carryforwards of approximately
      $6,881,000 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 income tax benefits related to income tax loss
      carryfowards 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, 2006 and 2005, the valuation allowance increased by
      $6,824,263 and $3,793,535, respectively.




F-20





Under
      the
      provision of the Internal Revenue Code, certain substantial changes in the
      Company’s ownership may have limited, or may limit in the future, the amount of
      net operating loss carryforwards which could be utilized annually to offset
      future taxable income and income tax liabilities. The amount of any limitation
      is determined based on the Company’s value and the long-term tax-exempt rate on
      the date of an ownership change.





**10.
      NOTES PAYABLE**





On
      July
      22, 2004, Goodman Blue, accepted a Small Firms Loan Guarantee Scheme (“Loan”)
      from HSBC Bank plc (“Lender”) of up to approximately $490,000. The Loan accrues
      interest at a rate of 3.0% above the Lender’s base interest rate of 4.5% as at
      December 31, 2006, and is payable in equal monthly installments of approximately
      $20,000 (which is exclusive of interest). Interest commenced on November 7,
      2005
      and is payable quarterly. The final payment is due on November 7, 2007. The
      balance of the Loan was drawn down for 16% on October 4, 2004 and 56% on
      September 30, 2005 and the remaining 28% on November 11, 2005. As of December
      31, 2006, the balance was $204,073. Under Section 8 of the Industrial
      Development Act 1982 in the United Kingdom the Secretary of State in the United
      Kingdom has guaranteed Goodman Blue’s obligation in respect of the Loan under
      separate terms as agreed between the Lender and the Secretary of State. For
      this
      guarantee provided by the Secretary of State in the United Kingdom Goodman
      Blue
      pays a guarantee premium at an annual rate of 2% on the Loan to the Secretary
      of
      State.





On
      March
      15, 2005, we completed the purchase of certain telecommunications equipment
      (including two Sonus Networks switches) from MRS Partners 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 Partners. The principal amount of the note was subsequently
      adjusted to $970,000, reflective of unanticipated recertification costs. Under
      the terms of the promissory note, interest accrues daily at a rate of 8.25%
      and
      is payable monthly in arrears. An initial principal payment of $100,000 was
      paid
      in 2005. An additional principal payment of $100,000 that was due on December
      31, 2005 was extended to and paid on March 31, 2006. The remaining principal
      amount ($770,000) and any unpaid interest originally payable on the first
      anniversary of the closing of the purchase, March 15, 2006, was extended to
      and
      paid on May 23, 2006.




**11.
      CONVERTIBLE DEBENTURES AND WARRANT FINANCING**





On
      February 18, 2005 and March 4, 2005, the Company 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, the Company sold convertible debentures in the aggregate
      principal amount of $8,400,000, convertible into common stock of the Company
      at
      $0.75 per share, and warrants to purchase an aggregate of 8,400,000 shares
      of
      common stock, at an exercise price of $1.00 per share. These warrants expire
      five years after the issue date.




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. 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. The Company is 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 common
      stock at any time at an initial conversion price of $0.75 per share. Except
      in
      the case of certain designated issuances, in the event the Company issues shares
      of common stock or common stock equivalents (i.e., securities convertible into,
      or exercisable or exchangeable for, shares of 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 the Company’s 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.




The
      Company has agreed to certain restrictions under the terms of the debentures,
      including a prohibition on the payment of cash dividends to 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 the Company’s 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 the Company’s 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.




F-21




Events
      of
      default under the debentures include failure to pay any amounts under the
      debentures when due, a material default under the Company’s other agreements
      with the investors or default in the Company’s obligations under mortgage,
      credit facility or similar agreements, a material inaccuracy in the
      representations and warranties made to the investors in connection with the
      convertible debenture and warrant financing, and the initiation of voluntary
      or
      involuntary bankruptcy proceedings against the Company. The Company obtained
      waivers from the outstanding debenture holders which waived any event of default
      and any late fees, including those associated with interest payments due on
      December 31, 2006 and March 31, 2007, provided the Company paid the interest
      payments due on December 31, 2006 and March 31, 2007, in full on or before
      April
      13, 2007. The Company paid the interest payments on April 9, 2007.




Of
      the
      $8,400,000 aggregate principal amount of convertible debentures sold, through
      December 31, 2006, $2,100,000 in outstanding principal has been converted into
      2,799,993 shares of common stock, reducing the amount of interest required
      to be
      paid in future periods, with $6,300,000 in principal remaining outstanding
      at
      December 31, 2006. In the Company’s consolidated balance sheet at December 31,
      2006, the remaining principal of $6,300,000 has been reduced by unamortized
      debt
      discount of $469,366.




The
      common stock purchase warrants issued to the investors are exercisable 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 the Company 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, the Company would receive no proceeds from the sale of its common
      stock in connection with such exercise. The warrants were initially exercisable
      for an aggregate 8,400,000 shares of common stock. As of December 31, 2006,
      the
      Company had issued 3,190,499 shares upon exercise of warrants, all in connection
      with the warrant exercise agreements described below.




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
      the Company issues shares of common stock or common stock equivalents (i.e.,
      securities convertible into, or exercisable or exchangeable for, shares of
      the
      Company’s 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 the Company’s 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.




In
      connection with the two closings of the private placement, the Company paid
      placement fees in the aggregate amount of $802,500 to the placement agent.
      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 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
      Company registered for resale under the Securities Act of 1933, as
      amended (the
“Securities Act”), the shares underlying the debentures and warrants pursuant to
      a registration statement on Form SB-2, as amended (File No. 333-123815). The
      registration statement was declared effective on May 3, 2005.




In
      March
      2005, the Company issued a warrant to purchase 100,000 shares of the Company’s
      common stock pursuant to a consulting agreement. The warrant is exercisable
      at
      $0.45 per share and expires in five years after the date of issuance. The
      warrant was valued at $29,913 using the Black-Scholes option pricing model
      using
      the following assumptions: risk free interest rate, 4.02%; expected dividend
      yield, 0; expected life, 5 years; and expected volatility 80%.




F-22




*Warrant
      Exercise Agreements.* In
      October 2005, the Company entered into several warrant
      exercise agreements with holders of warrants issued in the private placement
      that closed in the first quarter of 2005. Pursuant to these agreements, the
      Company issued to these holders new common stock purchase warrants exercisable
      for a number of shares equal to the number of shares they purchased upon
      exercise of the warrants issued to them in the private placement. These new
      warrants have an exercise price of $1.50 per share. The Company received
      aggregate proceeds of $3,190,499 in connection with the exercise of the prior
      warrants, and issued new warrants, which expire five years after the issue
      date,
      to purchase an aggregate of 3,190,499 shares of common stock (plus an additional
      warrant with an exercise price of $1.50, which expires five years after the
      issue date, to purchase 159,525 shares of common stock to a placement agent
      who
      assisted with the transaction). The shares of common stock underlying these
      warrants have been registered for resale with the Securities and Exchange
      Commission pursuant to a registration statement on Form SB-2 (File No.
      333-130808). This registration statement was declared effective on January
      31,
      2006.





**12.
      DISTRIBUTION AND MARKETING AGREEMENT**





On
      August
      11, 2004, the Company entered into a distribution and marketing agreement with
      NetYantra Inc. (“NetYantra US”) and NetYantra India Pvt. Ltd. (“NetYantra
      India”, with NetYantra US and NetYantra India being hereinafter referred to
      collectively as “NetYantra”) pursuant to which NetYantra granted to the Company
      the exclusive worldwide rights (other than in India where NetYantra is
      headquartered and subject to certain existing distribution agreements) to market
      and distribute the V-CubeTM IP-PBX software platform developed by NetYantra to
      Tier 1 carriers, telecommunications equipment manufacturers, ISPs ,
      large
      corporations, SMEs and other business entities and individual retail customers.
      Under this agreement, the Company paid NetYantra $400,000
      and was required to pay NetYantra fifty percent of certain net revenues that
      the
      Company derived from the distribution of the V-CubeTM platform.




In
      addition, the agreement stated that in the event that the Company’s common stock
      was quoted or traded on a stock market on or before the first anniversary of
      the
      agreement, the Company would 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).
      On July 21, 2005, public trading in the Company’s common stock began jointly on
      the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service under
      the trading symbol “VSTL.” The opening sale was at a price of $2.00 per share.
      The Company issued 500,000 shares of its common stock to NetYantra in compliance
      with the agreement.




On
      May 1,
      2006, the Company executed and delivered an Asset Purchase Agreement with
      NetYantra relating to the V-CubeTM IP-PBX software platform, as described below.
      The distribution and marketing agreement was terminated upon the closing of
      the
      acquisition of the V-CubeTM platform and associated intellectual property under
      the Asset Purchase Agreement on June 7, 2006.




**13.
      PURCHASE OF SOFTWARE AND INTELLECTUAL PROPERTY**





On
      June
      7, 2006, the Company completed the acquisition of certain assets of NetYantra
      for an aggregate purchase price of $8,800,000 in cash, 14,000,000 shares of
      the
      Company’s common stock (the “Share Consideration”) and the outstanding prepaid
      amount ($399,189) for royalties due on future net revenues that was paid under
      the terms of the distribution and marketing agreement described above. The
      acquisition was made pursuant to an Asset Purchase Agreement by and among
      Vistula, NetYantra US and NetYantra India dated April 28, 2006, as amended
      on
      May 11, 2006 and further amended on June 7, 2006 (the “Purchase Agreement”). In
      accordance with the terms of the Purchase Agreement, 10,068,833 shares of the
      Share Consideration were issued to NetYantra US at the closing. The remaining
      shares comprising the Share Consideration were issued to NetYantra US on July
      19, 2006 following an increase in the Company’s authorized common stock by its
      stockholders at the annual meeting of stockholders held on July 17, 2006. The
      acquired assets include NetYantra’s VoIP IP-PBX platform software and associated
      intellectual property. The Company had previously distributed this software
      as
      its V-CubeTM VoIP IP-PBX platform offering under a Distribution and Marketing
      Agreement with NetYantra.




The
      terms
      of the Purchase Agreement required the Company and NetYantra to use commercially
      reasonable efforts to negotiate and execute within sixty (60) days following
      the
      closing of the acquisition a license and revenue agreement, a services agreement
      and an executive employment agreement. Also, the terms of the Purchase Agreement
      prohibit, during the term of the services agreement and for 12 months
      thereafter, the Company and NetYantra from soliciting for hire, directly or
      indirectly, an employee, subcontractor or consultant of the other party, without
      that other party’s written consent.




On
      August
      3, 2006, the Company and NetYantra agreed to a 30 day extension to negotiate
      and
      execute a license and revenue agreement, a services agreement, and an executive
      employment agreement. Although a mutually satisfactory services agreement has
      not yet been executed, NetYantra has been performing services for the Company
      since June 7, 2006. The Company made cash payments of $463,968 for the services
      provided from June 7, 2006 to November 30, 2006 during the period to December
      31, 2006. The December services were accrued as of December 31, 2006.




F-23




In
      connection with the Purchase Agreement, the Company entered into a Registration
      Rights Agreement dated as of June 7, 2006 with NetYantra US (the “Registration
      Rights Agreement”) which provides NetYantra US with certain registration rights
      with respect to the shares being issued to NetYantra US pursuant to the Purchase
      Agreement (“Registrable Securities”). Under the terms of the Registration Rights
      Agreement, if at any time after the earlier of (i) the second anniversary of
      the
      date of that agreement or (ii) the date on which a persons or persons acting
      in
      concert who are not shareholders of the Company as at the date of that agreement
      acquire in a transaction or series of related transactions an aggregate of
      at
      least thirty percent (30%) of the then outstanding shares of common stock of
      the
      Company, the Company receives a request from NetYantra US that it requests
      a
      registration with respect to the Registrable Securities then outstanding, then
      the Company shall as soon as practicable, and in any event within forty-five
      (45) days after the date such request is given by NetYantra US, file a
      registration statement under the Securities Act, covering all Registrable
      Securities then outstanding. NetYantra US also has the right to request that
      the
      Registrable Securities be registered if the Company proposes to register any
      of
      its stock or other securities under the Securities Act in connection with the
      public offering of such securities solely for cash.




The
      Company recorded the acquisition of the V-CubeTM IP-PBX platform software and
      associated intellectual property as an intangible asset in June 2006 at a total
      of $26,279,189 ($8,800,000 in cash, 14,000,000 shares at $1.22 per share, and
      the outstanding prepaid royalty amount of $399,189). The intangible asset will
      be amortized over a five year estimated useful life beginning on July 1, 2006,
      which coincides with the first V-CubeTM product launch by one of the Company’s
      customers. At December 31, 2006 the net carrying value of this intangible asset
      was $23,651,270. Amortization expense for the period ended December 31, 2006
      was
      $2,627,919.





**14.
      STOCK AND WARRANT PURCHASE AGREEMENT**





On
      May
      22, 2006, the Company entered into a stock and warrant purchase agreement with
      23 accredited investors whereby the Company sold 16,300,000 units consisting
      of
      one share of common stock and eight-tenths of one warrant to acquire one share
      of common stock. The effective purchase price of the units was $1.00 per unit.
      In exchange for the units sold, the Company received gross cash proceeds of
      $16,300,000. The Company issued warrants for 13,040,000 common stock shares,
      exercisable until May 22, 2011 at an exercise price of $1.00 per
      share.




CRT
      Capital Group LLC (“CRT”) acted as the placement agent in connection with the
      offering. The aggregate commissions payable to CRT in connection with the
      private placement were approximately $978,000. In addition, the Company issued
      warrants to the placement agent to purchase 1,467,000 shares of common stock
      similar to those sold to the investors.




The
      Company realized net proceeds from the sale of units, after deducting placement
      agent fees and expenses, of approximately $15,200,000. The Company used a
      portion of these proceeds to purchase the software and intellectual property
      rights of NetYantra’s V-CubeTM IP-PBX platform as described in Note 13
      ($8,800,000); pay the outstanding principal, interest and fees related to the
      revolving credit agreement with Indigo Investments I LLC described in Note
      15
      ($1,500,000); and pay the outstanding principal and interest related to a
      promissory note for equipment ($800,000).




The
      Company agreed to register the resale of the shares of common stock sold in
      the
      offering and issuable upon exercise of the warrants. The Company was required
      to
      file the registration statement with the Securities and Exchange Commission
      (“SEC”) within forty-five (45) days of the closing and use its best efforts to
      cause the registration statement to be declared effective under the Securities
      Act no later than the earlier of (i) ninety (90) days (or in the case of a
      full
      review one hundred and twenty (120) days) after the closing date and (ii) the
      sixth (6th) business day following the date on which the Company is notified
      by
      the SEC that the registration statement will not be reviewed or is no longer
      subject to further review and comments. The Company is required to use its
      best
      efforts to keep the registration statement continuously effective under the
      Securities Act until the earlier of the date when all the registrable securities
      covered by the registration statement have been sold or are freely saleable
      and
      the second anniversary of the closing. In the event that the registration
      statement is not timely filed or declared effective when due, or after
      effectiveness ceases to remain effective, the Company is obligated to make
      cash
      payments in the nature of liquidated damages up to a limit of 10% of the
      purchase price of the units. A registration statement was filed on June 30,
      2006
      and became effective on July 14, 2006.




F-24




**15.
      COMMITMENTS AND CONTINGENCIES**




*Service
      Agreement*





During
      2004, the Company entered into a services agreement with Telehouse International
      Corporation of Europe Limited (Telehouse) and a service agreement with U.S.
      Colo, LLC for the use of certain equipment and services. The Company does not
      have any Future minimum service commitments under the Telehouse services
      agreement.





Future
      minimum service commitments under the U.S. Colo, LLC agreement is $12,000 for
      the year ended December 31, 2006.





Services
      expense, classified as a cost of revenue in the accompanying consolidated
      statement of operations, under these agreements were $120,673 and $46,581 for
      the years ended December 31, 2006 and 2005, respectively.





*Operating
      Leases*





The
      Company entered into a co-location agreement pursuant to which the Company
      rents
      approximately 400 square feet of space at 650 Grand Avenue in Los Angeles,
      California. The lease required minimum rent payments of $3,000 per month for
      the
      first three months, $3,500 per month for the second three months, and $4,000
      thereafter. Future minimum rents and service commitments described above are
      expected to total between $4,000 and $6,500 per month. The initial term of
      the
      agreement expires in April 2007. The Company recorded $42,000 of rent expense
      during the year ended December 31, 2006. Commencing in November 2005, the
      Company established its principal executive offices in New York under a lease
      agreement at the rate of approximately $6,500 per month under an agreement
      with
      JBC, Inc, which expires in November 2007. Commencing in April 2005, the Company
      established a new London office location under a new lease for approximately
      $6,500 per month, which expires in March 2007 and has been renewed to December
      2008 for approximately $5,200, net of sub-let space. In October 2006, the
      Company established a lease for the head office for Goodman Blue for
      approximately $4,000 per month, which expires in November 2008. Commencing
      in
      May 2005, the Company established an office in South Africa under a new lease
      for approximately $5,400 per month. The lease in South Africa was terminated
      effective May 2006.





Total
      rent expense for the years ending December 31, 2006 and 2005 were $398,398
      and
      $277,672 respectively.





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





2007
            
            $
            154,4672008
            
            
            41,195$
            195,662





*Other
      Commitments and Contingencies*





On
      October 12, 2006, Goodman Blue sold certain contracts and guaranteed to the
      buyer that the buyer would secure revenues in the amount of the purchase price
      prior to April 1, 2007. As of December 31, 2006 the Company was obligated to
      return $296,411 if the revenue amounts were not secured prior to April 1, 2007.
      Based on the information provided to the Company the buyer has secured revenues
      prior to April 1, 2007 greater than the amount of the purchase price and as
      a
      result the Company no longer has any obligation to the buyer under the sale
      of
      these contracts.




On
      January 27, 2006, the Company entered into a Financial Advisory Agreement (the
      “Agreement”) with Indigo Ventures LLC (“Indigo”) in which the Company agreed to
      appoint Indigo as its financial advisor to advise, consult with, and assist
      the
      Company in various matters which may include:




·
            a
                review of the Company’s business, operations and financial condition,
                including advising the Company on capitalization
                structures;




·
            advice
                relating to general capital-raising
                matters;




·
            recommendations
                relating to specific business operations, transactions and joint
                ventures;




·
            advice
                regarding future financings involving the Company or any of the Company’s
                affiliates’ debt or equity securities;
                and




·
            assistance
                in connection with the due diligence review of any significant acquisition
                transactions proposed by the Company during the term of the
                agreement.




F-25




In
      consideration for these services, the Company agreed to pay Indigo a cash fee
      of
      $20,000 per month in arrears, increasing to $30,000 per month beginning in
      the
      first month following the consummation of a significant debt or equity financing
      from which the Company obtains gross proceeds of at least $5 million. Following
      the May 2006 financing described in Note 14, the monthly cash fee payable to
      Indigo increased to $30,000. Also, the Company issued to Indigo 1,500,000
      restricted shares of common stock, which shares vested on June 7, 2006 upon
      the
      closing of the acquisition of the software and intellectual property described
      in Note 13. The shares the Company issued to Indigo are restricted shares and
      may not be sold, assigned or transferred by Indigo for a one (1) year period
      beginning on January 27, 2006 and ending on January 27, 2007. In order to save
      costs, on November 27, 2006, the Company sent a notice to Indigo indicating
      that
      the Company would not renew the Agreement, therefore the Agreement expired
      on
      January 27, 2007.





On
      March
      30, 2006 the Company entered into a revolving credit agreement with Indigo
      Investments I LLC that provided for up to $5,000,000 in advances to be available
      to the Company. Upon the closing of this credit facility, $1,000,000 was
      advanced to the Company and an additional $250,000 was advanced under the credit
      agreement in April 2006. Additional advances under the credit facility were
      dependent upon the Company’s accounts receivable balances and adherence to
      certain covenants as described in the credit agreement. Outstanding principal
      under this credit facility bore interest at a rate of 1.5% per month, increasing
      to 2.5% per month in the event of a default by the Company under the credit
      agreement. In addition, the Company was required to pay the lender a 2.25%
      commitment fee on the total amount of the credit facility and issue the lender
      a
      five-year warrant to purchase up to 500,000 shares of common stock at an
      exercise price of $1.50 per share. The exercise price of the warrant is subject
      to adjustment in certain circumstances.




All
      outstanding principal and interest on the credit facility plus the commitment
      fee became due and payable on May 22, 2006, which was the earlier of (i)
      September 30, 2006, or (ii) the closing of the sale of a minimum of $6,000,000
      of the Company’s equity securities. As the financing closed prior to September
      30, 2006, the Company also paid the lender an early repayment fee equal to
      2.25%
      of the total amount of the credit facility. The rights of the lender under
      the
      credit facility are junior to those of the outstanding convertible
      debentures. Advances
      drawn under this agreement were guaranteed by the Company’s
      Chairman.




A
      portion
      of the cash received from the sale of units consisting of common stock and
      warrants described in Note 14, was used on May 24, 2006, to pay down the credit
      facility in its entirety including all interest accrued, commitment fees, and
      early repayment fees. Also, the sale of units consisting of common stock and
      warrants described in Note 14, resulted in an anti-dilution adjustment to the
      exercise price of the outstanding warrants described above. Such adjustment
      reduced the exercise price of such warrants from $1.50 to $1.34 per share of
      common stock and increased the number of exercisable shares related to such
      warrants from 500,000 to 559,701.





On
      December 13, 2005, the Company entered into a Consultant, Representative and
      Professional Services Agreement with Quest Telecommunications, Inc. (“Quest”).
      Under this agreement, the Company appointed Quest as an independent advisor
      and
      the Company’s exclusive representative in the geographic areas of Vietnam,
      Cambodia, Malaysia and Turkey (and any other areas to which the Company and
      Quest agree in writing). Within
      these geographic areas, Quest will (i) assist in structuring and establishing
      business relationships, including introducing the Company and the V-CubeTM IP-PBX
      software platform to potential partners, distributors, licensees and/or
      purchasers, and (ii) provide project management services relating to business
      operations, including developing revenue targets, establishing technical support
      capability, facilitating technical support delivery, and monitoring license
      fee
      reconciliation. Quest will also act as the Company’s agent for the V-CubeTM to
      consumers from, but residing outside, the geographic area covered by this
      agreement (except for consumers residing in territories for which we or any
      of
      its affiliates have granted or hereafter grant exclusive distribution or agency
      rights). Under
      this agreement, the Company paid Quest $50,000 in consideration for Quest’s
      assistance relating to the execution by the Company and Saigon Post and
      Telecommunications Services Corporation (“SPT”) of a memorandum of understanding
      and pilot license agreement with respect to the V-CubeTM. The memorandum of
      understanding, which the Company entered into on September 20, 2005,
      contemplates that, following legal and technical evaluation of the V-CubeTM
platform by SPT, SPT and the Company will negotiate and enter into an agreement
      with respect to the deployment and commercialization of the V-CubeTM platform in
      Vietnam. The pilot license agreement, which the Company entered into on October
      15, 2005, permitted SPT to use the V-CubeTM platform for evaluation and testing
      purposes on a royalty-free basis from November 15, 2005 through February 15,
      2006. The
      Company entered into a distribution and marketing agreement with SPT with
      respect to the V-CubeTM on July 3, 2006. Upon signing this agreement, the Company
      is obligated to issue to Quest 300,000 shares of the Company’s common stock and
      to pay to Quest $150,000 in cash, plus a continuing commission of thirty percent
      of the license fees received from SPT in connection with the licensing and
      distribution of the V-CubeTM in the above-mentioned geographic areas (net of
      sales, use and value added taxes, if any, payable by us in connection with
      such
      license fees). Although the agreement with SPT has been signed, the Company
      does
      not expect to pay the $150,000 in cash or continuing commission of thirty
      percent of the license fees received from SPT due to SPT’s indication to enter
      into license purchase and maintenance agreement in lieu of the distribution
      and
      marketing agreement and a reported delay in SPT’s ability to launch the product
      due to the local government’s approval process, therefore the $150,000 due has
      not been recorded in the financial statements.




F-26





*Credit
      Facility*





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, and debt and equity financings. 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 Chairman. The obligations
      of
      the Chairman under the credit facility are secured by certain property in which
      the Chairman has a beneficial interest. The credit facility was guaranteed
      by
      the Company’s wholly-owned subsidiary, Vistula Limited. This guarantee was
      released by the financial institution on March 27, 2006.




*Employment
      Agreements*





Effective
      December 15, 2006, John Keith Markley resigned from the board of directors
      of
      VCS and from his position as president of Vistula USA. As a result of Mr.
      Markley’s resignation and pursuant to the Employment Agreement dated as of April
      11, 2006, as described below, between the Company and Mr. Markley, as amended
      by
      the Amendment to Employment Agreement dated August 1, 2006, as described below,
      and in accordance with an Agreement and General Release between the Company
      and
      Mr. Markley dated as of December 15, 2006, the Company shall be required to
      pay
      Mr. Markley his current base salary of $290,000 over twelve (12) months, in
      accordance with the Company’s current payroll practices; provided, that the
      Company and Mr. Markley agree that these amounts constitute “nonqualified
      deferred compensation” within the meaning of Section 409A of the Internal
      Revenue Code of 1986, as amended, and the regulations promulgated thereunder.
      Mr. Markley will continue to be covered under the Company’s medical plans for a
      period of twelve (12) months following his resignation; provided that Mr.
      Markley shall continue to be responsible for his portion of such payments via
      applicable withholdings.




On
      April
      11, 2006, the Company entered into an employment agreement with Mr. Markley
      relating to Mr. Markley’s employment as its chief executive officer. On August
      1, 2006, the Company entered into an amendment of the employment agreement
      in
      connection with a reorganization of the Company’s management positions. The
      amendment provided, among other things, that Mr. Markley resigned as the
      Company’s chief executive officer and agreed to serve as the president of
      Vistula USA, Inc., a wholly-owned US subsidiary of the Company. Under
      the
      amended employment agreement, the Company paid Mr. Markley an annual base salary
      of $290,000 and provided him with customary employment-related
      benefits.




The
      amendment also provided that, in addition to the existing severance benefits
      already contained in his employment agreement, in the event he voluntarily
      terminates his employment prior to a change of control (as defined in the
      amendment) or in the event that the Company elects to terminate his employment
      as a result of his repeated failure to comply with reasonable directions and
      instructions of the Company’s chief executive officer or board of directors in
      connection with the performance of his duties and responsibilities under his
      employment agreement prior to a change of control, the Company would be required
      to make severance payments to him equivalent to the base salary he would have
      received had his employment continued and to continue to provide medical
      benefits, in each case for a period of twelve months following termination
      of
      his employment. In the event the Company terminated Mr. Markley’s employment
      without cause, the Company would have been required to make severance payments
      equivalent to the base salary he would have received had his employment
      continued and to continue to provide medical benefits, in each case for a period
      of twelve months following the termination, if his employment is terminated
      in
      his first year of employment and in each case for a period of eighteen months
      if
      his employment was terminated at any time after his first year of
      employment.




The
      original employment agreement provided for the grant to Mr. Markley of two
      non-qualified stock options to purchase shares of common stock, one exercisable
      for 3,052,000 shares and the other exercisable for 948,000 shares, with the
      latter option grant subject to the ratification by stockholders at the next
      annual meeting of an increase in the number of shares available under the
      Amended and Restated 2004 Stock Incentive Plan to at least 16,000,000 shares,
      which ratification occurred on July 17, 2006. The Company’s compensation
      committee approved these grants on April 11, 2006, and fixed the exercise price
      per share at $1.18, representing the fair market value of the Company’s common
      stock on the date of grant based on the previous day’s closing price. In the
      amendment, Mr. Markley also agreed to waive his rights to exercise that portion
      of his outstanding option to purchase 948,000 shares of common stock granted
      to
      him on April 11, 2006 which entitles him to purchase 500,000 shares of common
      stock. Mr. Markley will retain the right to purchase up to 448,000 shares of
      common stock under that option. In the amendment, Mr. Markley also agreed to
      waive any claims he might have against the Company in connection with his change
      in position with the Company.




F-27




Each
      option vests with respect to one-sixth of the total number of shares subject
      to
      the option six months after the date of grant (April
      11, 2006). Each
      option continues to vest with respect to an additional one thirty-sixth of
      the
      total number of shares subject to the option on a monthly basis thereafter
      until
      fully vested. The options will accelerate in full upon a change of control
      of
      the Company or a termination without cause (as defined in the employment
      agreement).




Mr.
      Markley has agreed not to engage,
      during his employment and for a period equal to the longer of (a) one year
      following the termination of his employment or (b)
      the period for which he is entitled to severance payments following the
      termination of his employment,
      in any activities competitive with the
      Company in the United States or any foreign territory where the Company or
      any
      of its subsidiaries are conducting business. Mr. Markley also agreed, during
      that period, not to solicit any of the Company’s employees or the employees of
      its subsidiaries to leave the Company or to solicit any of the Company’s clients
      to terminate or curtail their business relationships with the
      Company.




Effective
      August 1, 2006, Jared Taylor was appointed as the Company’s Chief Financial
      Officer, Treasurer and Secretary following the resignation of George Vaughn
      of
      Vaughn & Associates, P.C., who was serving in these capacities under a
      consulting agreement between the Company and Vaughn & Associates, P.C. Mr.
      Taylor was promoted from his prior position of Manager of Accounting and
      Administration, a position he held since he joined the Company in July 2005.
      In
      connection with Mr. Taylor’s promotion to the role of chief financial officer,
      the Company has agreed to pay Mr. Taylor an annual base salary of $125,000
      and
      to grant him an incentive stock option to purchase up to 200,000 shares of
      the
      Company’s common stock. The option has an exercise price of $0.65 per share,
      representing the fair market value of the Company’s common stock on the date of
      grant (July 28, 2006). The option vests in four equal annual installments of
      50,000 shares commencing on the first anniversary date of the date of option
      grant and thereafter on each subsequent anniversary of the date of option grant
      until fully vested. The option shall become fully vested upon a change of
      control (as defined in his option agreement).




On
      January 5, 2006, the Company entered into an employment agreement with Ian
      Cope
      relating to Mr. Cope’s employment as its chief operations officer. Under the
      employment agreement, the Company will pay Mr. Cope an annual base salary of
      $140,000 and provide him with certain employment-related benefits. In addition,
      the employment agreement provides that the Company will grant Mr. Cope an
      incentive stock option to purchase 250,000 shares of the Company’s common stock
      with an exercise price equal to $1.42 per share; 50,000 of those shares subject
      to the option vested immediately and the remaining 200,000 shares subject to
      the
      option will vest in four equal annual installments of 50,000 shares beginning
      on
      January 5, 2007. The option is subject to the terms and conditions of the
      Company’s Amended and Restated 2004 Stock Incentive Plan. The employment
      agreement also provides that if Mr. Cope is terminated without cause, the
      Company will pay him his base salary for three months.




On
      February 28, 2006, the Company finalized an agreement with Mark Scully resolving
      matters relating to his cessation of employment as president and chief executive
      officer of Vistula USA, one of the Company’s wholly-owned subsidiaries, on
      November 2, 2005. In connection with a mutual release of claims, the Company
      paid Mr. Scully $50,000 in severance and issued to him 750,000 shares of common
      stock in respect of the exercise of an outstanding option issued under the
      Company’s Amended and Restated 2004 Stock Incentive Plan.





On
      August
      17, 2005, the Company entered into a Consulting Agreement (the “Agreement”) with
      EMS under which EMS agrees to provide the services of Mr. Galliers-Pratt to
      the
      Company. Under the Agreement, Mr. Galliers-Pratt will continue to serve as
      President and Chief Executive Officer. The Agreement provides that the Company
      shall pay EMS annual consulting fees of $240,000 as consideration for these
      services.




The
      Agreement has an initial term of two years. The term of the Agreement shall
      be
      automatically extended for additional periods of one year unless either party
      to
      the Agreement gives the other party notice of termination of the Agreement
      prior
      to the expiration of the then-current term. The Agreement may be terminated
      at
      any time by EMS or the Company. However, in the event the Company terminates
      the
      engagement of EMS without cause, the Company will be required to make severance
      payments for a period of two years after, and at the consulting fee rate in
      effect at the time of, such termination and to continue to pay for certain
      medical and other benefit plans for such period. Under the Agreement, EMS and
      Mr. Galliers-Pratt agree to be bound by certain non-competition and
      non-solicitation provisions, which are effective during the term of the
      Agreement and for a period of two years after termination of the
      Agreement.




F-28




Rupert
      Galliers-Pratt has served as the Company’s President and Chairman of the Board
      of Directors since the Company’s inception in March 2004, and has served as the
      Company’s Chief Executive Officer since the Company’s inception, with the
      exception of two brief periods, whereby Mr. Galliers-Pratt resumed the position
      of Chief Executive Officer.




*Distribution
      and Marketing Agreement*





On
      August
      11, 2004, the Company entered into a distribution and marketing agreement with
      NetYantra Inc. (“NetYantra US”) and NetYantra India Pvt. Ltd. (“NetYantra
      India”, with NetYantra US and NetYantra India being hereinafter referred to
      collectively as “NetYantra”) pursuant to which NetYantra granted to the Company
      the exclusive worldwide
      rights (other than in India where NetYantra is headquartered and subject to
      certain existing distribution agreements) to market and distribute the V-CubeTM
IP-PBX software platform developed by NetYantra to Tier 1 carriers,
      telecommunications equipment manufacturers, ISPs ,
      large
      corporations, SMEs and other business entities and individual retail customers.
      Under this agreement, the Company paid NetYantra $400,000 and was required
      to
      pay NetYantra fifty percent of certain net revenues that the Company derived
      from the distribution of the V-CubeTM platform.




In
      addition, the agreement stated that in the event that the Company’s common stock
      was quoted or traded on a stock market on or before the first anniversary of
      the
      agreement, the Company would 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).
      On July 21, 2005, public trading in the Company’s common stock began jointly on
      the OTC Bulletin Board and the Pink Sheets Electronic Quotation Service under
      the trading symbol “VSTL.” The opening sale was at a price of $2.00 per share.
      The Company issued 500,000 shares of its common stock to NetYantra in compliance
      with the agreement.




On
      May 1,
      2006, the Company executed and delivered an Asset Purchase Agreement with
      NetYantra relating to the V-CubeTM IP-PBX software platform. See Note 13. The
      distribution and marketing agreement was terminated upon the closing of the
      acquisition of the V-CubeTM platform and associated intellectual property under
      the Asset Purchase Agreement on June 7, 2006.




*Litigation*





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. The Company believes, as
      of
      December 31, 2006, there were no material unrecorded liabilities related to
      any
      known legal matters.





**16.
      RELATED PARTY TRANSACTIONS**




*Expenses
      Paid By Stockholder*





On
      March
      10, 2006, on behalf of the Company, the Company’s Chairman,
      Rupert Galliers-Pratt (the “Chairman”), advanced $75,000 directly to an escrow
      agent, allowing the Company to fulfill a contractual commitment in the normal
      course of business. The deposit was returned to the Chairman in full on March
      27, 2006. On December 15, 2006, the Chairman paid $30,000 on behalf of the
      Company to a consultant for services provided, which the Company reimbursed
      the
      Chairman in full on December 21, 2006.




*Common
      Stock*





On
      August
      17, 2005, the Company entered into a Consulting Agreement (the “Agreement”) with
      EMS under which EMS agrees to provide the services of Mr. Galliers-Pratt to
      the
      Company. See Note 15 for further discussion of this Agreement.





On
      December 7, 2005, the Company issued 100,000 shares of common stock to a
      stockholder of Vistula Communications Services SA (Pty.) Ltd. for consulting
      services to be rendered through December 6, 2006. The shares had a fair value
      of
      $130,000 based upon the closing price ($1.30) of the Company’s common stock as
      at December 7, 2005. These consulting services were recorded as part of selling,
      general and administrative expenses.





**17.
      EARNINGS (LOSS) 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, 2006 and 2005:





**2006**
            
            **2005**Net
                loss available for common shares and assumed conversions
            
            $
            (19,530,105
            )
            $
            (12,182,002
            )Weighted-average
                basic and diluted shares outstanding
            
            
            52,052,134
            
            
            26,822,678Net
                loss per common share basic and diluted
            
            $
            (0.38
            )
            $
            (0.45
            )




F-29




Options
      to purchase 11,712,300 and 5,153,000 shares of common stock for the years ended
      December 31, 2006 and 2005, respectively, have been excluded from the
      computation of net loss per share as their effect would have been antidilutive.
      Warrants to exercise 24,778,725 and 9,462,022 shares for the years ended
      December 31, 2006 and 2005, respectively, have been excluded from the
      computation of net loss per share as their effect would have been antidilutive.
      Any shares which may result from the conversion of convertible debt, but have
      not been converted as of December 31, 2005, have been excluded from the
      computation of net loss per share as their effect would have been antidilutive.





**18.
      GEOGRAPHIC INFORMATION**





Financial
      information by geographic area for the years ended December 31, 2006 and 2005
      was as follows:





**2006**
            
            **2005**Net
                revenues:United
                States
            
            $
            644,232
            
            $
            679,849United
                Kingdom
            
            
            301,205
            
            
            119,448Europe
                (excluding U.K.) and other
            
            
            146,462
            
            
            41,160$
            1,091,899
            
            $
            840,457Loss
                from operations:United
                States
            
            $
            (15,834,050
            )
            $
            (8,848,036
            )United
                Kingdom
            
            
            (2,302,566
            )
            
            (1,554,581
            )Europe
                (excluding U.K.) and other
            
            
            (167,074
            )
            
            (535,677
            )$
            (18,303,689
            )
            $
            (10,938,294
            )Tangible
                long-lived assets:United
                States
            
            $
            210,407
            
            $
            1,822,753United
                Kingdom
            
            
            234,592
            
            
            530,768Europe
                (excluding U.K.) and other
            
            
            -
            
            
            8,852$
            444,999
            
            $
            2,362,373





The
      Company is currently managed through one business segment, namely, the Vistula
      Companies. This includes Vistula Limited, Vistula USA, Inc. and Goodman Blue
      Limited, which are aggregators of telecommunications services to Tier 1 and
      Tier
      2 telecommunications carriers. The Vistula Companies have a switching facilities
      Los Angeles, free use of switching
      equipment in London as described in Note 4, and has interconnect agreements with suppliers in these locations. As described in
      Note
      1, Cardlink and Vistula SA are inactive and are expected to be dissolved during
      2007.





**19.
      SUBSEQUENT EVENTS**





The
      Company entered into an Agreement on April 13, 2007, whereby it sold its
      wholesale voice switching equipment (“Switch”) located in the United Kingdom
      used in the Company’s wholesale voice services business in exchange for the
      buyer (i) assuming the co-location lease and all associated costs, including,
      without limitation the costs of the circuits, power, and running the switching
      equipment (ii) operating the Switch, (iii) allowing the Company to use the
      switch for three years at no cost to the Company and (iv) assuming any billing
      processes previously performed by one of the Company’s employees, who will
      continue to be available to the Company. The Agreement is effective
      retroactively as of January 1, 2007.





On
      April
      6, 2007, the Company completed a private placement of convertible notes and
      warrants pursuant to a securities purchase agreement (the “Securities Purchase
      Agreement”) with certain accredited investors (the “Investors”). The Investors
      purchased convertible notes in the aggregate principal amount of $2,500,000
      and
      warrants to purchase up to an aggregate of 2,500,000 shares of the Company’s
      common stock. The private placement resulted in gross proceeds of
      $2,500,000.




The
      Company granted each of the Investors a participation right whereby they may
      elect to purchase all or a portion of securities sold in certain future
      financings. The participation right expires on the first anniversary of the
      closing date.




F-30




The
      Company also granted each Investor the right to exchange all or some of its
      notes for securities offered in certain future financings. In the event of
      this
      exchange right is asserted in connection with such a future financing, the
      Company would be required to issue to the Investor requesting the exchange
      a
      number of new securities offered in such financing determined by dividing the
      outstanding principal amount of the note being exchanged (plus accrued interest
      or other fees owed to such Investor) by the price at which the new securities
      are being sold in such financing. This exchange right expires on the first
      anniversary of the closing date.




Under
      the
      terms of the Securities Purchase Agreement, the Company is prohibited from
      engaging in certain types of financing transactions. In particular, for a period
      of 45 days after the date the initial registration statement covering the shares
      underlying the notes and warrants is first declared effective by the Securities
      and Exchange Commission (which the Company must file pursuant to a Registration
      Rights Agreement, as further described herein), the Company may not issue shares
      of common stock or common stock equivalents except pursuant to conversion or
      exercise of convertible securities or outstanding rights to acquire common
      stock
      that were outstanding on or prior to the closing date. Also, until such time
      as
      no Investor holds any of the notes, warrants or shares of common stock
      underlying the notes or warrants, the Company may not issue securities that
      are
      convertible into, exchangeable or exercisable for, or include the right to
      receive additional shares of the Company’s common stock at a conversion,
      exercise or exchange price, as applicable, that is (i) determined based on
      the
      market price of the Company’s common stock at any time after the issuance of
      such securities, or (ii) is subject to reset upon the occurrence of events
      directly or indirectly related to the Company’s business or the market for the
      Company’s common stock. The Company is also prohibited from entering into any
      agreement providing for the sale of securities at a price determined at a future
      time.




The
      notes
      issued to the Investors on April 6, 2007 accrue interest daily at an rate of
      12%
      per annum, which interest is payable quarterly on each March 31, June 30,
      September 30 and December 31 beginning on September 30, 2007. The final interest

      payment is due on the date of maturity of the note, April 6, 2009. In addition,
      on any date on which all or a portion of the principal of a note is converted,
      all unpaid interest having accrued on such principal at the time of such
      conversion will become immediately payable. The Company is not permitted to
      prepay any portion of the principal amount of any of the notes without the
      prior
      consent of the holder thereof. These notes are junior to the Company’s currently
      outstanding 8% convertible debentures due in February and March
      2008.




The
      notes
      are convertible at the option of the holders into shares of the Company’s common
      stock at any time at an initial conversion price of $1.00 per share. Except
      in
      the case of certain designated issuances, in the event the Company issues shares
      of common stock or common stock equivalents (i.e., securities convertible into,
      or exercisable or exchangeable for, shares of the Company’s 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 notes, the conversion price of the notes 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 the Company’s 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
      up to a maximum aggregate of 500,000 shares, securities issued in connection
      with acquisitions, joint ventures or other strategic transactions and securities
      issued under agreements executed by the us prior to the date of the Securities
      Purchase Agreement and disclosed in the Company’s reports filed with the SEC
      since January 1, 2006.




If,
      after
      the effectiveness of the registration statement, the market price for any period
      of 20 consecutive trading days exceeds $2.50 and the average daily trading
      volume for the Company’s common stock for such period exceeds 100,000 shares,
      the Company may, subject to certain conditions, force the holders of the notes
      to immediately convert all or any part of the then outstanding principal amount
      at the then-effective conversion price.




If,
      after
      the first year anniversary of the issuance of the notes, there is an effective
      registration statement and for a period of 20 consecutive trading days, the
      daily trading volume for the Company’s common stock exceeds 100,000 shares per
      trading day, the Company may, subject to certain conditions, redeem all or
      any
      part of the then outstanding principal amount of the notes for cash in an amount
      equal to the sum of (i) 150% of the then outstanding principal amount of the
      note, (ii) accrued but unpaid interest and (iii) all liquidated damages and
      other amounts due in respect of the note.




The
      Company has agreed to certain restrictions under the terms of the notes,
      including a prohibition on the payment of cash dividends to the Company’s
      stockholders while any of the notes are outstanding. Upon the occurrence of
      an
      event of default under the notes, 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 notes and the market price of the Company’s 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 notes. 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 the Company’s 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 notes). Upon an
      event
      of a default, the interest rate on the notes will also be increased to 18%
      per
      annum.




F-31




Events
      of
      default under the notes include failure to pay any amounts under the notes
      when
      due, a material default under other agreements with the Investors or default
      in
      the Company’s obligations under mortgage, credit facility or similar agreements,
      a material inaccuracy in the representations and warranties the Company made
      to
      the Investors in connection with the Financing, and the initiation of voluntary
      or involuntary bankruptcy proceedings against us.




The
      common stock purchase warrants issued to the Investors on April 6, 2007 are
      exercisable for an aggregate of 2,500,000 shares of the Company’s common stock
      at an initial exercise price of $1.00. The warrants have an expiration date
      of
      five years after the date of issuance, or April 6, 2012. They contain a cashless
      exercise provision whereby the holder may pay the exercise price by having
      the
      Company 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, the Company would receive no proceeds from the
      sale
      of the Company’s 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
      the Company issues shares of common stock or common stock equivalents (i.e.,
      securities convertible into, or exercisable or exchangeable for, shares of
      the
      Company’s 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 the Company’s 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
      up to
      a maximum aggregate of 500,000 shares, securities issued in connection with
      acquisitions, joint ventures or other strategic transactions and securities
      issued under agreements executed by the us prior to the date of the Securities
      Purchase Agreement and disclosed in our reports filed with the SEC since January
      1, 2006.




If,
      after
      the effectiveness of the registration statement, (i) the market price for any
      period of 20 consecutive trading days exceeds $2.50, (ii) the average daily
      trading volume for the Company’s common stock for such period exceeds 100,000
      shares and (iii) the Investor is not in possession of any information that
      constitutes, or might constitute, material non-public information which was
      provided by us, then we may, within 1 trading day of the end of such period,
      call for cancellation of all or any portion of the warrants for which a notice
      of exercise has not yet been delivered for consideration equal to $0.001 per
      share.




The
      Company agreed to register for resale under the Securities Act of 1933, as
      amended, the shares underlying the notes and warrants and the bonus shares
      pursuant to a Registration Rights Agreement between the Company and the
      Investors dated April 6, 2007. Specifically, the Company is required to file
      with the Securities and Exchange Commission no later than May 6, 2007 a
      registration statement covering the resale of a number of shares of common
      stock
      equal to 100% of the shares issuable upon conversion and exercise in full of
      the
      notes and warrants as of the date of filing of the registration statement plus
      the bonus shares. The registration statement covering these shares must be
      declared effective by the Securities and Exchange Commission no later than
      July
      5, 2007 (or in the event there is a review, no later than August 4, 2007).
      In
      the event the Company fails to file the registration statement or it is not
      declared effective within the timeframes specified by the Registration Rights
      Agreement, the Company will be required to pay to the Investors liquidated
      damages equal to 1.5% 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 notes and
      warrants until the Company files the delinquent registration statement or the
      registration statement is declared effective, as applicable.




If,
      at
      any time, the number of shares issuable upon conversion and exercise in full
      of
      the notes and warrants exceeds 100% of the number of shares then registered
      (e.g., due to adjustments in the conversion price of the notes or exercise
      price
      of the warrants), the Company will be required to file an additional
      registration statement covering the excess shares. The Company will have to
      file
      the additional registration statement on the earliest practicable date, and
      the
      additional registration statement must be declared effective by the Securities
      and Exchange Commission not later than the 60 th calendar
      day, following the date the 100% threshold is exceeded. If the Company does
      not
      file the registration statement or the registration statement is not declared
      effective within these time frames, the Company will be required to pay to
      the
      liquidated damages as described in the preceding paragraph.




F-32




On
      March
      16, 2007, the Company entered into an agreement with a placement agent, Oceana
      Partners, LLC, under which they agreed to provide services in connection with
      the sale of the convertible notes and warrants. Pursuant to the terms of the
      agreement, the Company paid Oceana a cash fee of approximately $52,000 and
      issued Oceana a five year warrant to purchase up to 1,300,000 shares of common
      stock at an exercise price of $1.00 per share upon the closing.




We
      have
      agreed to indemnify Oceana from claims arising in relation to the services
      it
      provides to the Company in connection with this agreement.




In
      connection with the closing of the convertible note and warrant financing,
      the
      Company paid placement agent fees in the amount of $56,000 in cash and warrants
      to purchase 1,400,000 shares of the Company’s common stock at $1.00 per share,
      which warrants expire in five years.  The
      Company agreed to indemnify the principal placement agent from claims arising
      in
      relation to the services it provides to us.





On
      February 2, 2007, the Company signed a distribution agreement with Northamber to
      sell
      its IP-PBX solutions to customers of Northamber in the
      United Kingdom. Northamber will offer a hosted IP-PBX product using Vistula's
      V-Cube(TM) platform. The hosted IP-PBX product will be sold via Northamber's
      unique network of 6,000 distributors and Master Agents in the UK. Under the
      agreement Vistula will host the service and provide Tier 2 and Tier 3 level
      support to Northamber's distributors and customers. Northamber is
      the
      UK's longest established and largest trade-only distributor of IT products
      and
      equipment.





On
      February 12, 2007, the Company entered into a Supplemental Agreement (the
“Amendment”) with Scott Lee Goodwin (“Goodwin”), the seller and former
      shareholder of Goodman Blue Limited, amending section 4 of the share purchase
      agreement dated as of October 12, 2006 (the “Purchase Agreement”), by and
      between the Company and Goodwin, under which Goodwin could require the Company
      to repurchase 2,500,000 shares of the Company’s common stock, $.001 par value
      per share (the “Consideration Shares”) for an aggregate purchase price of
      $2,500,000. The
      Purchase Agreement as amended provides that: (i) Goodwin shall have the option
      to require us to purchase 1,400,000 of the Consideration Shares for a total
      aggregate cash consideration of $1,400,000 (the “First Put Option”); and (ii)
      Goodwin shall have the option to require us to purchase 1,100,000 of the
      Consideration Shares for a total aggregate cash consideration of $1,100,000
      (the
“Second Put Option”). The First Put Option may only be exercised in the period
      commencing on February 1, 2007 and ending on April 27, 2007 at 5 :00pm
      EST. The Second Put Option may only be exercised in the period commencing on
      August 1, 2007 and ending on August 31, 2007. The
      terms
      of our currently outstanding debentures and notes prohibit the redemption of
      shares of our common stock without the debt holders consent.




On
      February 5, 2007, we granted options to purchase common stock to the persons
      and in the
      amounts that follow:




**Officers
                and Directors**
            
            **Shares**Rupert
                Galliers-Pratt
            
            
            200,000Ian
                Cope
            
            
            20,000Jared
                P. Taylor
            
            
            50,000Adam
                Bishop
            
            
            150,000Nick
                Topham
            
            
            25,000Anthony
                Warrender
            
            
            20,000J.
                Marcus Payne
            
            
            20,000Jack
                Early
            
            
            20,000Total
            
            
            505,000




F-33




On
      February 9, 2007, Rupert Galliers-Pratt, Anthony Warrender, J. Marcus Payne,
      Jack Early and Adam Bishop executed instruments whereby they rejected the option
      grants made to them on February 5, 2007.





The
      Company also granted additional options to purchase up to 20,000 shares of
      common stock to certain other employees. All of the above options have an
      exercise price of $0.32 per share which represents the closing price of the
      Company’s common stock on February 2, 2007 as reported on the Over the Counter
      Bulletin Board and an expiration date of February 5, 2017. The options were
      granted as compensation for employment. The options are immediately exercisable
      with respect to 25% of the total option shares purchaseable thereunder.
      Thereafter, the options will vest and become exercisable for an additional
      25%
      on the last day of each year after the date of grant, so that the options shall
      be fully vested on the third anniversary of the date of grant. All of the above
      options will accelerate in full upon a change of control. The options granted
      to
      Ian Cope and Jared Taylor and certain other employees are evidenced by an
      agreement in the form of the incentive stock option agreement.





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




None.





**ITEM
      8A. CONTROLS AND PROCEDURES**




*Evaluation
      of disclosure controls and procedures* . Based
      on
      our management’s evaluation (with the participation of our principal executive
      officer and principal financial officer), as of the end of the
      period covered by this report, our principal executive officer and principal
      financial officer have concluded that our disclosure controls and procedures
      (as
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended, (the “Exchange Act”)) are effective to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in Securities and Exchange Commission rules and forms.




It
      should
      be noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system are met. In addition, the design of any control system is based in part
      upon certain assumptions about the likelihood of future events. Because of
      these
      and other inherent limitations of control systems, there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.




*Changes
      in Internal Controls Over Financial* *Reporting* *.* Our
      management, in connection with its evaluation of internal controls (with the
      participation of our principal executive officer and principal financial officer), did not identify any change in internal control over the
      financial reporting process that occurred during our fourth fiscal quarter
      of
      2006 that would have materially affected, or would have been reasonably likely
      to materially affect, our internal control over financial
      reporting.




**ITEM
      8B. OTHER INFORMATION**





None.





33





**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
            
            55
            
            Chief
                Executive Officer, President and Chairman of the BoardJared
                P. Taylor
            
            33
            
            Chief
                Financial Officer, Treasurer and SecretaryIan
                Cope
            
            57
            
            Chief
                Operations OfficerAdam
                Bishop
            
            47
            
            President,
                Vistula LimitedJ.
                Marcus Payne
            
            58
            
            Director(1)(2)(3)Anthony
                Warrender
            
            56
            
            Director(1)(2)(3)Jack
                Early
            
            52
            
            Director(2)(3)







(1)
            Member
                of the Audit Committee


(2)
            Member
                of the Compensation Committee


(3)
            Member
                of the Nominating Committee





**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
      to
      April 12, 2006, and resumed services in those capacities on August 1, 2006.
      He
      also serves as chairman of the board of directors of our subsidiaries, Vistula
      Limited, Vistula USA, Inc., Vistula Communications SA (PTY) Ltd., 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.





**Jared
      P. Taylor.** On
      August 1, 2006, Mr. Taylor was appointed our chief financial officer, treasurer,
      and secretary. Mr. Taylor joined the Company in July 2005, as its Manager of
      Accounting and Administration. Prior to joining the Company, from June 2004
      until July 2005, Mr. Taylor served as the senior consolidations accountant
      for
      Ionics, Inc. From October 2003 to June 2004, he served as a senior accountant
      as
      ACMI Corporation and from June 2002 to September 2003, he served as the real
      property administrator at Akamai Technologies, Inc. From December 1996 to
      February 2002, Mr. Taylor served in various roles with Lend Lease Corporation,
      including serving as a financial manager for that company in London, Australia
      and the US.





**Ian
      Cope.** On
      January 5, 2006, our board of directors appointed Ian Cope as our chief
      operations officer. Mr. Cope was the chief technical officer at DSLi Corporation
      since November 2002 where he was responsible for the complete operations of
      a
      facilities-based competitive local exchange carrier providing a full range
      of
      voice and data services using both traditional circuit switched infrastructure
      and IP Centrex. From January 2002 through November 2002, Mr. Cope was a
      consultant to major ISPs and
      incumbent local
      exchange carriers on broadband access solutions, providing technical direction
      on the planning and implementation of initiatives. From January 2001 to December
      2001, Mr. Cope was the vice president of engineering for NX Networks,
      Inc. **** Mr.
      Cope
      has over thirty years experience in the global telecommunications industry.





**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. He also served as President and Chief Executive Officer of Vistula USA
      from November 2005 to August 1, 2006, when the Company restructed its
      management. Mr. Bishop has significant experience as a senior executive in
      the
      international telecommunications industry. From 1994 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 telecommunications field. Mr. Bishop
      graduated from London University with a degree in Physics.




34




**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.





**Anthony
      Warrender.** Mr.
      Warrender has served as a member of our board of directors since our inception.
      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 *.* Since
      May 2005, Mr. Warrender has served as a non-executive director of GoldQuest
      Mining Corporation, a publicly traded Canadian gold and minerals exploration
      company operating in the Dominican Republic. 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.





**Jack
      Early.** On
      April
      11, 2006, our board of directors elected Mr. Early as a director of the Company
      to fill the vacancy created by the departure of Kevin West in June of 2005.
      During 2004, Mr. Early served as the national sales manager of Clientsoft,
      a web
      services enterprise software company that was sold to Neon Systems in December
      of 2004. From August 2000 to January 2004, Mr. Early served as the non-executive
      chairman of the board of directors at Clientsoft where he sat on the
      compensation and audit committees and was the trustee of the company’s 401(k)
      plan. Mr. Early is active in the area of start-up ventures both as an
      entrepreneur and an investor. He is affiliated with angel investor groups that
      have funded new and emerging businesses including Naragansett Brewing Co.,
      Context Media and Tazz Networks. Mr. Early is a veteran of the enterprise
      software and services industry with over 25 years of management experience.
      Mr.
      Early co-founded Early Cloud and Co. (ECC) the pioneering software company
      noted
      for its technological expertise in the call center services industry. ECC was
      eventually acquired by IBM in 1995. Most recently he served as Chairman of
      the
      Board at Clientsoft a Web services platform and application tools company which
      was acquired by Neon Systems in 2004. Mr. Early is a member of our Compensation
      Committee and Nominating Committee.





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.





**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 have posted
      our Code of Business Conduct and Ethics on our website (http://www.vistula.com)
      and 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 Exchange Act of 1934,
      as
      amended, requires
      our officers , directors and persons who beneficially own more than ten percent of our common
      stock to file reports of ownership and changes in ownership with the Securities
      and Exchange Commission ("SEC"). SEC regulations require officers,
      directors, and greater-than-ten-percent stockholders to furnish us with copies
      of all Section 16(a) forms they file .




Based
      solely upon a review of Forms 3, 4 and 5 and amendments to those forms furnished
      to us during fiscal 2006, and, if applicable, written representations that
      a
      Form 5 was not required, we believe that all Section 16(a) filing requirements
      applicable to our officers, directors and ten-percent stockholders were
      fulfilled in a timely manner .





35





**ITEM
      10.  EXECUTIVE COMPENSATION**





**Executive
      Officer Compensation**





*Summary
      Compensation:* The
      following table sets forth certain information about the compensation we paid
      or
      accrued with respect to our chief executive officer and our two most highly
      compensated executive officers ( including
      an executive officer of one
      of our subsidiaries), who were
      serving as
      executive officers at the end of
      the 2006 fiscal year , and
      whose annual compensation exceeded $100,000 for that year .
      The
      following table also sets forth certain information about the compensation
      we
      paid or accrued with respect to a former highly compensated executive officer
      who was not serving at the end of the 2006 fiscal year.





Other
      annual compensation in the form of perquisites and other personal benefits
      has
      been omitted as the aggregate amount
      of those perquisites and other personal benefits was less than $10,000.




**Summary
      Compensation Table**




**Name
                and Principal Position**
            
            **Year**
            
            **Salary
                ($)**
            
            **Bonus
                ($)**
            
            **Option
                Awards ($) (5)**
            
            **All
                other compensation ($)**
            
            **Total
                ($)**Rupert
                Galliers-Pratt (1)
            
            
            2006
            
            
            240,000
            
            
            -
            
            
            1,364,623
            
            
            30,000
            
            
            1,634,623President,
                Chief Executive Officer, and Chairman of the Board
            
            
            2005
            
            
            240,000
            
            
            98,005
            
            
            900,909
            
            
            11,210
            
            
            1,250,124Adam
                Bishop (2)
            
            
            2006
            
            
            183,990
            
            
            -
            
            
            255,867
            
            
            -
            
            
            439,857President
                of Vistula Limited
            
            
            2005
            
            
            180,000
            
            
            127,859
            
            
            693,007
            
            
            -
            
            
            1,000,866Ian
                Cope (3)
            
            
            2006
            
            
            140,000
            
            
            -
            
            
            178,709
            
            
            -
            
            
            318,709Chief
                Operating Officer
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            33,333
            
            
            33,333J.
                Keith Markley (4)
            
            
            2006
            
            
            198,167
            
            
            -
            
            
            628,565
            
            
            290,000
            
            
            1,116,732Former
                Board member, former President of Vistula USA, Inc., and former Chief
                Executive Officer
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -





**** (1)  Mr.
      Galliers-Pratt has served as the Company’s Chairman of the Board and President
      since our inception, and has acted as Chief Executive Officer since our
      inception with the exception of two short periods before he resumed this
      position. All other compensation represents a car lease as per his employment
      agreement. The
      Option Awards have been granted to EMS, the entity which our Chairman and Chief
      Executive Officer is contracted through for consulting services.





(2)  Mr.
      Bishop has served as the President of Vistula Limited, a wholly-owned
      subsidiary, since the Company’s inception, and is considered one of the
      Company’s key employees. The Company depends on his continued service for the
      future success and continued revenues for the Company. There is no employment
      agreement in place between the Company and Mr. Bishop.





(3)  Mr.
      Cope
      began his employment as Chief Operating Officer on January 5, 2006. All other
      compensation during 2005 represents amounts which were earned in his capacity
      as
      a consultant prior to the commencement of his employment.





(4)  Mr.
      Markley’s employment began on April 11, 2006 as the Company’s Chief Executive
      Officer and as a member of the Board of Directors. On August 1, 2006, the
      Company re-organized its management, at which time Mr. Markley resigned as
      Chief
      Executive Officer and was appointed President of Vistula USA, Inc., a
      wholly-owned subsidiary, and agreed to cancel a portion of his options to
      exercise 500,000 options. Effective December 15, 2006, Mr. Markley resigned
      from
      his roles as a member of the Board of Directors and President of Vistula USA,
      Inc. The Option Awards is the net figure as reported in the financial statements
      for the value of the options received by Mr. Markley at the time his employment
      began on April 11, 2006 of $699,187, less the value of the options cancelled
      and
      forfeited, as discussed in the terms of his employment agreement below, of
      $70,621. All other compensation disclosed in 2006 is an accrual for future
      payments due for the termination of his employment as per the terms of his
      employment agreement. See Note 15 to the financial statements.




36




(5)  The
      fair
      value of each stock award was estimated on the grant date using the
      Black-Scholes option-pricing model. See Note 8 to the financial statements
      for a
      description of the assumptions used in estimating the fair value of stock
      options.





*Employment
      Agreements*




On
      August
      17, 2005, the Company entered into a Consulting Agreement (the “Agreement”) with
      Executive Management Services Limited (“EMS”) under which EMS agrees to provide
      the services of Mr. Galliers-Pratt, to the Company. Under the Agreement, Mr.
      Galliers-Pratt will continue to serve as President and Chief Executive Officer.
      The Agreement provides that the Company shall pay EMS annual consulting fees
      of
      $240,000 as consideration for these services, and permits for a reimbursement
      of
      a car lease up to $2,500 per month throughout the term of the Agreement.




The
      Agreement has an initial term of two years. The term of the Agreement shall
      be
      automatically extended for additional periods of one year unless either party
      to
      the Agreement gives the other party notice of termination of the Agreement
      prior
      to the expiration of the then-current term. The Agreement may be terminated
      at
      any time by EMS or the Company. However, in the event the Company terminates
      the
      engagement of EMS without cause, the Company will be required to make severance
      payments for a period of two years after, and at the consulting fee rate in
      effect at the time of, such termination and to continue to pay for certain
      medical and other benefit plans for such period. Under the Agreement, EMS and
      Mr. Galliers-Pratt agree to be bound by certain non-competition and
      non-solicitation provisions, which are effective during the term of the
      Agreement and for a period of two years after termination of the
      Agreement.





Rupert
      Galliers-Pratt has served as the Company’s President and Chairman of the Board
      of Directors since the Company’s inception in March 2004, and has served as the
      Company’s Chief Executive Officer since the Company’s inception, with the
      exception of two brief periods, whereby Mr. Galliers-Pratt resumed the position
      of Chief Executive Officer.





On
      January 5, 2006, the Company entered into an employment agreement with Ian
      Cope
      relating to Mr. Cope’s employment as its chief operations officer. Under the
      employment agreement, the Company pays Mr. Cope an annual base salary of
      $140,000 and provides him with certain employment-related benefits. As part
      of
      the employment agreement, Mr. Cope was granted an incentive stock option to
      purchase 250,000 shares of the Company’s common stock with an exercise price
      equal to $1.42 per share; 50,000 of those shares subject to the option vested
      immediately and the remaining 200,000 shares subject to the option vest in
      four
      equal annual installments of 50,000 shares beginning on January 5, 2007. The
      option is subject to the terms and conditions of the Company’s Amended and
      Restated 2004 Stock Incentive Plan. The employment agreement also provides
      that
      if Mr. Cope is terminated without cause, the Company will pay him his base
      salary for three months.





Effective
      December 15, 2006, John Keith Markley resigned from the board of directors
      of
      Vistula Communications Services, Inc. (the “Company”) and from his position as
      president of Vistula USA, Inc., a wholly owned subsidiary of the Company. As
      a
      result of Mr. Markley’s resignation and pursuant to the Employment Agreement
      dated as of April 11, 2006, as described below, between the Company and Mr.
      Markley, as amended by the Amendment to Employment Agreement dated August 1,
      2006, as described below, and in accordance with an Agreement and General
      Release between the Company and Mr. Markley dated as of December 15, 2006,
      the
      Company shall be required to pay Mr. Markley $290,000
      over twelve (12) months, in accordance with the Company’s current payroll
      practices; provided, that the Company and Mr. Markley agree that these amounts
      constitute “nonqualified deferred compensation” within the meaning of Section
      409A of the Internal Revenue Code of 1986, as amended, and the regulations
      promulgated thereunder. Mr. Markley will continue to be covered under the
      Company’s medical plans for a period of twelve (12) months following his
      resignation; provided that Mr. Markley shall continue to be responsible for
      his
      portion of such payments via applicable withholdings.




On
      April
      11, 2006, the Company entered into an employment agreement with J. Keith Markley
      relating to Mr. Markley’s employment as its chief executive officer. On August
      1, 2006, the Company entered into an amendment of the employment agreement
      in
      connection with a reorganization of the Company’s management positions (see Note
      15). The amendment provided, among other things, that Mr. Markley resign as
      the
      Company’s chief executive officer and agreed to serve as the president of
      Vistula USA, Inc., a wholly-owned US subsidiary of the Company. Under the
      amended employment agreement, the Company paid Mr. Markley an annual base salary
      of $290,000 and provided him with customary employment-related
      benefits.




The
      amendment also provided that, in addition to the existing severance benefits
      already contained in his employment agreement, in the event he voluntarily
      terminated his employment prior to a change of control (as defined in the
      amendment) or in the event that the Company elected to terminate his employment
      as a result of his repeated failure to comply with reasonable directions and
      instructions of the Company’s chief executive officer or board of directors in
      connection with the performance of his duties and responsibilities under his
      employment agreement prior to a change of control, the Company will be required
      to make severance payments to him equivalent to the base salary he would have
      received had his employment continued and to continue to provide medical
      benefits, in each case for a period of twelve months following termination
      of
      his employment. In the event the Company terminated Mr. Markley’s employment
      without cause, the Company would have been required to make severance payments
      equivalent to the base salary he would have received had his employment
      continued and to continue to provide medical benefits, in each case for a period
      of twelve months following the termination, if his employment was terminated
      in
      his first year of employment and in each case for a period of eighteen months
      if
      his employment had been terminated at any time after his first year of
      employment.




37




The
      original employment agreement provided for the grant to Mr. Markley of two
      non-qualified stock options to purchase shares of common stock, one exercisable
      for 3,052,000 shares and the other exercisable for 948,000 shares, with the
      latter option grant subject to the ratification by stockholders at the next
      annual meeting of an increase in the number of shares available under the
      Amended and Restated 2004 Stock Incentive Plan to at least 16,000,000 shares,
      which ratification occurred on July 17, 2006. The Company’s compensation
      committee approved these grants on April 11, 2006, and fixed the exercise price
      per share at $1.18, representing the fair market value of the Company’s common
      stock on the date of grant based on the previous day’s closing price. In the
      amendment, Mr. Markley agreed
      to
      waive his rights to exercise that portion of his outstanding option to purchase
      948,000 shares of common stock granted to him on April 11, 2006 which entitles
      him to purchase 500,000 shares of common stock. Mr. Markley will retain the
      right to purchase up to 448,000 shares of common stock under that option. In
      the
      amendment, Mr. Markley also agreed to waive any claims he might have against
      the
      Company in connection with his change in position with the Company.




Each
      option vested with respect to one-sixth of the total number of shares subject
      to
      the option six months after the date of grant (April 11, 2006). Each option
      continued to vest with respect to an additional one thirty-sixth of the total
      number of shares subject to the option on a monthly basis thereafter until
      fully
      vested. The options will accelerate in full upon a change of control of the
      Company or a termination without cause (as defined in the employment agreement).
      As defined in his option agreement, Mr. Markley has one year from his effective
      termination date of December 15, 2006 to exercise his vested stock options.




Mr.
      Markley agreed not to engage, during his employment and for a period equal
      to
      the longer of (a) one year following the termination of his employment or (b)
      the period for which he is entitled to severance payments following the
      termination of his employment, in any activities competitive with the Company
      in
      the United States or any foreign territory where the Company or any of its
      subsidiaries are conducting business. Mr. Markley also agreed, during that
      period, not to solicit any of the Company’s employees or the employees of its
      subsidiaries to leave the Company or to solicit any of the Company’s clients to
      terminate or curtail their business relationships with the Company.




*Outstanding
      equity awards at Fiscal Year-End* .
      The
      following table sets forth certain information regarding stock options held
      as
      of December 31, 2006 by the executive officers named in the summary compensation
      table.




**Outstanding
      Equity Awards at Fiscal Year-End**





**Individual
                Grants****Name**
            
            **Year
                of Grant**
            
            **Number
                of securities underlying unexercised options (#)
                exercisable(8)**
            
            **Number
                of securities underlying unexercised options (#)
                unexercisable**
            
            **Exercise
                or base price ($/share)**
            
            **Expiration
                date**Rupert
                Galliers-Pratt(3)
            
            
            2006
            
            
            300,000
            
            
            500,000
            
            
            1.25
            
            
            April
                12, 2016 (1b)2006
            
            
            1,500,000
            
            
            2,500,000
            
            
            1.50
            
            
            December
                23, 2015 (1a)2005
            
            
            650,000
            
            
            -
            
            
            0.45
            
            
            July
                7, 2015 (2)Adam
                Bishop
            
            
            2006
            
            
            150,000
            
            
            56,250
            
            
            1.25
            
            
            April
                12, 2016 (1b)2006
            
            
            281,250
            
            
            468,750
            
            
            1.50
            
            
            December
                23, 2015 (1a)2005
            
            
            500,000
            
            
            -
            
            
            0.45
            
            
            July
                7, 2015 (2)Ian
                Cope
            
            
            2006
            
            
            18,750
            
            
            31,250
            
            
            1.25
            
            
            April
                12, 2016 (1b)2006
            
            
            93,750
            
            
            156,250
            
            
            1.50
            
            
            December
                23, 2015 (1a)2006(4
            )
            
            50,000
            
            
            200,000
            
            
            1.42
            
            
            January
                5, 2016J.
                Keith Markley
            
            
            2006(75
            )
            
            778,050
            
            
            -
            
            
            1.18
            
            
            15-Dec-2007




38




(1)
            a)
                For options with an expiry date of December 23, 2015, the options
                became
                vested as to 25% of the total number of option shares upon stockholder
                ratification of the increase in the number of shares authorized under
                the
                Company’s 2004 Stock Incentive Plan to at least 15,000,000, which occurred
                on July 17, 2006. Thereafter, the options will become vested as to
                an
                additional 6.25% of the total number of option shares in quarterly
                installments beginning on September 30, 2006. The exercise price
                was
                determined to be above the stock’s closing price on December 23, 2005
                ($1.42), which was the date the Company granted the options. b) For
                options with an expiry date of April 12, 2016, the options became
                vested
                as to 25% of the total number of option shares upon shareholder
                ratification of the increase in the number of shares authorized under
                the
                Company’s 2004 Stock Incentive Plan to at least 18,000,000 shares, which
                occurred on July 17, 2006. Thereafter, the options will become vested
                as
                to an additional 6.25% of the total number of option shares in quarterly
                installments beginning on September 30, 2006. For both a) and b)
                the grant
                date and exercise price for the grantee is determined to be on the
                date
                the Company made the grant; however, for financial reporting purposes
                the
                price and grant date has been determined to be July 17, 2006, the
                date the
                shareholders ratified the increase in the number of shares under
                the
                Company’s 2004 Stock Incentive Plan.




(2)
              These
                  shares became 100% vested immediately upon the grant date. The
                  exercise
                  price equals the fair market value of ourcommon
                  stock on the date of grant, as determined by our board of directors
                  and
                  has been supported by an independent valuation.
 
 (3)
              All
                  of these shares have been issued to EMS, which Mr. Galliers-Prattholds
                  indirect voting and investment control over shares held by
                  EMS.
 
 (4)
              These
                  shares vested at 50,000 on the grant date, the same as the date
                  of the
                  employment agreement, January 5, 2006, and vests an additional
                  50,000
                  options on each anniversary of the employment agreement date until
                  fully
                  vested. The exercise price represents the fair market value of
                  the
                  Company’s common stock on the date of grant, January 5, 2006.
 
 (5)
              These
                  shares represent the net shares available for exercise to Mr. Markley
                  as
                  of December 31, 2006, after his resignation as a member of the
                  Board of
                  Directors and President of Vistula USA, Inc, as described in Note
                  15.
                  Under the termination agreement Mr. Markley has the right to exercise
                  all
                  vested options for a period of one year from the effective date
                  of his
                  resignation, December 15, 2006.
 
 (6)
              Allof
                  the aboveoptions
                  become fully vested upon a change in control in the Company.


**Director
      Compensation**




*Summary
      Compensation:* The
      following table sets forth certain information about the compensation we paid
      or
      accrued with respect to our directors who served during the year ended December
      31, 2006.





**Year**
            
            **Directors
                Fees**
            
            **Option
                Awards**(4)
            
            **All
                other compensation**
            
            **Total**Anthony
                M. Warrender(1)
            
            
            2006
            
            
            61,500
            
            
            85,289
            
            
            -
            
            
            146,7892005
            
            
            68,600
            
            
            326,650
            
            
            -
            
            
            395,250J.
                Marcus Payne(2)
            
            
            2006
            
            
            55,000
            
            
            269,180
            
            
            -
            
            
            324,1802005
            
            
            62,100
            
            
            207,902
            
            
            -
            
            
            270,002Jack
                Early(3)
            
            
            2006
            
            
            32,417
            
            
            154,318
            
            
            -
            
            
            186,7352005
            
            
            -
            
            
            -
            
            
            -
            
            
            -





(1)
            Mr.
                Warrender is the Chairman of the Audit Committee and Nominating Committee,
                and a member of the Compensation Committee.


(2)
            Includes
                option awards granted to Olympic Corporate Holdings Limited, a company
                which Mr. Payne is a director and options granted directly to Mr.
                Payne.
                Mr. Payne is the Chairman of the Compensation Committee, and a member
                of
                both the Audit and Nominating Committee.


(3)
            Mr.
                Early was named to the Board of Directors on April 12, 2006, and
                is a
                member of the Compensation Committee and the Nominating Committee.


(4)
            The
                fair value of each stock award was estimated on the grant date using
                the
                Black-Scholes option-pricing model. See Note 8 to the financial statements
                for a description of the assumptions used in estimating the fair
                value of
                stock options.





We
      pay
      our non-employee directors an annual fee of $40,000. 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 are included within the annual fee paid to the
      director.




39




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 are 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. Directors who are our employees will not receive separate fees for
      their
      services as directors.




*Equity
      compensation plans*




The
      following table provides information as of December 31, 2006 regarding shares
      authorized for issuance under our equity compensation plans, including
      individual compensation arrangements.




We
      have
      one equity compensation plan approved by our stockholders, the 2004 Stock
      Incentive Plan (the “Plan”):




**Equity
      compensation plan information**




**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
            
            
            11,712,300
            
            $
            1.24
            
            
            5,977,700Equity
                compensation plans not approved by security holders
            
            
            _
            
            
            _
            
            
            _**Total**
            
            
            11,712,300
            
            $
            1.24
            
            
            5,977,700




**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





At
      the
      close of business on April 6, 2007, there were issued and outstanding 66,964,898
      shares of our common stock. The following table provides information regarding
      beneficial ownership of our common stock as of April 6, 2007 by:




·
              Each
                    person known by us to be the beneficial owner of more than five
                    percent of
                    our common stock;


·
            Each
                of our directors;





·
            Each
                executive officer named in the summary compensation table (including
                one
                former executive officer); and





·
            All
                of our current directors and executive officers as a
                group.





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 April 6,
      2007.





40




**Shares
                Beneficially Owned****Name/Address
                of Beneficial Owner**
            
            **Number**
            
            **Percent**Rupert
                Galliers-Pratt(1)
              Mawley
                Hall, Cleobury Mortimer
              Worcestershire,
                DY14 8PN, United Kingdom;
            
            
            15,660,000
            
            
            22.46
            %NetYantra,
                Inc.
              5200
                NW 43rd St.
              Suite
                102, #327
              Gainesville,
                Florida 32606
            
            
            14,550,000
            
            
            21.73
            %Executive
                Management Services Limited(2)
              Palm
                Chambers No.4
              Fishlock
                Road
              Road
                Town
              Tortola,
                British Virgin Islands
            
            
            11,250,000
            
            
            16.14
            %Little
                Wing, L.P., Circle-T Explorer Master Capital International Inc.,
                Quilcap
                Corp., Tradewinds Fund Ltd., Quilcap International Corp., and Parker
                Quillen(3)
              c/o
                Quilcap Corp.
              145
                E. 57th Street, 10th Floor
              New
                York, NY 10022
            
            
            7,498,267
            
            
            10.75
            %Adam
                Bishop(4)
              44
                Kenilworth Road
              London
                W1H 6LT, United Kingdom
            
            
            1,393,750
            
            
            2.05
            %Anthony
                Warrender(5)
              4392
                Carrington Road
              Markham,
                Virginia 22643
            
            
            531,250
            
            
            *J.
                Marcus Payne(6)
              5315
                N. Clark Street
              Chicago,
                Illinois 60640
            
            
            718,750
            
            
            1.06
            %Jack
                Early(7)
              c/o
                Vistula Communications Services, Inc.
              405
                Park Avenue, Suite 801
              New
                York, NY 10022
            
            
            250,000
            
            
            *Ian
                Cope
              c/o
                Vistula Communications Services, Inc.
              405
                Park Avenue, Suite 801
              New
                York, NY 10022
            
            
            231,250
            
            
            *J.
                Keith Markley(8)
              c/o
                Vistula Communications Services, Inc.
              405
                Park Avenue, Suite 801
              New
                York, NY 10022
            
            
            778,050
            
            
            1.15
            %All
                current directors and executive officers as a group (7
                persons)
            
            
            18,851,500
            
            
            26.16
            %







*  Indicates
      less than 1%





(1)  Includes
      8,500,000 shares held by EMS and 2,750,000 shares that may be purchased upon
      the
      exercise of options held by EMS. Mr. Galliers-Pratt has indirect voting and
      investment power with respect to these shares. Also includes an aggregate of
      3,780,000 shares held of record by certain family members
      of Mr. Galliers-Pratt. In
      accordance with a securities purchase agreement dated April 6, 2007, EMS has
      agreed to transfer 5,000,000 shares of common stock held by it to certain
      investors. The number of shares reported above includes these 5,000,000 shares
      as they have not yet been transferred.




41




(2)  Rupert
      Galliers-Pratt has indirect voting and investment power with respect to these
      shares. In
      accordance with a securities purchase agreement dated April 6, 2007, EMS has
      agreed to transfer 5,000,000 shares of common stock held by it to certain
      investors. The number of shares reported above includes these 5,000,000 shares
      as they have not yet been transferred.





(3)  Information
      is based on our
      internal records and a
      Schedule 13G/A filed by Little Wing, L.P., Circle-T Explorer Master Capital
      International Inc., Quilcap Corp., Tradewinds Fund Ltd., Quil cap
      International Corp., and Parker Quillen with the Securities and Exchange
      Commission on January 19, 2007.





(4 )  Includes
      893,750 shares that may be purchased through the exercise of options held by
      Mr.
      Bishop.





( 5 )  Includes
      371,250 shares that may be purchased through the exercise of options held by
      Mr.
      Warrender. Mr. Warrender is a member of our board of directors.





( 6 )  Represents
      shares held by Olympic Corporate Holdings Limited of which Mr. Payne is a
      director. Includes 281,250 shares that may be purchased through the exercise
      of
      options held by Mr. Payne and 262,500 shares that may be purchased through
      the
      exercise of options held by Olympic Corporate Holdings Limited. Mr. Payne is
      a
      member of our board of directors.





( 7 )  Includes
      200,000 shares that may be purchased through the exercise of options held by
      Mr.
      Early.





( 8 )  Mr.
      Markley was our Chief Executive Officer, until August 1, 2006, at which time
      he
      resigned. Mr. Markley was the President of our wholly-owned subsidiary, Vistula
      USA, Inc. until December 15, 2006, at which time he resigned.





**ITEM
      12.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS**





One
      of
      our subsidiaries, Vistula Limited, had 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
      August
      11, 2005, we extended the convertible promissory note dated July 12, 2004,
      in
      the principal amount of $125,000 and the convertible promissory note dated
      August 11, 2004, in the principal amount of $50,000 issued by the Company,
      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, to December 31, 2005. On December 15, 2005, these two
      notes were extended to June 30, 2006. These notes 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. On June 30, 2006, the pension plan confirmed its earlier
      agreement to extend the maturity date of both promissory notes until December
      31, 2006. On December 31, 2006, the pension plan confirmed its earlier agreement
      to extend the maturity date of both promissory notes until June 30, 2007.





**ITEM
      13. EXHIBITS**





**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**2.1
            
            Asset
                Purchase Agreement, dated as of January 5, 2004, by and between VCS,
                Inc.
                and MRS Partners LLC.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            2.12.2
            
            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.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            2.22.3
            
            Amendment
                No. 1 to the Asset Purchase Agreement dated as of May 11, 2006 by
                and
                among Vistula Communications Services, Inc., NetYantra Inc. and NetYantra
                India Private Limited
            
            
            
            Form
                8-K
            
            June
                13, 2006
            
            2.1




42


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


2.4
            
            Amendment
                No. 2 to the Asset Purchase Agreement dated as of June 7, 2006 by
                and
                among Vistula Communications Services, Inc., NetYantra Inc. and NetYantra
                India Private Limited
            
            
            
            Form
                8-K
            
            June
                13, 2006
            
            2.22.5
            
            Asset
                Purchase Agreement dated as of April 28, 2006 by and among Vistula
                Communications Services, Inc., NetYantra Inc. and NetYantra India
                Private
                Limited
            
            
            
            Form
                8-K
            
            May
                2, 2006
            
            2.13.1
            
            Certificate
                of Incorporation filed with the Delaware Secretary of State on September
                22, 2003.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            3.13.2
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Delaware
                Secretary of State on January 23, 2004.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            3.23.3
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Delaware
                Secretary of State on March 4, 2004.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            3.33.4
            
            Bylaws
                adopted on September 22, 2003.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            3.43.5
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Delaware
                Secretary of State on July 20, 2004.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            3.53.6
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Delaware
                Secretary of State on July 18, 2006.
            
            
            
            Form
                8-K
            
            July
                20, 2006
            
            3.14.1
            
            Form
                of 8% Convertible Debenture
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            4.14.2
            
            Form
                of Common Stock Purchase Warrant
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            4.24.3
            
            Promissory
                note issued on March 15, 2005 by Vistula Communications Services,
                Inc. to
                MRS Partners LLC.
            
            
            
            Form
                8-K
            
            May
                23, 2005
            
            4.14.4
            
            Form
                of 12% Convertible Note
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            4.14.5
            
            Form
                of Common Stock Purchase Warrant
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            4.210.1*
            
            Amended
                and Restated Employment and Noncompetition Agreement, dated as of
                May 5,
                2004, by and between Vistula Communications Services, Inc., Vistula
                USA,
                Inc. and Mark Scully.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.210.2*
            
            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.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.310.3*
            
            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.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.4




43


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


10.4*
            
            Non-Statutory
                Stock Option, dated as of May 5, 2004, by and between Vistula
                Communications Services, Inc. and Mark Scully.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.510.5*
            
            Non-Statutory
                Stock Option, dated as of May 5, 2004, by and between Vistula
                Communications Services, Inc. and Edward DeMent.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.610.6*
            
            Non-Statutory
                Stock Option, dated as of May 5, 2004, by and between Vistula
                Communications Services, Inc. and Eric Pomeroy.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.710.7
            
            Telehouse
                FM Services Agreement, dated as of September 3, 2003, by and between
                Vistula Limited and Telehouse International Corporation of Europe
                Limited.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            10.810.8
            
            Preferred
                Partner Agreement, dated as of December 16, 2003, by and between
                Vistula
                Limited and Telstra Europe Limited.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.910.9
            
            Resale
                Agreement, dated as of September 4, 2003, by and between Vistula
                Limited
                and Telstra Europe Limited.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1010.10
            
            Reciprocal
                International Telecommunications Services Carrier Agreement, dated
                as of
                January 20, 2004, by and between Vistula Limited and SwissFone
                Inc.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1110.11
            
            Service
                Agreement, dated as of September 1, 2003, by and between Vistula
                Limited
                and iBasis Global, Inc.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1210.12
            
            Qwest
                Wholesale Services Agreement, dated as of February 27, 2004, by and
                between Vistula Limited and Qwest Communications
                Corporation.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1310.13
            
            Reciprocal
                Telecommunications Services Agreement, dated as of January 23, 2004,
                by
                and between Vistula Limited and Teleglobe International
                Ltd.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1410.14
            
            Primus
                Telecommunications Limited Carrier Services Agreement, dated as of
                February 16, 2004, by and between Vistula Limited and Primus
                Telecommunications Limited.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1510.15
            
            Reciprocal
                Telecommunications Services Agreement, dated as of December 2, 2002,
                by
                and between Vistula Limited and Bharti Telesonic Ltd.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1610.16
            
            International
                Switched Telecommunications Services Agreement, dated as of August
                8,
                2003, by and between Vistula Limited and Elitetele SA.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1710.17
            
            Global
                IP Network Service Agreement, dated as of February 10, 2004, by and
                between Vistula Limited and NTT Europe Ltd.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.18




44


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


10.18
            
            Reciprocal
                International Carrier Service Agreement, dated as of April 15, 2004,
                by
                and between Vistula Limited and KDDI America, Inc.
            
            
            
            Form
                10-SB
            
            May
                12, 2004
            
            10.1910.19
            
            Distribution
                and Marketing Agreement, dated as of August 11, 2004, by and between
                NetYantra Inc., NetYantra India Pvt. Ltd. and Vistula Communications
                Services, Inc.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            10.2010.20
            
            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.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            10.2110.21
            
            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.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            10.2210.22
            
            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.
            
            
            
            Form
                10-SB/A
            
            August
                31, 2004
            
            10.2310.23
            
            Letter
                Agreement, dated September 9, 2004, by and between NetYantra Inc.,
                NetYantra India Pvt. Ltd. and Vistula Communications Services,
                Inc.
            
            
            
            Form
                10-QSB
            
            November
                19, 2004
            
            10.1310.24
            
            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.
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            10.110.25
            
            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.
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            10.2




45


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


10.26
            
            Placement
                Agent Agreement dated February 15, 2005 by and between Vistula
                Communications Services, Inc. and IndiGo Securities, LLC.
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            10.310.27
            
            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.
            
            
            
            Form
                8-K
            
            February
                25, 2005
            
            10.410.28
            
            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.
            
            
            
            Form
                8-K
            
            March
                21, 2005
            
            10.110.29
            
            Distribution
                and Marketing Agreement by and between Vistula Communications Services,
                Inc. and Telstra Europe Limited dated as of April 1, 2005.
            
            
            
            Form
                8-K
            
            April
                4, 2004
            
            10.110.30*
            
            Vistula
                Communications Services, Inc. Amended and Restated 2004 Stock Incentive
                Plan.
            
            
            
            Form
                10-QSB
            
            August
                15, 2005
            
            10.110.31*
            
            Consulting
                Agreement dated August 17, 2005 with Executive Management Services
                Limited.
            
            
            
            Form
                8-K
            
            August
                18, 2005
            
            10.110.32
            
            Form
                of Warrant Exercise Agreement.
            
            
            
            Form
                8-K
            
            October
                7, 2005
            
            4.110.33
            
            Form
                of Warrant.
            
            
            
            Form
                8-K
            
            October
                7, 2005
            
            10.110.34
            
            Registration
                Rights Agreement dated October 3, 2005.
            
            
            
            Form
                8-K
            
            October
                7, 2005
            
            10.210.35
            
            Consultant,
                Representative and Professional Services Agreement dated December
                13, 2005
                with Quest Telecommunications, Inc.
            
            
            
            Form
                8-K
            
            December
                19, 2005
            
            10.110.36*
            
            Employment
                Agreement with Ian Cope dated January 5, 2006.
            
            
            
            Form
                8-K
            
            January
                10, 2006
            
            10.1




46


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


10.37
            
            Financial
                Advisory Agreement with Indigo Ventures LLC dated January 27,
                2006
            
            
            
            Form
                8-K
            
            January
                31, 2006
            
            10.110.38
            
            Subscription
                Agreement by and between Vistula Communications Services, Inc. and
                Indigo
                Investments I LLC dated March 30, 2006
            
            
            
            Form
                10-KSB
            
            March
                31, 2006
            
            10.4210.39
            
            Loan
                and Security Agreement by and between Vistula Communications Services,
                Inc. and Indigo Investments I LLC dated March 30, 2006
            
            
            
            Form
                10-KSB
            
            March
                31, 2006
            
            10.4310.40
            
            Revolving
                Loan Note issued by Vistula Communications Services, Inc. to Indigo
                Investments I LLC on March 30, 2006
            
            
            
            Form
                10-KSB
            
            March
                31, 2006
            
            10.4410.41
            
            Common
                Stock Purchase Warrant issued by Vistula Communications Services,
                Inc. to
                Indigo Investments I LLC on March 30, 2006
            
            
            
            Form
                10-KSB
            
            March
                31, 2006
            
            10.4510.42*
            
            Employment
                Agreement with J. Keith Markley dated April 11, 2006
            
            
            
            Form
                8-K
            
            April
                14, 2006
            
            10.110.43
            
            Stock
                and Warrant Purchase Agreement by and among Vistula Communications
                Services, Inc. and the Investors named therein dated May 19,
                2006
            
            
            
            Form
                8-K
            
            May
                22, 2006
            
            99.210.44
            
            Registration
                Rights Agreement by and among Vistula Communications Services, Inc.
                and
                the Investors named therein dated May 22, 2006
            
            
            
            Form
                8-K
            
            May
                22, 2006
            
            99.310.45
            
            Form
                of Investor Common Stock Purchase Warrant
            
            
            
            Form
                8-K
            
            May
                22, 2006
            
            99.410.46
            
            Form
                of Placement Agent Common Stock Purchase Warrant
            
            
            
            Form
                8-K
            
            May
                22, 2006
            
            99.510.47
            
            Placement
                Agency Agreement by and between Vistula Communications Services,
                Inc. and
                CRT Capital Group LLC dated May 19, 2006
            
            
            
            Form
                8-K
            
            May
                22, 2006
            
            99.610.48
            
            Registration
                Rights Agreement dated as of June 7, 2006 between Vistula Communications
                Services, Inc. and NetYantra Inc.
            
            
            
            Form
                8-K
            
            June
                13, 2006
            
            2.310.49
            
            Amendment
                to Employment Agreement of John Keith Markley dated August 1,
                2006
            
            
            
            Form
                8-K
            
            August
                3, 2006
            
            10.110.50
            
            Share
                Purchase Agreement dated as of October 11, 2006 by and between Vistula
                Communications Services, Inc. and Scott Lee Goodwin
            
            
            
            Form
                8-K
            
            October
                11, 2006
            
            10.110.51
            
            Agreement
                and General Release between the Company and John Keith Markley dated
                as of
                December 15, 2006
            
            
            
            Form
                8-K
            
            December
                18, 2006
            
            99.110.52
            
            Form
                of Incentive Stock Option under Vistula Communications Services,
                Inc.’s
                Amended and Restated 2004 Stock Incentive Plan
            
            
            
            Form
                8-K
            
            February
                9, 2007
            
            10.1




47


**Filed
                with**
            
            **Incorporated
                by Reference****Exhibit
                No.**
            
            **Description**
            
            **this
                Form 10-KSB**
            
            **Form**
            
            **Filing
                Date**
            
            **Exhibit
                No.**


10.53
            
            Form
                of Non-Statutory Option under Vistula Communications Services, Inc.’s
                Amended and Restated 2004 Stock Incentive Plan
            
            
            
            Form
                8-K
            
            February
                9, 2007
            
            10.210.54
            
            Supplemental
                Agreement dated as of February 12, 2007 by and between Vistula
                Communications Services, Inc. and Scott Lee Goodwin
            
            
            
            Form
                8-K
            
            February
                16, 2007
            
            10.110.55
            
            Securities
                Purchase Agreement dated April 6, 2007
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            10.110.56
            
            Registration
                Rights Agreement dated April 6, 2007
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            10.210.57
            
            Placement
                Agent Agreement dated March 16, 2007
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            10.310.58
            
            Placement
                Agent Agreement dated April 5, 2007
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            10.410.59
            
            Escrow
                Agreement dated April 6, 2007
            
            
            
            Form
                8-K
            
            April
                9, 2007
            
            10.510.60
            
            Purchase
                Agreement dated March 24, 2007
            
            X21.1
            
            List
                of Subsidiaries of the Registrant.
            
            
            
            Form
                SB-2
            
            December
                30, 2005
            
            21.131.1
            
            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.
            
            X31.2
            
            Certification
                byJared
                P. Taylorpursuant 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.
            
            X32.1
            
            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.
            
            X32.2
            
            Certification
                byJared
                P. Taylorpursuant 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.
            
            X







*
      Management contract or compensatory plan or arrangement.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Aggregate
      fees for professional services rendered for the Company by our prior principal
      accountant Vitale, Caturano & Company, Ltd. (“Vitale”) and our successor
      accountant, PKF, Certified Public Accountants, A Professional Corporation
      (“PKF”), for the years ended December 31, 2006 and December 31, 2005,
      were:





**2006**
            
            **2005**Audit
                and quarterly reviews, PKF
            
            $
            159,011
            
            $
            85,000Audit
                Related, PKF
            
            
            25,000
            
            
            —Audit,
                Vitale
            
            
            —
            
            
            74,964Audit
                Related, Vitale
            
            
            —
            
            
            18,802Tax,
                PKF
            
            
            8,500
            
            
            4,000All
                Other
            
            
            —
            
            
            —Total
            
            $
            192,511
            
            $
            182,766




48




The
      Audit
      fees for the years ended December 31, 2006 and 2005 were for professional
      services rendered for the audits of the consolidated financial statements of
      the
      Company as well as audits and quarterly reviews.





The
      Audit
      Related fees for the years ended December 31, 2006 and 2005 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 the business acquired on October 11,
      2006.





**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, 2006 was obtained in reliance on the waiver of
      the
      pre-approval requirement afforded in SEC regulations.




49




**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:
            /s/
                Rupert Galliers-PrattRupert
                Galliers-PrattTitle:
                President, Chief Executive Officer and Chairman of the Board of
                Directors


Date:
                April 17, 2007


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-PrattTitle:
                President, Chief Executive Officer and Chairman of the Board of Directors
                (principal executive officer)


Date:
                April 17, 2007By:
            /s/
                Jared P. TaylorJared
                P. TaylorTitle:
                Chief Financial Officer (principal financial and accounting
                officer)


Date:
                April 17, 2007By:
            /s/
                J. Marcus PayneJ.
              Marcus PayneTitle:
                Director


Date:
                April 17, 2007By:
            /s/
                Anthony WarrenderAnthony
                WarrenderTitle:
                Director


Date:
                April 17, 2007By:
            /s/
                Jack EarlyJack
                EarlyTitle:
                Director


Date:
                April 17, 2007




50