**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        DC 20549
   **FORM
        10-QSB**
   x  QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
        OF
        1934
 
 **For
        the quarterly period ended: September 30, 2006**
 
  ̈  QUARTERLY
        REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES AND EXCHANGE ACT
        OF
        1934
 
 For
        the
        transition period from ______________ to _______________
   Commission
        File Number: 000-30061
 
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 (Exact
        name of small business issuer as specified in its charter)
 
 **California**
 (State
        or
        other jurisdiction of incorporation or organization)
 
 **95-4557538**
 (IRS
        Employer Identification No.)
 
 **438
        East Katella Avenue, Suite 217, Orange, California 92867**
 (Address
        of principal executive offices)
 
 **(714)
        288-1570**
 (Issuer's
        telephone number)
 
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days:  Yes x No  ̈
 
 As
        of
        November 17, 2006, Elephant Talk Communications, Inc. had 218,265,927 shares
        of
        Common Stock outstanding.
 
 Transitional
        Small Business Disclosure Format (check one): Yes  ̈ No x
 -
              1
              -
 *Table
              of Contents*
  **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 **AND
        SUBSIDIARIES**
 
 Report
        on
        Form 10-QSB
 For
        the
        quarter ended
 September
        30, 2006
 
 **TABLE
        OF CONTENTS**
 
 Page**PART
                  I FINANCIAL INFORMATION**Item
                  1.Financial
                  StatementsCondensed
                  Consolidated Balance Sheet at September 30, 2006
                  (Unaudited)
              3Condensed
                  Consolidated Statements of Operations for the
                  Three Months and Nine Months ended September 30, 2006 and 2005
                  (Unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for the
                  Nine Months ended
                September
                  30, 2006 and 2005
                  (Unaudited)
              5Notes
                  to the Condensed Consolidated Financial Statements
                  (Unaudited)
              6
                  -
                  15Item
                  2.Management's
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              16Item
                  3.Controls
                  and Procedures
              22**PART
                  II OTHER INFORMATION**Item
                  1.Legal
                  Proceedings
              23Item
                  2.Changes
                  in Securities
              23Item
                  3.Defaults
                  upon Senior Securities
              23Item
                  4.Submission
                  of Matters to Vote of Security
                  Holders
              23Item
                  5.Other
                  Information
              23Item
                  6.Exhibits
                  and Reports on Form 8-K
              24Signature
              25
 -
              2
              -
 *Table
              of Contents*
 **PART
        I FINANCIAL
        INFORMATION**
 
 **Item
        1.**  **Financial
        Statements**
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND
        SUBSIDIARIES**
 CONDENSED
        CONSOLIDATED BALANCE SHEET (UNAUDITED)
 SEPTEMBER30,
        2006
 
 **ASSETS****CURRENT
                  ASSETS**Cash
                  and cash equivalents
              
              $
              754,963Accounts
                  receivable, net
              
              
              638,861Advance
                  to third party
              
              
              2,572,154Prepaid
                  expenses and other current assets
              
              
              276,514Total
                  Current Assets
              
              
              4,242,492**PROPERTY
                  AND EQUIPMENT - NET**
              
              
              365,596**OTHER
                  ASSETS**Due
                  from related parties
              
              
              884,719Telecom
                  licenses
              
              
              124,668Goodwill
              
              
              1,870,273****Earnest
                  deposit for acquisitions
              
              
              6,268,642Total
                  Other Assets
              
              
              9,148,302**TOTAL
                  ASSETS**
              
              $
              13,756,390**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT****CURRENT
                  LIABILITIES**Overdraft
              
              $
              181,093Accounts
                  payable and customer deposits
              
              
              482,696Deferred
                  revenue
              
              
              116,788Accrued
                  expenses and other payable
              
              
              1,635,889Advances
                  from third parties
              
              
              1,689,480Loans
                  payable
              
              
              1,000,006Investor
                  deposit for share purchase
              
              
              3,837,896Due
                  to related parties
              
              
              351,528Total
                  Current Liabilities
              
              
              9,295,376**LONG-TERM
                  LIABILITIES**Convertible
                  promissory note
              
              
              3,500,000**TOTAL
                  LIABILITIES**
              
              
              12,795,376**MINORITY
                  INTEREST**
              
              
              1,090,653**COMMITMENT
                  AND CONTINGENCIES**
              
              
              --**STOCKHOLDERS'
                  DEFICIT**Preferred
                    stock Class B, no par value, 5,000,000 shares authorized,none
                    issued and outstanding
              
              
              --Common
                    stock, no par value, 250,000,000 shares authorized,218,265,927
                    issued and outstanding
              
              
              16,375,262Common
                  stock to be issued for acquisition
              
              
              500,000Common
                  stock subscriptions
              
              
              (8,991
              )Common
                  stock, no par value, 20,000,000 shares issued as earnest deposit
                  for
                  acquisition
              
              
              (720,000
              )Accumulated
                  comprehensive income
              
              
              17,923Accumulated
                  deficit
              
              
              (16,293,833
              )Total
                  Stockholders' Deficit
              
              
              (129,639
              )**TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT**
              
              $
              13,756,390
  The
        accompanying notes are an integral part of these consolidated unaudited
        financial statements.  -
              3
              -
 *Table
              of Contents*
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND
        SUBSIDIARIES**
 CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
        (UNAUDITED)
 
 **For
                  the three months ended****September
                  30,**
              
              **For
                  the nine months ended****September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**REVENUES
              
              $
              898,406
              
              $
              42,780
              
              $
              4,566,406
              
              $
              246,413COST
                  OF REVENUE
              
              
              35,514
              
              
              38,187
              
              
              800,751
              
              
              204,261GROSS
                  PROFIT
              
              
              862,892
              
              
              4,593
              
              
              3,765,655
              
              
              42,152OPERATING
                  EXPENSESSelling,
                  general and administrative
              
              
              2,701,231
              
              
              214,328
              
              
              6,174,306
              
              
              944,316Impairment
                  of investment
              
              
              1,246,849
              
              
              --
              
              
              1,246,849
              
              
              -Depreciation
                  and amortization
              
              
              21,012
              
              
              10,386
              
              
              72,082
              
              
              48,442Total
                  Operating Expenses
              
              
              3,969,092
              
              
              224,714
              
              
              7,493,237
              
              
              992,758LOSS
                  FROM OPERATIONS
              
              
              (3,106,200
              )
              
              (220,121
              )
              
              (3,727,582
              )
              
              (950,606
              )OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              29
              
              
              7
              
              
              182
              
              
              664Gain
                  on settlement of vendor payable
              
              
              --
              
              
              --
              
              
              --
              
              
              49,031Interest
                  expense
              
              
              (168,618
              )
              
              (26,664
              )
              
              (377,149
              )
              
              (86,124
              )Loss
                  on disposal of fixed assets
              
              
              --
              
              
              22,304
              
              
              --
              
              
              (26,066
              )Miscellaneous
                  income
              
              
              2,046
              
              
              --
              
              
              2,046
              
              
              --Total
                  Other Expense, net
              
              
              (166,543
              )
              
              (4,353
              )
              
              (374,921
              )
              
              (62,495
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (3,272,743
              )
              
              (224,474
              )
              
              (4,102,503
              )
              
              (1,013,101
              )Income
                  taxes
              
              
              --
              
              
              --
              
              
              800
              
              
              800LOSS
                  FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST
              
              
              (3,272,743
              )
              
              (224,474
              )
              
              (4,103,303
              )
              
              (1,013,901
              )Gain
                  (Loss) in subsidiary attributable to minority interest
              
              
              124,346
              
              
              --
              
              
              (58,095
              )
              
              --LOSS
                  BEFORE DISCONTINUED OPERATIONS
              
              
              (3,148,397
              )
              
              (224,474
              )
              
              (4,161,398
              )
              
              (1,013,901
              )Loss
                  from discontinued operations
              
              
              --
              
              
              --
              
              
              --
              
              
              (7,229
              )Gain
                  on disposal of discontinued operations
              
              
              --
              
              
              --
              
              
              --
              
              
              7,229--
              
              
              --
              
              
              --
              
              
              --NET
                  LOSS
              
              
              (3,148,396
              )
              
              (224,474
              )
              
              (4,161,398
              )
              
              (1,013,901
              )OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation gain
              
              
              --
              
              
              --
              
              
              --
              
              
              644--
              
              
              --
              
              
              --
              
              
              644COMPREHENSIVE
                  LOSS
              
              $
              (3,148,396
              )
              $
              (224,474
              )
              $
              (4,161,398
              )
              $
              (1,013,257
              )Net
                  loss per common share and equivalents - basic and diluted
              
              $
              (0.017
              )
              $
              (0.001
              )
              $
              (0.024
              )
              $
              (0.009
              )Weighted
                  average shares outstanding during the period - basic and
                  diluted
              
              
              184,617,774
              
              
              196,259,664
              
              
              174,090,939
              
              
              114,179,785
  The
        accompanying notes are an integral part of these consolidated unaudited
        financial statements.  -
              4
              -
 *Table
              of Contents*
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND
        SUBSIDIARIES**
 CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 **For
                  the nine months ended September 30,****2006**
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  loss
              
              $
              (4,161,398
              )
              $
              (1,013,901
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              72,082
              
              
              48,442Stock
                  issued for acquisition
              
              
              500,000
              
              
              --Impairment
                  of investment
              
              
              1,246,849
              
              
              --Provision
                  for uncollectible amounts
              
              
              --
              
              
              11,293Loss
                  on disposal of fixed assets
              
              
              --
              
              
              26,066Issuance
                  of stock for compensation and services
              
              
              1,189,175
              
              
              393,000Issuance
                  of stock for consulting services
              
              
              142,500
              
              
              --Gain
                  on disposal of subsidiary
              
              
              --
              
              
              (7,229
              )Loss
                  from discontinued operations
              
              
              --
              
              
              7,229Minority
                  interest
              
              
              58,095
              
              
              --Gain
                  on settlement of payables
              
              
              --
              
              
              (49,031
              )Changes
                  in operating assets and liabilities:Decrease
                  in accounts receivable
              
              
              439,934
              
              
              437(Increase)
                  decrease in prepaid expenses, deposits and other assets
              
              
              (217,515
              )
              
              14,905Increase
                  (decrease) in accounts payable and customer deposits
              
              
              5,832
              
              
              (10,457
              )Increase
                  (decrease) in deferred revenue
              
              
              9,366
              
              
              (10,136
              )Increase
                  in accrued expenses and other payable
              
              
              503,791
              
              
              38,802Net
                  cash used in operating activities
              
              
              (211,287
              )
              
              (550,580
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Purchase
                  of property and equipment
              
              
              (132,360
              )
              
              (43,423
              )Purchase
                  of telecom license
              
              
              (124,668
              )
              
              --Cash
                  lost in disposition of subsidiary
              
              
              --
              
              
              (127,711
              )Net
                  cash flows from acquisition
              
              
              (1,074,214
              )
              
              --Earnest
                  deposit on acquisitions, net
              
              
              40,002
              
              
              (7,294,714
              )Proceeds
                  from acquisition of subsidiary
              
              
              --
              
              
              127,711Net
                  cash used in investing activities
              
              
              (1,291,240
              )
              
              (7,338,137
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Cash
                  overdraft
              
              
              31,767
              
              
              11,509Advances
                  received for acquisitions
              
              
              1,689,480
              
              
              228,139Proceeds
                  from bank loans
              
              
              3,746
              
              
              --Proceeds
                  from (payments of) note payable
              
              
              929,700
              
              
              (209,578
              )Proceeds
                  from sale of shares
              
              
              --
              
              
              7,851,655Investment
                  from minority stockholders
              
              
              193,993
              
              
              --Payments
                  to related parties
              
              
              (818,893
              )
              
              (23,005
              )Net
                  cash provided by financing activities
              
              
              2,029,793
              
              
              7,858,720**EFFECT
                  OF EXCHANGE RATES ON CASH**
              
              
              28,881
              
              
              644**NET
                  INCREASE (DECREASE) IN CASH**
              
              
              556,146
              
              
              (29,353
              )**CASH,
                  BEGINNING OF THE PERIOD**
              
              
              198,816
              
              
              67,631**CASH,
                  END OF THE PERIOD**
              
              $
              754,963
              
              $
              38,278**SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                  paid during the period for interest
              
              $
              17,333
              
              $
              38,804Cash
                  paid during the period for income taxes
              
              $
              800
              
              $
              800
  The
        accompanying notes are an integral part of these consolidated unaudited
        financial statements.  -
              5
              -
 *Table
              of Contents*
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND
        SUBSIDIARIES**
 NOTES
        TO
        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
        30, 2006
 (UNAUDITED)
  **NOTE
        1:** **Organization
        and Nature of Operations**
 
 Elephant
        Talk Communications, Inc. (herein referred to as “Elephant Talk,” “ETCI” or
“Company,” formerly known as Staruni Corporation), incorporated on February 5,
        1962 under the laws of the state of California as Altius Corporation, was
        involved in manufacturing of freeway signs. In March 1997, Altius acquired
        Starnet Universe Internet, Inc., a web developer and Internet Service Provider
        (ISP) and changed its name to Staruni Corporation. On January 4, 2002, Staruni
        Corporation merged with Elephant Talk Limited, a company incorporated in
        Hong
        Kong, and filed a Certificate of Amendment of Articles of Incorporation to
        amend
        the corporate name to Elephant Talk Communications, Inc. This name change
        was
        done in conjunction with the merger and to emphasize that the Company’s new
        focus will be the business of Elephant Talk Limited.
 
 On
        January 4, 2002, the Company exchanged 90% of its common stock for 100% of
        the
        common stock of Elephant Talk Limited by issuing 31,164,210 shares of common
        stock to the shareholders of Elephant Talk Limited. Elephant Talk Limited
        is a
        limited liability company incorporated in Hong Kong (ETHK) engaged in long
        distance telephone business. Per the agreement, the Company sold its Internet
        Service Provider (ISP) business to a related party, Vision Aerospace, Inc.
        (Vision) for 1,000,000 shares of Vision valued at $10,835. Vision is owned
        by
        the former CEO and President of the Company. The value of the shares was
        recorded at the book value of the assets exchanged to acquire the shares
        of
        Vision. Pursuant to the terms of the share exchange agreement, control of
        the
        combined companies passed to the former shareholders of Elephant Talk Limited.
        This type of share exchange has been treated as a capital transaction
        accompanied by recapitalization of Elephant Talk Limited in substance rather
        than a business combination. The transaction is deemed a “reverse merger” for
        accounting purposes since the former owners of Elephant Talk Limited controlled
        majority of the total common shares outstanding immediately following the
        merger. Recapitalization accounting resulted in consolidated financial
        statements being issued under the name of Elephant Talk Communications, Inc.,
        but were considered a continuation of Elephant Talk Limited. No pro forma
        financial statements are being presented as ETCI has no assets other than
        the
        shares of the related third party discussed above.
 
 On
        January 5, 2005, the Company completed the purchase of 60% of the equity
        ownership interest in True Precise Technology Limited (“True Price”), a limited
        liability company registered in British Virgin Islands, from Keen Solution
        Group
        Limited (“Keen Solution”) in a stock swap arrangement. As consideration for the
        acquisition, the Company issued 23,137,500 restricted common shares to Keen
        Solution valued at $1,436,875 for its 60% equity interest. Upon completion
        of
        the transaction, True Precise became a majority owned subsidiary of the Company.
        On August 8, 2005, Keen Solution unilaterally decided to terminate the Share
        Exchange Agreement. The
        Company has treated True Precise’s transaction as discontinued operation and has
        recorded 23,137,500 common shares as cancelled shares as of September 30,
        2006.
        Of those shares, 20,137,500 have been returned to the Company’s treasury. The
        Company has placed a stop transfer restriction on the remaining 3,000,000
        common
        shares not received, and continues to pursue their return from Keen Solution.
        The Company has evaluated its legal options in connection with the termination
        of the Share Exchange Agreement and concluded that a mutual rescission of
        the
        agreement was in the Company’s best interest.
 
 On
        July
        11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited formed
        Full Mark Technology Limited, a limited liability company organized under
        the
        laws of British Virgin Islands, to facilitate acquisitions for the Company
        in
        China. On December 13, 2005, Full Mark Technology Limited, a wholly owned
        subsidiary of Elephant Talk Limited, formed a wholly owned subsidiary Jinfuyi
        Technology (Beijing) Co. Ltd. (“Jinfuyi”), a limited liability company organized
        and existing under the laws of the Peoples’ Republic of China, with a registered
        capital of $200,000. On January 2, 2006, Jinfuyi and Beijing China Wind
        Telecommunication Information Technology Co. Limited, a limited liability
        company organized under the laws of the Peoples’ Republic of China (“Beijing
        China Wind”), entered into an Exclusive Technical Consulting and Services
        Agreement (the ”Service Agreement”), pursuant to which Jinfuyi has the exclusive
        right to provide technical and consulting services in exchange for services
        fees
        that will be approximately $4,875,000 per year, subject to the right of Jinfuyi
        to adjust the service fee depending on the quantity of the services that
        it
        actually provides.
 
 On
        January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (“Guangdong Elephant Talk”) a wholly owned subsidiary and an agent of
        the Company, and Beijing Zhongrun Chuangtou Technology Co., Ltd., a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (the “Vendor”), entered into an Equity Transfer Agreement (the
”Agreement”), pursuant to which Guangdong Elephant Talk agreed to acquire sixty
        percent (60%) of the registered capital of Beijing China Wind. Pursuant to
        the
        Agreement, the purchase price for 60% equity interest in Beijing China Wind
        amounted to $4,800,000, subject to adjustments based on Beijing China Wind’s
        audited net income for fiscal 2005 and 2006. The purchase consideration is
        payable (x) in cash of $2,800,000 in five installments, the last of which
        is to
        be paid on January 31, 2007, and (y) by the issuance by the Company to the
        Vendor of 20,000,000 shares of restricted common stock valued at $0.10 per
        share, in four equal installments, the last of which is to be issued on January
        31, 2007. The Vendor has the right to exercise an option within 30 days after
        July 31, 2007 to return the 20,000,000 shares of restricted common stock
        either
        in exchange for a 25% equity interest in Beijing China Wind or for settlement
        in
        cash within 90 days. The Company has paid $1,420,000 in cash and has issued
        10,000,000 restricted Common Shares valued at $500,000 towards its investment
        in
        Beijing China Wind joint venture as of September 30, 2006.
 
 -
            6
            -
 *Table
            of Contents*
  On
        November 6, 2005, the Company through its subsidiary Elephant Talk Limited
        incorporated a joint venture Free Zone Limited Liability company in Dubai
        Technology Electronic Commerce and Media Free Zone, Dubai, United Arab Emirates
        (UAE) under the name Elephant Talk Middle East & Africa FZ-LLC (“ET
        ME&A”). The registered capital of ET ME&A is $100,817, and the Company’s
        wholly owned subsidiary Elephant Talk Limited has contributed $50,953 towards
        its 50.54% equity share in the joint venture company as of September 30,
        2006.
        ET ME&A is committed to spend the necessary funds to keep its share of
        equity investment and is currently seeking regulatory approvals for obtaining
        trade and business licenses from the UAE government to conduct its business.
        ET
        ME&A has not yet begun operations and plans to operate various telecom
        related businesses in the Middle East and Africa.
 
 After
        evaluating the processes to expand our business and the costs of setting
        up
        regional subsidiaries in the Middle East under the name ET ME&A, the Company
        decided to create a new holding company in Bahrain. On June 17, 2006, the
        Company through its subsidiary Elephant Talk Limited, incorporated a limited
        liability company in the Kingdom of Bahrain under the name Elephant Talk
        Middle
        East & Africa (Holding) W.L.L (“ET ME&A Holding”). The registered
        capital of ET ME&A Holding is $387,787 and Elephant Talk Limited has
        contributed $197,771 towards its 51% equity interest in ET ME&A Holding as
        of September 30, 2006.
  On
          June
          5, 2006, the Company through its subsidiary Elephant Talk Limited formed
          and
          incorporated a wholly owned subsidiary Elephant Talk (Shenzhen) Investments
          Limited (“ET Shenzhen”), a limited liability company organized and existing
          under the laws of the Peoples’ Republic of China, with a registered capital of
          $128,205. ET Shenzhen has not yet begun operations and no capital contributions
          have been made by Elephant Talk Limited.
 On
        June
        19, 2006, the Company through its subsidiary ET ME&A Holding, incorporated a
        limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk
        Bahrain W.L.L. (“ET Bahrain”) to manage the Company’s operations in Bahrain. The
        registered capital of ET Bahrain is $387,787 and ET ME&A Holding owns 99% of
        the equity ownership in ET Bahrain. ET ME&A Holding has contributed $383,909
        as its share of registered capital as of September 30, 2006. ET ME&A Holding
        and ET Bahrain have not yet begun operations.
 
 On
        August
        3, 2006, the Company formed and incorporated an entity under the name Elephant
        Talk Europe Holding BV (“ET Europe”), a private limited liability company
        registered in Amsterdam, Holland with an authorized capital of $113,670
        (90,000 Euros). The Company owns 100% equity in ET Europe. The purpose of
        forming ET Europe was to help the Company conclude its pending acquisition
        of
        Benoit Telecom Holding AG. The Company has contributed $22,734 towards its
        share
        of the registered capital of ET Europe. On November 17, 2006, the Company
        executed the definitive Stock Purchase Agreement and completed its acquisition
        of Benoit Telecom Holding AG to be effective on December 1, 2006.
 
 On
        September 12, 2006, the Company through its subsidiary ET ME&A Holding,
        incorporated a limited liability company under the name Elephant Talk Middle
        East & Africa Jordon (“ET Jordon”) to manage the Company’s operations in
        Jordon. The registered capital of ET Jordon is $210,918 (81,585 BHD) and
        ET
        ME&A owns 100% of the equity ownership in ET Jordon. ET ME&A Holding has
        contributed $210,918 as its 100% share of the registered capital as of September
        30, 2006. ET Jordon has applied for the telecommunication licenses and has
        not
        begun its operations.
 
 **NOTE
        2:**  **Basis
        of Presentation**
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with generally accepted accounting principles for interim financial
        information and with the instructions to Form 10-QSB. Accordingly, they do
        not
        include all of the information and footnotes required by generally accepted
        accounting principles for complete financial statements and related notes
        included in the Company's 2005 Form 10-KSB.
 
 The
        audited consolidated financial statements of the Company for the year ended
        December 31, 2005 were filed with the Securities and Exchange Commission
        on May
        19, 2006, and are hereby referenced. In the opinion of management, the
        accompanying unaudited consolidated financial statements contain all adjustments
        (which include only normal recurring adjustments) considered necessary for
        fair
        presentation has been included.
 
 The
        results of operations for the nine months ended September 30, 2006 are not
        necessarily indicative of the results to be expected for the entire year.
        Certain 2005 amounts have been reclassified to conform to current period
        presentation. These reclassifications have no effect on previously reported
        net
        income (loss).
 
 **NOTE
        3:**  **Principles
        of Consolidation**
  The
          accompanying consolidated financial statements for the three months and
          nine
          months ended September 30, 2006 included the accounts of Elephant Talk
          Communications, Inc., its wholly owned subsidiary Elephant Talk Limited,
          its
          wholly owned subsidiary Elephant Talk Europe Holding BV, its wholly owned
          subsidiary and agent Guangdong Elephant Talk Network Consulting Limited,
          its
          wholly owned subsidiary Elephant Talk (Shenzhen) Investments Limited, its
          wholly
          owned subsidiary Full Mark Technology Limited, its wholly owned subsidiary
          Jinfuyi Technology (Beijing) Co. Limited, its majority owned (51%) subsidiary
          Elephant Talk Middle East & Africa (Holding) W.L.L., its majority owned
          (99%) subsidiary Elephant
          Talk Bahrain W.L.L. ,
          its
          wholly owned subsidiary Elephant Talk Jordon, its majority owned (50.54%)
          subsidiary Elephant Talk Middle East & Africa FZ-LLC and its majority owned
          (60%) subsidiary Beijing China Wind. The consolidated financial statements
          for
          the three months and nine months ended September 30, 2005 included the
          accounts
          of Elephant Talk Communications, Inc., and its 100% wholly owned subsidiary
          Elephant Talk Limited. Minority interest principally represents minority
          shareholders’ proportionate share of equity in our consolidated subsidiary
          Elephant Talk Middle East and Africa FZ-LLC, Elephant Talk Middle East
&
Africa (Holding) W.L.L., Elephant Talk Bahrain W.L.L., and Guangdong Elephant
          Talk Network Consulting Limited. All significant inter-company accounts
          and
          transactions have been eliminated in consolidation.
 
 -
            7
            -
 *Table
            of Contents*
  **NOTE
        4:**  **Use
        of Estimates**
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
 
 **NOTE
        5:**  **Supplemental
        Disclosure of Cash Flows**
 
 The
        Company prepares its statements of cash flows using the indirect method as
        defined under the Financial Accounting Standard No. 95. The cash flow statements
        do not include the following non-cash investing and financing
        activities:
 
 During
        the nine months ended September 30, 2006, the Company issued 2,400,000
        restricted common shares valued at $120,000 as compensation to a consultant
        as
        finder’s fee for an acquisition target. The shares were valued at the closing
        market price of the share price on the date of execution of the agreement.
        The
        Company issued 250,000 restricted common shares valued at $22,500 to an employee
        as compensation for services. The shares were valued at the closing market
        price
        on the date of issuance. The
        Company issued 3,169,580 restricted common shares valued at $191,625 as
        compensation to directors for services rendered since December 2005 to September
        30, 2006. The shares were valued at the closing market price on the first
        day of
        each month from December 2005 to September 30, 2006 for the months for which
        services were performed. On August 22, 2006, the Company issued 24,938,759
        common shares to three directors valued at $997,550, in connection with
        furtherance of Section 5(g) of that certain Stock Purchase Agreement dated
        June
        30, 2005 executed by the Company, and in consideration of such members of
        management agreeing to enter into employment agreements with the Company
        in
        their positions. The common shares were valued at the closing market price
        of
        the share price on the date of execution of the Stock Purchase
        Agreement. The
        Company issued 10,000,000 common shares valued at $500,000 towards the
        consideration for acquisition of Beijing China Wind. The common shares were
        valued at the closing market price of the share price on the date of execution
        of the agreement.
 
 **NOTE
        6:**  **Recently
        Issued Accounting Pronouncements**
 
 In
        December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
        Non-monetary Assets." The Statement is an amendment of APB Opinion No. 29
        to
        eliminate the exception for non-monetary exchanges of similar productive
        assets
        and replaces it with a general exception for exchanges of non-monetary assets
        that do not have commercial substance. The Company believes that the adoption
        of
        this standard will have no material impact on its financial
        statements.
 
 In
        March
        2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue
        No.
        03-1, "The Meaning of Other-Than-Temporary Impairment and its Application
        to
        Certain Investments.” The EITF reached a consensus about the criteria that
        should be used to determine when an investment is considered impaired, whether
        that impairment is other-than-temporary, and the measurement of an impairment
        loss and how that criteria should be applied to investments accounted for
        under
        SFAS No. 115 "Accounting in certain investments in debt and equity securities.”
EITF 03-01 also included accounting considerations subsequent to the recognition
        of other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. Additionally, EITF 03-01 includes new disclosure requirements
        for
        investments that are deemed to be temporarily impaired. In September 2004,
        the
        Financial Accounting Standards Board (FASB) delayed the accounting provisions
        of
        EITF 03-01; however the disclosure requirements remain effective for annual
        reports ending after June 15, 2004. The Company will evaluate the impact
        of EITF
        03-01 once final guidance is issued.
 
 In
        May
        2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections.
        This
        Statement replaces APB Opinion No, 20, Accounting Changes, and FASB Statement
        No. 3, Reporting Accounting Changes in Interim Financial Statements, and
        changes
        the requirements for the accounting for and reporting of a change in accounting
        principle. This Statement 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. SFAS 154 also requires that a change in depreciation, amortization
        or depletion method for long-lived, non-financial assets be accounted for
        as a
        change in accounting estimate effected by a change in accounting principle.
        This
        Statement is effective in fiscal years beginning after December 15, 2005.
        The
        Company has not yet determined the effect of implementing this
        standard.
 
 In
        December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
        an
        Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
        companies to recognize in the statement of operations the grant- date fair
        value
        of stock options and other equity-based compensation issued to employees.
        FAS
        No. 123R is effective beginning in the Company's second quarter of fiscal
        2006.
        The Company is in process of evaluating the impact of this pronouncement
        on its
        financial position.
 
 -
            8
            -
 *Table
            of Contents*
 In
        February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
        Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
        Derivative Instruments and Hedging Activities,” and SFAF No. 140, “Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities.” SFAS No. 155, permits fair value re-measurement for any hybrid
        financial instrument that contains an embedded derivative that otherwise
        would
        require bifurcation, clarifies which interest-only strips and principal-only
        strips are not subject to the requirements of SFAS No. 133, establishes a
        requirement to evaluate interest in securitized financial assets to identify
        interests that are freestanding derivatives or that are hybrid financial
        instruments that contain an embedded derivative requiring bifurcation, clarifies
        that concentrations of credit risk in the form of subordination are not embedded
        derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
        qualifying special-purpose entity from holding a derivative financial instrument
        that pertains to a beneficial interest other than another derivative financial
        instrument. This statement is effective for all financial instruments acquired
        or issued after the beginning of the Company’s first fiscal year that begins
        after September 15, 2006. The Company has not evaluated the impact of this
        pronouncement its financial statements.
 
 In
        March
        2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
        Statement amends FASB Statement No. 140, *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities. This Statement:
 
 1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract. 
 2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable. 
 3.
            Permits
                an entity to choose ‘Amortization method’ or ‘Fair value measurement
                method’ for each class of separately recognized servicing assets and
                servicing liabilities: 
 4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value. 
 5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities. 
 This
        Statement is effective as of the beginning of the Company’s first fiscal year
        that begins after September 15, 2006. Management believes that this statement
        will not have a significant impact on the consolidated financial
        statements.
 
 In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This Statement is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
  In
        September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
        Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
        88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
        employer to recognize the over funded or under funded status of a defined
        benefit postretirement plan (other than a multiemployer plan) as an asset
        or
        liability in its statement of financial position and to recognize changes
        in
        that funded status in the year in which the changes occur through comprehensive
        income of a business entity or changes in unrestricted net assets of a
        not-for-profit organization. This Statement also improves financial reporting
        by
        requiring an employer to measure the funded status of a plan as of the date
        of
        its year-end statement of financial position, with limited exceptions. An
        employer with publicly traded equity securities is required to initially
        recognize the funded status of a defined benefit postretirement plan and
        to
        provide the required disclosures as of the end of the fiscal year ending
        after
        December 15, 2006. An employer without publicly traded equity securities
        is
        required to recognize the funded status of a defined benefit postretirement
        plan
        and to provide the required disclosures as of the end of the fiscal year
        ending
        after June 15, 2007. However, an employer without publicly traded equity
        securities is required to disclose the following information in the notes
        to
        financial statements for a fiscal year ending after December 15, 2006, but
        before June 16, 2007, unless it has applied the recognition provisions of
        this
        Statement in preparing those financial statements:
  a.  A
        brief
        description of the provisions of this Statement
 b.  The
        date
        that adoption is required
 c.  The
        date
        the employer plans to adopt the recognition provisions of this Statement,
        if
        earlier.
  The
        requirement to measure plan assets and benefit obligations as of the date
        of the
        employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
 -
            9
            -
 *Table
            of Contents*
  **NOTE
        7:**  **Advances
        to a Third Party**
 
 The
        Company has advanced $2,572,154 to Benoit Telecom holding AG (“Benoit Telecom”),
        a European telecom entity for its working capital requirements. The advances
        made are secured and deemed fully recoverable as of September 30, 2006. On
        November 17, 2006, the Company completed its acquisition of Benoit Telecom
        and
        executed a Stock Purchase Agreement for the acquisition to be effective December
        1, 2006.
 
 **NOTE
        8:**  **Earnest
        Deposits for Acquisitions**
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        with a
        European investor to acquire all of the issued and outstanding shares of
        Benoit
        Telecom. The Company has advanced earnest deposit of $6,043,080 with an escrow
        trust company as of September 30, 2006. In addition, the Company has executed
        a
        Promise to Repay Agreement and a Security Agreement with the escrow trust
        company to repay the full earnest deposit to the Company if the acquisition
        is
        not consummated for any reason. On November 17, 2006, the Company through
        its
        wholly owned subsidiary Elephant Talk Europe Holding BV, completed its
        acquisition of Benoit Telecom and executed a Stock Purchase Agreement for
        the
        acquisition to be effective December 1, 2006.
 
 The
        Company has advanced fully refundable earnest deposit of $225,562 and has
        issued
        20,000,000 common shares valued at $720,000 to Calfin Trust in connection
        with
        its proposed acquisition of Phonetone Telecom Ltd. (“Phonetone”) from Calfin
        Trust as of September 30, 2006. The Company and Calfin Trust mutually agreed
        to
        terminate the transaction and executed a Rescission Agreement on October
        30,
        2006. The Company has received a payment of $80,000 on November 6, 2006 towards
        its earnest deposit and expects to receive the balance of earnest deposit
        of
        $145,562 and 20,000,000 common shares by December 15, 2006. The Company has
        taken protective measures to ensure that 20,000,000 shares are restricted
        and
        non-tradable.
 
 The
        Company has recorded $6,988,642 as earnest deposits for acquisitions in the
        accompanying financial statements as of September 30, 2006.
 
 **NOTE
        9:**  **Investment
        in Subsidiaries:**
 
 **Beijing
        China Wind Telecommunication Information Technology Company Limited (“Beijing
        China Wind”)**
 
 On
        January 4, 2006, the Company, through its wholly owned subsidiary and agent
        Guangdong Elephant Talk Network Consulting Limited, entered into an agreement
        to
        acquire sixty percent (60%) of the registered capital of Beijing China Wind.
        Pursuant to the Agreement, the purchase price for 60% of Beijing China Wind
        was
        agreed to be $4,800,000, subject to adjustments based on Beijing China Wind’s
        audited net income for fiscal years 2005 and 2006, and is payable (a) in
        cash of
        $2,800,000 in five installments, the last of which is to be paid on January
        31,
        2007, and (b) by issuance of 20,000,000 restricted common shares valued at
        $0.10
        per share to the owners of Beijing China Wind in four equal installments,
        the
        last of which is to be issued on January 31, 2007. The owners of Beijing
        China
        Wind has the right to exercise an option within 30 days after July 31, 2007
        to
        return the 20,000,000 restricted common shares either in exchange for a 25%
        equity interest in Beijing China Wind or for settlement in cash within 90
        days.
        The Company has issued 10,000,000 restricted common shares valued at $500,000
        and has made cash payments of $1,420,000 to the owners of Beijing China Wind
        towards it 60% ownership equity in Beijing China Wind as of September 30,
        2006.
        The shares were valued at the closing market price of shares on the day of
        execution of the agreement. If Beijing China Wind is able to achieve the
        net
        profits and revenue targets for 2006 as agreed pursuant to the terms of the
        Agreement, the Company will have a obligation to pay $1,380,000 in cash and
        10,000,000 restricted shares of common stock on or before January 31, 2007
        for
        the agreed purchase price of $4,800,000 for 60% equity ownership in Beijing
        China Wind.
  -
            10
            -
 *Table
            of Contents*
 
 **Investment
                  in Beijing China Wind Telecommunication Information Technology
                  Co.
                  Limited**Consideration
                  payable for Beijing China Wind on acquisition date January 4,
                  2006:Cash
                  payable
              
              $
              1,600,000Common
                  shares to be issued - 20,000,000 shares
              
              
              1,000,000Total
                  consideration payable
              
              $
              2,600,000Fair
                  value of net assets received on acquisition date January 4,
                  2006:Cash
              
              $
              95,786Accounts
                  receivable, net of allowances
              
              
              1,071,595Other
                  receivables and prepayments
              
              
              36,256Due
                  from directors
              
              
              323,657Due
                  from a related company
              
              
              3,849Property
                  and equipment, net
              
              
              218,471Other
                  assets
              
              
              1,712,510Accounts
                  payable
              
              
              (437,943
              )Other
                  payables and accrued expenses
              
              
              (926,781
              )Value
                  added tax payable
              
              
              (47,289
              )Notes
                  payable
              
              
              (30,544
              )Due
                  to stockholders
              
              
              (27,253
              )1,992,314Minority
                  interest - 40%
              
              
              (796,926
              )$
              1,195,388Goodwill
              
              
              1,404,612Total
                  consideration paid
              
              $
              2,600,000
  The
          Company recorded goodwill on consolidation of its acquired entities in
          the total
          amount of $3,117,123 upon completion of acquisition of Beijing Chinawind.
          Beijing Chinawind revenues and profitability have consistently declined
          over
          several months due to the change in business outlook and change in telecom
          policies of network carriers in China. The Company is currently in litigation
          with the shareholders of Beijing Chinawind as described in Note 17, and
          therefore, has recorded an impairment allowance of $1,246,849 in the
          accompanying financial statements as of September 30, 2006.
  **Elephant
            Talk (Shenzhen) Investments Limited (“ET Shenzhen”)**
 
 On
            June
            5, 2006, the Company through its subsidiary Elephant Talk Limited formed
            and
            incorporated a wholly owned subsidiary Elephant Talk (Shenzhen) Investments
            Limited (“ET Shenzhen”), a limited liability company organized and existing
            under the laws of the Peoples’ Republic of China, with a registered capital of
            $128,205. As of September 30, 2006, ET Shenzhen has not yet begun operations
            and
            no capital contribution has been made by Elephant Talk
            Limited.
 
 **Elephant
        Talk Middle East & Africa (Holding), W.L.L (“ET ME&A
        Holding”)**
 
 On
        June
        17, 2006, the Company through its subsidiary Elephant Talk Limited, incorporated
        a limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk Middle East & Africa (Holding) W.L.L (“ET ME&A Holding”). The
        registered capital of ET ME&A Holding is $387,787 and Elephant Talk Limited
        has contributed $197,771 towards its 51% equity interest in ET ME&A Holding
        as of September 30, 2006. ET ME&A Holding has not yet started its operations
        as of September 30, 2006.
 
 **Elephant
        Talk Bahrain W.L.L (“ET Bahrain”)**
 
 On
        June
        19, 2006, the Company through its subsidiary ET ME&A Holding, incorporated a
        limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk
        Bahrain W.L.L. (“ET Bahrain”) to manage the Company’s operations in Bahrain. The
        registered capital of ET Bahrain is $387,787. ME&A Holding owns 99% of the
        equity ownership in ET Bahrain and has contributed 100% of registered capital
        as
        of September 30, 2006. ET Bahrain has not yet begun its operations as of
        September 30, 2006.
 
 -
            11
            -
 *Table
            of Contents*
 **Elephant
        Talk Middle East & Africa FZ-LLC (“ET ME&A”)**
 
 On
        November 6, 2005, the Company through its wholly owned subsidiary Elephant
        Talk
        Limited, incorporated a joint venture Free Zone Limited Liability company
        in
        Dubai under the name Elephant Talk Middle East & Africa FZ-LLC (“ET
        ME&A”). The registered capital of ET ME&A is $100,817, and Elephant Talk
        Limited has contributed $50,953 towards its 50.54% equity share in the joint
        venture company as of September 30, 2006. ET ME&A has not yet begun
        operations and plans to operate various telecom related businesses in the
        Middle
        East and Africa.
 
 **Elephant
        Talk Jordon W.L.L. (“ET Jordon”)**
 
 On
        September 12, 2006, the Company through its subsidiary ET ME&A Holding,
        incorporated a limited liability company under the name Elephant Talk Middle
        East & Africa Jordon (“ET Jordon”) to manage the Company’s operations in
        Jordon. The registered capital of ET Jordon is $210,918 (81,585 BHD) and
        ET
        ME&A owns 100% of the equity ownership in ET Jordon. ET ME&A Holding has
        contributed $210,918 as its 100% share of the registered capital as of September
        30, 2006. ET Jordon has applied for the telecommunication licenses and has
        not
        begun its operations.
 
 **Elephant
        Talk Europe Holding BV (“ET Europe”)**
 
 On
        August
        3, 2006, the Company formed and incorporated an entity under the name Elephant
        Talk Europe Holding BV (“ET Europe”), a private limited liability company
        registered in Amsterdam, Holland with the authorized capital of $113,670
        (90,000
        Euros). The Company owns 100% equity in ET Europe. The purpose of forming
        ET
        Europe was to help the Company conclude on its pending acquisition of Benoit
        Telecom Holding AG. The Company has contributed $22,734 towards its share
        of the
        registered capital of ET Europe. ET Europe executed a Stock Purchase Agreement
        on November 17, 2006 to complete the acquisition of Benoit Telecom to be
        effective as of December 1, 2006.
 
 **NOTE
        10:**  **Related
        Party Transactions**
 
 The
        Company’s wholly owned subsidiary has advanced funds amounting to $321,319 to an
        affiliate that the Company’s officers and/or shareholders have an ownership
        interest in prior to 2002. The Company has provided a reserve for uncollectible
        funds amounting to $96,396 for such funds advanced as of September 30,
        2006.
 
 The
        Company’s affiliate had signed a promissory note of $408,975 which was fully
        guaranteed by the Company. The note requires a monthly installment of $12,804
        with the remaining balance due on December 24, 2006. The affiliate is making
        monthly payments in accordance with the payment terms, and expects to pay
        the
        balance due in full on due date. In case of default of payments on the
        promissory note, the Company will be obligated to pay the unpaid balance
        of the
        note in full. Since the affiliate is making payments on time, the Company
        did
        not deem it necessary to provide for an allowance for the unpaid balance
        of
        $361,766 on the promissory note in the accompanying financial statements
        at
        September 30, 2006.
 
 The
        Company paid $108,808 and $97,717 in business consulting and management advisory
        fees to two entities owned and controlled by the two directors of the Company,
        for the nine months ended September 30, 2006 and 2005,
        respectively.
 
 **NOTE
        11:**  **Loans
        Payable**
 
 Loans
        payable at September 30, 2006 are summarized as follows:
 
 Installment
                  loan payable, bank, monthly principal and interest payments of
                  $12,804
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  September 30, 2006, due December 24, 2006, secured by personal
                  guarantees
                  of two stockholders, a director, and a third party
              
              $
              361,766Installment
                  loan payable, bank, monthly principal and interest payments of
                  $2,924
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  September 30, 2006, due December 24, 2011, secured by personal
                  guarantees
                  of three stockholders and a director
              
              
              223,970Installment
                  loan payable, bank, monthly principal and interest payments of
                  $1,751
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  September 30, 2006, due June 28, 2009, secured by personal guarantees
                  of
                  three stockholders and a director
              
              
              98,903Term
                  loan payable, bank, monthly payments of interest at bank's prime
                  rate,
                  8.0% at September 30, 2006
              
              
              315,367$
              1,000,006
  -
            12
            -
 *Table
            of Contents*
 The
        Company has executed a credit facility with a bank in Hong Kong since June
        29,
        2004 under which the Company has borrowed funds from the bank under three
        installment loans and a term loan arrangements. The Company is in default
        of
        making loan payments on all the loans and as a result, the entire loan balances
        outstanding at September 30, 2006 are immediately due and payable to the
        bank.
        Furthermore, the Company is obligated to pay a default interest rate at the
        rate
        of 4.5% per annum in addition to the prescribed interest rate of the installment
        loans and term loan. The Company has recorded $43,905 and $34,733 in interest
        expense and default interest expense on loans payable as of September 30,
        2006
        and 2005.
 
 **NOTE
        12:**  **Convertible
        Promissory Notes**
 
 On
        December 15, 2005, the Company executed a Convertible Promissory Note (the
        “Note”) in the principal sum of $3,500,000 with Rising Water Capital, an
        investor. The Note has a term of thirty (30) months, during which time interest
        on the Principal Amount will accrue from the date of this Note at an annual
        interest rate of 10%. The Note will be paid in full at the end of the thirty
        month term with a balloon payment of principal and interest accrued. The
        Note
        shall be convertible during the term, in whole or in part, into common shares
        at
        the conversion price of three and one-half cents ($0.035) per share provided,
        however, that this Note shall not be convertible during the term when the
        Company has insufficient authorized common shares to issue to the Note holder
        when a demand for conversion is made. The Note is secured by shares owned
        or to
        be owned by the Company in the entities Beijing China Wind, ET ME&A Holding
        and ET ME&A. As of September 30, 2006, the Company has received the
        principal balance of $3,500,000, and has recorded an interest expense of
        $88,472
        and $255,366 in the accompanying financial statements for the three months
        and
        nine months ended September 30, 2006.
 
 On
        May
        26, 2006, the Company executed a second Convertible Promissory Note (the
“Note”)
        in the principal sum of $3,000,000 with Rising Water Capital, an investor.
        The
        Note has a term of thirty (30) months, during which time interest on the
        Principal Amount will accrue from the date of this Note at an annual interest
        rate of 10%. The Note will be paid in full at the end of the thirty month
        term
        with a balloon payment of principal and interest accrued. The Note shall
        be
        convertible during the term, in whole or in part, into common shares at the
        conversion price of seven cents ($0.07) per share provided, however, that
        this
        Note shall not be convertible during the term when the Company has insufficient
        authorized common shares to issue to the Note holder when a demand for
        conversion is made. The Note is secured by shares owned or to be owned by
        the
        Company in the entities Beijing China Wind, ET ME&A Holding and ET ME&A.
        As of September 30, 2006, the Company has received the principal balance
        of
        $1,625,525, and has recorded an interest expense of $38,377 and $60,506 in
        the
        accompanying financial statements for the three months and nine months ended
        September 30, 2006.
 
 **NOTE
        13:**  **Stockholders’
        Equity**
 
 During
        the nine months ended September 30, 2006, the Company issued 3,169,580
        restricted common shares valued at $191,625 as compensation to directors
        for
        services rendered. The shares were valued at the closing market price on
        the
        first day of each month for the months for which services were performed.
        The
        Company issued 24,938,759 common shares to three directors valued at $997,550,
        in connection with furtherance of the terms of a Stock Purchase Agreement
        dated
        June 30, 2005 and in consideration of such directors agreeing to enter into
        employment agreements with the Company in their positions. The common shares
        were valued at the closing market price of the share price on the date of
        execution of the Stock Purchase Agreement. The Company entered into an agreement
        with an employee and issued 250,000 restricted common shares valued at $22,500
        for compensation earned. The common shares were valued at the closing market
        price of the shares on the date of issuance. The Company issued 2,400,000
        common
        shares valued at $120,000 to a consultant for providing consulting, business
        advisory and finder’s fee for a target acquisition. The common shares were
        valued at the closing market price of the shares on the date of execution
        of the
        agreement. The Company issued as a partial consideration 10,000,000 restricted
        common shares valued at $500,000 to the owners of Beijing China Wind in
        connection with its acquisition of 60% equity interest in Beijing China Wind.
        The shares were valued at the closing market price of the shares on the date
        of
        execution of the agreement.
 
 **NOTE
        14:**  **Basic
        and Diluted Net Loss Per Share**
 
 Basic
        and
        diluted net loss per share for the three months and nine months ended September
        30, 2006 and 2005 was determined by dividing net loss for the periods by
        the
        weighted average number of basic and diluted shares of common stock outstanding.
        Weighted average number of shares used to compute basic and diluted loss
        per
        share is the same since the effect of dilutive securities is
        anti-dilutive.
 
 **NOTE
        15:**  **Employee
        Benefit Plan and Non-Qualified Stock Option and Compensation
        Plan**
 
 Employee
        Benefit Plan: The Company adopted an employee benefit plan “The 2000 Employee
        Benefit Plan” (the “Plan”) on May 30, 2000. Under the Plan, the Company may
        issue shares or grant options to acquire the Company’s common stock, no par
        value, from time to time to employees of the Company or its subsidiaries.
        In
        addition, at the discretion of the Board of Directors, shares may be granted
        under this Plan to other individuals, including consultants or advisors,
        who
        contribute to the success of the Company or its subsidiaries, provided that
        bona
        fide services shall be rendered by consultants and advisors and such services
        must not be in conjunction with the offer or sale of securities in a capital
        raising transaction. No stock may be issued or options granted under the
        Plan to
        consultants, advisors or other persons who directly or indirectly promote
        or
        maintain a market for the Company’s securities. The Plan is intended to aid the
        Company in maintaining and developing a management team, attracting qualified
        officers and employees capable of assuring the future success of the Company,
        and rewarding those individuals who have contributed to the success of the
        Company. The Plan is administrated under the direction of the Board of
        Directors. A total of 4,000,000 (four million) common shares and 4,000,000
        (four
        million) stock options to acquire common shares may be subject to, or issued
        pursuant to, benefits granted under the Plan. At any time any stock option
        is
        granted under the terms of this Plan, the Company will reserve for issuance
        the
        number of shares of Stock subject to such option until it is exercised or
        expired. The Plan Administrator shall determine from time to time the terms,
        conditions and price of the options granted. Options shall not be construed
        to
        be stock and cannot be exercised after the expiration of its term. Under
        the
        Plan, 300,000 shares of common stock and 4,000,000 stock options remain
        available for grant at September 30, 2006.
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  2006
        Non-Qualified Stock and Option Compensation Plan: On July 21, 2006, the Company
        adopted a 2006 Non-Qualified Stock and Option Compensation Plan and filed
        a
        Registration Statement on Form S-8 with the Commission to register shares
        awarded under the Plan on the same date. The Compensation Committee of the
        Board
        of Directors issues common stock and awards options to employees, directors,
        officers, consultants, advisors and other persons associated with the Company.
        The 2006 Plan is intended to provide a method whereby the Company would be
        stimulated by the personal involvement of our employees, directors, officers,
        consultants, advisors and other persons in our business and reward such
        involvement, thereby advancing the interests of the Company and all of its
        shareholders. A total of 15,000,000 shares of common stock for stock awards
        and
        10,000,000 shares of common stock underlying option grants were authorized
        under
        the 2006 Plan. None of the shares under the plan were issued as of September
        30,
        2006.
 
 **NOTE
        16:** **** **Contingent
        Consideration**
 
 In
        January 2006, the Company acquired a 60% interest in Beijing China Wind for
        an
        agreed total consideration of $4,800,000 of which $2,800,000 was payable
        in cash
        and the issuance of 20,000,000 shares of the Company’s common stock. In
        accordance with the Equity Transfer Agreement (“ET Agreement”) signed between
        the vendor and the Company, the agreed valuation for the 20,000,000 shares
        was
        $0.10 per common stock for $2,000,000. The Company recorded the 20,000,000
        shares at $0.05 per common stock for $1,000,000 based on the closing price
        of
        the Company’s stock at the date of closing of agreement of January 4, 2006. As
        of September 30, 2006, the Company is contingently liable for $1,200,000
        to the
        vendor, of which $600,000 was due on or before July 31, 2006 to be adjusted
        proportionately if Beijing China Wind does not achieve a profit of $1,000,000
        (RMB 8.0 million) in 2005 and $1,125,000 (RMB 9.0 million) for the first
        half of
        2006. An additional $600,000 cash consideration is due on or before January
        31,
        2007 to be adjusted proportionately if Beijing China Wind does not achieve
        a
        profit of $2,250,000 (RMB 18.0 million) for 2006. If any of the conditions
        are
        not met, the vendor has 30 days from July 31, 2007 to give notice to the
        Company
        to buy back 25% equity interest in Beijing China Wind from the Company in
        return
        for the 20,000,000 shares issued as part of the acquisition agreement.
  **NOTE
        17:**  **Litigations**
 
 On
        September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
        organized and existing under the laws of the People’s Republic of China
        (“Beijing Zhongrun”) and a minority shareholder of Beijing China Wind
        Telecommunication Information Technology Company Limited, a company organized
        and existing under the laws of the People’s Republic of China (“Beijing
        Chinawind”), filed two lawsuits against Guangdong Elephant Talk Network
        Consulting Limited, a company organized and existing under the laws of the
        People’s Republic of China and an agent of the Company (“ETGD”), in the Beijing
        Civil Courts. The lawsuit alleges a) that ETGD failed to pay the remaining
        consideration of $787,748 under an Equity Transfer Agreement, dated January
        4,
        2006 (the “Agreement”), between ETGD and Beijing Zhongrun, which provided for
        the acquisition by ETGD from Beijing Zhongrun of 60% of the registered capital
        of Beijing Chinawind; and b) that ETGD induced the minority shareholders
        of
        Beijing Chinawind to accept, pursuant to the Agreement, consideration of
        $1,000,000 through the issuance of 10,000,000 common shares of the Company
        valued at $0.10 per common share. The lawsuit
        further alleges that Chinese law prohibits citizens of the People’s Republic of
        China from accepting shares of companies listed on the United States
        Over-The-Counter Bulletin Board Quotation Service, which is regulated by
        the
        National Association of Securities Dealers, Inc., as compensation in an
        acquisition transaction.
 
 Beijing
        Zhongrun has demanded that ETGD exchange the issued stock for $1,000,000,
        pay
        the outstanding payment under the Agreement and compensate Beijing Zhongrun
        for
        breach of contract in the sum of RMB524,664 (approximately US$64,773). In
        the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704).
  The
            Company has retained a legal counsel
            licensed to practice civil law in the People’s Republic of China who
            has
            advised the Company that Beijing Zhongrun's lawsuits are not supported
            by valid
            facts nor have sufficient legal evidence. Accordingly, the Company considers
            that the claims of Beijing Zhongrun are without
            merit and the Company plans to vigorously defend th ese lawsuit s .
 **NOTE
        18:**  **Going
        Concern**
 
 The
        accompanying financial statements have been prepared in conformity with
        generally accepted accounting principle, which contemplate continuation of
        the
        Company as a going concern. The Company has an accumulated deficit of
        $16,293,833 and a working capital deficiency of $5,052,885 as of September
        30,
        2006 including a net loss of $4,161,398 for the nine months ended September
        30,
        2006. This raises a substantial doubt about the Company’s ability to continue as
        a going concern. In view of the matters described below, recoverability of
        a
        major portion of the recorded asset amounts shown in the accompanying balance
        sheet is dependent upon continued operations of the Company, which in turn
        is
        dependent upon the Company’s ability to raise additional capital, obtain
        financing and to succeed in its future operations.
 
 The
        financial statements do not include any adjustments relating to the
        recoverability and classification of recorded asset amounts or amounts and
        classification of liabilities that might be necessary should the Company
        be
        unable to continue as a going concern.
 
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            14
            -
 *Table
            of Contents*
  Management
        has taken the following steps to revise its operating and financial
        requirements, which it believes are sufficient to provide the Company with
        the
        ability to continue as a going concern. Management has devoted considerable
        efforts during the period ended September 30, 2006 towards (i) obtaining
        additional equity financing (ii) controlling of general and administrative
        expenses (iii) management of accounts payable (iv) settlement of debt by
        issuance of common shares and (v) acquire profitable companies that bring
        synergies to the Companies products and services.
 
 **NOTE
        19:**  **Subsequent
        Events**
 
 The
        Company received $1,788,246 in cash advances as of November 15, 2006 against
        a
        new $3,000,000 million Convertible Promissory Note executed by Rising Water
        Capital.
 
 On
        October 30, 2006, the Company executed a Rescission Agreement to terminate
        its
        proposed acquisition of Phonetone. On November 6, 2006, the Company received
        $80,000 from Calfin Trust towards its advance of earnest deposit of $225,562
        for
        Phonetone acquisition and expects to receive the remaining balance of earnest
        deposits of $145,562 and 20,000,000 common shares issued to Calfin Trust
        by not
        later than December 15, 2006.
 
 On
        November 17, 2006, the Company executed a definitive Stock Purchase Agreement
        to
        complete the acquisition of Benoit Telecom Holding AG to be effective December
        1, 2006.
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              15
              -
 *Table
              of Contents*
  **PART
        1**
 
 **ITEM
        2.**  **Management
        Discussion and Analysis or Plan of Operation**
 
 Elephant
        Talk Communications, Inc. (ETCI) is a facility based international long distance
        carrier offering highly reliable and competitively priced services on the
        wholesale market. The Company provides services to first-tier local and
        international telecommunications carriers, enabling those carriers and other
        service providers to offer voice and fax services to their end-customers.
        The
        operations include international long distance on both sides of the Pacific,
        serving over 20 foreign countries through an advanced and flexible network.
        The
        Company has been expanding its foothold in Asia with more profitable routes
        and
        the development of value-added services, such as PC-to-Phone service, voice
        over
        Internet protocol (VoIP), Broadband Internet and Short messaging service
        (SMS).
        The Company is actively pursuing new sales channels for the higher-margin
        prepaid calling card market, expanding from the U.S. to several countries
        in
        South East Asia.
 
 Pursuant
        to an agreement and plan of reorganization, effective August 27, 2001, and
        through the subsequent acquisition that completed on January 4, 2002, Staruni
        Corporation, a California corporation acquired Elephant Talk Limited, a limited
        company incorporated in Hong Kong. This type of share exchange has been treated
        as a capital transaction accompanied by recapitalization of Elephant Talk
        Limited in substance, rather than a business combination, and is deemed a
        “reverse acquisition” for accounting purposes since the former owners of
        Elephant Talk Limited controlled majority of the total common shares outstanding
        immediately following the acquisition. The acquisition caused no change in
        any
        of the shares of the Company’s common stock outstanding on the acquisition date,
        and no other securities were converted as a result of the
        acquisition.
 
 On
        January 5, 2005, the Company completed its purchase of 60% equity ownership
        interest in True Precise Technology Limited (“True Precise”), from Keen Solution
        Group Limited (“Keen Solution”) in a Share Exchange Agreement. As consideration
        for the acquisition, the Company had issued 23,137,500 restricted Common
        Shares
        to Keen Solution valued at $1,436,875. Upon completion of the acquisition
        on
        January 5, 2005, True Precise became a majority owned subsidiary of the Company.
        On August 8, 2005, Keen Solutions sent notification informing the Company
        that
        it had unilaterally decided to terminate the Share Exchange Agreement. The
        True
        Precise acquisition has been cancelled, and the
        Company has taken protective measures to ensure that the 23,137,500 Common
        Shares are restricted and nontradeable. Of
        those
        shares, 20,137,500 have been returned to the Company’s treasury. The Company has
        evaluated its legal options in connection with the termination of the Share
        Exchange Agreement and concluded that a mutual rescission of the agreement
        was
        in the Company’s best interest. The Company still continues to pursue the return
        of 3,000,000 Common Shares from Keen Solution. In May 2006, True Precise
        ceased
        its existence as it discontinued its operations. The Company recorded $1,923
        in
        expenses of True Precise under general and administrative expenses as of
        the
        date of cease of operations in May 2006.
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        to
        acquire all of the issued and outstanding shares of Benoit Telecom Holding
        A.G.
        (“Benoit Telecom”), a European telecom company from Beltrust A.G. The Company
        has made the earnest deposits of $6,043,080 for its acquisition with an escrow
        trust company. On November 17, 2006, the Company executed a definitive Stock
        Purchase Agreement to complete the acquisition on November 17, 2006 to be
        effective as of December 1, 2006. Benoit Telecom is a telecommunications
        service
        provider that provides various premium rate services such as 0900 service
        and
        VoIP services to corporations and content providers within the European Union.
        The Company believes that it can extract considerable synergies with this
        acquisition by integrating its VOIP platforms and extend its reach from China
        to
        Europe and vice-versa.
 
 Pursuant
        to the terms of an agency agreement in connection with its acquisition of
        Phonetone Telecom Ltd. from Calfin Trust, the Company had agreed to issue
        40,000,000 restricted common shares, pay a cash consideration of $600,000,
        and
        share 15% of the yearly total profit margin generated by the Company or any
        of
        its affiliated companies from the Phonetone’s premium rate numbers in the years
        2006, 2007 and 2008. As of September 30, 2006, the Company has advanced $225,562
        and 20,000,000 shares of its Common Stock valued at $720,000 to Calfin Trust
        as
        an earnest deposit towards the Phonetone’s proposed acquisition. The Company and
        Calfin Trust mutually agreed to terminate the transaction and executed a
        Rescission Agreement on October 30, 2006. The Company has received a payment
        of
        $80,000 on November 6, 2006 towards its earnest deposit and expects to receive
        the balance of earnest deposit of $145,562 and 20,000,000 common shares by
        December 15, 2006. The Company has taken protective measures to ensure that
        20,000,000 shares are restricted and non-tradable.
 
 On
        July
        11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited, formed
        Full Mark Technology Limited (“Full Mark”), a limited liability company
        organized under the laws of British Virgin Islands, to facilitate acquisitions
        of profitable business in China. On December 13, 2005, Full Mark formed a
        wholly
        owned subsidiary Jinfuyi Technology (Beijing) Co. Ltd. (“Jinfuyi”), a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China, with a registered capital of $200,000. On January 2, 2006, Jinfuyi
        and
        Beijing China Wind entered into an Exclusive Technical Consulting and Services
        Agreement, pursuant to which Jinfuyi has the exclusive right to provide
        technical and consulting services in exchange for services fees of approximately
        $4,875,000 per year, subject to the right of Jinfuyi to adjust the service
        fee
        depending on the quantity of the services that it actually provides. As of
        September 30, 2006, no technical and consulting services were provided by
        Jinfui.
 
 On
        January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (“Guangdong Elephant Talk”) a wholly owned subsidiary and an agent of
        the Company, and Beijing Zhongrun Chuangtou Technology Co., Ltd., a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (the “Vendor”), entered into an Equity Transfer Agreement (the
”Agreement”), pursuant to which Guangdong Elephant Talk agreed to acquire sixty
        percent (60%) of the registered capital of Beijing China Wind.
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              16
              -
 *Table
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 Pursuant
        to the Agreement, the purchase price for 60% of Beijing China Wind was agreed
        to
        be $4,800,000, subject to adjustments based on Beijing China Wind’s audited net
        income for fiscal 2005 and 2006, and is payable (x) in cash of $2,800,000
        in
        five installments the last of which is to be paid on January 31, 2007, and
        (y)
        by the issuance by the Company to the Vendor of 20,000,000 shares of restricted
        common stock valued at $0.10 per share, in four equal installments the last
        of
        which is to be issued on January 31, 2007. The Vendor has the right to exercise
        an option within 30 days after July 31, 2007 to return the 20,000,000 shares
        of
        restricted common stock either in exchange for a 25% equity interest in Beijing
        China Wind or for settlement in cash within 90 days. If Beijing China Wind
        is
        able to achieve the net profits and revenue targets for 2006 as agreed pursuant
        to the terms of the Agreement, the Company will have a obligation to pay
        $1,380,000 in cash and 10,000,000 restricted shares of common stock on or
        before
        January 31, 2007 for the agreed purchase price for 60% equity ownership in
        Beijing China Wind. As of September 30, 2006, the Company has a past due
        obligation to pay the remaining balance of $180,000 of its fourth installment
        payment of $600,000. As of September 30, 2006, the Company is contingently
        liable for $1,200,000 to the Vendor, of which $600,000 is due on or before
        July
        31, 2006 to be adjusted proportionately if Beijing China Wind does not achieve
        a
        profit of $1,000,000 (RMB 8.0 million) in 2005 and $1,125,000 (RMB 9.0 million)
        for the first half of 2006. An additional $600,000 cash consideration is
        due on
        or before January 31, 2007 to be adjusted proportionately if Beijing China
        Wind
        does not achieve a profit of $2,250,000 (RMB 18.0 million) for 2006. If any
        of
        the conditions of the Agreement are not met, the Vendor has 30 days from
        July
        31, 2007 to give notice to the Company to buy back 25% equity interest in
        Beijing China Wind from the Company in return for the 20,000,000 shares issued
        as part of the acquisition agreement. The Company recorded goodwill on
        consolidation of its acquired entities in the total amount of $3,117,123
        upon
        completion of acquisition of Beijing Chinawind. Beijing Chinawind revenues
        and
        profitability have consistently declined over several months due to the change
        in business outlook and change in telecom policies of network carriers in
        China.
        The Company is currently in litigation with the shareholders of Beijing
        Chinawind as described in Note 17 to the footnotes to the consolidated financial
        statements, and therefore, recorded an impairment allowance of $1,246,849
        on its
        investment in Beijing Chinawind in the accompanying financial statements
        as of
        September 30, 2006.
 
 On
        November 6, 2005, the Company formed a joint venture Free Zone Limited Liability
        company to be incorporated in the Dubai Technology, Electronic Commerce and
        Media Free Zone, Dubai, United Arab Emirates (UAE) under the name Elephant
        Talk
        Middle East & Africa FZ-LLC (“ET ME&A”). The registered capital of ET
        ME&A is $100,817, and the Company’s wholly owned subsidiary Elephant Talk
        Limited has contributed $50,953 towards its 50.54% equity share in the joint
        venture company as of September 30, 2006. ET ME&A is committed to spend the
        necessary funds to keep its share of equity investment and is currently seeking
        regulatory approvals for obtaining trade and business licenses from the UAE
        government to conduct its business. ET ME&A and has not yet begun operations
        and plans to operate various telecom related businesses in the Middle East
        and
        Africa.
 
 After
        evaluating the processes to expand our business and the costs of setting
        up
        regional subsidiaries in the Middle East under the name ET ME&A, the Company
        decided to create a new holding company in Bahrain. On June 17, 2006, the
        Company through its subsidiary Elephant Talk Limited, incorporated a limited
        liability company in the Kingdom of Bahrain under the name Elephant Talk
        Middle
        East & Africa (Holding) W.L.L (“ET ME&A Holding”). The registered
        capital of ET ME&A Holding is $387,787 and Elephant Talk Limited has
        contributed $197,771 towards its 51% equity interest in ET ME&A Holding as
        of September 30, 2006.
  On
          June
          5, 2006, the Company through its subsidiary Elephant Talk Limited formed
          and
          incorporated a wholly owned subsidiary Elephant Talk (Shenzhen) Investments
          Limited (“ET Shenzhen”), a limited liability company organized and existing
          under the laws of the Peoples’ Republic of China, with a registered capital of
          $128,205. As of September 30, 2006, ET Investment has not yet begun operations
          and no capital contributions have been made by Elephant Talk
          Limited.
 On
        June
        19, 2006, the Company through its subsidiary ET ME&A Holding, incorporated a
        limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk
        Bahrain W.L.L. (“ET Bahrain”) to manage the Company’s operations in Bahrain. The
        registered capital of ET Bahrain is $387,787 and ET ME&A Holding owns 99% of
        the equity ownership in ET Bahrain. ET ME&A Holding has contributed $383,909
        as its share of registered capital as of September 30, 2006. ET ME&A Holding
        and ET Bahrain have not yet begun operations.
  On
          August
          3, 2006, the Company formed and incorporated an entity under the name Elephant
          Talk Europe Holding BV (“ET Europe”), a private limited liability company
          registered in Amsterdam, Holland with an authorized capital of $113,670
          (90,000
          Euros). The Company owns 100% equity in ET Europe. The purpose of forming
          ET
          Europe was to help the Company conclude its pending acquisition of Benoit
          Telecom Holding AG. The Company has contributed $22,734 towards its share
          of the
          registered capital of ET Europe. On November 17, 2006, the Company executed
          the
          definitive Stock Purchase Agreement and completed its acquisition of Benoit
          Telecom Holding AG to be made effective on December 1, 2006.
 On
        September 12, 2006, the Company through its subsidiary ET ME&A Holding,
        incorporated a limited liability company under the name Elephant Talk Middle
        East & Africa Jordon (“ET Jordon”) to manage the Company’s operations in
        Jordon. The registered capital of ET Jordon is $210,918 (81,585 BHD) and
        ET
        ME&A owns 100% of the equity ownership in ET Jordon. ET ME&A Holding has
        contributed $210,918 as its 100% share of the registered capital as of September
        30, 2006. ET Jordon has applied for the telecommunication licenses and has
        not
        begun its operations.
  Results
          of Operations: Our results of operations for the three months and nine
          months
          ended September 30, 2006 consisted of operations of Elephant Talk
          Communications, Inc., its wholly owned subsidiary Elephant Talk Limited,
          its
          wholly owned subsidiary Elephant Talk Europe Holding BV, its wholly owned
          subsidiary Guangdong Elephant Talk Network Consulting Limited, its wholly
          owned
          subsidiary Elephant Talk (Shenzhen) Investments Limited, its wholly owned
          subsidiary Full Mark Technology Limited, its wholly owned subsidiary Jinfuyi
          Technology (Beijing) Co. Limited, its majority owned (51%) subsidiary Elephant
          Talk Middle East & Africa (Holding) W.L.L., its majority owned (99%)
          subsidiary Elephant Talk Bahrain W.L.L., its wholly owned subsidiary Elephant
          Talk Jordon, its majority owned (50.54%) subsidiary Elephant Talk Middle
          East
& Africa FZ-LLC and its majority owned (60%) subsidiary Beijing China Wind.
          The consolidated financial statements for the three months and nine months
          ended
          September 30, 2005 included the accounts of Elephant Talk Communications,
          Inc.,
          and its 100% wholly owned subsidiary Elephant Talk Limited. The results
          of
          operations of the Company for the three months and nine months ended September
          30, 2005 consisted of our operations of Elephant Talk Communications, Inc.
          and
          our wholly owned subsidiary Elephant Talk Limited. The Company reported
          net
          losses of $3,148,396 and $4,161,398 for the three months and nine months
          ended
          September 30, 2006 compared to net losses of $224,474 and $1,013,901 for
          the
          same periods in 2005.
 
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  Revenues
        and Cost of revenues: The Company reported revenues of $898,406 and $4,566,406
        during the three months and nine months ended September 30, 2006 compared
        to
        $42,780 and $246,413 for the same periods in 2005. Revenues for the three
        months
        and nine months ended September 30, 2006 consisted of $868,885 and $4,438,043
        from mobile value-added services offered by the Company’s subsidiary Beijing
        Chinawind, a majority owned (60%) subsidiary of Guangdong Elephant Talk Network
        Consulting Limited, to a large subscriber base of customers via mediums such
        as
        mobile terminals or the internet. The services offered included short messaging
        services, multimedia messaging services, wireless application protocol,
        interactive voice response and ring-back tone services as well as web portal.
        Furthermore, the Company’s sale of telecommunications products such as voice and
        data transmission like IDD, pre-paid calling cards, eTalk and facsimile services
        provided to a wide range of customers including major telecommunication
        companies to retail customers primarily in China, Japan and Hong Kong. During
        the three months and nine months period ended September 30, 2005, the Company
        recorded revenues by only selling telecommunications products and provided
        technical consulting and business advisory services relating to data
        communication and information systems.
 
 Cost
        of
        revenues was $35,514 and $800,751 for the three months and nine months ended
        September 30, 2006 compared to $38,187 and $204,261 for the same periods
        in
        2005. Cost of revenues for the three months and nine months periods ended
        September 30, 2006 consisted of $8,557 and $684,640 primarily through the
        mobile
        operator charges in providing mobile value added services to our subscriber
        base
        by the Company’s subsidiary Beijing China Wind, and costs incurred for resale
        arrangements with long distance service providers, cost of leasing transmission
        facilities, international gateway switches for voice, data transmission and
        facsimile services and discounts offered on eTalk cards sold by Elephant
        Talk
        Limited. Gross margins for the three months and nine months ended September
        30,
        2006 was $862,892 and $3,765,655 or 96% and 82% of revenues as compared to
        $4,593 and $42,152 or 11% and 17% of revenues for the same periods in 2005.
        Gross margins for the three months and nine months periods ended September
        30,
        2006 consisted of $860,327 and $3,753,403 from the Company’s subsidiary
        Guangdong Elephant Talk Network Consulting Limited. The increases in gross
        margins for the three months and nine months ended September 30, 2006 compared
        to the same periods in 2005 was due to the change in the revenue mix for
        the
        mobile value added services provided to the customers in the telecom markets
        due
        to the strategic acquisition of Beijing China Wind.
 
 Operating
        Expenses: Selling, general and administrative expenses (S,G&A) were
        $2,701,231 and $6,174,306 for the three months and nine months ended September
        30, 2006 compared to $214,328 and $944,316 for the same periods in 2005.
        S,G&A expenses for the three months and nine months period ended September
        30, 2006 consisted of $993,212 and $3,355,904 from the Company’s subsidiary
        Beijing China Wind. S,G&A expenses increased during the three months and
        nine months ended September 30, 2006 compared to the same periods in 2005,
        primarily due to the increase in marketing and promotion expenses of the
        new
        mobile value added business services provided to our subscriber base, stock
        compensation paid to three Officers and Directors valued at $997,550, increased
        payroll and other legal and administrative expenses of the newly acquired
        businesses. Impairment of investment was $1,246,849 for the three months
        and
        nine months ended September 30, 2006 compared to zero for the same periods
        in
        2005. The Company recorded an impairment on its investment in Beijing Chinawind
        since revenues and profitability of Beijing Chinawind have consistently declined
        over several months due to the change in business outlook and change in telecom
        policies of network carriers in China. Furthermore, the Company is currently
        in
        litigation with the shareholders of Beijing Chinawind as described in Note
        17,
        and therefore, has recorded an impairment allowance of $1,246,849 in the
        accompanying financial statements as of September 30, 2006. Depreciation
        expense
        increased to $21,012 and $72,082 for the three months and nine months ended
        September 30, 2006 compared to $10,386 and $48,442 for the same periods in
        2005
        primarily due to the acquisition of assets by the subsidiaries of the
        Company.
 
 Other
        Income and Expenses: Interest income was $29 and $182 for the three months
        and
        nine months period ended September 30, 2006 compared to $7 and $664 for the
        same
        periods in 2005. The Company recorded a gain on settlement of debts of $49,031
        and loss on disposal of fixed assets of $26,066 for the nine months period
        ended
        September 30, 2005 as compared to none for the same periods in 2006. Interest
        expense was $168,618 and $377,149 for the three months and nine months ended
        September 30, 2006 compared to $26,684 and $86,124 for the same periods in
        2005.
        Interest expense increased due to the Company borrowing additional loans
        from an
        investor and bank.
 
 Minority
        interest: The Company’s majority owned subsidiary Elephant Talk Middle East
& Africa FZ-LLC incurred a profit of $9,189 and a loss of $1,657 for the
        three months and nine months ended September 30, 2006 compared to none for
        the
        same periods in 2005. Guangdong Elephant Talk Network Consulting Limited
        incurred a loss from operations of $65,441 and a profit from operation
        of $208,534 for the three months and nine months periods ended September
        30, 2006 compared to none for the same periods in 2005. Elephant Talk Middle
        East and Africa (Holding) W.L.L. incurred a loss of $89,906 and $104,049
        for the
        three months and nine months periods ended September 30, 2006 compared to
        none
        for the same periods in 2005. The Company recorded a net profit of $124,346
        and
        a loss of $58,095 for the three months and nine months ended September 30,
        2006
        attributable to minority shareholders’ interest in the accompanying financial
        statements. The Company did not have a majority owned subsidiaries during
        the
        three months and nine months periods ended September 30, 2005.
 
 Liquidity
        and Capital Resources: The Company's principal capital requirements during
        the
        year 2006 are to fund the internal operations and complete the pending
        acquisitions of growth-oriented telecommunications and related businesses
        in
        Asia and Europe. The Company plans to raise necessary funds by selling its
        own
        common shares to selected investors and bringing in business partners whose
        contributions include the necessary cash. In view of low borrowing interest
        rates, the Company continues to actively pursuing additional credit facilities
        with investors and financial institutions in Hong Kong, Europe, Middle East
        and
        USA as a means to obtain new funding. The Company’s management estimates that it
        currently does not have the funds to operate for the next twelve months without
        raising additional capital.
 
 As
        shown
        in the accompanying financial statements, the Company incurred a net loss
        of
        $4,161,398 for the nine months ended September 30, 2006 as compared to a
        net
        loss of $1,013,901 for the same period in 2005. Additionally, the Company’s
        current liabilities exceeded its current assets by $5,052,885 at September
        30,
        2006. These factors and the Company’s inability to meet its debt obligations
        from current operations, and the need to raise additional funds to accomplish
        its objectives, create a substantial doubt about Elephant Talk's ability
        to
        continue as a going concern. Furthermore, the Company’s independent auditors
        have issued a going concern opinion on the Company’s audited financial
        statements for the fiscal year ended December 31, 2005 as the Company did
        not
        have sufficient funds available to operate for the next twelve
        months.
 
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  The
        Company’s forecast of the period of time through which its financial resources
        will be adequate to support its operations is a forward-looking statement
        that
        involves risks and uncertainties, and actual results could vary as a result
        of a
        number of factors.
 
 Operating
        activities: Net cash used in operating activities during the nine months
        period
        ended September 30, 2006 amounted to $211,287 primarily due to decrease in
        accounts receivable of $439,934, increase in prepaid expenses, deposits and
        other current assets of $217,515, increase in accounts payable and customer
        deposits of $5,832, increase in accrued expenses and other payable of $503,791,
        and  increase
        in deferred revenue of $9,366. Additionally, the Company’s current liabilities
        exceeded its current assets by $5,052,884 **** at
        September 30, 2006. These factors and the Company’s inability to meet its debt
        obligations from current operations, and the need to raise additional funds
        to
        accomplish its objectives, create a substantial doubt about the Company’s
        ability to continue as a going concern.
 
 Investing
        activities. Net cash used in investing activities during the nine months
        period
        ended September 30, 2006 was $1,291,240 primarily due to net cash outflow
        of
        $1,074,214 due to acquisition of Beijing Chinawind and net cash received
        for
        earnest deposits of $40,002 to acquire telecom companies in Europe. The Company
        used proceeds to acquire equipment for $132,360 and telecom licenses for
        $124,668 in Middle East during the nine months ended September 30,
        2006.
 
 Financing
        activities. Net cash provided by financing activities during the nine months
        period ended September 30, 2006 was $2,029,793. The Company received $2,619,180
        in funding against the convertible note payable from an accredited investor,
        and
        $193,993 from the minority shareholders of the Company’s subsidiaries. The
        Company received cash overdraft of $31,767, and made cash payments of $818,893
        to related parties and $3,746 in payments of bank loans during the nine months
        period ended September 30, 2006.
 
 As
        a
        result of the above activities, the Company experienced a net increase in
        cash
        of $556,146 for the nine months period ended September 30, 2006. The ability
        of
        the Company to continue as a going concern is still dependent on its success
        in
        obtaining additional financing from the institutional investors, acquiring
        profitable operations or by selling its common shares and fulfilling its
        plan of
        restructuring as outlined above.
 
 **Application
        of critical accounting policies and estimates** :
 
 Our
        discussion and analysis of financial condition and results of operations
        are
        based on our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires us to make estimates
        and
        judgments that affect the reported amounts of assets and liabilities and
        the
        disclosure of contingent assets and liabilities at the date of the consolidated
        financial statements, and the reported amounts of revenue and expenses during
        the period reported. By their nature, these estimates and judgments are subject
        to an inherent degree of uncertainty. We based our estimates and judgments
        on
        historical experience, market trends, and other factors that we believed
        to be
        reasonable under the circumstances. The results of these estimates form the
        basis for judgments about the carrying value of assets and liabilities that
        are
        not readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions. We have discussed the
        development, selection, and disclosure of these estimates with the Audit
        Committee of our Board of Directors. We believe there have been no material
        changes to our critical accounting policies and estimates during the nine
        months
        period ended September 30, 2006 compared to those discussed in our Annual
        Report
        on Form 10-KSB for the year ended December 31, 2005.
 
 We
        believe the following critical accounting policies reflect our more significant
        judgments and estimates used in the preparation of our financial statements.
 
 Revenue
        Recognition, Cost of Revenue and Deferred Revenue:
 The
        Company's revenue recognition policies are in compliance with Staff accounting
        bulletin (SAB) 104. The Company derives revenues from mobile value-added
        services offered by the Company’s subsidiary Guangdong Elephant Talk Network
        Consulting Limited to a large subscriber base of customers via mediums such
        as
        mobile terminals or the internet. The services offered include short messaging
        services, multimedia messaging services, wireless application protocol,
        interactive voice response and ring-back tone services as well as web portal.
        Furthermore, the Company’s derives revenues from the sale of minutes of calling
        time via sale of its prepaid calling cards. Cost of revenue includes the
        cost of
        providing value added services to its customers and capacity associated with
        the
        revenue recognized within the corresponding time period. Revenue is deferred
        upon activation of the calling cards and is recognized as the prepaid calling
        card balances are reduced based upon minute usage, imposition of administrative
        fees, or no further obligations exist with respect to a calling card. Deferred
        revenues represent amounts received from its customers for the unused minutes
        of
        the prepaid calling cards sold to its customers since the Company recognizes
        revenues only on the usage of the minutes.
 
 Stock-based
        Compensation:
 The
        Company follows the prescribed accounting and reporting standards for all
        stock-based compensation plans, including employee stock options, restricted
        stock, employee stock purchase plans and stock appreciation rights in accordance
        with SFAS No. 148 “Accounting for Stock-Based Compensation.” SFAS No. 148
        provides alternative methods of transition for a voluntary change to the
        fair
        value based method of accounting for stock-based employee compensation. In
        addition, this Statement requires prominent disclosures in both annual and
        interim financial statements about the method of accounting for stock-based
        employee compensation and the effect of the method used, on reported
        results.
 
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  Issuance
        of Shares for Services:
 The
        Company accounts for the issuance of equity instruments to acquire goods
        and
        services based on the fair value of the goods and services or the fair value
        of
        the equity instrument at the time of issuance, whichever is more reliably
        measurable.
 
 Impact
        of
        accounting pronouncements:
 In
        January 2003, the Financial Accounting Standards Board ("FASB") issued
        Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities
        (VIE)," (revised December 2003 by FIN No. 46R), which addresses how a business
        enterprise should evaluate whether it has a controlling financial interest
        in an
        entity through means other than voting rights and accordingly should consolidate
        the entity. For variable interests in VIEs created before January 1, 2004,
        the Interpretation will be applied beginning on January 1, 2005. For any
        VIEs
        that must be consolidated under FIN No. 46R that were created before January
        1,
        2004, the assets, liabilities and non-controlling interests of the VIE initially
        would be measured at their carrying amounts with any difference between the
        net
        amount added to the balance sheet and any previously recognized interest
        being
        recognized as the cumulative effect of an accounting change. If determining
        the
        carrying amounts is not practicable, fair value at the date FIN No. 46R first
        applies may be used to measure the assets, liabilities and non-controlling
        interest of the VIE. The
        guidelines of this statement are not applicable to the Company.
 
 In
        December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (“SFAS
        123R”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation”
(“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to
        Employees” and its related implementation guidance. SFAS 123R establishes
        standards for the accounting for transactions in which an entity exchanges
        its
        equity instruments for goods or services, including obtaining employee services
        in share-based payment transactions. SFAS 123R applies to all awards granted
        after the required effective date and to awards modified, repurchased, or
        cancelled after that date. Adoption of the provisions of SFAS 123R is effective
        as of the beginning of the first interim or annual reporting period that
        begins
        after June 15, 2005. The guidelines of this statement are not applicable
        to the
        Company.
 
 In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
        of
        ARB No. 43, Chapter 4"(“SFAS 151”) This statement clarifies the criteria of
        "abnormal amounts" of freight, handling costs, and spoilage that are required
        to
        be expensed as current period charges rather than deferred in inventory.
        In
        addition, this statement requires that allocation of fixed production overheads
        to the costs of conversion be based on the normal capacity of the production
        facilities. SFAS 151 is effective for the Company July 1, 2005. The Company
        does
        not expect the adoption of this statement will have any material impact on
        its
        results or financial position.
 
 In
        December 2004, the FASB issued SFAS no. 153, *Exchanges
        of Nonmonetary Assets an amendment of APB Opinion No. 29.* This
        statement addresses the measurement of exchanges of nonmonetary assets. It
        eliminates the exception from fair value measurement for nonmonetary exchanges
        of similar productive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting
        for Nonmonetary Transactions,* and
        replaces it with an exception for exchanges that do not have commercial
        substance. This statement specifies that a nonmonetary exchange has commercial
        substance if the future cash flows of the entity are expected to change
        significantly as a result of the exchange. The Company does not expect the
        adoption of this statement will have any material impact on its results or
        financial position.
 
 In
        December 2004, the FASB issued SFAS No. 152, *Accounting
        for Real Estate Time-Sharing Transactions an amendment of FASB Statements
        No. 66
        and 67.* This
        statement amends FASB
        Statement No. 66 , *Accounting for Sales of Real Estate,* to
        reference the financial accounting and reporting guidance for real estate
        time-sharing transactions that is provided in AICPA Statement of Position
        (SOP)
        04-2, *Accounting for Real Estate Time-Sharing Transactions.* This
        statement also amends FASB
        Statement No. 67 , *Accounting for Costs and Initial Rental Operations of Real Estate
        Projects,* to state
        that the guidance for (a) incidental operations and (b) costs incurred to
        sell
        real estate projects does not apply to real estate time-sharing transactions.
        This statement is effective for financial statements for fiscal years beginning
        after June 15, 2005. The guidelines of this statement are not applicable
        to the
        Company.
 
 SFAS
        No.
        154 (“SFAS 154”), *Accounting
        Changes and Error Corrections,* was
        issued in May 2005 and replaces APB Opinion No. 20 and SFAS No. 3 (“SFAS 3”).
        SFAS No. 154 requires retrospective application for voluntary changes in
        accounting principle in most instances and is required to be applied to all
        accounting changes made in fiscal years beginning after December 15, 2005.
        At
        such, the Company is required to adopt these provisions at the beginning
        of the
        fiscal year ended December 31, 2006. The Company is currently evaluating
        the
        impact of SFAS 154 on its consolidated financial statement.
 
 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.
 
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  In
        March
        2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
        Statement amends FASB Statement No. 140, *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities. This Statement:
 
 1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract. 
 2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable. 
 3.
            Permits
                an entity to choose ‘Amortization method’ or ‘Fair value measurement
                method’ for each class of separately recognized servicing assets and
                servicing liabilities: 
 4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value. 
 5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities. 
 This
        Statement is effective as of the beginning of the Company’s first fiscal year
        that begins after September 15, 2006. Management believes that this statement
        will not have a significant impact on the consolidated financial
        statements.
 
 In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This Statement is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
  In
        September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
        Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
        88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
        employer to recognize the over funded or under funded status of a defined
        benefit postretirement plan (other than a multiemployer plan) as an asset
        or
        liability in its statement of financial position and to recognize changes
        in
        that funded status in the year in which the changes occur through comprehensive
        income of a business entity or changes in unrestricted net assets of a
        not-for-profit organization. This Statement also improves financial reporting
        by
        requiring an employer to measure the funded status of a plan as of the date
        of
        its year-end statement of financial position, with limited exceptions. An
        employer with publicly traded equity securities is required to initially
        recognize the funded status of a defined benefit postretirement plan and
        to
        provide the required disclosures as of the end of the fiscal year ending
        after
        December 15, 2006. An employer without publicly traded equity securities
        is
        required to recognize the funded status of a defined benefit postretirement
        plan
        and to provide the required disclosures as of the end of the fiscal year
        ending
        after June 15, 2007. However, an employer without publicly traded equity
        securities is required to disclose the following information in the notes
        to
        financial statements for a fiscal year ending after December 15, 2006, but
        before June 16, 2007, unless it has applied the recognition provisions of
        this
        Statement in preparing those financial statements:
 
 a.  A
        brief
        description of the provisions of this Statement
 b.  The
        date
        that adoption is required
 c.  The
        date
        the employer plans to adopt the recognition provisions of this Statement,
        if
        earlier.
 
 The
        requirement to measure plan assets and benefit obligations as of the date
        of the
        employer’s fiscal year-end statement of financial position is effective for
        fiscal years ending after December 15, 2008. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
 
 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.
 
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 *Table
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  **ITEM
        3.**  **Controls
        and Procedures**
 
 The
        Company maintains controls and procedures designed to ensure that it is able
        to
        collect the information it is required to disclose in the reports it files
        with
        the SEC, and process, summarize, and disclose this information within the
        time
        periods specified in the rules of the SEC. The Company's Chief Executive
        Officer
        and Chief Financial Officer (“Certifying Officers”) are responsible for
        establishing and maintaining these procedures and, as required by the rules
        of
        the SEC, evaluate their effectiveness.
 
 **Disclosure
        Controls and Procedures and Internal Controls**
 
 The
        Company maintains disclosure controls and procedures designed with the objective
        of ensuring that information required to be disclosed in our reports filed
        with
        the Commission under the Exchange Act, such as this Quarterly report, is
        recorded, processed, summarized and reported within the time period specified
        in
        the Commission's rules and forms. Disclosure controls are also designed with
        the
        objective of ensuring that material information relating to the Company is
        made
        known to the Certifying Officers by others, particularly during the period
        in
        which the applicable report is being prepared. The Company maintains a system
        of
        internal controls designed to provide reasonable assurance that a) transactions
        are executed in accordance with management's general or specific authorization;
        b) transactions are recorded as necessary, to permit preparation of financial
        statements in conformity with generally accepted accounting principles, and
        to
        maintain accountability for assets; c) access to assets is permitted only
        in
        accordance with management's general or specific authorization; and d) the
        recorded accountability for assets is compared with the existing assets at
        reasonable intervals and appropriate action is taken with respect to any
        differences.
 
 **Scope
        of the Evaluation**
 
 The
        Certifying Officers’ evaluation of our disclosure controls and internal controls
        are done periodically so that the conclusions concerning the effectiveness
        of
        our controls can be reported in our quarterly reports on Form 10-QSB and
        Annual
        reports on Form 10-KSB. The overall goals of these various evaluation activities
        are to monitor our disclosure controls and our internal controls, and to
        make
        modifications, if and as necessary. Our external auditors also review internal
        controls in connection with their audit and review activities.
 
 **Material
        Weakness in Disclosure Controls**
 
 The
        Securities and Exchange Commission rules embodied in the Sarbanes-Oxley Act
        of
        2002, in particular, Section 404, require that a company's internal controls
        over financial reporting be based upon a recognized internal control framework.
        The Certifying Officers have evaluated the effectiveness of our disclosure
        controls and procedures and internal controls over financial reporting (as
        such
        terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
        Act of 1934, as amended) as of the end of the period covered by the filing
        of
        the Report, and concluded that, as of the end of such period, our disclosure
        controls and procedures were deficient and not effective. The Company acquired
        a
        majority owned subsidiary in China in January 2006 and is continuing to
        strengthen internal controls and disclosure controls over the financial
        reporting. While the Company has internal controls and procedures in place,
        the
        Certifying Officers believe that during the period ending September 30, 2006,
        the Company’s subsidiary in China had a breakdown in following the Company’s
        established policies and procedures of recording of transactions in accounting
        records accurately, preparation of monthly reconciliations and management’s
        review of operating results on a timely basis.
 
 **Management’s
        Action**
 
 The
        Certifying Officers have recruited an experienced financial manager at the
        Company’s subsidiary in Hong Kong to ensure that the transactions are recorded
        accurately, and account reconciliations are prepared on a timely basis. The
        Company is continuing to take the necessary corrective steps to improve and
        strengthen its disclosure controls and procedures, including recruiting an
        experienced financial manager for its China subsidiary, hiring an experienced
        and seasoned legal counsel, hosting monthly management meetings to review
        and
        enforce existing policies, and implementing new policies and procedures in
        an
        effort to remediate these deficiencies. Management plans to monitor, on a
        periodic basis that corrective actions implemented are working effectively,
        and
        will report on progress of the corrective actions in the future filings whether
        such corrective actions have remedied the material weaknesses.
 
 Except
        as
        noted above, there have not been any changes in our disclosure controls and
        procedures and internal control over financial reporting (as such term is
        defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
        first fiscal quarter that have materially affected, or are reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
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 *Table
            of Contents*
  **PART
        II**
 
 **ITEM
        1.**  **Legal
        Proceedings**
 
 On
        September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
        organized and existing under the laws of the People’s Republic of China
        (“Beijing Zhongrun”) and a minority shareholder of Beijing China Wind
        Telecommunication Information Technology Company Limited, a company organized
        and existing under the laws of the People’s Republic of China (“Beijing
        Chinawind”), filed two lawsuits against Guangdong Elephant Talk Network
        Consulting Limited, a company organized and existing under the laws of the
        People’s Republic of China and an agent of the Company (“ETGD”), in the Beijing
        Civil Courts. The lawsuit alleges a) that ETGD failed to pay the remaining
        consideration of $787,748 under an Equity Transfer Agreement, dated January
        4,
        2006 (the “Agreement”), between ETGD and Beijing Zhongrun, which provided for
        the acquisition by ETGD from Beijing Zhongrun of 60% of the registered capital
        of Beijing Chinawind; and b) that ETGD induced the minority shareholders
        of
        Beijing Chinawind to accept, pursuant to the Agreement, consideration of
        $1,000,000 through the issuance of 10,000,000 common shares of the Company
        valued at $0.10 per common share. The lawsuit
        further alleges that Chinese law prohibits citizens of the People’s Republic of
        China from accepting shares of companies listed on the United States
        Over-The-Counter Bulletin Board Quotation Service, which is regulated by
        the
        National Association of Securities Dealers, Inc., as compensation in an
        acquisition transaction.
 
 Beijing
        Zhongrun has demanded that ETGD exchange the issued stock for $1,000,000,
        pay
        the outstanding payment under the Agreement and compensate Beijing Zhongrun
        for
        breach of contract in the sum of RMB524,664 (approximately $64,773). In the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704).
  The
            Company has retained a legal counsel
            licensed to practice civil law in the People’s Republic of China who
            has
            advised the Company that Beijing Zhongrun's lawsuits are not supported
            by valid
            facts nor have sufficient legal evidence. Accordingly, the Company considers
            that the claims of Beijing Zhongrun are without
            merit and the Company plans to vigorously defend th ese lawsuit s .
 **ITEM
        2.**  **Changes
        in Securities**
 
 On
        August
        22, 2006, the Company issued 24,938,759 shares of common stock valued at
        $997,550 to three Officers and Directors in furtherance of Section 5 (g)
        of
        certain Stock Purchase Agreement dated June 30, 2005 and in consideration
        of
        such members of management agreeing to enter into certain Employment Agreements
        with the Company in their positions. The shares were valued at the closing
        market price of the shares on the date of execution of the
        agreement.
 
 On
        September 1, 2006, the Company issued 285,285 shares of common stock valued
        at
        $37,000 to two directors for compensation earned. The shares were valued
        at the
        closing market price of the shares on the first trading day of the month
        for
        which such compensation is earned.
 
 On
        September 28, 2006, the Company issued 2,791,795 shares of common stock valued
        at $150,000 for compensation paid to Directors for director fees earned for
        the
        periods April 1, 2005 to September 30, 2006. The shares were valued at the
        closing market price of the shares on the first trading day of the month
        for
        which such compensation is earned.
 
 **ITEM
        3.** **Defaults
        Upon Senior Securities**
 
 Not
        applicable.
 
 **ITEM
        4.**  **Submission
        of Matters to Vote of Securities Holders**
 
 None.
 
 **ITEM
        5.**  **Other
        Information**
 
 None.
 
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  **ITEM
        6.**  **Exhibits
        and Reports on Form 8-K**
 
 The
        following list describes the exhibits filed as part of this Quarterly Report
        on
        Form 10-QSB and reports on Form 8-K within the last fiscal quarter.
  a)
                    Exhibit No.
                
                Description
                    of Document31.1
                
                Certification
                    of Chief Executive Officer Pursuant to the
                    Securities Exchange Act of 1934, Rules 13a-14 and 15d-14
                  as
                    Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 200231.2
                
                Certification
                    of Chief Financial Officer Pursuant to the
                    Securities Exchange Act of 1934, Rules 13a-14 and 15d-14
                  as
                    Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                    Act of 200299.1
                
                Certification
                    Pursuant to 18 U.S.C. Section 1350, as
                    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002
  b)  Reports
        on Form 8-K
 
 Entry
        into a Material Definitive Agreement and Unregistered Sale of Equity Securities
        - Filed on September 5, 2006, Incorporated by reference. Film No.
        061072937.
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  **SIGNATURE**
 
 In
        accordance with the requirements of the Exchange Act, the registrant has
        caused
        this report signed on its behalf by the undersigned, thereunto duly
        authorized.
 
 
 **Elephant
                  Talk Communications, Inc.**Date:
                  November 18, 2006
              
              By:
                  /s/
                  Steven van der VeldenSteven
                  van der VeldenPresident
                  & Chief Executive Officer
 
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