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 June
30, 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 xNo o.





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 o     Accelerated
filer o     Non-Accelerated
filer o  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 o  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 o  No
o





As of
July 31, 2009, there were 54,471,209 shares of the Company’s common stock
outstanding.









ELEPHANT
TALK COMMUNICATIONS, INC.


TABLE OF
CONTENTS


FORM
10-Q


June 30,
2009




PART
      I – FINANCIAL INFORMATION
            
            
            3Item
      1. Consolidated Financial Statements
            
            
            3Consolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
            
            
            3Unaudited
      Consolidated Statements of Operation for the three and six months periods
      ended   June 30, 2009 and 2008
            
            
            4Unaudited
      Consolidated Statements of Cash Flows for the six months periods
      ended   June 30, 2009 and 2008
            
            
            5Notes
      to the Consolidated Financial Statements (Unaudited)
            
            
            6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
            
            
            20Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            
            
            26Item
      4T. Controls and Procedures
            
            
            26PART
      II - OTHER INFORMATION
            
            
            27Item
      1. Legal Proceedings
            
            
            27Item
      1a. Risk Factors
            
            
            28Item
      2.  Unregistered Sales of Equity Securities and Use of Proceeds
            
            
            28Item
      3.  Defaults upon Senior Securities
            
            
            28Item
      4.  Submission of Matters to a Vote of Security
      Holders
            
            
            28Item
      5.  Other Information
            
            
            28Item
      6. Exhibits
            
            
            29SIGNATURES
            
            
            30Exhibit
      31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)Exhibit
      31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)Exhibit
      32.1 Certification of Chief Executive Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002Exhibit
      32.2 Certification of Chief Financial Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002




2




PART I -
FINANCIAL INFORMATION




Item 1. Consolidated Financial
Statements





ELEPHANT TALK COMMUNICATIONS, INC. AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET


(UNAUDITED)




June
      30,
            
            
            December
      31,2009
            
            
            2008UnauditedASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            575,770
            
            
            $
            1,656,546Restricted
      cash
            
            
            191,822
            
            
            
            191,209Accounts
      receivable, net of allowance for doubtful accounts of $313,757 and
      $503,102 at June 30, 2009 and December 31, 2008
    respectively
            
            
            6,543,966
            
            
            
            4,574,013Prepaid
      expenses and other current assets
            
            
            2,042,835
            
            
            
            1,916,967Total
      Current Assets
            
            
            9,354,393
            
            
            
            8,338,735LONG
      TERM DEPOSITS
            
            
            296,110
            
            
            
            310,356PROPERTY
      AND EQUIPMENT, NET
            
            
            7,455,352
            
            
            
            6,345,113INTANGIBLE
      ASSETS, NET
            
            
            4,189,831
            
            
            
            4,461,869TOTAL
      ASSETS
            
            $
            21,295,686
            
            
            $
            19,456,073LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
            
            $
            335,349
            
            
            $
            322,903Accounts
      payable and customer deposits
            
            
            7,442,336
            
            
            
            5,809,211Deferred
      revenue
            
            
            218,251
            
            
            
            220,058Accrued
      expenses and other payables
            
            
            1,963,422
            
            
            
            1,890,004Shares
      to be issued
            
            
            -
            
            
            
            619,057Advances
      from third parties
            
            
            202,935
            
            
            
            274,762Loans
      payable
            
            
            881,070
            
            
            
            881,035Due
      to related parties
            
            
            4,340,497
            
            
            
            —Total
      Current Liabilities
            
            
            15,383,860
            
            
            
            10,017,030LONG
      TERM DEBT
            
            
            418,792
            
            
            
            402,425NONCONTROLLING
      INTEREST
            
            
            185,375
            
            
            
            191,767STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 54,471,209 issued and
      outstanding  as of June 30, 2009 compared to 50,433,260 shares
      issued and outstanding as of December 31, 2008
            
            
            54,424,137
            
            
            
            52,933,209Accumulated
      other comprehensive income
            
            
            749,575
            
            
            
            946,834Accumulated
      deficit
            
            
            (49,866,053
            )
            
            
            (45,035,192
            )Total
      Stockholders' Equity (Deficit)
            
            
            5,307,659
            
            
            
            8,844,851TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
            
            $
            21,295,686
            
            
            $
            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
              ended
      June 30,
            
            
            For
      the Six Months
              ended
      June 30,2009
            
            
            2008
            
            
            2009
            
            
            2008REVENUES
            
            $
            11,311,398
            
            
            $
            11,921,290
            
            
            $
            20,740,282
            
            
            $
            23,678,570COST
      AND OPERATING EXPENSESCost
      of service
            
            
            10,632,204
            
            
            
            11,573,624
            
            
            
            19,780,001
            
            
            
            22,986,135Selling,
      general and administrative expenses
            
            
            1,783,795
            
            
            
            1,664,504
            
            
            
            3,246,943
            
            
            
            3,421,503Non
      cash compensation to officers, directors and employees
            
            
            750,406
            
            
            
            228,585
            
            
            
            1,019,866
            
            
            
            390,072Depreciation
      and amortization of intangibles assets
            
            
            707,763
            
            
            
            751,725
            
            
            
            1,337,945
            
            
            
            1,426,181Total
      cost and operating expenses
            
            
            13,874,168
            
            
            
            14,218,438
            
            
            
            25,384,755
            
            
            
            28,223,891LOSS
      FROM OPERATIONS
            
            
            (2,562,770
            )
            
            
            (2,297,148
            )
            
            
            (4,644,473
            )
            
            
            (4,545,321
            )OTHER
      INCOME (EXPENSE)Interest
      income
            
            
            12,237
            
            
            
            20,710
            
            
            
            22,307
            
            
            
            36,463Interest
      expense
            
            
            (136,154
            )
            
            
            (398,494
            )
            
            
            (207,939
            )
            
            
            (769,071
            )Other
      expenses
            
            
            -
            
            
            
            (7,761
            )
            
            
            -
            
            
            
            (8,969
            )Total
      other income (expense)
            
            
            (123,917
            )
            
            
            (385,545
            )
            
            
            (185,632
            )
            
            
            (741,577
            )LOSS
      BEFORE PROVISION FOR INCOME TAXES
            
            
            (2,686,687
            )
            
            
            (2,682,693
            )
            
            
            (4,830,105
            )
            
            
            (5,286,898
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            (800
            )
            
            
            (800
            )NET
      LOSS
            
            
            (2,686,687
            )
            
            
            (2,682,693
            )
            
            
            (4,830,905
            )
            
            
            (5,287,698
            )Net
      income (loss) attributable to noncontrolling interest
            
            
            (653
            )
            
            
            30,232
            
            
            
            (756
            )
            
            
            59,249NET
      LOSS
            
            
            (2,687,340
            )
            
            
            (2,652,461
            )
            
            
            (4,831,661
            )
            
            
            (5,228,449
            )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation gain (loss)
            
            
            470,533
            
            
            
            103,715
            
            
            
            (197,259
            )
            
            
            1,214,347470,533
            
            
            
            103,715
            
            
            
            (197,259
            )
            
            
            1,214,347COMPREHENSIVE
      LOSS
            
            $
            (2,216,807
            )
            
            $
            (2,548,746
            )
            
            $
            (5,028,920
            )
            
            $
            (4,014,102
            )Net
      loss per common share and equivalents - basic and diluted
            
            $
            (0.050
            )
            
            $
            (0.159
            )
            
            $
            (0.092
            )
            
            $
            (0.399
            )Weighted
      average shares outstanding during the period - basic and
      diluted
            
            
            53,864,109
            
            
            
            16,726,734
            
            
            
            52,693,232
            
            
            
            13,108,807




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 six months periods
              ended
      June 30,2009
            
            
            2008Unaudited
            
            
            UnauditedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (4,831,661
            )
            
            $
            (5,228,449
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            1,337,945
            
            
            
            1,426,181Provision
      for doubtful accounts
            
            
            (178,090
            )
            
            
            —Stock
      based compensation
            
            
            868,616
            
            
            
            390,072Noncontrolling
      interest
            
            
            756
            
            
            
            (59,249
            )Amortization
      of Shares issued for Consultancy
            
            
            151,250
            
            
            
            4,514Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
            
            
            (1,704,371
            )
            
            
            (975,575
            )(Increase)
      decrease in prepaid expenses, deposits and other assets
            
            
            (158,168
            )
            
            
            10,427Increase
      (decrease) in accounts payable, proceeds from related parties and customer
      deposits
            
            
            1,565,246
            
            
            
            982,368Increase
      (decrease) in deferred revenue
            
            
            (1,807
            )
            
            
            —Increase
      (decrease) in accrued expenses and other payables
            
            
            (112,870
            )
            
            
            300,675Net
      cash used in operating activities
            
            
            (3,063,154
            )
            
            
            (3,149,036
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (1,963,245
            )
            
            
            (489,102
            )Restricted
      cash
            
            
            18
            
            
            
            1,588Net cash used in investing activities
            
            
            (1,963,227
            )
            
            
            (487,514
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
            
            
            12,767
            
            
            
            12,044Placement
      fees
            
            
            -
            
            
            
            (462,867
            )Proceeds
      from bank loans
            
            
            -
            
            
            
            (38,011
            )Proceeds
      from sale of shares
            
            
            -
            
            
            
            15,937Proceeds
      from related parties
            
            
            
            
            
            
            3,306,372Loan
      to third party
            
            
            (345,895
            )Loan
      from related party
            
            
            4,340,497
            
            
            
            —Net cash provided by financing activities
            
            
            4,007,369
            
            
            
            2,833,475EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
            
            
            (61,764
            )
            
            
            182,331NET
      DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (1,080,776
            )
            
            
            (620,744
            )CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
            
            
            1,656,546
            
            
            
            4,366,312CASH
      AND CASH EQUIVALENTS, END OF THE PERIOD
            
            $
            575,770
            
            
            $
            3,745,568SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
            
            $
            19,880
            
            
            $
            35,968




For
      the six months periods
              ended
      June 30,2009
            
            
            2008Unaudited
            
            
            UnauditedSUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING &FINANCING
      ACTIVITIES:Shares
      issued to convert the notes payable to related parties and accrued
      interest
            
            $
            532,583
            
            
            $
            7,939,171Deemed
      Dividend as a result of loss on conversion of the above Note to related
      party
            
            
            -
            
            
            
            1,200,000




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




5


ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


NOTES TO THE UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS





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. Historically, the Company has primarily derived its revenues from
traditional fixed-line services, but since 2006, significant investments have
been made in mobile enabling services and platforms. The first revenues from
these mobile services (MVNE/MVNO) started during the fourth quarter of
2008.





Our
service offerings can be grouped around:





·
            Customized
      mobile services





·
            Mobile
      enabling platforms





·
            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 are positioning ourselves as the MVNE
partner of choice for the larger, global Mobile Network Operators (MNO’s) and a
one-stop convergent solutions provider for specialized MVNO
customers.





We have
leveraged 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.





2. Financial Condition
and Going Concern





The
Company has an accumulated deficit of ($49,866,053) as of June 30,
2009.  Historically, the Company has relied on a combination of debt
and equity financings to fund ongoing cash requirements.  In the first
six months of 2009, the Company received a total of $4.3 million in loans from
QAT II Investments SA (“QAT II”), a related party.  In July and August
of 2009, QAT II converted $4.1 million of loans into the Company’s private
placement of convertible notes (“the Notes”) and warrants (the “Warrants” and
together with the Notes, the “Securities”), and the Company received an
additional $1.3 million in gross proceeds from the sale of Securities to other
accredited investors.  Management believes that the cash balance at
June 30, 2009, in combination with the net proceeds received from the sale of
the Securities in July and August of 2009, will provide the Company with
sufficient funds through the end of the third quarter of 2009.
 
 Although
QAT II and other related parties have invested, or have arranged for the
investment of, a total of $35.4 million between 2005 through December 31, 2008,
and have since January 2009 funded the Company’s short-term capital requirements
with an additional $4.7 million (through August 14, 2009), there can be no
assurance that they will continue to do so.  Further, although the
Company has recently raised an additional $1.3 million in gross proceeds through
the sale of the Securities to unaffiliated accredited investors, there can be no
assurance that the Company will continue to raise sufficient capital to operate
its business.  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 the Company is unable to secure additional capital, as
circumstances require, it may not be able to continue
operations.
 
 As of
June 30, 2009, these conditions raise substantial doubt about the Company’s
ability to continue as a going concern.  The financial statements
filed as part of this Quarterly Report on Form 10-Q do not include any
adjustments that might result from the outcome of this
uncertainty.




6




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 and six months ended June 30, 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 and six months
ended June 30, 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.





Foreign Currency
Translation





The
functional currency was Euros for the Company’s 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 June 30, 2009 and
December 31, 2008 was $749,575 and $946,834, respectively. The foreign currency
translation gain/(loss) for the three months ended June 30, 2009 and 2008
was $470,533 and $103,715, respectively. The foreign currency translation
gain/(loss) for the six months ended June 30, 2009 and 2008 was ($197,259)
and $1,214,347, respectively.




7




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 June 30, 2009 and December 31,
2008, the allowance for doubtful accounts was $313,757 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 $218,251 and $220,058 as of June 30, 2009 and December 31,
2008, respectively.





Cost ofService





Cost of
service includes origination, termination, network and billing charges from
telecommunications operators, outpayment costs to content and information
providers, network costs, data center costs, facility costs of hosting network
and equipment, and costs of providing resale arrangements with long
distance service providers, costs of leasing transmission facilities and
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 three 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.




9




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.




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 six months ended
June 30, 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 andThirdParty
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.





In May
2009, the FASB issued FAS No. 165, “Subsequent Events,” (“FAS 165”). The purpose
of FAS 165 is to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued. FAS 165 is effective for interim and annual periods ending
after June 15, 2009. We adopted this statement for our quarter ended June
30, 2009, and the adoption did not have a material impact on our results of
operations, financial position or cash flows.





In June
2009, the FASB issued FAS No. 168, “The FASB Accounting Standards Codification
and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162” (“FAS 168”). FAS 168 establishes the FASB Standards
Accounting Codification (“Codification”) as the source of authoritative U.S.
GAAP recognized by the FASB to be applied to nongovernmental entities and rules
and interpretive releases of the SEC as authoritative GAAP for SEC registrants.
The Codification will supersede all the existing non-SEC accounting and
reporting standards upon its effective date and subsequently, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. FAS 168 also replaces FASB Statement No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” given that once in
effect, the Codification will carry the same level of authority. The Company
does not anticipate that the adoption of this statement will have a material
impact on its consolidated financial statement footnote disclosures. FAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, which will be our quarter ending September 30, 2009.
The adoption of this statement is not expected to have a material impact on our
results of operations, financial position or cash flows.





4.Long-termEarnestDeposit





Long-term
earnest deposits to various telecom carriers during the course of its operations
totaled $296,110 at June 30, 2009, compared with $310,356 at December 31,
2008.  The deposits are refundable at the termination of the business
relationship with the carriers.





5.PrepaidExpenses andOtherCurrentAssets





Prepaid
expenses and other current assets recorded as $2,042,835 as of June 30, 2009,
compared with $1,916,967 as of December 31, 2008.  The 2008 amount
consists primarily of prepaid Value Added Tax (“VAT”), unvested stock related
compensation for management and consultants and advances to Validsoft Limited
(“Validsoft”) made pursuant to the Bridging Loan Agreement (see also Note
23).




11




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. These investments typically pertain to the
Company’s:





·
            Intelligent
      Network (IN) platform·
            CRM
      software





·
            Mediation,
      Rating & Pricing engine·
            Operations
      and Business Support software





·
            Network
      management tools





Property
and equipment at June 30, 2009 and December 31, 2008 consists of:





Average
                Estimated
      Useful
              Lives
            
            
            June
      30, 2009
            
            
            December
      31,
              2008Leasehold
      improvements
            
            
            3
            
            
            $
            0
            
            
            $
            10,433Furniture
      and fixtures
            
            
            5
            
            
            
            88,838
            
            
            
            78,278Computer,
      communication and network equipment
            
            
            3 -
      10
            
            
            
            7,941,248
            
            
            
            6,395,032Software
            
            
            5
            
            
            
            4,889,619
            
            
            
            4,632,430Automobiles
            
            
            5
            
            
            
            132,753
            
            
            
            133,202Construction
      in progress
            
            
            
            
            
            
            1,096,136
            
            
            
            1,047,24814,148,594
            
            
            
            12,296,623Less:
      accumulated depreciation
            
            
            
            
            
            
            (6,693,242
            )
            
            
            (5,951,510
            )$
            7,455,352
            
            
            $
            6,345,113





Total
depreciation expense for the three months ended June 30, 2009 and 2008 was
$509,847and $192,647, respectively. Total depreciation expense for the six
months ended June 30, 2009 and 2008 was $953,177 and $469,718,
respectively.





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
            
            
            June
      30, 2009
            
            
            December
      31,
              2008Customer
      Contracts, Licenses & Interconnect
            
            
            5 -
      10
            
            
            $
            12,215,907
            
            
            $
            12,104,634Less:
      Accumulated Amortization and impairment charges
            
            
            
            
            
            
            (8,026,076
            )
            
            
            (7,642,765
            )$
            4,189,831
            
            
            $
            4,461,869




Intangible
asset amortization expense for the three months ended June 30, 2009 and 2008 was
$197,916 and $559,078 respectively. Amortization expense for the six months
ended June 30, 2008 and 2007 totaled $384,768 and $956,463
respectively





8.Overdraft





In 2004,
Elephant Talk Ltd. executed a credit facility with a bank in Hong Kong pursuant
to which Elephant Talk Ltd. borrowed funds.. As of June 30, 2009, the overdraft
balance, including accrued interest totaled, $236,444 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 June 30, 2009, Moba Consulting
Partners B.V., a subsidiary of the Company, had an overdraft of $98,905 compared
to $99,240 as of December 31, 2008 on one of the company’s bank
accounts.




12




9.Accrued
Expenses





As of
June 30, 2009 and December 31, 2008, accrued expenses were comprised of the
following:





June
      30,
            
            
            December
      31,2009
            
            
            2008Accrued
      Selling, General & Administrative expenses
            
            $
            370,095
            
            
            $
            513,722Placement
      fees
            
            
            -
            
            
            
            491,100Accrued
      cost of sales and network
            
            
            53,529
            
            
            
            14,140Accrued
      taxes
            
            
            714,536
            
            
            
            227,896Accrued
      interest payable
            
            
            589,348
            
            
            
            439,290Other
            
            
            235,914
            
            
            
            203,856Total
      accrued expenses
            
            $
            1,963,422
            
            
            $
            1,890,004





10.Advances fromThirdParties





As of
June 30, 2009 and December 31, 2008 the Company had $202,935 and $274,762,
respectively as payable  to third parties, related to litigation
matters detailed in Note 19.





11.Due toRelatedParties





As of
June 30, 2009, the Company had received secured, interest bearing loans at 12%
per annum, from QAT II totaling $4.3 million.  In July 2009, QAT II
converted $4.1 million of these loans into the Company’s Convertible Notes and
Warrant offering (see also Note 23).  There were no amounts due to
related parties at December 31, 2008.





12.Loans
Payable





Loans
payable at June 30, 2009 and December 31, 2008 are summarized as
follows:




June
      30,
                2009
              
              
              December 31,
                2008Installment loan payable
      due December 24, 2006, secured by personal guarantees of two shareholders,
      a former director, and a third party
              
              $
              320,532
              
              
              $
              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
              
              
              191,524
              
              
              
              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
              
              
              85,157
              
              
              
              85,154Term
      loan payable, bank, monthly payments of interest at bank's prime rate,
      7.0% at June 30, 2009
              
              
              283,857
              
              
              
              283,845Total
              
              $
              881,070
              
              
              $
              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 $493,046 as of June 30, 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 $12,767 and
$5,049 in interest expense and default interest expense, respectively, on loans
payable as of June 30, 2009 and June 30, 2008 and $53,681 and $50,234in interest
expense as of June 30, 2009 and June 30, 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.





13


13.LongTermDebt





The
Company’s 51% owned subsidiary ET-UTS N.V. has received $418,792 in interest
bearing (8% per annum) unsecured loans from UTS N.V., the 49% shareholder in the
subsidiary. No maturity has been fixed.





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 54,225,309 common shares issued and
outstanding as of June 30, 2009. The shares issued and outstanding as per the
stock transfer agent’s records are 54,471,209, and include 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 the Company’s
records. These shares have been blocked for trading by the Stock Transfer
Agent.





15.Basicand 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.





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 June 30,
2009.





2006
Non-Qualified Stock and Option Compensation Plan





Under
this plan there are, as of June 30, 2009, 344,342 stock options outstanding.
There are remaining 600,000 shares and 55,658 stock options available for
grant.





14




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




Common
stock purchase options and warrants consisted of the following as of June 30,
2009:





Number of
              shares
            
            
            Exercise
              Price
            
            
            Fair ValueOptions:Outstanding
      as of December 31, 2008
            
            
            366,009
            
            
            $
            2.25
            
            
            
            —Granted
      in 2009
            
            
            —
            
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled/Forfeited
            
            
            21,667
            
            
            
            —
            
            
            
            —Outstanding
      as of June 30, 2009
            
            
            344,342
            
            
            $
            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
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 2007 (9,667) and 2008
(12,000).




Following
is a summary of the status of options outstanding at June 30, 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
            
            
            344,342
            
            2.86
      years
            
            $
            2.25
            
            
            
            0
            
            
            $
            2.25





At June
30, 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 $0.14
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 that was effected on June 11, 2008.  As of June 30, 2009,
a total of 466,500 stock options and 500,000 shares had been granted under this
plan. Options granted generally begin vesting over a 3 year period after grant
date. Options generally expire 2 years from the date of vesting.





Common stock purchase options and
warrants consisted of the following as of June 30, 2009:




Number of
              shares
            
            
            Exercise
              Price
            
            
            Fair ValueOptions:Outstanding
      as of December 31, 2008
            
            
            366,009
            
            
            $
            0.655
            
            
            $
            128,103Granted
      in 2009
            
            
            122,158
            
            
            $
            0.655
            
            
            $
            42,755Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled/Forfeited
            
            
            21,667
            
            
            $
            0.655
            
            
            $
            7,583Outstanding
      as of June 30, 2009
            
            
            466,500
            
            
            $
            0.655
            
            
            $
            163,275





At June
30, 2009 the share-price at closing was $0.95 which, results in a $0.35 fair
value per stock option and $163,275 for all common stock options granted in this
plan.




15




Following is a summary of the status of options outstanding at
June 30, 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$
            0.60-0.82
            
            
            466,500
            
            4.35
      years
            
            $
            0.655
            
            
            
            —
            
            
            
            —





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 1.36%. 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 $0.2
million.





Stock-Based
Compensation Expense





Under the
provisions of SFAS 123(R), the Company recorded for the three months ended June
30, 2009 $750,406 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 $228,585. 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).





17.Commitments





As of
June 30, 2009 commitments of the Company relating to leases, co-location,
interconnect and office rents,





December
      31, 2009
            
            $
            1,307,499December
      31, 2010
            
            
            1,852,178December
      31, 2011
            
            
            1,845,523December
      31, 2012
            
            
            1,577,930December
      31, 2013
            
            
            173,240Total
            
            $
            6,756,370





18.Non-controlling
Interest





The
Company had non-controlling interests in several of its subsidiaries. The
balance of the noncontrolling interests as of June 30, 2009 and December 31,
2008 were as follows:





Noncontrolling
      interest Balance at Subsidiary
            
            %
            
            
            June
              31, 2009
            
            
            December 31,
              2008ETC
      PRS UK
            
            
            49
            %
            
            $
            10,306
            
            
            $
            10,807ETC
      PRS Netherlands
            
            
            49
            %
            
            
            137,660
            
            
            
            144,344ET
      Bahrain WLL
            
            
            1
            %
            
            
            2,176
            
            
            
            1,388ET
      ME&A FZ LLC
            
            
            49.46
            %
            
            
            35,233
            
            
            
            35,227Total
            
            
            
            
            
            $
            185,375
            
            
            $
            191,767





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 no longer pursue our
interests in the concerned company.





(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 agreement and a consultancy agreement
entered into between the Company and Choi.  The Company settled the
dispute on the termination agreement with a payment of $70,000.  The
complaint regarding the alleged breach of the consulting agreement remains
unsettled and Choi is claiming damages of approximately $70,000, 120,000 stock
options and attorney's fees and other related costs.  The trial is
scheduled to commence on August 24, 2009.





(d)
Manu Ohri Litigation





On March
26, 2009, an action was commenced against the Company in the state of California
by Manu Ohri (“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 claims, 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 deny all material allegations of Ohri's complaint and
assert various affirmative defenses. We also filed and served a cross-complaint
against Ohri, who then filed and served an answer, denying the material
allegations of our cross-complaint.




17


20.SegmentInformation





Six
      months ended June 30, 2009




EUROPENetherlands
            
            Spain
            
            Switzerland
            
            Others
            
            Total
            
            Far East

                Hong
      Kong
            
            Middle
      East
            
            The
      Americas
            
            TOTALRevenues
      from unaffiliated customers:
            
            $
            15,812,063
            
            
            $
            1,105,997
            
            
            $
            2,896,008
            
            
            $
            322,238
            
            
            $
            20,136,307
            
            
            $
            690
            
            
            $
            603,286
            
            
            $
            -
            
            
            $
            20,740,282Operating
      income (loss)
            
            $
            (811,298
            )
            
            $
            157,194
            
            
            $
            (1,375,495
            )
            
            $
            (186,754
            )
            
            $
            (2,216,354
            )
            
            $
            (141,575
            )
            
            $
            (35,796
            )
            
            $
            (2,250,749
            )
            
            $
            (4,644,473
            )Net
      income (loss):
            
            $
            (801,211
            )
            
            $
            157,194
            
            
            $
            (1,375,383
            )
            
            $
            (186,496
            )
            
            $
            (2,205,896
            )
            
            $
            (611,163
            )
            
            $
            (37,205
            )
            
            $
            (1,977,398
            )
            
            $
            (4,831,661
            )Identifiable
      assets
            
            $
            5,479,037
            
            
            $
            1,603,571
            
            
            $
            11,091,128
            
            
            $
            558,253
            
            
            $
            18,731,989
            
            
            $
            276,129
            
            
            $
            615,910
            
            
            $
            1,671,658
            
            
            $
            21,295,686Depreciation
      and amortization
            
            $
            (50,043
            )
            
            $
            (97,800
            )
            
            $
            (825,239
            )
            
            $
            (2,044
            )
            
            $
            (975,126
            )
            
            $
            (23,857
            )
            
            $
            (20,752
            )
            
            $
            (318,209
            )
            
            $
            (1,337,945
            )Capital
      expenditure
            
            $
            24,628
            
            
            $
            1,260
            
            
            $
            1,873,724
            
            
            $
            -
            
            
            $
            1,899,612
            
            
            $
            181,079
            
            
            $
            -
            
            
            $
            187,907
            
            
            $
            2,268,598




Six
      months ended June 30, 2008




EUROPENetherlands
            
            Spain
            
            Switzerland
            
            Others
            
            Total
            
            Far
      East
              Hong
      Kong
            
            MiddleEast
            
            TheAmericas
            
            TOTALRevenues
      from unaffiliated customers:
            
            $
            17,587,448
            
            
            $
            1,471,589
            
            
            $
            4,342,523
            
            
            $
            271,805
            
            
            $
            23,673,365
            
            
            $
            5,205
            
            
            $
            -
            
            
            $
            -
            
            
            $
            23,678,570Operating
      income (loss)
            
            $
            (1,491,408
            )
            
            $
            214,856
            
            
            $
            (960,065
            )
            
            $
            (416,626
            )
            
            $
            (2,653,243
            )
            
            $
            (411,152
            )
            
            $
            (121,002
            )
            
            $
            (1,359,924
            )
            
            $
            (4,545,321
            )Net
      income (loss):
            
            $
            (1,464,410
            )
            
            $
            214,856
            
            
            $
            (960,065
            )
            
            $
            (416,626
            )
            
            $
            (2,626,245
            )
            
            $
            (768,856
            )
            
            $
            (121,002
            )
            
            $
            (1,712,346
            )
            
            $
            (5,228,449
            )Identifiable
      assets
            
            $
            8,994,410
            
            
            $
            1,920,032
            
            
            $
            12,397,491
            
            
            $
            1,417,536
            
            
            $
            24,729,469
            
            
            $
            238,285
            
            
            $
            595,504
            
            
            $
            -
            
            
            $
            25,563,258Depreciation
      and amortization
            
            $
            (324,673
            )
            
            $
            (120,086
            )
            
            $
            (944,607
            )
            
            $
            (13,695
            )
            
            $
            (1,403,061
            )
            
            $
            (22,284
            )
            
            $
            (836
            )
            
            $
            -
            
            
            $
            (1,426,181
            )Capital
      expenditure
            
            $
            24,396
            
            
            $
            1,298
            
            
            $
            426,682
            
            
            $
            -
            
            
            $
            452,376
            
            
            $
            36,726
            
            
            $
            -
            
            
            $
            -
            
            
            $
            489,102




21.
Concentrations
 
 Customers
in excess of 10% of total revenues were as follows:
 
 For the
three and six months ended June 30, 2009, the Company had a customer in the
Netherlands, which accounted for revenue of $5,258,880 and $10,532,569
respectively. For the same periods in 2008, this same Dutch customer accounted
for $5,807,197 and $11,699,525 respectively.




22.Related Party
Transactions





Loan
agreements and subsequent (partial) conversion




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 $1,404,692. 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, later extended by agreement to August 31, 2009.
 On February 15, February 23, March 31, 2009, May 4 and  May 27
QAT II  entered into  five loan agreements with the Company
whereby QAT II  agreed to provide the Company with $702,346,
$702,346, $702,346, $491,642 and $337,126 respectively.  The
outstanding principal of $4,340,497 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’s 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 or 10-Q 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.





On July
31, 2009, $4,100,000 of the outstanding QAT II loan amount described above was
converted into the Company’s Convertible Note and Warrant Private Placement
(“the Notes”).





Validsoft
Due Diligence




In
connection with the potential acquisition of ValidSoft, on March 16, 2009, the
Company entered into an agreement with Quercas Management Group, SA (“QMG”), a
related party, 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 (see Note 23).




18




23. Validsoft, Limited
Transactions





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.  The HOT Agreement is subject to, among other
terms and conditions, the Company’s ability to raise certain levels of financing
and provide certain advances to ValidSoft.  Pursuant to the HOT
Agreement and a Bridging Loan Agreement, as amended, as of June 30, 2009, the
Company had advanced a total of $345,895 to ValidSoft.




On June
17, 2009, the Company and Validsoft entered into a Collaboration Agreement (the
"Collaboration Agreement"). Pursuant to the Collaboration Agreement, the Company
and Validsoft will bundle and sell products offered by the Companies. The
Companies have granted each other worldwide licenses for their intellectual
property in connection with the distribution, marketing and sale of products to
be offered. The Companies have agreed to terms regarding the allocation of
revenue generated by the sale of the bundled products, and to indemnify the
other party in the event of losses arising from a breach of the Collaboration
Agreement by either the Company or Validsoft. The Agreement has a term of ten
years.




On June
30, 2009, the Company entered into an Extension Agreement with Validsoft Limited
("Validsoft" and collectively with the Company, the "Parties"), the purpose of
which was to amend a certain Side Agreement between the Parties dated April 24,
2009, thereby amending a certain Bridging Loan Agreement and the HOT Agreement,
each also between the Parties and dated February 23, 2009. The purpose of the
Extension Agreement was to extend certain dates in each of the Bridging Loan
Agreement and HOT Agreement from April 30, 2009 to July 31, 2009.




In
connection with the potential acquisition of ValidSoft, on March 16, 2009, the
Company entered into an agreement with QMG, a related party, 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.




24.SubsequentEvents





On July
1st2009
and July 8, QAT II , a closed-end fund of QAT Investments, entered into a loan
agreement with the Company whereby QAT II provided the Company with $213,795 and
$142,530.  According to the terms, the loans 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 August 31, 2009. The agreement and amount were
entered in Euro’s, which means that currency differences may occur in filings
made and this Report.




On July
31, 2009, the Company consummated a closing (the "Closing") of its private
placement offering (the "Offering") of Units comprised of 12% secured
convertible promissory notes (the "Notes") and warrants to purchase shares of
common stock (the "Warrants", and together with the Notes, the "Securities") to
accredited investors ("Investors"). The Securities were offered and sold
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"). The Company sold an aggregate of
$5,111,000 principal amount of Notes and delivered Warrants to purchase an
aggregate of 5,111,000 shares of the Company's common stock at a purchase price
of $1.00 per share. The Company intends to use the net proceeds from the
Offering primarily for working capital.  After taking into
consideration the conversion of $4.1 million of existing QAT II loans into this
Unit offering, the Company received gross cash proceeds of $1.3
million.




19




The Notes
are convertible at the option of the holder into common stock, no par value, of
the Company ("Common Stock") at a conversion price (the "Conversion Price")
equal to eighty five percent (85%) of the price at which shares are sold in a
future public offering (the "Public Offering") currently contemplated by the
Company if consummated; provided, however, that if the Public Offering is not
consummated on or before March 31, 2010, the Conversion Price shall be equal to
eighty five percent (85%) of the twenty (20) day average closing price of the
Common Stock for the twenty (20) trading days prior to March 31, 2010 (the
"March 31, 2010 Conversion Price"); provided further, however, that if at any
time following the earlier of the closing of the Public Offering or March 31,
2010, the twenty (20) day average closing price of the Common Stock for any
twenty (20) consecutive trading days exceeds two hundred percent (200%) of the
Public Offering closing price or of the twenty (20) day average closing price of
the Common Stock for the twenty (20) trading days prior to March 31, 2010, as
applicable, that any Notes which remain unconverted shall automatically convert
into shares of the Common Stock at the Conversion Price or the March 31, 2010
Conversion Price, as applicable.




Certain
Investors that invested through their individual retirement accounts received
Class B Notes. All other Investors received Class A Notes. The Class B Notes are
identical to the Class A Notes in all respects except that the Class A Notes are
secured by a first priority security interest in all of the assets of the
Company and certain subsidiaries whereas the Class B Notes are secured by all
the current assets of the Company and its consolidated subsidiaries including
cash, cash equivalents and accounts receivable. In addition, the Class B Notes
provide for simple interest as opposed to the Class A Notes, which provide for
compounded interest.




The
Warrants entitle the holders to purchase shares of Common Stock reserved for
issuance thereunder (the "Warrant Shares") for a period of five years from the
date of issuance and contain certain anti-dilution rights and a cashless
exercise feature on terms specified in the Warrants. In the event the trading
price of the Common Stock exceeds $2.00 for twenty (20) consecutive trading
days, the Company has the option to require that the Investors exercise the
Warrants. In the event the Investor chooses not to exercise the Warrants in this
case, the Investor will receive such number of Warrant Shares as the Investor
would be entitled to receive pursuant to a cashless exercise.




The
Company is obligated to register the shares of Common Stock underlying the Notes
and Warrants pursuant to unlimited piggy-back registration rights granted to the
Investors.




Separately,
on July 31, 2009, the Company entered a Letter Agreement with Validsoft whereby
Validsoft acknowledged its receipt of certain payments made pursuant to a
previous agreement among the parties.









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.




20




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)





Beginning
in 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. On
September 17, 2008, a hosting agreement was 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’s
in the Netherlands to its platform, making use of the mobile network of
T-Mobile.





2. On May
20, 2009, Elephant Talk Communication Holding, AG, a wholly-owned subsidiary of
the Company, entered into a definitive agreement with Vizzavi Espana, S.L. for
the supply of operation and technical services through a comprehensive
technological platform.  The Company, through Elephant Talk
Communication Holding, AG, will offer exclusive operation and technical support
services to Vizzavi, a Vodafone Group company.





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 and implemented the first Vizzavi (a
Vodafone Group company) MVNO in Spain as of June 2009.





4. In
line with the expected convergence of applications and bundling of services, we
intend to integrate our services with offerings bythirdparty
providers with a uniquely specialized or compatible technology. Although there
can be no assurance as to the completion of the agreement, in February 2009, we
entered into a Heads of Agreement (the “HOT Agreement”) to acquire a
controlling interest in Validsoft. Validsoft provides telecommunications based
credit card fraud identification and detection solutions combined with fully
automated customer service resolution capability, which is ideally suited for
mass consumer deployment via banks. In addition, we have entered into a
collaboration agreement with Validsoft on June 17, 2009.





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





Since new
management was hired in late 2006, approximately $30 million of investments
have been made into the Company through the end of 2008. The following is a
general description of the use of such proceeds during this period. Management
believes that the Company’s traditional fixed line business (“old
business”) could be operated by approximately 15 people, which is much smaller
number of people compared to the total employees and long term contractors the
Company currently employs.





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 required approximately 45 employees and
consultants.  During the period of 2006 to 2008, we spent
approximately $ 2.9 million in Network Costs and $13.9 million in selling
general & administration expenses (excluding $1.4 million in capitalized
development compensation cost). When allocating roughly 25% of the network costs
and 75% of the selling general & administration costs (based upon the
average amount of people working for the old and new business; in 2007 we had a
headcount of 53, as opposed to 72 in 2008), we estimate that a total of $11.2
million was spent on developing these new capabilities.  In addition,
we invested approximately $9.3 million in the acquisition of the Benoit Telecom
Group in addition to other smaller acquisitions in order to build our footprint
in Europe.  In addition, we spent approximately $4.5
million plus $1.43 million (in capitalized development compensation costs), or a
total of $5.9 million in capital expenditures over the last two
years.  In total we have invested approximately $26.4 million in
building our mobile platform capabilities.  When costs of raising
capital are included, in addition to certain deposits made, a total of $30
million has been expended in positioning us in our new
business.




21





Results of
Operations
 
 Our
results of operations for the three months and six months ended June 30, 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.
 
 We report
our financial statements in US dollars (“USD”), although the majority of our
business activates are denominated in Euro’s.  This situation can lead
to period-to-period fluctuations in our reported USD results arising from
changes in the exchange rate between the USD and the Euro.  Generally
speaking, when the USD strengthens relative to the Euro it has an unfavorable
impact on our revenue and income accounts and a favorable impact on our expense
accounts.  Conversely, when the USD weakens relative to the Euro, it
produces a favorable impact on our revenue and income accounts, and an
unfavorable impact on our expense accounts.  The fluctuations in the
USD/Euro exchange rate can result in currency translation effects, which impact
our reported USD results and may make it difficult to determine actual increases
and decreases in our revenue and expense accounts which are attributable to our
actual operating activities.  In addition to reporting changes in our
financial statements in USD’s as per the requirements of GAAP, we also highlight
the impact of any material currency translation effect by providing a comparison
between periods on constant currency basis, where the most recent USD/Euro
exchange rate is applied to previous periods.  Management believes
that this allows for greater insight into the trends and changes in our business
for the reported periods.
 
 Revenue
 
 Revenue
for the three months ended June 30, 2009 was $11,311,398, a decrease of $609,892
or 5.1%, compared to $11,921,290 for the same period in 2008. The decrease in
revenue for the 2009 period was primarily the result of the unfavorable impact
of a $1,529,535 currency exchange translation effect arising from a lower
USD/Euro exchange rate.  In constant currency, total revenue for the
three months ended June 30, 2009 was $11,124,476, an increase of $941,905 or
9.3% compared to the same period in 2008.  The increase in revenue was
attributable to an increase in our MVNO revenue of $1,758,414 compared to $0 in
2008, offset by a decline in our PRS and retail service of $1,049,050, or 10.5%,
compared to the same period in 2008.
 
 Revenue
for the six months ended June 30, 2009 was $20,740,282, a decrease of $2,938,288
or 12.4%, compared to $23,678,570 for the six months ended June 30, 2008. The
decrease in revenue for the 2009 period was primarily the result of the
unfavorable impact of a $3.030,706 currency exchange translation effect arising
from a lower USD/Euro exchange rate.  In constant currency, total
revenue for the six months ended June 30, 2009 was $20,740,282, an increase of
$92,314 or 0.5% compared to the same period in 2008.  The increase in
revenue was attributable to an increase in our MVNO revenue of $2,191,538
compared to $0 in the same period in 2008, offset by a decline in our PRS and
retail service revenue of $2,502,559 or 12.3%, compared to the same period in
2008.
 
 Management
believes that our PRS and retail services revenue will continue to decline in
future quarters, however, we expect revenue from our MVNO operations will more
than offset those declines.
 
 Cost
of service
 Cost of
service includes 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.
 
 Cost of
service for the three months ended June 30, 2009 was $10,632,204, a reduction of
$941,420 or 8.1%, compared to $11,573,624 for the same period in
2008.  The decrease in cost of service was primarily


22




the
result of the favorable impact of a $1,480,725 currency exchange translation
effect arising from a lower USD/Euro exchange rate. In constant currency, cost
of service increased $560,489 or 5.7% compared to the same period in 2008
primarily as a result of higher levels of revenue.
 
 Cost of
service for the six months ended June 30, 2009 was $19,780,001, a reduction of
$3,206,134 or 14%, compared to $22,986,135 for the same period in
2008.  This decrease in cost of service was primarily the result of a
favorable impact of a $2,934,392 currency exchange translation effect arising
from a lower USD/Euro exchange rate.  In constant currency, cost of
service decreased $271,743 or 1.4%, compared to the same period in 2008,
primarily as a result of improved margins on our new MVNO revenue.
 
 Cost of
service, as a percent of revenue, expressed in constant dollar terms was 93.9%
and 97.1% for the three month periods in 2009 and 2008, respectively, and 95.4%
to 97.1% for the six month periods in 2009 and 2008,
respectively.  Management expects cost of service will continue to
decline as a percent of revenue, subject to certain quarterly fluctuations, in
constant currency terms compared to previous quarters as a greater proportion of
future revenue is comprised of our MVNO services which have a substantially
lower cost of service than our traditional PRS business.
 
 Selling,
general and administrative
 Selling,
general and administrative (“SG&A”) expense for the three months ended June
30, 2009 was $1,783,795, an increase of $119,291 or 7.2% compared to $1,664,504
for the same period in 2008.  For the six months ended June 30, 2009,
SG&A expense was $3,246,943, an increase of $174,560 or 5.1%, compared to
$3,421,503 in the same period in 2008.  The increase in SG&A
expense for the three and six month periods was primarily attributable to
increased staffing levels and related costs associated with the expansion of our
MVNO operations.
 
 Non-cash
compensation to officers, directors and employees
 Non-cash
compensation for the three and six months ended June 30, 2009, was $750,406 and
$1,019,866, respectively, compared to $228,585 and $390,072, for the
corresponding 2008 periods. The increase in both periods is primarily
attributable to higher staffing levels, and awards made under the 2008 Incentive
Plan  Non-cash compensation is comprised of:
 
 ·
              the
      expense related to shares of restricted common stock that were 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 and six months ended June 20, 2009, was $707,763
and $1,337,945, respectively, compared to $751,725 and $1,426,181 for the
comparable periods in 2008.
 
 Other
Income and Expenses:
 Interest
income for the three months ended June 30, 2009 was $12,237 compared to $20,710
for the same period in 2008. Interest income was $22,307 and $36,463 for the six
months ended June 30, 2009 and 2008 respectively
 
 For the
three months ended June 30, 2009, interest expense was $136,154 compared to
$398,494 for the same period in 2008. Interest expense was $207,939 and
$769,071, for the six months ended June 30, 2009 and 2008,
respectively.  The interest expense decrease resulted from the
conversion of certain interest bearing debt into equity, which occurred in the
second quarter of 2008.
   23
  Non-controlling
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 and   ET-UTS
NV.
 
 During
the three and six months ended June 30, 2009, we incurred a non-controlling
interest charge of $653 and $756 respectively. During the same period in 2008,
we incurred losses of $30,232 and $59,249 attributable to minority shareholders’
interest.
 
 Comprehensive
Income (Loss)
 We record
foreign currency translation gains and losses as comprehensive income or loss.
Comprehensive Income (Loss) for the three and six months ended June 30, 2009 was
$470,533 and ($197,259) respectively, compared to income of $103,715 and
$1,214,347 for the three and six months ended June 30, 2008. The decrease in the
2009 periods compared to the same periods in 2008 is primarily attributable to
the translation effect resulting from the substantial fluctuations in the
USD/Euro exchange rates.
 
 Liquidity
and Capital Resources
 We have
an accumulated deficit of ($49,866,053) as of June 30,
2009.  Historically, we have relied on a combination of debt and
equity financings to fund our ongoing cash requirements.  In the first
six months of 2009, we received a total of $4.3 million in loans from QAT II
Investments SA (“QAT II”), a related party.  In July and August of
2009, QAT II converted $4.1 million of loans into our private placement of
convertible notes (“the Notes”) and warrants (the “Warrants” and together with
the Notes, the “Securities”), and we received an additional $1.3 million in
proceeds from the sale of Securities to other accredited
investors.  We believe that the cash balance at June 30, 2009, in
combination with the net proceeds received from the sale of the Securities in
July and August of 2009, will provide us with sufficient funds through the end
of the third quarter of 2009.
 
 Although
QAT II and other related parties have invested, or have arranged for the
investment of, a total of $35.4 million between 2005 through December 31, 2008,
and have since January 2009 funded our short-term capital requirements with an
additional $4.7 million (through August 14, 2009), there can be no assurance
that they will continue to do so.  Further, although we have recently
raised an additional $1.3 million through the sale of the Securities to
unaffiliated accredited investors, there can be no assurance that we will be
able to continue to raise sufficient capital to operate our
business.  Although we have 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 us or our 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
June 30, 2009, these conditions raise substantial doubt about our ability to
continue as a going concern.  The financial statements filed as part
of this Quarterly Report on Form 10-Q do not include any adjustments that might
result from the outcome of this uncertainty.
 
 Operating
activities
 Net cash
used in operating activities for the six months ended June 30, 2009 was
$3,063,154, a decrease of $85,882 or 2.7%, from the $3,149,036. This decrease in
use of cash from operations is largely due to an increase of operating losses
(after adjusting for non-cash items) in the first half year 2009 versus
2008.
 
 Investment
activities
 Net cash
used in investment activities for the six months ended June 30, 2009 was
$1,963,227, an increase of $1,475,713 or 302.7%, compared to $487,514 in the
same period in 2008.  The increase was primarily attributable to
increases in PP&E required to support the expansion of our MVNO
business.


24





Financing
activities
 Net cash
received by financing activities for the six months ended June 30, 2009 was
$4,007,369 compared to $2,833,475.  The 2009 amount is comprised of
amounts loaned to the Company by QAT II offset by advances the Company made to
ValidSoft.
 
 As a
result of the above activities, the Company had a cash and cash equivalents
balance of $575,770 as of June 30, 2009, a net decrease in cash and cash
equivalents of $1,080,776, for the six months ended June 30, 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.




25




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.





In May 2009, the FASB issued FAS No. 165, “Subsequent
Events,” (“FAS 165”). The purpose of FAS 165 is to establish general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued FAS 165 is effective for
interim and annual periods ending after June 15th,
2009. The Company does not believe that the implementation of this standard
will have a material impact on its consolidated financial
statements





In June
2009, the FASB issued FAS No. 168, “The FASB Accounting Standards Codification
and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162” (“FAS 168”). FAS 168 establishes the FASB Standards
Accounting Codification (“Codification”) as the source of authoritative U.S.
GAAP recognized by the FASB to be applied to nongovernmental entities and rules
and interpretive releases of the SEC as authoritative GAAP for SEC registrants.
The Codification will supersede all the existing non-SEC accounting and
reporting standards upon its effective date and subsequently, the FASB will not
issue new standards in the form of Statements, FASB Staff Positions or Emerging
Issues Task Force Abstracts. FAS 168 also replaces FASB Statement No. 162, “The
Hierarchy of Generally Accepted Accounting Principles” given that once in
effect, the Codification will carry the same level of authority. The Company
does not anticipate that the adoption of this statement will have a material
impact on its consolidated financial statement footnote disclosures. FAS 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009, which will be our quarter ending September 30, 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.




26





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.





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 June 30, 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.




27





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 agreement and a consultancy agreement
entered into between the Company and Choi.  The Company settled the
dispute on the termination agreement with a payment of $70,000.  The
complaint regarding the alleged breach of the consulting agreement remains
unsettled and could result in damages of approximately $70,000, 120,000 stock
options and attorney's fees and other related costs.  The trial is
scheduled to commence on August 24, 3009.





(d) Manu Ohri Litigation




On March
26, 2009, an action was commenced against the Company in the state of California
by Manu Ohri (“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 claims, 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 deny all material allegations of Ohri's complaint and
assert various affirmative defenses. We also filed and served a cross-complaint
against Ohri, who then filed and served an answer, denying the material
allegations of our cross-complaint.





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 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 April
28, 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 June
30, 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.




On June
30, 2009, we issued an aggregate number of 500,000 shares of our common stock to
our management team (4 persons) for successfully meeting of targets set by the
company.




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.




28





Item 6.
Exhibits





(a)
Exhibits




31.1
            
            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.





29





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.August
      14, 2009
              By:
              /s/ Steven
      van der VeldenSteven
      van der VeldenPresident
      and Chief Executive Officer(Principal
      Executive Officer)






August
      14, 2009
              By:
              /s/ Mark
      NijeMark
      NijeChief
      Financial Officer(Principal
      Financial and Accounting Officer)




30




Index to
Exhibits




Number
            
            Exhibit
            
            Page31.1
            
            Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)31.2
            
            Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)32.1
            
            Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906   of
      the Sarbanes-Oxley Act of 200232.2
            
            Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906   of
      the Sarbanes-Oxley Act of 2002





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