UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




WASHINGTON,
D. C. 20549




FORM
10-Q





x   Quarterly report under
Section 13 or 15(d) of the Securities Exchange Act of 1934




For the
quarterly period ended March
31, 2009





 ̈   Transition
report under Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
transition period from ______ to ______





000-30061


( Commission file
No.)





ELEPHANT
TALK COMMUNICATIONS, INC.


(Exact
name of small business issuer as specified in its charter)




CALIFORNIA
            
            95-4557538(State
      or other jurisdiction of
            
            (I.R.S.
      employer identification no.)incorporation
      or organization)




Schiphol
Boulevard 249


1118
BH Schiphol


The
Netherlands


(Address
of principal executive offices)




31 0 20 653 5916


(Issuer's
telephone number, including area code)




Check
whether the registrant (1) has 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
 ̈ .





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




Large
Accelerated filer  ̈ 
   Accelerated filer  ̈ 
   Non-Accelerated filer  ̈   Smaller
reporting company  x





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


Yes  ̈  No x





Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Website, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).     Yes  ̈  No  ̈





As of May
19, 2009, there were 54,266,778 shares of the Company’s common stock
outstanding.







ELEPHANT
TALK COMMUNICATIONS, INC.




TABLE OF
CONTENTS




FORM
10-Q




March 31,
2009




PART
      I - FINANCIAL INFORMATION
              
              3Item
      1. Consolidated Financial Statements
              
              3Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) and December 31,
      2008
              
              3Unaudited
      Consolidated Statements of Operations for the three months periods ended
      March 31, 2009 and 2008
              
              4Unaudited
      Consolidated Statements of Cash Flows for the three months periods ended
      March 31, 2009 and 2008
              
              5Notes
      to the Consolidated Financial Statements (Unaudited)
              
              6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
              
              19Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
              
              24Item
      4T. Controls and Procedures
              
              24PART
      II - OTHER INFORMATION
              
              25Item
      1. Legal Proceedings
              
              25Item
      1a. Risk Factors
              
              26Item
      2.  Unregistered Sales of Equity Securities and Use of Proceeds
              
              26Item
      3.  Defaults upon Senior Securities
              
              26Item
      4.  Submission of Matters to a Vote of Security
      Holders
              
              26Item
      5.  Other Information
              
              26Item
      6. Exhibits
              
              27SIGNATURES
              
              27Exhibit
      10.1 Loan agreement May 4, 2009 with related party QAT II Investments
      SAExhibit
      31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
              
              X-1Exhibit
      31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
              
              X-2Exhibit
      32.1 Certification of Chief Executive Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
              
              X-3Exhibit
      32.2 Certification of Chief Financial Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
              
              X-4


2




PART I - FINANCIAL
INFORMATION




Item 1. Consolidated Financial
Statements





ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET




March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008UnauditedASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  1,716,063
                  
                  
                  $
                  1,656,546Restricted
      cash
                  
                  
                  181,671
                  
                  
                  
                  191,209Accounts
      receivable, net of allowance for doubtful accounts of $480,275 and
      $503,102 at March 31, 2009 and December 31, 2008
    respectively
                  
                  
                  5,102,076
                  
                  
                  
                  4,574,013Prepaid
      expenses and other current assets
                  
                  
                  2,265,618
                  
                  
                  
                  1,916,967Total
      Current Assets
                  
                  
                  9,265,428
                  
                  
                  
                  8,338,735LONG
      TERM DEPOSITS
                  
                  
                  292,593
                  
                  
                  
                  310,356PROPERTY
      AND EQUIPMENT, NET
                  
                  
                  6,672,066
                  
                  
                  
                  6,345,113INTANGIBLE
      ASSETS, NET
                  
                  
                  4,043,499
                  
                  
                  
                  4,461,869TOTAL
      ASSETS
                  
                  $
                  20,273,586
                  
                  
                  $
                  19,456,073LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
                  
                  $
                  322,907
                  
                  
                  $
                  322,903Accounts
      payable and customer deposits
                  
                  
                  6,439,804
                  
                  
                  
                  5,809,211Deferred
      revenue
                  
                  
                  220,295
                  
                  
                  
                  220,058Accrued
      expenses and other payables
                  
                  
                  1,729,799
                  
                  
                  
                  1,890,004Shares
      to be issued
                  
                  
                  -
                  
                  
                  
                  619,057Advances
      from third parties
                  
                  
                  280,633
                  
                  
                  
                  274,762Loans
      payable
                  
                  
                  881,058
                  
                  
                  
                  881,035Due
      to related parties
                  
                  
                  2,690,600
                  
                  
                  
                  —Total
      Current Liabilities
                  
                  
                  12,565,096
                  
                  
                  
                  10,017,030LONG
      TERM DEBT
                  
                  
                  410,527
                  
                  
                  
                  402,425MINORITY
      INTEREST
                  
                  
                  175,848
                  
                  
                  
                  191,767STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 53,920,885 issued and
      outstanding  as of March 31, 2009 compared to 50,433,260 shares
      issued and outstanding as of December 31, 2008
                  
                  
                  54,022,586
                  
                  
                  
                  52,933,209Accumulated
      other comprehensive income
                  
                  
                  279,042
                  
                  
                  
                  946,834Accumulated
      deficit
                  
                  
                  (47,179,513
                  )
                  
                  
                  (45,035,192
                  )Total
      Stockholders' Equity (Deficit)
                  
                  
                  7,122,115
                  
                  
                  
                  8,844,851TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                  
                  $
                  20,273,586
                  
                  
                  $
                  19,456,073




The
accompanying notes are an integral part of the unaudited consolidated financial
statements




3




ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS


(UNAUDITED)





For the three months periods ended March31,2009
                
                
                2008Unaudited
                
                
                UnauditedREVENUES
                
                $
                9,428,884
                
                
                $
                11,757,280COSTS
      AND OPERATING EXPENSESCost
      of service
                
                
                9,147,797
                
                
                
                11,412,511Selling,
      general and administrative expenses
                
                
                1,463,148
                
                
                
                1,756,999Non
      cash compensation to officers, directors and employees
                
                
                269,460
                
                
                
                161,487Depreciation
      and amortization of intangibles assets
                
                
                630,182
                
                
                
                674,456Total
      Costs and Operating Expenses
                
                
                11,510,587
                
                
                
                14,005,453LOSS
      FROM OPERATIONS
                
                
                (2,081,703
                )
                
                
                (2,248,173
                )OTHER
      INCOME (EXPENSE)Interest
      income
                
                
                10,070
                
                
                
                15,753Interest
      expense
                
                
                (71,785
                )
                
                
                (370,577
                )Other
      expense
                
                
                -
                
                
                
                (1,208
                )Total
      Other Income (Expense)
                
                
                (61,715
                )
                
                
                (356,032
                )LOSS
      BEFORE INCOME TAXES AND MINORITY INTEREST
                
                
                (2,143,418
                )
                
                
                (2,604,205
                )Provision
      for income taxes
                
                
                (800
                )
                
                
                (800
                )LOSS
      BEFORE MINORITY INTEREST
                
                
                (2,144,218
                )
                
                
                (2,605,005
                )Minority
      interest
                
                
                (103
                )
                
                
                29,017NET
      LOSS
                
                
                (2,144,321
                )
                
                
                (2,575,988
                )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation (loss) gain
                
                
                (667,792
                )
                
                
                1,110,632(667,792
                )
                
                
                1,110,632COMPREHENSIVE
      LOSS
                
                $
                (2,812,113
                )
                
                $
                (1,465,356
                )Net
      loss per common share and equivalents - basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.27
                )*Weighted
      average shares outstanding during the period - basic and
      diluted
                
                
                51,509,345
                
                
                
                9,530,637
                *





*)
adjusted for reversed stock split





The
accompanying notes are an integral part of the unaudited consolidated financial
statements


4




ELEPHANT TALK
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(UNAUDITED)





For the three months periods endedMarch 31,2009
                    
                    
                    2008Unaudited
                    
                    
                    UnauditedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                    
                    $
                    (2,144,321
                    )
                    
                    $
                    (2,575,988
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                    
                    
                    630,182
                    
                    
                    
                    674,456Provision
      for doubtful accounts
                    
                    
                    8,833
                    
                    
                    
                    -Stock
      based compensation
                    
                    
                    228,835
                    
                    
                    
                    13,379Minority
      interest
                    
                    
                    103
                    
                    
                    
                    29,017Amortization
      of Shares issued for Consultancy
                    
                    
                    40,625
                    
                    
                    
                    -Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
                    
                    
                    (810,410
                    )
                    
                    
                    (1,607,125
                    )(Increase)
      decrease in prepaid expenses, deposits and other assets
                    
                    
                    (378,916
                    )
                    
                    
                    21,464Increase
      (decrease) in accounts payable, proceeds form related parties and customer
      deposits
                    
                    
                    946,844
                    
                    
                    
                    1,476,917Increase
      (decrease) in deferred revenue
                    
                    
                    496
                    
                    
                    
                    -Increase
      (decrease) in accrued expenses and other payables
                    
                    
                    (333,739
                    )
                    
                    
                    141,223Net
      cash used in operating activities
                    
                    
                    (1,811,468
                    )
                    
                    
                    (1,826,657
                    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                    
                    
                    (731,634
                    )
                    
                    
                    (224,753
                    )Restricted
      cash
                    
                    
                    9
                    
                    
                    
                    (6,009
                    )Net cash used in investing activities
                    
                    
                    (731,625
                    )
                    
                    
                    (230,762
                    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
                    
                    
                    6,259
                    
                    
                    
                    6,141Proceeds
      from bank loans
                    
                    
                    -
                    
                    
                    
                    1,398Loan
      from related party
                    
                    
                    2,698,702
                    
                    
                    
                    -Net cash provided by financing activities
                    
                    
                    2,704,961
                    
                    
                    
                    7,539EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
                    
                    
                    (102,350
                    )
                    
                    
                    176,887NET
      INCREASE IN CASH AND CASH EQUIVALENTS
                    
                    
                    59,517
                    
                    
                    
                    (1,872,993
                    )CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
                    
                    
                    1,656,546
                    
                    
                    
                    4,366,312CASH
      AND CASH EQUIVALENTS, END OF THE PERIOD
                    
                    $
                    1,716,063
                    
                    
                    $
                    2,493,319SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
                    
                    $
                    10,070
                    
                    
                    $
                    7,527




For the three months periods endedMarch 31,2009
                
                
                2008Unaudited
                
                
                UnauditedSUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING & FINANCING
    ACTIVITIES:Shares
      issued to convert the notes payable to related parties and accrued
      interest
                
                $
                532,583
                
                
                $
                25,467


5




ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


NOTES
TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 1 Organization and
Nature of Operations





We were
incorporated on February 5, 1962 under the laws of the state of California as
Altius Corporation and involved in the manufacturing of freeway signs. In March
1997, Altius acquired Starnet Universe Internet, Inc., a web developer and
Internet Service Provider (ISP) and we changed our 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.





Elephant
Talk Communications is positioning itself as an international telecom operator
and enabler to the multimedia industry by facilitating the distribution of all
forms of content as well as Mobile and Fixed telecom services to its global
telecommunications customers.





The
Company currently provides traditional telecom services, media streaming, and
distribution services primarily to the business-to-business (B2B) community as
well as Mobile Virtual Network Enabler (MVNE) and Mobile Virtual Network
Operator (MVNO) services within the telecommunications market where it has a
presence. Up until the reporting period the Company has mainly derived its
revenues from traditional fixed-line services, but has made its largest
investments in mobile enabling services and platforms. The first revenues from
mobile services (MVNE/MVNO) started during the fourth quarter of Q4
2008.





Our
service offerings can be considered to be grouped around:





·
            Customized mobile
      services





·
            Mobile enabling
      platform





·
            Fixed network
      outsourcing





We view
ourselves as a specialized enabler, offering various parts of the back office
network including messaging platforms, data platforms and billing
solutions.  As a result, we believe we are positioning ourselves as
the MVNE partner of choice for the larger, global Mobile Network Operators
(MNO’s) and one-stop convergent solutions provider for specialized MVNO
customers.





Lastly,
we build upon our fixed network capabilities, streaming technology and Premium
Rate Services experience to offer an integrated solution for content
distribution and associated payment resolution. The (mobile and fixed)
technology, software and systems set-up is supported by a switch-based telecom
network with full national licenses and direct fixed line interconnections with
the Incumbents/National Telecom Operators in seven (7) European countries and
one (1) in the Middle Eastern (Bahrain), complimented with partnerships with
telecom operators in France, Germany, Scandinavia and Poland.





NOTE 2 Financial
Condition and Going Concern





The
Company has an accumulated deficit of ($47,179,513) as of March 31,
2009.  Historically the Company has relied on a combination of debt
and equity financings to fund ongoing cash requirements. In the first quarter of
2009 the Company received a total $2.7 million as a loan from a related party
QAT II Investments SA (“QAT II”).  Following the first quarter QAT II
provided financing for $1.1 million, thus bringing the total amount funded in
2009 by QAT II  to $3.8 million.





The cash
balance at March 31, 2009 and the additional loans have provided sufficient
funds through the beginning of the second quarter of 2009.





Management
is in ongoing discussions with QAT regarding additional borrowings to fund the
capital requirements in the immediate future until a more permanent source of
funding can be secured.  At the same time Management has began fund
raising activities by engaging a U.S. Investment Banking
firm.  Although QAT and other related parties have invested, or have
arranged for the investment of, a total of $35.4 million since 2005 through
December 31, 2008, and have since January 2009 demonstrated a willingness to
fund the Company’s immediate capital requirements for an additional $3.8
million, there can be no assurance that they will continue to do
so.


6





Given the
need to raise additional funds, potentially in the immediate short term, we are
actively engaged in discussions with potential financing sources in addition to
QAT in order to fund the expected cash requirements generated by future
operations, capital expenditures and potential acquisitions.  Although
the Company has previously been able to raise capital as needed, such capital
may not continue to be available at all, or if available, that the terms of such
financing may be dilutive to existing shareholders or otherwise on terms not
favorable to the Company or existing shareholders. Further, the current global
financial situation may offer additional challenges to raising the required
capital.  If we are unable to secure additional capital, as
circumstances require, we may not be able to continue operations. As of March
31, 2009, these conditions raised substantial doubt from our auditors as to our
ability to continue as a going concern.





NOTE 3 Significant
Accounting Policies





Basis of Presentation -
Interim Financial Information





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-Q. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and related notes as
included in the Company's 2008 Form 10-K. These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements on Form 10-K. In the opinion of management, the accompanying
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and contain all adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation of the Company’s financial position, results of operations and
cash flows as of and for the periods presented.





The
results of operations for the three months ended March 31, 2009 are not
necessarily indicative of the results to be expected for the entire
year.





Principles of
Consolidation





The
accompanying consolidated financial statements for the three months ended March
31, 2009 and December 31, 2008 include the accounts of Elephant Talk
Communications, Inc., its wholly-owned subsidiary Elephant Talk Europe Holding
B.V., its wholly-owned subsidiary Elephant Talk Communication Holding AG, its
wholly-owned subsidiary Elephant Talk Communications S.L.U., its wholly-owned
subsidiary Elephant Talk Mobile Services B.V.( formerly known as Cardnet
Clearing Services B.V), its wholly-owned subsidiary Elephant Talk Communication
Austria GmbH, its wholly-owned subsidiary Vocalis Austria GmbH, its wholly-owned
subsidiary Elephant Talk Communications Italy S.R.L., its wholly-owned
subsidiary ET-Stream GmbH, its wholly-owned subsidiary Elephant Talk
Communication Carrier Services GmbH, its wholly-owned subsidiary Elephant Talk
Communication (Europe) GmbH, its wholly-owned subsidiary Elephant Talk
Communication Schweiz GmbH, its wholly-owned subsidiary Moba Consulting Partners
B.V.,its majority owned (51%) subsidiary Elephant Talk Communications Premium
Rate Services Netherlands B.V., its wholly-owned subsidiary Elephant Talk
Communications France S.A.S., its majority owned (51%) subsidiary Elephant Talk
Communications PRS U.K. Limited, its wholly-owned subsidiary Elephant Talk
Communications Luxembourg SA, its wholly-owned subsidiary Elephant Talk Global
Holding B.V., its wholly-owned subsidiary Elephant Talk Business Services
W.L.L., its wholly-owned subsidiary Guangzhou Elephant Talk Information
Technology Limited., its wholly-owned Elephant Talk Caribbean B.V., its majority
owned (51%) subsidiary ET-UTS N.V., its wholly-owned subsidiary Elephant Talk
Limited, its wholly-owned subsidiary Full Mark Technology Ltd., its wholly-owned
subsidiary Jinfuyi Technology Limited, its majority owned (51%) subsidiary
Elephant Talk Middle East & Africa (Holding) W.L.L., its majority owned
(51%) subsidiary Elephant Talk Middle East & Africa (Holding) Jordan L.L.C.,
its majority owned (50.49%) subsidiary Elephant Talk Middle East & Africa
Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk Middle
East & Africa FZ-LLC.





For
comparative purposes, certain prior period amounts have been reclassified to
facilitate comparisons with the current year financial
reporting.


7





Foreign Currency
Translation





The
functional currency was Euros for its wholly-owned subsidiary Elephant Talk
Europe Holding B.V. and subsidiaries, and Euros for its wholly-owned subsidiary
Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned
subsidiary Elephant Talk Limited. The financial statements of the Company were
translated to USD using period-end exchange rates as to assets and liabilities
and average exchange rates as to revenues and expenses, and capital accounts
were translated at their historical exchange rates when the capital transaction
occurred. In accordance with SFAS 52, net gains and losses resulting from
translation of foreign currency financial statements are included in the
statements of stockholder’s equity as other comprehensive income (loss). Foreign
currency transaction gains and losses are included in consolidated income
(loss). The accumulated other comprehensive income as of March 31, 2009 and
December 31, 2008 was $279,042 and $946,834, respectively. The foreign currency
translation gain (loss) for the three months periods ended March 31, 2009 and
2008 were  ($667,792) and $1,110,632, respectively.




Use of
Estimates





The
preparation of the accompanying financial statements conforms with accounting
principles generally accepted in the United States of America and requires
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period.  Actual results
could differ materially from those estimates and assumptions.





Cash and Cash
Equivalents





For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time of
purchase to be cash equivalents.





Restricted
Cash





Restricted
cash represents cash deposited as bank guarantee for interconnects.




Accounts Receivables,
net





The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains an allowance for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these allowances. Allowances are recorded primarily on
a specific identification basis.  As of March 31, 2009 and December
31, 2008 the allowance for doubtful accounts was $480,275 and $503,102,
respectively.





Revenue Recognition and
Deferred Revenue





The
Company's revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) 104. Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of arrangement exists, the service is
performed and the collectability of the resulting receivable is reasonably
assured. The Company derives revenue from activities as a fixed-line and mobile
services provider with its network and its own switching technology. Revenue
represents amounts earned for telecommunication services provided to customers
(net of value added tax and inter-company revenue).  The Company
recognizes revenue from prepaid calling cards as the services are
provided.  Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as deferred revenue. Deferred
revenue represents amounts received from the customers against future sales of
services since the Company recognizes revenue upon performing the services.
Deferred revenue was $220,295 and $220,058 as of March 31, 2009 and December 31,
2008, respectively.





Cost of
service





Cost of
service include origination, termination, network and billing charges from
telecommunications operators, outpayment costs to content and information
providers, network costs, data centre costs, facility cost of hosting network
and equipment and cost in providing resale arrangements with long distance
service providers, cost of leasing transmission facilities, international
gateway switches for voice and data transmission services.


8





Reporting
Segments





Statement
of Financial Accounting Standards (“SFAS”) No. 131,“Disclosures about segments
of an enterprise and related information” (SFAS No.131). SFAS No. 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performances. The Company allocates its resources and assesses the performance
of its sales activities based upon geographic locations of its
subsidiaries.





Stock-based
Compensation





Effective
January 1, 2006, we adopted the provisions of the Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payments," (SFAS 123(R)), using
the prospective approach. As a result, we recognize stock-based compensation
expense for only those awards that are granted subsequent to December 31, 2005
and any previously existing awards that are subject to variable accounting,
including certain stock options that were exercised with notes in 2003, until
the awards are exercised, forfeited, or contractually expire in accordance with
the prospective method and the transition rules of SFAS 123(R). Under SFAS
123(R), stock-based awards granted after December 31, 2005, are recorded at fair
value as of the grant date and recognized as expense over the employee's
requisite service period (the vesting period, generally four years), which we
have elected to amortize on a straight-line basis. Options exercised with a note
receivable in 2003 continue to be accounted for under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25).





Income
Taxes





The
Company accounts for income taxes under SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). This statement requires the recognition of deferred tax
assets and liabilities for the future consequences of events that have been
recognized in the Company’s financial statements or tax returns. The measurement
of the deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and the tax bases
of the Company’s assets and liabilities result in a deferred tax asset, SFAS 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or the
entire deferred tax asset will not be realized. As part of the process of
preparing our consolidated financial statements, we are required to estimate our
income tax expense in each of the jurisdictions in which we operate. In the
ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of revenue sharing and reimbursement
arrangements among related entities, the process of identifying items of revenue
and expenses that qualify for preferential tax treatment and segregation of
foreign and domestic income and expense to avoid double taxation. We also assess
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting differences. These differences result
in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We may record a valuation allowance to reduce our
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. Although we believe that our estimates are reasonable and
that we have considered future taxable income and ongoing prudent and feasible
tax strategies in estimating our tax outcome and in assessing the need for the
valuation allowance, there is no assurance that the final tax outcome and the
valuation allowance will not be different than those that are reflected in our
historical income tax provisions and accruals.





In July
2006, the Financial Accounting Standards Board issued Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”). FIN 48 prescribes a recognition threshold and measurement
methodology to recognize and measure an income tax position taken, or expected
to be taken, in a tax return. The evaluation of a tax position is based on a
two-step approach. The first step requires an entity to evaluate whether the tax
position would “more likely than not” be sustained upon examination by the
appropriate taxing authority. The second step requires the tax position be
measured at the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. In addition, previously
recognized benefits from tax positions that no longer meet the new criteria
would be derecognized. The cumulative effect of applying the provisions of FIN
48 are reported as an adjustment to the opening balance of retained earnings in
the period of adoption. FIN 48 is effective for fiscal years beginning after
December 15, 2006.





We have
filed or are in the process of filing tax returns that are subject to audit by
the respective tax authorities. Although the ultimate outcome is unknown, we
believe that any adjustments that may result from tax return audits are not
likely to have a material, adverse effect on our consolidated results of
operations, financial condition or cash flows.


9





Comprehensive
Income/(Loss)


Comprehensive
income includes all changes in equity during a period from non-owner sources.
Other comprehensive income refers to gains and losses that under accounting
principles generally accepted in the United States are recorded as an element of
stockholders’ equity but are excluded from net income. For the three months
ended March 31, 2009 and 2008 the Company’s comprehensive income/(loss)
consisted of its net loss and foreign currency translation
adjustments.




Intangible
Assets





In
accordance with SFAS No. 142, intangible assets are carried at cost less
accumulated amortization and impairment charges. Intangible assets are amortized
on a straight-line basis over the expected useful lives of the assets, between
three and ten years. Other intangible assets are reviewed for impairment in
accordance with SFAS No. 144, “Accounting for Impairment or Disposal of
Long-Lived Assets,” annually, or whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Measurement of any impairment loss for long-lived assets and identifiable
intangible assets that management expects to hold and use is based on the amount
of the carrying value that exceeds the fair value of the asset.





Property and Equipment,
Internally Developed and third party Software





Property
and equipment are initially recorded at cost.  Additions and
improvements are capitalized, while expenditures that do not enhance the assets
or extend the useful life are charged to operating expenses as
incurred.  Included in property and equipment are certain costs
related to the development of the Company’s internally developed software
technology platform.  The Company has adopted the provisions of the
AICPA Statement of Position No. 98-1 “Accounting for Costs of Computer Software
Developed or Obtained for Internal Use” (SOP 98-1).





The
Company has capitalized certain computer software development costs upon the
establishment of technological feasibility. Technological feasibility is
considered to have occurred upon completion of a detailed program design that
has been confirmed by documenting the product specifications, or to the extent
that a detailed program design is not pursued, upon completion of a working
model that has been confirmed by testing to be consistent with the product
design. Depreciation applied using the straight-line method over the estimated
useful lives of the assets once the assets are placed in service. Once a new
functionality or improvement is released for operational use, the asset is moved
from the property and equipment category “projects under construction” to a
property and equipment asset subject to depreciation in accordance with the
principle described in the previous sentence.





Fair Value
Measurements





Effective
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements. The adoption of this statement with
respect to the Company’s financial assets and liabilities, did not impact the
Company’s consolidated results of operations, financial condition and
disclosures.





The
carrying value of the Company’s financial assets and liabilities, including cash
and cash equivalents, accounts payable and accrued liabilities, are carried at
historical cost basis and approximate fair value because of the short-term
nature of these instruments. The carrying value of the Company’s notes payable
approximates fair value based on management’s best estimate of the interest
rates that would be available for similar debt obligations having similar terms
at the balance sheet date.





Recently
Issued Accounting Pronouncements





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments in the financial statements. The most significant change the FSP
brings is a revision to the amount of other-than-temporary loss of a debt
security recorded in earnings. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual reporting periods ending after June 15, 2009. The Company
does not believe that the implementation of this standard will have a material
impact on its consolidated financial statements.


10





In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. This FSP provides additional
guidance for estimating fair value in accordance with FASB Statement No. 157,
Fair Value Measurements, when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FSP FAS 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and is applied
prospectively. The Company does not believe that the implementation of this
standard will have a material impact on its consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments. This FSP amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company does not believe that the implementation
of this standard will have a material impact on its consolidated financial
statements.




NOTE 4 Long term
earnest deposit




Long term
earnest deposits to various telecom carriers during the course of its operations
amount to $292,593 as at March 31, 2009 compared with $310,356 as of December
31, 2008.  The deposits are refundable at the termination of the
business relationship with the carriers.




NOTE 5 Prepaid expenses
and other current assets




Prepaid
expenses and other current assets recorded as $2,265,618 as of March 31, 2009,
compared with $1,916,967 as of December 31, 2008.  The 2008 amount
consists of prepaid VAT and unvested stock related compensation for management
and consultants.





NOTE 6 Property &
Equipment





The
Company has evaluated the nature of its systems engineering and software
programming activities and relevance to its business activities and has
concluded that the reclassification of these investments from Intangibles to
Property and Equipment more accurately reflects the nature and financial
reporting of the Company. Typically these investments pertain to the
Company’s:





·
            Intelligent
      Network (IN) platform


·
            CRM
      software


·
            Mediation,
      Rating & Pricing engine


·
            Operations
      and Business Support software


·
            Network
      management tools




11




Property
and equipment at March 31, 2009 and December 31, 2008 consist of:





Average
                            Estimated Useful
                            Lives
                          
                          
                          March 31, 2009
                          
                          
                          December 31,
                            2008Leasehold
      improvements
                          
                          
                          3
                          
                          
                          $
                          0
                          
                          
                          $
                          10,433Furniture
      and fixtures
                          
                          
                          5
                          
                          
                          
                          85,400
                          
                          
                          
                          78,278Computer,
      communication and network equipment
                          
                          
                          3 -
      10
                          
                          
                          
                          6,660,654
                          
                          
                          
                          6,395,032Software
                          
                          
                          5
                          
                          
                          
                          4,487,988
                          
                          
                          
                          4,632,430Automobiles
                          
                          
                          5
                          
                          
                          
                          124,794
                          
                          
                          
                          133,202Construction
      in progress
                          
                          
                          
                          
                          
                          
                          1,383,186
                          
                          
                          
                          1,047,24812,742,023
                          
                          
                          
                          12,296,623Less:
      accumulated depreciation
                          
                          
                          
                          
                          
                          
                          (6,069,957
                          )
                          
                          
                          (5,951,510
                          )$
                          6,672,066
                          
                          
                          $
                          6,345,113





Total
depreciation expense for the three months ended March 31, 2009 and 2008 was
$443,330 and $223,292 respectively.





NOTE 7 Intangible
Assets - Customer Contracts, Licenses and Interconnects





Intangible
assets include customer contracts, telecommunication licenses and integrated,
multi-country, centrally managed switch-based interconnects.





Average
                                  Estimated Useful
                                  Lives
                                
                                
                                March 31, 2009
                                
                                
                                December 31,
                                  2008Customer
      Contracts, Licenses & Interconnect
                                
                                
                                5 -
      10
                                
                                
                                $
                                11,558,028
                                
                                
                                $
                                12,104,634Less:
      Accumulated Amortization and impairment charges
                                
                                
                                
                                
                                
                                
                                (7,514,529
                                )
                                
                                
                                (7,642,765
                                )$
                                4,043,499
                                
                                
                                $
                                4,461,869





Intangible
asset amortization expense for the three months ended March 31, 2009 and 2008
was $186,852 and $451,165 respectively.





NOTE
8 Overdraft




In 2004,
Elephant Talk Ltd. executed a credit facility with a bank in Hong Kong pursuant
to which Elephant Talk Ltd. has borrowed funds from the bank. As of March 31,
2009 the overdraft balance included accrued interest amounted to $229,931
compared to $223,663 as of December 31, 2008.  The interest rate and
default payment interest rate were charged at 2% and 6% per annum above the
Lender’s Hong Kong Dollar Prime Rate quoted by the Lender from time to time. The
Company has not guaranteed the credit facility or is otherwise obligated to pay
funds drawn upon it on behalf of Elephant Talk Ltd. As of March 31, 2009 Moba
Consulting Partners B.V. had an overdraft of $92,976 compared to $99,240 as of
December 31, 2008 on one of the company’s bank accounts.




NOTE
9 Accrued Expenses





As of
March 31, 2009 and December 31, 2008, the accrued expenses comprised of the
following:





March 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Accrued
      Selling, General & Administrative expenses
                    
                    $
                    262,299
                    
                    
                    $
                    513,722Placement
      fees
                    
                    
                    -
                    
                    
                    
                    491,100Accrued
      cost of sales and network
                    
                    
                    36,179
                    
                    
                    
                    14,140Accrued
      taxes
                    
                    
                    773,588
                    
                    
                    
                    227,896Accrued
      interest payable
                    
                    
                    481,152
                    
                    
                    
                    439,290Other
                    
                    
                    176,580
                    
                    
                    
                    203,856Total
      accrued expenses
                    
                    $
                    1,729,799
                    
                    
                    $
                    1,890,004


12





NOTE 10 Advances from
third parties





As of
March 31, 2009 and December 31, 2008 the Company had $280,633 and $274,762,
respectively as payable to third parties related to two litigations as mentioned
in footnote 19.





NOTE 11 Due to related
parties





The
Company received secured interest bearing loans at 12% p.a. from QAT II
Investments SA, an entity that certain shareholders and officers have an
ownership interest in the company. Unless the company and QAT II arrive at an
investment agreement, these amounts are due latest on June 30,2009.
Further details are provided in this Report in Note 21: Related Party
Transaction.





Due to
related parties amount to $2,690,600 as of March 31, 2009 compared with $0 as of
December 31, 2008.





NOTE
12Loans
Payable





Loans
payable at March 31, 2009 and December 31, 2008 are summarized as
follows:





March 31,
                    2009
                  
                  
                  December 31, 2008Installment loan payable
      due December 24, 2006, secured by personal
                    guarantees
      of two shareholders, a former director, and a third party
                  
                  $
                  320,528
                  
                  
                  $
                  320,520Installment
      loan payable, bank, monthly principal and interest payments of $2,798
      including interest at bank's prime rate plus 1.5% per annum, 8.25% at
      November 30, 2008, due December 24, 2011, secured by personal guarantees
      of three shareholders and a former director
                  
                  
                  191,521
                  
                  
                  
                  191,516Installment
      loan payable, bank, monthly principal and interest payments of $1,729
      including interest at bank's prime rate plus 1.5% per annum, 8.25% at
      November 24, 2008, due June 28, 2009, secured by personal guarantees of
      three shareholders and a former director
                  
                  
                  85,156
                  
                  
                  
                  85,154Term
      loan payable, bank, monthly payments of interest at bank's prime rate,
      7.0% at March 31, 2009
                  
                  
                  283,853
                  
                  
                  
                  283,845Total
                  
                  $
                  881,058
                  
                  
                  $
                  881,035





Elephant
Talk Ltd has executed a credit facility with a bank in Hong Kong since June 29,
2004 under which Elephant Talk Ltd has borrowed funds from the bank under three
installment loans and a term loan arrangement. Elephant Talk Ltd is in default
of making loan payments on all the loans and has recorded an accrued interest
amounting to $452,236 as of March 31, 2009. As a result of the default, the
entire loan balance outstanding at December 31, 2008 is due and payable to the
bank. Furthermore, Elephant Talk Ltd is obligated to pay a default interest rate
at the rate of 4.25% per annum in addition to the prescribed interest rate of
the installment loans and term loan. Elephant Talk Ltd has recorded $1,580.80
and $26,598 in interest expense and default interest expense, respectively, on
loans payable as of March 31, 2009 and March 31, 2008 and $2,728 and $25,285 in
interest expense as of March 31, 2009 and March 31, 2008, respectively. The
Company has not guaranteed the credit facility or is otherwise obligated to pay
funds drawn upon it on behalf of Elephant Talk Ltd.




NOTE 13 Long term
debt





The company’s 51% owned subsidiary
ET-UTS N.V. has received $410,527 in interest bearing (8% per annum) unsecured
loans from UTS N.V., the 49% shareholder in the subsidiary. No maturity has been
fixed.





NOTE 14 Stockholders’
Equity





(A)
Common Stock





The
Company is presently authorized to issue 250,000,000 shares of no par value
Common Stock. The Company currently has 53,920,885 common shares issued and
outstanding as of March 31, 2009.  The shares issued and outstanding as per
the stock transfer agent’s records are 54,166,777 and includes 245,900 shares
which were cancelled by the Company prior to 2006. However, these shares were
not returned to the stock transfer agent and never cancelled on records. These
shares have been blocked for trading by the Stock Transfer
Agent.


13





The
following table summarizes the shares issued for the three months ended March
31, 2009:




Number of shares issuedComputation
      of Full Dilution - March 31, 2009December
      31, 2008 Total number of shares issued
                  
                  
                  50,433,260Shares
      Issued for Directors' Compensation
                  
                  
                  2,420,833
                  *Shares
      issued for placement and sign in fee agent (Pending 2008)
                  
                  
                  809,000Shares
      Issued for 2008 Funding
                  
                  
                  476
                  *Shares
      issued for - Services 2009 Public Offering
                  
                  
                  200,000Shares
      issued for placement and sign in fee agent (Pending 2008)
                  
                  
                  57,316
                  *March
      31, 2009 Total number of shares issued
                  
                  
                  53,920,885





The (*)
marked line items add up to the 2008 shares to be issued as per closing December
31, 2008.





NOTE 15 Basic and
Diluted Net Loss Per Share





Net loss
per share is calculated in accordance with the SFAS  No.128 (SFAS
No.128), “Earnings per share”. Basic net loss per share is based upon the
weighted average number of common shares outstanding. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants are
assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. 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 16 Employee
Benefit Plan and Non-Qualified Stock Option and Compensation
Plan





2000
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 160,000 common shares and 160,000 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, 12,000 shares of common stock
and 160,000 stock options remain available for grant at March 31,
2009.





2006
Non-Qualified Stock and Option Compensation Plan





Under
this plan there are as of March 31, 2009, 354,009 stock options outstanding.
There are remaining 600,000 shares and 45,991 stock options available for
grant.





Options
granted generally vest over a 3 year period. Options generally expire 2 years
from the date of vesting.




14




Common
stock purchase options and warrants consisted of the following as of March 31,
2009:





Number of
                  shares
                
                
                Exercise
                  Price
                
                
                Fair ValueOptions:Outstanding
      as of December 31, 2008
                
                
                366,009
                
                
                $
                2.25
                
                
                
                —Granted
      in 2009
                
                
                —
                
                
                
                —
                
                
                
                —Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled/Forfeited
                
                
                12,000
                
                
                
                —
                
                
                
                —Outstanding
      as of March 31, 2009
                
                
                354,009
                
                
                $
                2.25
                
                
                $
                0





The
options were granted with an exercise price of $2.25, the share closing price as
of September 26, 2007. The options will generally vest on December 31, 2009 or
much earlier if there is a change of control in the Company. The options will
expire on December 31, 2011 or later depending on granting date.




The
cancelled/forfeited options during 2009 were granted in 2008.




Following
is a summary of the status of options outstanding at March 31,
2009:




Options outstanding
                      
                      
                      Options exercisableRange of Exercise Prices
                      
                      Total
                        Options
                        Outstanding
                      
                      Weighted
                        Average
                        Remaining
                        Life
                        (Years)
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Options
                        Exercisable
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price$
                      2.25
                      
                      
                      354,009
                      
                      3.10
      years
                      
                      $
                      2.25
                      
                      
                      
                      0
                      
                      
                      $
                      2.25


At March
31, 2009 the total compensation cost related to unvested stock-based awards
granted to employees under the provisions of SFAS 123(R) and the Company's
2006 stock award plan, but not yet recognized was approximately $0.2
million.




2008
Long-Term Incentive Plan




The 2008
plan was adopted on January 15, 2008, and approved by our shareholders on the
same date at our annual meeting. This incentive plan authorizes awards of up to
5,000,000 shares of common stock, in the form of incentive and non-qualified
stock options, stock appreciation rights, performance units, restricted stock
awards and performance bonuses.  The amount of common stock underlying
the awards to be granted remained the same after the 25 to one reverse
stock-split.  As of March 31, 2009, a total of 359,409 stock options
had been granted under this plan. Options granted generally begin vesting over a
2 year period. Options generally expire 2 years from the date of
grant.




Common stock purchase options and
warrants consisted of the following as of March 31, 2009:




Number of
                  shares
                
                
                Exercise
                  Price
                
                
                Fair ValueOptions:Outstanding
      as of December 31, 2008
                
                
                366,009
                
                
                $
                0.60
                
                
                $
                36,601Granted
      in 2009
                
                
                5,400
                
                
                $
                0.60
                
                
                $
                540Exercised
                
                
                —
                
                
                
                —
                
                
                
                —Cancelled/Forfeited
                
                
                12,000
                
                
                $
                0.60
                
                
                $
                1,200Outstanding
      as of March 31, 2009
                
                
                359,409
                
                
                $
                0.60
                
                
                $
                35,941





At March
31, 2009 the share-price at closing was $0.70 which results in a $0.10 fair
value per stock option and $35,941 for all common stock options granted in this
plan.




15




Following
is a summary of the status of options outstanding at March 31,
2009:




Options outstanding
                    
                    
                    Options exercisableRange of Exercise Price
                    
                    Total
                      Options
                      Outstanding
                    
                    Weighted
                      Average
                      Remaining
                      Life
                      (Years)
                    
                    Weighted
                      Average
                      Exercise
                      Price
                    
                    
                    Options
                      Exercisable
                    
                    
                    Weighted
                      Average
                      Exercise
                      Price$
                    0.60
                    
                    
                    359,409
                    
                    4.64
      years
                    
                    $
                    0.60
                    
                    
                    
                    —
                    
                    
                    
                    —





The
average assumptions used so far for the options granted in 2009 using the
Black-Scholes options model are: volatility of 167%, term of 3 years and a Risk
Free Interest Rate assumption of 1.25%. The expected dividend yield is
zero.




At
December 31, 2008 the total compensation cost related to unvested stock-based
awards granted to employees under the provisions of SFAS 123(R) and the
Company's 2008 stock award plan, but not yet recognized was approximately $0.1
million.




Stock-Based
Compensation Expense




Under the
provisions of SFAS 123(R), the Company recorded for the three months ended March
31, 2009 $269,460  in stock-based compensation expense for management
shares, Non-Qualified Stock and Option Compensation Plan and shares issued for
consultancy. For the comparable period in 2008 the expensing was $161,487.. The
Company utilized the Black-Scholes valuation model for estimating the fair value
of the stock-based compensation granted after the adoption of SFAS
123(R).




NOTE
17 Commitments





As of
March 31, 2009 commitments of the Company relating to leases, co-location,
interconnect and office rents,




December
      31, 2009
                            
                            $
                            2,147,933December
      31, 2010
                            
                            
                            1,746,312December
      31, 2011
                            
                            
                            1,679,702December
      31, 2012
                            
                            
                            1,403,279December
      31, 2013
                            
                            
                            82,799Total
                            
                            $
                            7,060,025





NOTE
18Minority
interests in subsidiaries





The
Company had minority interests in several of its subsidiaries. The balance of
the minority interests as of March 31, 2009 and December 31, 2008 were as
follows:




Minority Interest Balance at Subsidiary
                        
                        Minority Interest %
                        
                        
                        March
                          31, 2009
                        
                        
                        December 31, 2008ETC
      PRS UK
                        
                        
                        49
                        %
                        
                        $
                        9,688
                        
                        
                        $
                        10,807ETC
      PRS Netherlands
                        
                        
                        49
                        %
                        
                        
                        129,407
                        
                        
                        
                        144,344ET
      ME&A Holding WLL
                        
                        
                        49
                        %ET
      Bahrain WLL
                        
                        
                        1
                        %
                        
                        
                        1,513
                        
                        
                        
                        1,388ET
      ME&A FZ LLC
                        
                        
                        49.46
                        %
                        
                        
                        35,240
                        
                        
                        
                        35,227Total
                        
                        
                        
                        
                        
                        $
                        175,848
                        
                        
                        $
                        191,767




NOTE
19 Litigation




(a)
Beijing Chinawind


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 Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), 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 alleged
that a.) ETGD failed to pay the remaining consideration of $787,748 under an
Equity Transfer Agreement, dated January 4, 2006 (the “CW 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.)
ETGD induced the minority shareholders of Beijing Chinawind to accept, pursuant
to the CW Agreement, consideration of $1,000,000 through the issuance of 400,000
common shares of the Company valued at $2.25 per common share. The lawsuit
further alleged 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


16





The
judgment of the Beijing Haiding Civil Court was received. On October 18, 2007
the verdict was given in the two cases.  The CW Agreement was
confirmed to be effective. All requests from CW are rejected.  In
addition, the Court confirmed the opinion of ETGD: that the resolutions of the
shareholders meeting of China Wind held on January 27, 2007 are invalid, as the
meeting was not conducted in a proper way.





On
February 4, 2009, our board of directors decided to pursue no longer our
interests in the concerned company, as the business perspectives are no longer
seen as of value for us.





(b)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.


As
previously described in our 2004 Annual Report we and New Times Navigation
Limited mutually agreed to terminate this purchase agreement. We returned the
received shares of New Times Navigation Limited to the concerned shareholders
and received back 90,100 of our common stock out of the 204,000 issued by us for
the purchase. In addition we issued 37 unsecured convertible promissory notes
for a total amount of $3,600,000. On our request 21 notes were returned with a
total value of $2,040,000.





We are
presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return a
total of 113,900 common shares (valued at $381,565) and also to have them return
the remaining 18 unsecured convertible promissory notes representing a total
amount of $1,740,000 and rescind the purchase agreement. The case is currently
pending.





(c)
Russelle Choi Litigation


On or
about September 12, 2008, an action was commenced against the Company by
Russelle Choi ("Choi"), our former CEO and director, in the California Superior
Court, Orange County, in a matter entitled Choi v. Elephant Talk Communications,
Inc., Case No. 30-2008-00111874.  The complaint alleges that we
breached a termination and consultancy agreement between us and Choi, resulting
in damages of approximately $140,000, 120,000 stock options and attorney’s fees
and costs. We have denied all material allegations of Choi’s complaint, and have
asserted various affirmative defenses. We have placed Choi and the Court on
notice of our intent to file a counterclaim against Choi for breach of fiduciary
duty and fraud potentially giving rise to damages in excess of Choi’s claims
against us.





(d)
Manu Ohri Litigation


On March 26, 2009, an action was
commenced against us in the state of California by Manu Ohri, our former Chief
Financial Officer, alleging a breach of written contract, a breach of oral
contract, and a common count for services rendered. The suit requests, among
other things, $427,816 in unpaid severance payments, $56,951 owed under an oral
consulting agreement, and stock options payable under the oral consulting
agreement with a net value of $622,000.  We intend to dispute these
claims


17





NOTE 20 Segment
Information




Three
months ended March 31, 2009




EUROPENetherlands
                          
                          
                          Spain
                          
                          
                          Switzerland
                          
                          
                          Others
                          
                          
                          Total
                          
                          
                          Far
      East
                            Hong
      Kong / China
                          
                          
                          Middle
      East
                          
                          
                          The
      Americas
                          
                          
                          TOTALRevenues
      from unaffiliated customers:
                          
                          $
                          7,167,378
                          
                          
                          $
                          479,596
                          
                          
                          $
                          1,326,979
                          
                          
                          $
                          160,466
                          
                          
                          $
                          9,134,419
                          
                          
                          $
                          4,878
                          
                          
                          $
                          289,587
                          
                          
                          $
                          -
                          
                          
                          $
                          9,428,884Operating
      income (loss)
                          
                          $
                          (258,790
                          )
                          
                          $
                          8,924
                          
                          
                          $
                          (850,525
                          )
                          
                          $
                          (88,490
                          )
                          
                          $
                          (1,188,881
                          )
                          
                          $
                          (133,370
                          )
                          
                          $
                          (29,527
                          )
                          
                          $
                          (729,925
                          )
                          
                          $
                          (2,081,703
                          )Net
      income (loss):
                          
                          $
                          (258,648
                          )
                          
                          $
                          8,924
                          
                          
                          $
                          (850,475
                          )
                          
                          $
                          (88,523
                          )
                          
                          $
                          (1,188,722
                          )
                          
                          $
                          (366,493
                          )
                          
                          $
                          (29,425
                          )
                          
                          $
                          (559,681
                          )
                          
                          $
                          (2,144,321
                          )Identifiable
      assets
                          
                          $
                          4,737,281
                          
                          
                          $
                          1,506,734
                          
                          
                          $
                          10,301,027
                          
                          
                          $
                          559,813
                          
                          
                          $
                          17,104,854
                          
                          
                          $
                          259,104
                          
                          
                          $
                          850,286
                          
                          
                          $
                          2,059,342
                          
                          
                          $
                          20,273,586Depreciation
      and amortization & impairment charge
                          
                          $
                          (24,364
                          )
                          
                          $
                          (44,529
                          )
                          
                          $
                          (383,758
                          )
                          
                          $
                          3,849
                          
                          
                          $
                          (448,802
                          )
                          
                          $
                          (11,916
                          )
                          
                          $
                          (10,360
                          )
                          
                          $
                          (159,104
                          )
                          
                          $
                          (630,182
                          )Capital
      expenditure
                          
                          $
                          23,152
                          
                          
                          $
                          1,184
                          
                          
                          $
                          549,232
                          
                          
                          $
                          -
                          
                          
                          $
                          573,568
                          
                          
                          $
                          2,827
                          
                          
                          $
                          -
                          
                          
                          $
                          155,240
                          
                          
                          $
                          731,634





Three
months ended March 31, 2008




EUROPENetherlands
                        
                        
                        Spain
                        
                        
                        Switzerland
                        
                        
                        Others
                        
                        
                        Total
                        
                        
                        Far
      East
                          Hong
      Kong / China
                        
                        
                        Middle
      East
                        
                        
                        The
      Americas
                        
                        
                        TOTALRevenues
      from unaffiliated customers:
                        
                        $
                        8,715,093
                        
                        
                        $
                        694,283
                        
                        
                        $
                        2,219,107
                        
                        
                        $
                        125,120
                        
                        
                        $
                        11,753,603
                        
                        
                        $
                        3,677
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        11,757,280Operating
      income (loss)
                        
                        $
                        (745,051
                        )
                        
                        $
                        146,250
                        
                        
                        $
                        (462,067
                        )
                        
                        $
                        (212,681
                        )
                        
                        $
                        (1,273,549
                        )
                        
                        $
                        (241,067
                        )
                        
                        $
                        (61,691
                        )
                        
                        $
                        (672,666
                        )
                        
                        $
                        (2,248,973
                        )Net
      income (loss):
                        
                        $
                        (730,507
                        )
                        
                        $
                        146,250
                        
                        
                        $
                        (462,067
                        )
                        
                        $
                        (212,681
                        )
                        
                        $
                        (1,259,005
                        )
                        
                        $
                        (420,525
                        )
                        
                        $
                        (61,691
                        )
                        
                        $
                        (834,767
                        )
                        
                        $
                        (2,575,988
                        )Identifiable
      assets
                        
                        $
                        8,551,301
                        
                        
                        $
                        1,952,685
                        
                        
                        $
                        12,428,849
                        
                        
                        $
                        1,308,209
                        
                        
                        $
                        24,241,044
                        
                        
                        $
                        203,994
                        
                        
                        $
                        608,359
                        
                        
                        $
                        5,888
                        
                        
                        $
                        25,059,285Depreciation
      and amortization
                        
                        $
                        (161,504
                        )
                        
                        $
                        (58,811
                        )
                        
                        $
                        (437,735
                        )
                        
                        $
                        (6,708
                        )
                        
                        $
                        (664,758
                        )
                        
                        $
                        (9,698
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        (674,456
                        )Capital
      expenditure
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        197,319
                        
                        
                        $
                        -
                        
                        
                        $
                        197,319
                        
                        
                        $
                        27,434
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        224,753




NOTE 21 Related Party
Transactions





Loan
agreements




On
January 27, 2009, QAT II Investments SA (“QAT II), a closed-end sister fund of
QAT Investments SA, entered into a loan agreement with the Company whereby QAT
II  agreed to provide the Company with $1,409,700. According to the
terms, the loan will bear interest at a rate of twelve percent (12%) per annum
and shall be repaid either: (1) if QAT II  and the Company sign an
investment agreement, the amount due under the loan will be reduced by the
investment amount pursuant to the investment agreement, or (2) if no investment
agreement is executed, the principal amount of the loan plus interest is due and
payable by June 30, 2009.  On February 15, February 23, and March 31, 2009
QAT II  entered into three loan agreements with the Company whereby
QAT II  agreed to provide the Company with $643,650, $637,250 and
$660,400 respectively.  The outstanding principal of $3,351,000 and
interest at a rate of twelve percent (12%) per annum shall become immediately
due and payable in the event the Company fails to make required payments of
principal and interest, or otherwise breaches the agreements and fails to cure
such breach upon twenty (20) days notice, or if it disposes of its properties or
assets without QAT II ’ prior consent, or if it files a petition for bankruptcy
or otherwise resolves to wind up its affairs.  All agreements and
amounts were entered in Euro’s. Accordingly, deviations may occur with prior 8-K
filings due to different exchange rate usage.




In
connection with the loan agreements, on March 30, 2009 we entered into a
security agreement (the “Security Agreement”) with QAT II .  The
Security Agreement granted QAT II  a security interest in the revenues
received by us under a Spanish MVNE Agreement which management expects to be
entered into by the parties (the “MVNE Agreement”).   The Security
Agreement will terminate when all amounts due under the loan agreements have
been paid in full by Registrant.




Payments made in connection with the
2008 Financing




On March
31, 2008, in lieu of cash compensation owed to QMG and Amelia for their services
in connection with the 2008 Financing, we issued 34,000 shares of common
stock to QAT (at the request of QMG) and 33,000 shares of common stock to
Amelia.


18


Due
Diligence Agreement.




On
February 23, 2009, the Company entered into a non-binding heads of terms
agreement (the “HOT Agreement”) with ValidSoft Limited (“ValidSoft”), a
corporation organized under the laws of the Republic of
Ireland.  Under the proposed terms of the HOT Agreement the Company
expects to enter into a definitive agreement to acquire 50.1% of ValidSoft (the
“First Acquisition Agreement”) by effecting a subscription for new shares
in ValidSoft as well as a purchase of shares of ValidSoft from existing
ValidSoft shareholders.




In
connection with the potential acquisition of ValidSoft, on March 16, 2009, the
Company entered into an agreement with QMG under which QMG will conduct due
diligence of ValidSoft in exchange for an amount equal to 3% of the
consideration paid by the Company under the First Acquisition
Agreement.




Stock issuance




On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment.  As a result of the Company’s private placement of
securities in excess of $1.0 million, RWC is additionally entitled, as an
Incentive Payment, approximately $451,915 in cash and was issued warrants to
purchase 338,029 shares of the Company’s common stock at $1.05 per share,
warrants to purchase 338,029 shares of the Company’s common stock at $1.26 per
share and warrants to purchase 169,015 shares of the Company’s common stock at
$1.47 per share. In lieu of the cash payment RWC accepted 742,000 shares of our
common stock, based on a conversion price of $0.60 per share.




NOTE
22 Subsequent Events - Related Party Transactions





Loan
agreements




On May
4th
2009, QAT II , a closed-end fund of QAT Investments, entered into a loan
agreement with the Company whereby QAT II will provide the Company with $
462,253.  According to the terms, the loan will bear interest at a rate of
twelve percent (12%) per annum and shall be repaid either: (1) if QAT II and the
Company sign an investment agreement, the amount due under the loan will be
reduced by the investment amount pursuant to the investment agreement, or (2) if
no investment agreement is executed, the principal amount of the loan plus
interest is due and payable by June 30, 2009. The agreement and amount were
entered in Euro’s.  Further terms and conditions as mentioned in NOTE
21 above as well as Exhibit 10.1




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




Forward-Looking
Statements




Any
forward looking statements made herein are based on current expectations of the
Company, involve a number of risks and uncertainties and should not be
considered as guarantees of future performance. The factors that could cause
actual results to differ materially include: interruptions or cancellation of
existing contracts, inability to integrate acquisitions, impact of competitive
products and pricing, product demand and market acceptance risks, the presence
of competitors with greater financial resources than the Company, product
development and commercialization risks, changes in governmental regulations,
and changing economic conditions in developing countries and an inability to
arrange additional debt or equity financing. More information about factors that
potentially could affect the Company's financial results is included in the
Company's filings with the Securities and Exchange Commission, including its
Annual Report on Form 10-K for the year ended December 31, 2008.




The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this
document.





Overview





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and the other financial information included elsewhere in this
document.





Telecom
infrastructure & network


We
currently operate a switch-based telecom network with national licenses and
direct fixed line interconnects with the Incumbents/National Telecom Operators
in seven (7) European countries, one (1) in the Middle East (Bahrain), and
partnerships with telecom operators in Scandinavia, Poland and Germany, and
France. Codec and media streaming servers are currently located in six centers
geographically spread around the world.


19





Business
Support and Operational Support System/IN/CRM-Billing platform





Together
with the centrally operated and managed IN-CRM-Billing platform, we offer
geographical, premium rate, toll free, personal, nomadic and VoIP numbers.
Services are primarily provided to the business market and include traditional
telecom services, VOIP, media streaming and distribution including the necessary
billing and collection. Through our European and Chinese development centers, we
develop in-house telecom and media related systems and software.





Mobile
Services (MVNE/MVNO)





As of
2007, we positioned ourselves in Europe as a MVNE to MNO’s and MVNO’s offering a
wide range of Mobile Enabling/Enhancing services through sophisticated,
proprietary technology supported by multi-country operations with a focus on
B-B, outsourcing /partnering strategy. Important milestones in this respect
are:





1. September 11,
2008. Letter of Intent signed by Vodafone Espaňa S.A.U. and Elephant Talk
Communications, Inc., confirming the award by Vodafone Espaňa to Elephant Talk
of the project of implementation and operation of a new MVNE platform for the
Spanish market. Upon signing of the intended Hosting
Agreement between Parties, Elephant Talk will become the exclusive MVNE for
Vizzavi Spain (part of the Vodafone Group).





2.
September 17, 2008. Hosting Agreement signed between T-Mobile Netherlands BV and
Elephant Talk Holding AG, a 100% affiliate of Elephant Talk Europe Holding BV.
T-Mobile is one of the 3 Mobile Network Operators in the Netherlands. Elephant
Talk will, as exclusive MVNE for T-Mobile, connect MVNO in the Netherlands to
its platform, making use of the mobile network of T-Mobile.





3.
Following the start of our Mobile (MVNE) services in the Netherlands in the
fourth quarter of 2008, we have been able to enter into a number of Heads of
Agreements with MVNO’s in the Netherlands.





4. In
line with the expected convergence of applications and bundling of services we
need to integrate our services with offerings by 3rd party
providers with a uniquely specialized or compatible technology. Although there
can be no assurance as to the completion of the agreement, we have entered into
a Heads of Agreement to acquire controlling interest in Validsoft. Validsoft
provides Telecommunications based Card Fraud Identification and Detection
solutions combined with fully automated resolution capability ideally suited for
mass consumer deployment.





Nature of use of funding
received by the Company (2006 – 2008); mobile investment
estimate.





As of the
moment new management took over in Fall 2006, approximately $30 million
investment has been made into the company until the end of 2008. Below
management provides additional background on the use of funds over the stated
period.




In
management’s best estimate the Company’s traditional fixed line business (“old
business”) could be operated by approximately 15 people, which is a limited
number of people considering the total employees and long term
contractors.




However,
in order to expand our capabilities to create our mobile platform and the
underlying footprint (“new business”), including all related capabilities in the
areas of CRM, Billing, IN, and the integration of all mobile network components,
we have on average been using approximately 45 people. Over the period 2006-2008
we spend $ 2.94 million in Network Cost and $13.9 million in Selling General
& Administration (excluding $1.43 million in activated compensation cost).
When allocating roughly 25% of the Network Cost and 75% of the Selling General
& Administration (based upon the average amount of people working for the
old and new business; in 2007 we had a headcount of 53, in 2008 of 72), an
amount of $0.74 million plus $10.43 million or $11.17 million could therefore be
attributed to developing these new capabilities.




In
addition, we invested approximately $9.3 million in the acquisition of the
Benoit Telecom Group plus additional other companies to build our footprint in
Europe.


20


Furthermore,
we spent approximately $4.5 million plus $1.43 million (as being activated
compensation cost) or $5.93 million in capital expenditures over the last 2
years.




All
together we spent $26.4 million in building our mobile platform capabilities. On
average we estimate to have spent approximately 10% in costs of raising our
funding (commissions, legal, Investor Relations, research reports,
presentations, travel, etc), thus arriving at an investment of $29.3 million. An
amount of $900,000 over 2007 and 2008 was paid towards deposits in restricted
cash, thus arriving at an amount of around $30 million that management estimates
reflects the move to create our mobile capabilities. In the first quarter of
2009 this level of investment in the mobile capabilities has
continued.




Results of
Operations





Our
results of operations for the three months ended March 31, 2009, consisted of
the operations of Elephant Talk Communications, Inc., its wholly-owned
subsidiary Elephant Talk Limited and its subsidiaries, its wholly-owned
subsidiary Elephant Talk Europe Holding BV and its subsidiaries, and its
wholly-owned subsidiary Elephant Talk Global Holding BV and its
subsidiaries.





Economic Crisis:


We
believe that mobile telecommunications and the business-to-business markets that
we serve will remain relatively stable in the face of the continued
deteriorating economic climate (see also Liquidity and Capital
Resources).





Three
Month Periods Ended March 31, 2009 compared to the Three Month Periods Ended
March 31, 2008





Revenue




Revenue
for the three months ended March 31, 2009 was $9,428,884 compared to $11,757,280
for the same period in 2008. A major part of the decrease is caused by negative
translation effect of $1.5 million. The remainder of the decrease was primarily
the result of the decrease experienced in our Premium Rate Calling Services
(PRS) services, the largest revenue generating service of the company. A
decrease was also experienced in our Carrier (Pre) Select services.





Revenues
for the three month period pertaining to our (new) mobile services increased as
well as our new Middle East market (Bahrain) for prepaid calling card services.
However, these increases did not off-set the decrease in our traditional PRS/CPS
services described above.





Cost
of service




Cost of
service was for the three months ended March 31, 2009 was $9,147,797 compared to
$11,412,511 for the same period in 2008. Cost of service include origination,
termination, network and billing charges from telecommunications operators,
outpayment costs to content and information providers, network costs, data
center costs, facility cost of hosting network and equipment and cost in
providing resale arrangements with long distance service providers, cost of
leasing transmission facilities, international gateway switches for voice, and
data transmission services.  The cost of service remained 97% of the
total revenue. The decrease in cost of service between the first quarter of 2009
and 2008 included a positive translation effect of $1.5 million.





Selling,
general and administrative




Selling,
general and administrative expenses for the three months ended March 31, 2009
was $1,463,148 compared to $1,756,999 in 2008. The decrease in SG&A between
the first quarter of 2009 and 2008 included a positive translation effect of
$137,623. The increased management & personnel expenses were offset by the
decrease in other selling, general and administrativecosts.




Non
cash compensation to officers, directors and employees




Non-cash
compensation for the three month ended March 31, 2009 was $269,460 and $161,487
for the corresponding 2008 period. Non-cash compensation is comprised
of:


21


·
            the expense related to shares of
      restricted common stock that are issued to management in connection with a
      compensation plan originated in the first quarter of
      2007;


·
            the 2006 Non-Qualified Stock and
      Option Compensation Plan and  the 2008 Long-Term Incentive Plan
      and


·
            the expense related to shares
      issued to consultants for
services.




Depreciation
and amortization




Depreciation
and amortization for the three months March 31, 2009 was $630,182 and $674,456
for the comparable period in 2008. The decrease in depreciation and amortization
between the first quarter of 2009 and 2008 included a positive translation
effect of $70,600.




Other
Income and Expenses:




Interest
for the three months ended March 31, 2009 was ($61,715) compared to ($356,032)
in 2008.


The
interest expense decrease resulted from the conversion in the second quarter
2008 of Promissory Notes into equity.





Minority
Interest




Our
majority owned subsidiaries Elephant Talk Communications PRS U.K. Limited,
Elephant Talk Communications Premium Rate Services Netherlands B.V., Elephant
Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
W.L.L., Elephant Talk Middle East & Africa FZ-LLC andET-UTS
NV.





During
the three months ended March 31, 2009 a minority interest charge was incurred of
($103) compared to $29,017 in the same period last year.




Comprehensive
Income (Loss)




We record
foreign currency translation gains and losses as comprehensive income or loss.
Comprehensive Income for the three months ended March 31, 2009 was a loss of
($667,792) versus income of $1,110,632 for the three months ended March 31,
2008. The decrease per the first quarter 2009 compared to the same period of
2008 is primarily attributable to the translation effect resulting from the
substantial decrease in the value of Euro compared to the USD which has occurred
throughout the third and fourth quarter of 2008.





Liquidity
and Capital Resources




We have
an accumulated deficit of $47,179,513 including a net loss of $2,144,321for the
three months ended March 31, 2009. For the three months ended March 31, 2009 we
received a total $2,690,600 from the related party QAT II .  We
believe that our cash balance at March 31, 2009, in combination with additional
loans of $ 1.1 million received from QAT II , cash generated from operations,
will provide sufficient funds through the beginning of the second quarter of
2009.





In the
light of the need to raise additional funds in the immediate short term, we are
focused on capital raising activities, in addition to continuing to control
operating costs and aggressively managing working capital. We are actively
seeking to raise additional debt or equity financing in order to fund our cash
requirements generated by future operations, capital expenditures and potential
acquisitions.  Although we have previously been able to raise capital as
needed, there can be no assurance that such capital will continue to be
available at all, or if available, that the terms of such financing would not be
dilutive to existing shareholders or otherwise on terms favorable to us.
Further, the current global financial situation may offer additional challenges
to raising the capital we require in the immediate short term. If we are unable
to secure additional capital, as circumstances require, we may not be able to
continue our operations. As of March 31, 2009, these conditions raised
substantial doubt from our auditors as to our ability to continue as a going
concern.





These
financial statements assume that we will continue as a going concern. If we are
unable to continue as a going concern, we may be unable to realize our assets
and discharge our liabilities in the normal course of business. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or to the amounts and classification of
liabilities that may be necessary should we be unable to continue as a going
concern.


22





Operating
activities




Net cash
used in operating activities for the three months ended March 31, 2009 was
$1,811,468. This decrease in use of cash is largely due to an increase of
operating losses (after adjusting for non-cash items) in the first quarter 2009
versus 2008 and to a smaller extent the deterioration of working capital
compared to 2008.




Investment
activities




Net cash
used in investment activities for the three months ended March 31, 2009 was
$731,625.




Financing
activities




Net cash
received by financing activities for the three months ended March 31, 2009 was
$2,704,961.





As a
result of the above activities, the Company had a cash and cash equivalents
balance of $1,716,063 as of March 31, 2009, a net increase in cash and cash
equivalents of $59,517, for the three months ended March 31, 2009.





Application of Critical
Accounting Policies and Estimates





Revenue
Recognition, Cost of Service and Deferred Revenue


Premium
rate services represent our primary revenue source.  Our revenue
recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104.
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured. We derive revenue from
activities as a fixed-line and mobile telecom provider with its network and its
own switching technology.





Other
than prepaid calling cards, we bill our customers for all services on a monthly
basis and recognize revenue as the services are consumed and billed. As to the
prepaid calling card services we recognize revenue as the services are provided.
Revenue represents amounts net of value added tax and inter-company revenue.
Payments received before all of the relevant criteria for revenue recognition
are satisfied are recorded as deferred revenue. Deferred revenue represents
amounts received from the customers against future sales of services since we
recognize revenue upon performing the services.





Stock-based
Compensation


Effective
January 1, 2006, we adopted Statement No.123R, “Share-Based Payment” SFAS 123R,
which requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. SFAS 123R is being applied on the modified
prospective basis. Prior to the adoption of SFAS 123R, we accounted for its
stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion No.25, Accounting for Stock
Issued to Employees, and related interpretations, and accordingly, recognized no
compensation expense related to the stock-based plans. Under the modified
prospective approach, SFAS 123R applies to new awards and to awards that were
outstanding on January 1, 2006 that are subsequently modified, repurchased or
cancelled.





Intangible
Assets & Impairment of long lived assets & business
combinations


We assess
the recoverability of the carrying value of long-lived assets. If circumstances
suggest that long-lived assets may be impaired, and a review indicates that the
carrying value will not be recoverable, as determined based on the projected
undiscounted future cash flows, the carrying value is reduced to its estimated
fair value. The determination of cash flows is based upon assumptions and
forecasts that may not occur. In addition, we assess goodwill and
indefinite-lived intangible assets for impairment annually, or more frequently
if circumstances indicate impairment may have occurred.





We use
the purchase method of accounting for business combinations and the results of
the acquired businesses are included in the income statement from the date of
acquisition. The purchase price includes the direct costs of the acquisition.
However, beginning in fiscal 2009, acquisition-related costs will be expensed as
incurred, in accordance with FASB issued revision to SFAS No. 141, “Business
Combinations”(SFAS 141(R)). Amounts allocated to intangible assets are amortized
over their estimated useful lives; no amounts are allocated to in-progress
research and development.


23





Impact
of Accounting Pronouncements





In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation
of Other-Than-Temporary Impairments. This FSP amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments in the financial statements. The most significant change the FSP
brings is a revision to the amount of other-than-temporary loss of a debt
security recorded in earnings. FSP FAS 115-2 and FAS 124-2 is effective for
interim and annual reporting periods ending after June 15, 2009. The Company
does not believe that the implementation of this standard will have a material
impact on its consolidated financial statements.





In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly. This FSP provides additional
guidance for estimating fair value in accordance with FASB Statement No. 157,
Fair Value Measurements, when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. This FSP
emphasizes that even if there has been a significant decrease in the volume and
level of activity for the asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants at the measurement
date under current market conditions. FSP FAS 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and is applied
prospectively. The Company does not believe that the implementation of this
standard will have a material impact on its consolidated financial
statements.





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments. This FSP amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. This FSP
also amends APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in summarized financial information at interim reporting periods.
FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods
ending after June 15, 2009. The Company does not believe that the implementation
of this standard will have a material impact on its consolidated financial
statements.




Item
3. Quantitative and Qualitative Disclosure About Market Risks





Not
applicable.





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures


Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on the foregoing,
our chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were not effective as of the end of the
period covered by this quarterly report due to the significant deficiencies
described below.





Our
management has identified a material weakness in our disclosure controls and
procedures due to a lack of personnel and technological resources. This material
weakness restricts our ability to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is
accumulated and communicated to management and that information is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.





Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed or submitted under the Exchange Act is
accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosure.


24





Changes
in Internal Control over Financial Reporting


There have not been any other changes
in the Corporation’s internal control over financial reporting during the
quarter ended March 31, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s  internal control over
financial reporting.





PART
II - OTHER INFORMATION




Item
1. Legal Proceedings





(a)
Beijing Chinawind


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 Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), 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 alleged
that a.) ETGD failed to pay the remaining consideration of $787,748 under an
Equity Transfer Agreement, dated January 4, 2006 (the “CW 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.)
ETGD induced the minority shareholders of Beijing Chinawind to accept, pursuant
to the CW Agreement, consideration of $1,000,000 through the issuance of 400,000
common shares of the Company valued at $2.25 per common share. The lawsuit
further alleged 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





The
judgment of the Beijing Haiding Civil Court was received. On October 18, 2007
the verdict was given in the two cases.  The CW Agreement was
confirmed to be effective. All requests from CW are rejected.  In
addition, the Court confirmed the opinion of ETGD: that the resolutions of the
shareholders meeting of China Wind held on January 27, 2007 are invalid, as the
meeting was not conducted in a proper way.





On
February 4, 2009, our board of directors decided to pursue no longer our
interests in the concerned company, as the business perspectives are no longer
seen as of value for us.





(b)
Rescission of the Purchase Agreement of May 24, 2004 of New Times Navigation
Limited.


As
previously described in our 2004 Annual Report we and New Times Navigation
Limited mutually agreed to terminate this purchase agreement. We returned the
received shares of New Times Navigation Limited to the concerned shareholders
and received back 90,100 of our common stock out of the 204,000 issued by us for
the purchase. In addition we issued 37 unsecured convertible promissory notes
for a total amount of $3,600,000. On our request 21 notes were returned with a
total value of $2,040,000.





We are
presently seeking relief from the High Court of the Hong Kong Special
Administrative Region against the holders of the unreturned shares to return a
total of 113,900 common shares (valued at $381,565) and also to have them return
the remaining 18 unsecured convertible promissory notes representing a total
amount of $1,740,000 and rescind the purchase agreement. The case is currently
pending.





(c)
Russelle Choi Litigation


On or
about September 12, 2008, an action was commenced against the Company by
Russelle Choi ("Choi"), our former CEO and director, in the California Superior
Court, Orange County, in a matter entitled Choi v. Elephant Talk Communications,
Inc., Case No. 30-2008-00111874.  The complaint alleges that we
breached a termination and consultancy agreement between us and Choi, resulting
in damages of approximately $140,000, 120,000 stock options and attorney’s fees
and costs. We have denied all material allegations of Choi’s complaint, and have
asserted various affirmative defenses. We have placed Choi and the Court on
notice of our intent to file a counterclaim against Choi for breach of fiduciary
duty and fraud potentially giving rise to damages in excess of Choi’s claims
against us.


25





(d)
Manu Ohri Litigation


On March 26, 2009, an action was
commenced against us in the state of California by Manu Ohri, our former Chief
Financial Officer, alleging a breach of written contract, a breach of oral
contract, and a common count for services rendered. The suit requests, among
other things, $427,816 in unpaid severance payments, $56,951 owed under an oral
consulting agreement, and stock options payable under the oral consulting
agreement with a net value of $622,000.  We intend to dispute these
claims





Item
1a. Risk Factors





In
addition to the other information set forth in this Quarterly Report on Form
10-Q, you should carefully consider the Risk Factors included in Part I, “Item
1A. — “Risk Factors” of our Annual Report on Form 10-K for the year ended
December 31, 2008, and the additional, if any, Risk Factors set forth below.
These Risk Factors could materially impact our business, financial condition
and/or operating results. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
impact our business, financial condition and/or operating results.





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





On February 17, 2009, we
issued 1,000,000 shares of our common stock to QAT Investments S.A. (“QAT”) as
consideration for the services provided by two of our directors: Johan Dejager
and Yves van Sante.  The shares of common stock were issued directly
to QAT pursuant to an agreement between QAT and each of Messrs. Dejager and van
Sante.




On February 17, 2009, pursuant to a
consulting agreement between us and Alliance Advisors LLC, we issued 200,000
shares of common stock to Alliance Advisors LLC in exchange for services
rendered.




On March 26, 2009, we issued 34,000
shares of our common stock to QAT in consideration for the placement agency
services of its wholly-owned subsidiary, Quercus Management Group N. V. (“QMG”)
in our 2008 offering of common stock and warrants.




On March 26, 2009, we issued 742,000
shares of our common stock to Rising Water Capital, A.G. pursuant to a
settlement agreement between us and RWC dated June 9, 2008.




On March 30, 2009, we issued 33,000
shares of our common stock to Amelia & Associates SA in consideration for
its placement agency services in our 2008 offering of common stock and
warrants.




On April 16, 2009, pursuant to a
consulting agreement between us and OTC Global Partners LLC, we issued 100,000
shares of common stock to OTC Global Partners LLC in exchange for services
rendered.




On May 4,
2009, we issued 124,800 shares of our common stock to QAT as consideration for
the services provided by Steven van der Velden, our Chairman, President and
Chief Executive Officer.  The shares of common stock were issued
directly to QAT pursuant to an agreement between QAT and Mr. van der
Velden.




The
above-referenced securities were offered and sold pursuant to the exemptions
from registration provided by Section 4(2) of the Securities Act of 1933 and
Rule 506 of Regulation D promulgated thereunder.





Item
3. Defaults upon Senior Securities.





None.




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





None.




Item
5. Other Information





None.


26





Item
6. Exhibits




(a)
Exhibits




10.1
              
              Loan
      agreement dated  May 4, 2009 with related party QAT II
      Investments SA31.1
              
              Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
      X-1.31.2
              
              Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) on page
      X-2.32.1
              
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 on page X-3.32.2
              
              Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 on page
X-4.





SIGNATURES




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




ELEPHANT
      TALK COMMUNICATIONS, INC.May
      19, 2009
              By:
              /s/ Steven van der
    VeldenSteven
      van der VeldenPresident
      and Chief Executive Officer
                (Principal
      Executive Officer)May
      19, 2009
              By:
              /s/ Mark NijeMark
      NijeChief
      Financial Officer
                (Principal
      Financial and Accounting
Officer)


27




Index to
Exhibits




Number
                  
                  Exhibit
                  
                  Page10.1
                  
                  Loan
      agreement dated  May 4, 2009 with related party QAT II
      Investments SA31.1
                  
                  Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
                  
                  X-131.2
                  
                  Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
                  
                  X-232.1
                  
                  Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906   of
      the Sarbanes-Oxley Act of 2002
                  
                  X-332.2
                  
                  Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906   of
      the Sarbanes-Oxley Act of 2002
                  
                  X-4


28