UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D. C. 20549





FORM
10-Q





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





For the
quarterly period ended June
30,2010





 ̈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)





19103
Centre Rose Boulevard


Lutz,
FL 33558


United
States


(Address
of principal executive offices)





+ 1 813 926 8920


(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  ̈





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





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




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





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


Yes  ̈No x




As of
August 13, 2010, there were 75,699,642 shares of the Company’s common stock
outstanding.









ELEPHANT
TALK COMMUNICATIONS, INC.


TABLE OF
CONTENTS


FORM
10-Q


June 30,
2010




PART
      I - FINANCIAL INFORMATION
                
                3Item
      1. Consolidated Financial Statements
                
                3Consolidated
      Balance Sheets as of June 30, 2010 (Unaudited) and December 31,
      2009
                
                3Unaudited
      Consolidated Statements of Operations for the six months periods ended
      June 30, 2010 and 2009
                
                4Unaudited
      Consolidated Statements of Cash Flows for the six months periods ended
      June 30, 2010 and 2009
                
                5Notes
      to the Consolidated Financial Statements (Unaudited)
                
                6Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of Operations
                
                24Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                
                31Item
      4T. Controls and Procedures
                
                31PART
      II - OTHER INFORMATION
                
                32Item
      1. Legal Proceedings
                
                32Item
      1a. Risk Factors
                
                33Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                33Item
      3.  Defaults upon Senior Securities
                
                34Item
      4.  Submission of Matters to a Vote of Security
      Holders
                
                34Item
      5.  Other Information
                
                34Item
      6. Exhibits
                
                34SIGNATURES
                
                35Exhibit
      31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
                
                X-1Exhibit
      31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
      or Rule 15(d)-14(a)
                
                X-2Exhibit
      32.1 Certification of Chief Executive Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
                
                X-3Exhibit
      32.2 Certification of Chief Financial Officer pursuant to section 906 of
      the Sarbanes-Oxley Act of 2002
                
                X-4




2




PART
I - FINANCIAL INFORMATION




Item 1. Consolidated Financial
Statements





ELEPHANT TALK COMMUNICATIONS, INC. AND
SUBSIDIARIES


CONSOLIDATED
BALANCE SHEET


(UNAUDITED)




June
      30,
                    2010
                  
                  
                  December
      31,
                    2009ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                  
                  $
                  4,276,714
                  
                  
                  $
                  1,457,900Restricted
      cash
                  
                  
                  188,630
                  
                  
                  
                  192,116Accounts
      receivable, net of an allowance for doubtful accounts of $595,284 and
      $764,302at June 30, 2010 and December 31, 2009
      respectively
                  
                  
                  5,716,232
                  
                  
                  
                  5,071,293Prepaid
      expenses and other current assets
                  
                  
                  2,166,298
                  
                  
                  
                  2,657,019Total
      Current Assets
                  
                  
                  12,347,874
                  
                  
                  
                  9,378,328LONG
      TERM DEPOSITS
                  
                  
                  346,746
                  
                  
                  
                  330,946DEFERRED
      FINANCING COSTS
                  
                  
                  2,117,067
                  
                  
                  
                  3,033,277PROPERTY
      AND EQUIPMENT, NET
                  
                  
                  6,829,204
                  
                  
                  
                  7,773,862INTANGIBLE
      ASSETS, NET
                  
                  
                  16,699,367
                  
                  
                  
                  3,910,363GOODWILL
                  
                  
                  3,046,790
                  
                  
                  
                  --TOTAL
      ASSETS
                  
                  $
                  41,387,048
                  
                  
                  $
                  24,426,776LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
                  
                  $
                  353,904
                  
                  
                  $
                  351,589Accounts
      payable and customer deposits
                  
                  
                  4,178,589
                  
                  
                  
                  6,475,074Deferred
      revenue
                  
                  
                  --
                  
                  
                  
                  132,205Accrued
      expenses and other payables
                  
                  
                  5,552,413
                  
                  
                  
                  2,738,998Shares
      to be issued
                  
                  
                  7,161,795
                  
                  
                  
                  --Convertible
      14% loan - related party (net of discount of $ 1,421,941 and $0,
      respectively)
                  
                  
                  836,539
                  
                  
                  
                  --Advances
      from related parties
                  
                  
                  --
                  
                  
                  
                  13,287Loans
      payable
                  
                  
                  877,187
                  
                  
                  
                  880,536Total
      Current Liabilities
                  
                  
                  18,960,427
                  
                  
                  
                  10,591,689LONG
      TERM LIABILITIESLoan
      from related party
                  
                  
                  450,436
                  
                  
                  
                  437,161Convertible
      12% secured note (net of discount of $ 12,126,341 and
      $12,333,020respectively)
                  
                  
                  95,680
                  
                  
                  
                  --Warrant
      liabilities
                  
                  
                  28,038,455
                  
                  
                  
                  16,626,126Conversion
      feature
                  
                  
                  8,735,904
                  
                  
                  
                  2,899,801Total
      Long term Liabilities
                  
                  
                  37,320,475
                  
                  
                  
                  19,963,088Total
      Liabilities
                  
                  
                  56,280,902
                  
                  
                  
                  30,554,777STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 65,812,367 issued andoutstanding as of June 30, 2010 compared to 53,695,984 shares
      issued and outstanding as of December 31, 2009
                  
                  
                  76,521,715
                  
                  
                  
                  54,880,778Accumulated
      other comprehensive income (loss)
                  
                  
                  (2,553,849
                  )
                  
                  
                  1,136,897Accumulated
      deficit
                  
                  
                  (89,030,994
                  )
                  
                  
                  (62,335,076
                  )Elephant
      Talk Comunications, Inc. Stockholders' Equity
                  
                  
                  (15,063,128
                  )
                  
                  
                  (6,317,401
                  )NON-CONTROLLING
      INTEREST
                  
                  
                  169,274
                  
                  
                  
                  189,400Total
      Stockholders' Equity
                  
                  
                  (14,893,854
                  )
                  
                  
                  (6,128,001
                  )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                  
                  $
                  41,387,048
                  
                  
                  $
                  24,426,776




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
                      Period
      ended,
                      June
      30
                    
                    
                    For
      the Six Months
                      Period
      ended,
                      June
      302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009REVENUES
                    
                    $
                    9,673,825
                    
                    
                    $
                    11,311,398
                    
                    
                    $
                    19,617,590
                    
                    
                    $
                    20,740,282COST
      AND OPERATING EXPENSESCost
      of service
                    
                    
                    9,005,394
                    
                    
                    
                    10,632,204
                    
                    
                    
                    18,379,282
                    
                    
                    
                    19,780,001Selling,
      general and administrative expenses
                    
                    
                    2,079,359
                    
                    
                    
                    1,783,795
                    
                    
                    
                    3,984,709
                    
                    
                    
                    3,246,943Non
      cash compensation to officers, directors and employees
                    
                    
                    2,712,756
                    
                    
                    
                    750,406
                    
                    
                    
                    3,253,669
                    
                    
                    
                    1,019,866Depreciation
      and amortization of intangibles assets
                    
                    
                    1,515,428
                    
                    
                    
                    707,763
                    
                    
                    
                    2,360,122
                    
                    
                    
                    1,337,945Total
      cost and operating expenses
                    
                    
                    15,312,937
                    
                    
                    
                    13,874,168
                    
                    
                    
                    27,977,782
                    
                    
                    
                    25,384,755LOSS
      FROM OPERATIONS
                    
                    
                    (5,639,112
                    )
                    
                    
                    (2,562,770
                    )
                    
                    
                    (8,360,192
                    )
                    
                    
                    (4,644,473
                    )OTHER
      INCOME (EXPENSE)Interest
      income
                    
                    
                    32,520
                    
                    
                    
                    12,237
                    
                    
                    
                    65,119
                    
                    
                    
                    22,307Interest
      expense
                    
                    
                    (535,887
                    )
                    
                    
                    (136,154
                    )
                    
                    
                    (982,427
                    )
                    
                    
                    (207,939
                    )Interest
      expense related to debt discount
                    
                    
                    (4,959,044
                    )
                    
                    
                    --
                    
                    
                    
                    (7,545,823
                    )
                    
                    
                    --Change
      in fair value of warrant liabilities & conversion
    feature
                    
                    
                    (2,660,727
                    )
                    
                    
                    --
                    
                    
                    
                    (8,748,778
                    )
                    
                    
                    --Amoritization
      of deferred financing costs
                    
                    
                    (593,689
                    )
                    
                    
                    --
                    
                    
                    
                    (1,121,535
                    )
                    
                    
                    --Total
      other income (expense)
                    
                    
                    (8,716,827
                    )
                    
                    
                    (123,917
                    )
                    
                    
                    (18,333,444
                    )
                    
                    
                    (185,632
                    )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                    
                    
                    (14,355,939
                    )
                    
                    
                    (2,686,687
                    )
                    
                    
                    (26,693,636
                    )
                    
                    
                    (4,830,105
                    )Provision
      for income taxes
                    
                    
                    (800
                    )
                    
                    
                    -
                    
                    
                    
                    (800
                    )
                    
                    
                    (800
                    )NET
      LOSS BEFORE NONCONTROLLING INTEREST
                    
                    
                    (14,356,739
                    )
                    
                    
                    (2,686,687
                    )
                    
                    
                    (26,694,436
                    )
                    
                    
                    (4,830,905
                    )Net
      (loss) income attributable to noncontrolling interest
                    
                    
                    (1,785
                    )
                    
                    
                    (653
                    )
                    
                    
                    (2,283
                    )
                    
                    
                    (756
                    )NET
      LOSS
                    
                    
                    (14,358,524
                    )
                    
                    
                    (2,687,340
                    )
                    
                    
                    (26,696,719
                    )
                    
                    
                    (4,831,661
                    )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation gain (loss)
                    
                    
                    (3,168,961
                    )
                    
                    
                    470,533
                    
                    
                    
                    (3,690,746
                    )
                    
                    
                    (197,259
                    )(3,168,961
                    )
                    
                    
                    470,533
                    
                    
                    
                    (3,690,746
                    )
                    
                    
                    (197,259
                    )COMPREHENSIVE
      LOSS
                    
                    $
                    (17,527,485
                    )
                    
                    $
                    (2,216,807
                    )
                    
                    $
                    (30,387,465
                    )
                    
                    $
                    (5,028,920
                    )Net
      loss per common share and equivalents - basic and diluted
                    
                    $
                    (0.23
                    )
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.45
                    )
                    
                    $
                    (0.09
                    )Weighted
      average shares outstanding during the period - basic and
      diluted
                    
                    
                    62,356,471
                    
                    
                    
                    53,864,109
                    
                    
                    
                    58,696,088
                    
                    
                    
                    52,693,232


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 period
                ended,
      June 302010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (26,696,719
              )
              
              $
              (4,831,661
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              2,360,122
              
              
              
              1,337,945Provision
      for doubtful accounts
              
              
              (57,474
              )
              
              
              (178,090
              )Stock
      based compensation
              
              
              2,876,951
              
              
              
              868,616Noncontrolling
      interest
              
              
              2,283
              
              
              
              756Amortization
      of Shares issued for Consultancy
              
              
              376,718
              
              
              
              151,250Issuance
      of stock
              
              
              221,626
              
              
              
              --Exercise
      of warrants (cash less)
              
              
              364,718
              
              
              
              --Exercise
      of convertible note (cash less)
              
              
              112,443
              
              
              
              --Change
      in fair value of warrant liabilities
              
              
              8,748,778
              
              
              
              --Amortization
      of deferred financing costs
              
              
              1,121,535
              
              
              
              --Interest
      expense relating to debt discount and conversion feature
              
              
              7,545,823
              
              
              
              --Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              (1,342,543
              )
              
              
              (1,704,371
              )Decrease
      (Increase) in prepaid expenses, deposits and other assets
              
              
              162,513
              
              
              
              (158,168
              )Increase
      (decrease) in accounts payable, proceeds from related parties and customer
      deposits
              
              
              (1,789,851
              )
              
              
              1,565,246Increase
      (decrease) in deferred revenue
              
              
              (131,835
              )
              
              
              (1,807
              )Increase
      (decrease) in accrued expenses and other payables
              
              
              (717,070
              )
              
              
              (112,870
              )Net
      cash used in operating activities
              
              
              (6,841,983
              )
              
              
              (3,063,154
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (1,214,286
              )
              
              
              (1,963,245
              )Restricted
      cash
              
              
              20
              
              
              
              18Cash
      received from acquisition of subsidiary
              
              
              48,577
              
              
              
              --Loan
      to third party
              
              
              --
              
              
              
              (345,895
              )Net
      cash used in investing activities
              
              
              (1,165,689
              )
              
              
              (2,309,122
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
              
              
              18,721
              
              
              
              12,767Deferred
      financing costs
              
              
              (205,326
              )
              
              
              --Loan
      from related party QAT Bridge Loan
              
              
              2,513,195
              
              
              
              4,340,497Loan
      from related party Bridge SPA
              
              
              2,885,000
              
              
              
              --Proceeds
      from Private Placement Offering
              
              
              6,459,800
              
              
              
              --Exercise
      of warrants (cash less)
              
              
              25,000
              
              
              
              --Placement
      fees
              
              
              (1,197,073
              )
              
              
              --Net
      cash provided by financing activities
              
              
              10,499,317
              
              
              
              4,353,264EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
              
              
              327,169
              
              
              
              (61,764
              )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              2,818,814
              
              
              
              (1,080,776
              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
              
              
              1,457,900
              
              
              
              1,656,546CASH
      AND CASH EQUIVALENTS, END OF THE PERIOD
              
              $
              4,276,714
              
              
              $
              575,770SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
              
              $
              473,824
              
              
              $
              19,880




2010
                      
                      
                      2009SUPPLEMENTAL
      DISCLOSURES OF NON-CASHINVESTING
      & FINANCINGACTIVITIES:Increase
      in Share Capital due to Acquisitions and Non-Cash
      Compensation
                      
                      $
                      14,318,336
                      
                      
                      $
                      532,583Increase
      in Share Capital due to Exercise of Warrants and Conversion of
      Notes
                      
                      $
                      346,564
                      
                      
                      $
                      -Decrease
      of Net Debt due to Conversion of Notes
                      
                      $
                      425
                      
                      
                      $
                      -Increase
      of Warrants due to fundraising of Convertible notes
                      
                      
                      7,539,585
                      
                      
                      
                      -




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
 
 Note 1. Organization and
Nature of Operations
 
 The
Company
 
 Elephant
Talk Communications, Inc. (“Elephant Talk,” “we,” “us” or the “Company”), is an
international provider of business software and services to the
telecommunications and financial services industry. The company enables both
mobile network operators (“MNOs”) and virtual operators (“MVNOs”) to offer a
full suite of products, delivery platforms, support services, superior industry
expertise and high quality customer service without substantial upfront
investments from clients. Elephant Talk provides global telecommunication
companies, MNOs, banks, supermarkets, consumer product companies, media firms,
and other businesses a full suite of products and services that enables them to
fully provide telecom services as part of their business offerings. The company
offers various dynamic products that include remote health care, credit card
fraud prevention, mobile internet ID security, multi-country discounted phone
services, loyalty management services, and a whole range of other emerging
customized mobile services.
 
 Converged telecommunication services
– full MVNE solutions.The Company is a
niche player in the converged telecommunications market, providing traffic and
network services as a licensed operator, and specializing in carrier grade
mobile enabling platforms to provide outsourced solutions to the various players
in the telecommunications’ value chain, including MNOs, MVNOs and non-operator
companies in need of both mobile as well as specialized land-line
telecommunication services. In this chain we position ourselves as a Full Mobile
Virtual Network Enabler , including also customized mobile services such as our
network integrated ValidSoft security and fraud prevention
solutions.
 
 ValidSoft
– electronic fraud prevention
  Our
recent major acquisition of ValidSoft LTd. (“ValidSoft”) gives us a position in
providing solutions to counter electronic fraud relating to card, the internet,
and telephone channels. ValidSoft's solutions are used to verify the
authenticity of both consumers and institutions (mutual authentication), and the
integrity of transactions (transaction verification) for the mass market, in a
highly cost effective and secure manner, yet easy to use and intuitive.
ValidSoft solutions are marketed under VALid-POS® and VALid®. For its biometrics
based product it trades under VALid-VSGTM.
 
 Principles of
Consolidation
 
 The
accompanying consolidated financial statements for June 30, 2010 and December
31, 2009 include the accounts of Elephant Talk its wholly-owned subsidiary
Elephant Talk Europe Holding B.V., its wholly-owned subsidiary Elephant Talk
Communication Holding AG, its wholly-owned subsidiaries Elephant Talk
Communications S.L.U., Elephant Talk Mobile Services B.V., Elephant Talk
Communication Austria GmbH, Elephant Talk Telekom GmbH (formerly Vocalis Austria
GmbH), Elephant Talk Communications Italy S.R.L., ET-Stream GmbH, Elephant Talk
Communication Carrier Services GmbH, Elephant Talk Communication (Europe) GmbH,
Elephant Talk Communication Schweiz GmbH, Moba Consulting Partners B.V.,
Elephant Talk Communications France S.A.S.,its majority owned (51%) subsidiary
Elephant Talk Communications Premium Rate Services Netherlands B.V., 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 majority owned (60%)
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 (99%) subsidiary Elephant Talk Middle East &
Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk
Middle East & Africa FZ-LLC and its wholly-owned subsidiary ValidSoft
Limited,ValidSoft
(UK) Ltd&
ValidSoft (Australia) Pty Ltd.
 
 Acquisitions.
  On March
17, 2010, the Company acquired all of the assets of privately held ValidSoft Ltd
from Ireland (“ValidSoft”) for total consideration of $ 16,033,689 paid by the
issuance of shares in the Company as well as warrants.This consideration
excludes the contingent consideration payable upon ValidSoft meeting certain
performance targets. The opening balance sheet of ValidSoft has been recorded as
of 1 April 2010. The Consolidated Statement of Income for the three months ended
June 30, 2010 include the financial results of ValidSoft as of 1 April
2010.
  6
 
 Interim Financial
Information
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. 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 our 2009 Form 10-K. These consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
in our 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 our financial position, results of operations and cash flows as
of and for the periods presented.
 
 The
results of operations for the six months ended June 30, 2010 are not necessarily
indicative of the results to be expected for the entire year.
 
 Note 2. Financial Condition
and Going Concern
 
 The Company has an accumulated deficit of ($89,030,994) as of June
30, 2010. Historically the Company has relied on a combination of debt and
equity financings to fund ongoing cash requirements. In the first half year of
2010 the Company has received loans in the total amount of €1,850,000 (US
$2,513,195) from QAT II Investments, SA, a related party investment fund
(“QAT II”).  We also raised $2,885,000 in a bridge financing of units
consisting of common stock, no par value, and warrants exercisable into common
stock, with accredited investors (the “Bridge Financing”)  Subsequent
to the Bridge Financing, we conducted a private placement (the “2010 Private
Placement Offering”) of units consisting of shares of our common stock and
warrants to accredited investors.
 
 The first
closing of the 2010 Private Placement Offering took place on June 28,
2010.  In connection with the first closing, we sold units having an
aggregate value of $6,459,800 at a
price of $1.20 per unit.  In connection with the first closing, we
issued 5,383,175 shares of common stock and warrants to purchase up to 5,383,175
shares of common stock at $1.50 per share.  The units 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”).  Excluding the second closing of the 2010 Private Placement
Offering on August 4, 2010 (described in Note 26), we have raised gross proceeds
of approximately $11.9 million in 2010, resulting in net proceeds to us of
approximately $10.7 million.
  We believe that our cash balance at June
30, 2010, in combination with the additional funding received so farin 2010,cash generated from
operationsand commitments
for additional funding,
will provide sufficient funds at least to the beginning of the
next year. We continue in the short term in raising funds under our 2010 Private
Placement Offering.
  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, on reasonable
terms.  Further, the terms of such financing may be dilutive to
existing shareholders or otherwise on terms not favorable to the Company or
existing shareholders. 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, or do not succeed
in meeting our sales objectives we may not be able to continue operations.
As of June 2010, these conditions raised substantial doubt from our auditors as
to our ability to continue as a going concern.
 
 Note 3. Significant
Accounting Policies
 
 Foreign Currency
Translation
 
 The
functional currency iss Euros for the Company’s wholly-owned subsidiary Elephant
Talk Europe Holding B.V. and its 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 and the British Pound Sterling for
its wholly-owned subsidiary ValidSoft (UK) Ltd. 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 Accounting Standard Codification
(“ASC”) 830, Foreign Currency Matters, (formerly known as Statement of Financial
Accounting Standards (“SFAS”) No. 52), net gains and losses resulting from
translation of foreign currency financial statements are included in the
statements of shareholder’s equity as other comprehensive income (loss). Foreign
currency transaction gains and losses are included in consolidated income
(loss). The accumulated other comprehensive income (loss) as of June 30, 2010
and December 31, 2009 was ($2,553,849) and $1,136,897, respectively. The foreign
currency translation gain/(loss) for the three months ended June 30, 2010 and
2009 was ($3,168,961) and $470,533, respectively. The foreign currency
translation gain/(loss) for the six months ended June 30, 2010 and 2009 was
($3,690,746) and ($197,259), respectively.
  7
 
 Use of
Estimates
 
 The
preparation of the accompanying financial statements conforms with accounting
principles generally accepted in the United States 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 is geographically dispersed. 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, 2010 and December 31, 2009 the allowance for doubtful
accounts was $595,284 and $764,302, respectively.
 
 Revenue Recognition and
Deferred Revenue
 
 The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”), (formerly, 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 landline 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 $0 and $132,205 as of June 30, 2010 and December
31, 2009, respectively.
 
 Cost of
Service
 
 Cost of
service includes origination, termination, network and billing charges from
telecommunications operators, out payment 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.
 
 Reporting
Segments
 
 ASC 820,
Segment Reporting, (Formerly 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.
  8
 
 Stock-based
Compensation
 
 Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation” (“ASC 718”) (formerly SFAS No. 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 promissory notes in 2003, until the awards are
exercised, forfeited, or contractually expire in accordance with the prospective
method and the transition rules of ASC 718. Under ASC 718, 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.
 
 Income
Taxes
 
 The
Company accounts for income taxes under ASC 740, “Accounting for Income Taxes”
(“ASC 740”) (formerly SFAS No. 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,
ASC 740 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.
  ASC 740
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
Company has filed, or is in the process of filing, tax returns that are subject
to audit by the respective tax authorities. Although the ultimate outcome would
be 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 position or cash flows.
 
 Comprehensive
Income/(Loss)
 
 Comprehensive
income (loss) 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 shareholders’ equity but are excluded from net income. For the first
six months of 2010 and 2009 the Company’s comprehensive income/(loss) consisted
of its net loss and foreign currency translation adjustments.
  9
 
 Intangible
Assets
 
 In
accordance with ASC 350, “Accounting for Goodwill and other Intangible Assets”
(“ASC 350”) (formerly 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 ASC 360, Property, Plant, and Equipment,” (formerly SFAS No.
144), annually, or whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Measurement of any
impairment loss for long-lived assets and identifiable intangible assets that
management expects to hold and use is based on the amount of the carrying value
that exceeds the fair value of the asset.
 
 Property and Equipment,
Internally Developed and third party Software
 
 Property
and equipment are initially recorded at cost. Additions and improvements are
capitalized, while expenditures that do not enhance the assets or extend the
useful life are charged to operating expenses as incurred. Included in property
and equipment are certain costs related to the development of the Company’s
internally developed software technology platform. The Company has adopted the
provisions of ASC 985, “Software”, (“ASC 985”) (formerly the AICPA Statement of
Position No. 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
 
 Fair
value is defined as the price that would be received upon the sale of an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Assets and liabilities recorded at fair
value in the consolidated balance sheets are categorized based upon the level of
judgment associated with the inputs used to measure their fair value. The fair
value hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances
(unobservable inputs). The fair value hierarchy consists of three broad levels,
which gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1) and the lowest priority to
unobservable inputs (Level 3). The three levels of the fair value hierarchy are
described below:
  Level Input:
              
              Input Definition:Level
      I
              
              Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement date.Level
      II
              
              Inputs,
      other than quoted prices included in Level I, that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.Level
      III
              
              Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.
 
 The
following table summarizes fair value measurements by level at June 30, 2010 for
financial assets and liabilities measured at fair value on a recurring
basis:
  level
      I
                
                
                level
      II
                
                
                level
      III
                
                
                TotalWarrant
      liabilities
                
                $
                28,038,455
                
                
                $
                --
                
                
                $
                --
                
                
                $
                28,038,455Conversion
      feature
                
                
                --
                
                
                
                8,735,904
                
                
                
                --
                
                
                
                8,735,904Total
      liabilities
                
                $
                28,038,455
                
                
                $
                8,735,904
                
                
                $
                --
                
                
                $
                36,774,359
  10
  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
December 2007, the FASB issued guidance which is now part of ASC 810-10,
“Noncontrolling Interests in Consolidated Financial Statements”, an Amendment of
Accounting Research Bulletin No. 51 “ (formerly Statement of Financial
Accounting Standards (SFAS) 160. This guidance establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, changes in a parent’s ownership of a noncontrolling
interest, calculation and disclosure of the consolidated net income attributable
to the parent and the noncontrolling interest, changes in a parent’s ownership
interest while the parent retains its controlling financial interest and fair
value measurement of any retained noncontrolling equity investment. The new
guidance is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company adopted this guidance on January 1, 2009,
the beginning of its 2009 fiscal year, which resulted in certain
reclassifications related to the noncontrolling interest in the consolidated
financial statements.
 
 In April
2008, the FASB issued revised guidance on determining the useful life of
intangible assets. The revised guidance, which is now part of ASC 350-30 General
Intangibles Other than Goodwill (previously Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets), amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The guidance is
effective for fiscal years beginning after December 15, 2008 and applies
prospectively to intangible assets acquired after the effective date. Early
adoption is not permitted. The adoption of SFAS No. ASC 350-30 did not have a
material impact on the Company’s consolidated financial statements.
  In April
2009, the FASB issued guidance, which is now part of ASC 825, “Interim
Disclosures about Fair Value of Financial Instruments” (“ASC 825”), (formerly
Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1). ASC 825 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. ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
ASC 825 did not have an impact on the Company’s consolidated financial
statements.
 
 In May
2009, the FASB issued new guidance for accounting for subsequent events. The new
guidance, which is now part of ASC 855-10, “Subsequent Events” (“ASC 855-10”)
(formerly, SFAS No. 165) is consistent with existing auditing standards in
defining subsequent events as events or transactions that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued, but it also requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date. The
new guidance defines two types of subsequent events: “recognized subsequent
events” and “non-recognized subsequent events.” Recognized subsequent events
provide additional evidence about conditions that existed at the balance sheet
date and must be reflected in the company’s financial statements. Non-recognized
subsequent events provide evidence about conditions that arose after the balance
sheet date and are not reflected in the financial statements of a company.
Certain non-recognized subsequent events may require disclosure to prevent the
financial statements from being misleading. The new guidance was effective on a
prospective basis for interim or annual periods ending after June 15, 2009. We
adopted the provisions of ASC 855-10 as required.
 
 In June
2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (ASC 105-10) (formerly Statement of Financial Accounting
Standards No. 168), establishes the FASB Accounting Standards Codification as
the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with generally accepted accounting principles. ASC 105-10 is
effective for interim and annual periods ending after September 15, 2009. The
adoption of ASC 105-10 did not have a material impact on the Company’s
consolidated financial statements.
  11
 
 Note 4. Long Term
Deposit
 
 Long term
deposits to various telecom carriers during the course of its operations and
office space rental deposits amount to $346,746 as of June 30, 2010 compared
with $330,946 as of December 31, 2009. The deposits are refundable at the
termination of the business relationship with the carriers or termination of the
rental contracts.
 
 Note 5. Prepaid Expenses and
other Current Assets
 
 Prepaid
expenses and other current assets recorded as $2,166,298 as of June 30, 2010,
compared with $2,657,019 as of December 31, 2009.
 
 The
amounts comprise prepaid Value Added Tax (“VAT”), unvested stock related
compensation for management & consultants and other general and
administrative expenses.
 
 Note 6. Deferred Financing
Costs
 
 Deferred
financing costs consist of commissions, warrants issued to placement agents,
associated expenses and legal fees for the 2009 private placement of units
consisting of notes and warrants, and for the 2010 QAT convertible loans. At
June 30, 2010 and December 31, 2009, deferred financing costs were $2,117,067
and $3,033,277, respectively, and are amortized over the terms of each of the
notes and the 2010 QAT convertible loans, respectively.
  Note 7. Property &
Equipment
 
 The
Company has evaluated the nature of its systems engineering and software
programming activities and relevance to its business activities and has
concluded that the reclassification of these investments from Intangibles to
Property and Equipment more accurately reflects the nature and financial
reporting of the Company. Typically, these investments pertain to the
Company’s:
  ·
              Intelligent
      Network (IN) platform
  ·
              CRM
      software
  ·
              Mediation,
      Rating & Pricing engine
  ·
              Operations
      and Business Support software
  ·
              Network
      management tools
 
 Property
and equipment at June 30, 2010 and December 31, 2009 consist of:
  Average
      Estimated Useful Lives
              
              
              June
      30,
                2010
              
              
              December
      31,
                2009Furniture
      and fixtures
              
              
              5
              
              
              
              202,934
              
              
              
              219,469Computer,
      communication and network equipment
              
              
              3 -
      10
              
              
              
              7,676,100
              
              
              
              8,071,138Software
              
              
              5
              
              
              
              3,946,873
              
              
              
              4,410,714Automobiles
              
              
              5
              
              
              
              115,350
              
              
              
              135,455Construction
      in progress
              
              
              
              
              
              
              1,374,840
              
              
              
              1,009,96913,316,097
              
              
              
              13,846,745Less:
      accumulated depreciation
              
              
              
              
              
              
              (6,486,893
              )
              
              
              (6,072,883
              )$
              6,829,204
              
              
              $
              7,773,862
  Total
depreciation expense for the three months ended June 30, 2010 and 2009 was
$488,669 and $509,847, respectively. Total depreciation expense for the six
months ended June 30, 2010 and 2009 was $1,149,056 and $953,177,
respectively.
  12
 
 Note 8. Intangible Assets -
Customer Contracts, Licenses and Interconnects
 
 Intangible
assets include customer contracts, telecommunication licenses and integrated,
multi-country, centrally managed switch-based interconnects. ValidSoft
Intellectual Property, including but not limited to software source codes,
applications, customer list & pipeline, registration & licenses, patents
and trademark/brands.
 
 Average
      Estimated
                  Useful
      Lives
                
                
                June
      30,
                  2010
                
                
                December
      31,
                  2009Customer
      Contracts, Licenses , Interconnect & Technology
                
                
                5 -
      10
                
                
                $
                10,970,482
                
                
                
                12,282,126Validsoft
      IP & Technology
                
                
                1 -
      10
                
                
                
                14,404,084
                
                
                
                --Less:
      Accumulated Amortization and impairment charges
                
                
                
                
                
                
                (7,882,448
                )
                
                
                (8,371,763
                )Less:
      Accumulated Amortization Validsoft IP & Technology
                
                
                
                
                
                
                (792,751
                )
                
                
                --$
                16,699,367
                
                
                $
                3,910,363
  Intangible
asset amortization expense for the three months ended June 30, 2010 and 2009 was
$1,026,759 and $197,916 respectively. Amortization expense for the six months
ended June 30, 2010 and 2009 totaled $1,211,066 and $384,768
respectively.
  Goodwill
                
                June
      30,
                  2010
                
                
                December
      31,
                  2009Goodwill
      at acquisition (Note 9)
                
                $
                3,433,833
                
                
                
                --End
      of period exchange rate translation
                
                
                (387,043
                )
                
                
                --$
                3,046,790
                
                
                $
                0
  Estimated future amortization
      expense related to our intangible assets is:2010
                                                                      
                                                                      
                                                                      2011
                                                                      
                                                                      
                                                                      2012
                                                                      
                                                                      
                                                                      2013
                                                                      
                                                                      
                                                                      2014
                                                                      
                                                                      
                                                                      2015
                                                                      
                                                                      
                                                                      2015remainder
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      
                                                                      thereafterInterconnect licenses and
      contracts
                                                                      
                                                                      
                                                                      344.421
                                                                      
                                                                      
                                                                      
                                                                      688.843
                                                                      
                                                                      
                                                                      
                                                                      686.974
                                                                      
                                                                      
                                                                      
                                                                      666.429
                                                                      
                                                                      
                                                                      
                                                                      588.674
                                                                      
                                                                      
                                                                      
                                                                      112.694
                                                                      
                                                                      
                                                                      
                                                                      -ValidSoft IP &
      Technology
                                                                      
                                                                      
                                                                      1.529.921
                                                                      
                                                                      
                                                                      
                                                                      2.734.360
                                                                      
                                                                      
                                                                      
                                                                      2.734.360
                                                                      
                                                                      
                                                                      
                                                                      2.734.360
                                                                      
                                                                      
                                                                      
                                                                      2.734.360
                                                                      
                                                                      
                                                                      
                                                                      756.823
                                                                      
                                                                      
                                                                      
                                                                      387.1481.874.342
                                                                      
                                                                      
                                                                      
                                                                      3.423.203
                                                                      
                                                                      
                                                                      
                                                                      3.421.334
                                                                      
                                                                      
                                                                      
                                                                      3.400.789
                                                                      
                                                                      
                                                                      
                                                                      3.323.034
                                                                      
                                                                      
                                                                      
                                                                      869.517
                                                                      
                                                                      
                                                                      
                                                                      387.148
  Note
9   Acquisition of ValidSoft Ltd
  On March 17, 2010 we issued 10,235,739
shares and 3,829,487 warrants as purchase price consideration following the
completionof the
acquisition ofValidSoft of
which 2,558,937 shares and 957,373 warrants are contingent upon meeting specific
targets following a stepped earn-out agreement.  Based upon a number major
contracts not being concluded yet at reporting date, the Companydoes not assume that the targets as set
for the contingent consideration to be released, will be met at this point in
time. Consequently, the total value for the consideration is $16,033,688
comprising the fair market value for the non-contingent sharesof $12,129,352 and non-contingent
warrants of $3,904,336. The contingent consideration is held in escrow.The Company will continue to monitor the
progress made and determine quarterly to which extent parts of the steppedtargets are likely to be
met.
 Consideration
      paid
                
                Total
                  Consideration
                
                
                Non-Contingent
      Consideration
                
                
                Contingent
      ConsiderationNumber
      of shares
                
                
                10,235,739
                
                
                
                7,676,805
                
                
                
                2,558,934Fair
      value (share price at 17 March 2010)
                
                $
                1,58
                
                
                $
                12,129,352
                
                
                
                -Numer
      of warrants
                
                
                3,829,487
                
                
                
                2,872,114
                
                
                
                957,373Fair
      Value (black-scholes)
                
                
                
                
                
                $
                3,904,336Total
      Consideration Paid
                
                
                
                
                
                $
                16,033,688
 13
 
 Following
the valuation of ValidSoft, we allocated
the above purchase price to the identifiable assets and liabilities of
ValidSoft.
 
 A summary
of the assets acquired and liabilities assumed for ValidSoft are:
 
 Estimated
      fair values:Assets
      acquired
              
              $
              16,677,323Liabilities
      assumed
              
              
              4,077,467Net
      assets acquired
              
              
              12,599,586Consideration
      paid
              
              
              16,033,688Goodwill
              
              $
              3,433,833
  The
operating results of ValidSoft have been consolidated with those of the Company
starting April1, 2010.
  UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE
SIX  MONTHS ENDED JUNE 30, 2010 AND 2009
  The
following un-audited pro forma consolidated financial information for the six
months ended June 30, 2010 and 2009, as presented below, reflects the results of
operations of the Company as of April 1, 2010 and assuming that the acquisition
occurred on April 1, 2009, respectively, and after giving effect to the purchase
accounting adjustments. These pro forma results have been prepared for
information purposes only and do not purport to be indicative of what operating
results would have been had the acquisitions actually taken place on April 1,
2010 and 2009 respectively, and may not be indicative of future operating
results.
  Pro
      forma consolidated
                
                June
      30,
                  2010
                
                
                June
      30,
                  2009Revenues
                
                $
                19,674,169
                
                
                $
                20,804,620Operating
      loss
                
                
                (8,792,293
                )
                
                
                (7,139,525
                )Net
      loss
                
                
                (27,180,023
                )
                
                
                (7,252,052
                )Loss
      per share - basic and fully diluted
                
                
                (0.44
                )
                
                
                (0.12
                )
 
 Note: For comparison
purposes with 2009Operating Loss
of ($8,792,293) and Net loss of ($27,180,023) are exclusive of the amortization
charge incurred of $792,751 in the three months ending March 31, 2010 following
the Fair Market Valuation of the assets of ValidSoft.
 
 The
Company included the financial results of ValidSoft in its consolidated 2010
financial results from the date April 1, 2010 through June 30,
2010.
 
 Further
details on the acquisition of ValidSoft can be found in our Current Report on
Form 8-K/A filed June2,
2010.
 
 Note 10.
Overdraft
 
 In 2004,
Elephant Talk Ltd. executed a credit facility with a bank in Hong Kong pursuant
to which Elephant Talk Ltd. has borrowed funds from the bank. As of June 30,
2010 the overdraft balance included accrued interest amounted to $263,294
compared to $250,023 as of December 31, 2009. 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 nor is it otherwise obligated to pay
funds drawn upon it on behalf of Elephant Talk Ltd. As of June 30, 2010 Moba
Consulting Partners B.V. had an overdraft of $90,610 compared to $101,566 as of
December 31, 2009 on one of the company’s bank accounts.
  14
 
 Note 11. Accrued
Expenses
 
 As of
June 30, 2010 and December 31, 2009, the accrued expenses comprised of the
following:
  June
      30,
              
              
              December
      31,2010
              
              
              2009Accrued
      Selling, General & Administrative expenses
              
              $
              1,975,507
              
              
              $
              589,630Placement
      fees
              
              
              —
              
              
              
              —Accrued
      cost of sales and network
              
              
              297,885
              
              
              
              307,172Accrued
      taxes
              
              
              1,528,727
              
              
              
              855,370Accrued
      interest payable
              
              
              1,260,645
              
              
              
              552,393Other
              
              
              489,649
              
              
              
              434,432Total
      accrued expenses
              
              $
              5,552,413
              
              
              $
              2,738,998
  Note 12. Convertible 14%
loan – related party
 
 The
Company received interest-bearing loans in the first quarter at 14% per annum
from QAT II . The loans are due to be repaid 180 days after the date the loans
were made available to the Company or in the event another person or entity
consummates an equity or debt securities financing with the Company in the
amount of at least $5,000,000, upon notice to the Company.
 
 These
loans included the option of conversion into equity under certain conditions. An
amendment to the Loan Agreement dated June 10, 2010, has affected the term and
conditions of the agreement. See Note 25: Related Party Transactions, for more
information.
 
 The
principal convertible 14% loan amount to €1,850,000 and is subject to
re-valuation on monthly basis, the current outstanding amount is $2,258,480 as
of June 30, 2010.
  Breakdown
      of Convertible 14% Note
              
              Principal
              
              
              Discount
              
              
              Net
      LiabilityConvertible
      14% note - related party
              
              $
              2,258,480
              
              
              $
              (1,421,941
              )
              
              $
              836,539Totals
              
              $
              2,258,480
              
              
              $
              (1,421,941
              )
              
              $
              836,539
  Note
13.Loans
Payable
 
 Loans
payable at June 30, 2010 and December 31, 2009 are summarized as
follows:
  June
      30,
                2010
              
              
              December
      31,
                2009Installment
      loan payable due December 24, 2006, secured by personal guarantees of two
      shareholders, a former director, and a third party
              
              $
              319,121
              
              
              $
              320,339Installment
      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
              
              
              190.679
              
              
              
              191,407Installment
      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
              
              
              84,782
              
              
              
              85,106Term
      loan payable, bank, monthly payments of interest at bank's prime rate,
      7.0% at June 30, 2010
              
              
              282,605
              
              
              
              283,684Total
              
              $
              877,187
              
              
              $
              880,536
 
 Elephant
Talk Ltd. executed a credit facility with a bank in Hong Kong on 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 $594,652 as of June 30, 2010. As a result of the default, the
entire loan balance outstanding at June 30, 2010 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 $4.787 and
$12,767 in interest expense and default interest expense, respectively, on loans
payable as of June 30, 2010 and June 30, 2009 and $37,655 and $53,681 in
interest expense as of June 30, 2010 and June 30, 2009, respectively. The
Company has not guaranteed the credit facility nor is it otherwise obligated to
pay funds drawn upon it on behalf of Elephant Talk Ltd.
  15
 
 Note 14. Long term
debt
 
 The
Company’s 51% owned subsidiary ET-UTS N.V. has received $450,436 in interest
bearing (8% per annum) unsecured loans from United Telecommunication Services
N.V., the 49% shareholder in the subsidiary. No maturity has been
fixed.
 
 Note 15. 12% Secured
Convertible Promissory Notes
 
 On July
31, August 18, September 3, September 30 and October 30, 2009, the Company
consummated closings of its 2009 private placement offerings of units (the “2009
private placement”) comprised of 12% secured convertible promissory notes (the
“Notes”) and warrants (the “Warrants”) to purchase shares of common stock to
accredited. The securities were offered and sold pursuant to an exemption from
registration under Section 4(2) of the Securities Act. The Company sold an
aggregate of $12,333,020 principal amount of Notes and delivered Warrants to
purchase an aggregate of 12,333,020 shares of the Company’s common stock at a
purchase price of $1.00 per share. The Company used the net proceeds from the
2009 private placement primarily for working capital.
  The value
of the Warrants to the investors of the 2009 private placement has been
capitalized and off set against the liability for the Notes. This resulted in a
debt discount of $12,333,020 incurred in connection with the private placement.
The debt discount will be amortized over the term of the Notes using the
effective interest method.
  Breakdown
      of Convertible 12% Secured Note
                
                Principal
                
                
                Conversions
                
                
                Net
                  Principal
                
                
                Net
                  Discount
                
                
                Net
                  LiabilityConvertible
      12% secured note - related party
                
                $
                5,332,383
                
                
                $
                0
                
                
                $
                5,332,383
                
                
                $
                5,290,625
                
                
                $
                41,758Convertible
      12% secured note - third party
                
                $
                7,000,637
                
                
                $
                111,000
                
                
                $
                6,889,637
                
                
                $
                6,835,716
                
                
                $
                53,922Totals
                
                $
                12,333,020
                
                
                $
                111,000
                
                
                $
                12,222,020
                
                
                $
                12,126,341
                
                
                $
                95,680
  The Notes
are convertible at the option of the holder into no par value common stock of
the Company at a conversion price equal to $1.35. During the second quarter of
2010 a principal amount of $111,000 of the outstanding
Notes were  converted into common stock. This has resulted in an
accelerated accretion of the relating debt discount (see “Breakdown of
Convertible 12% Secured Note Disclunt,” below). The related number of common
stock issued is 83,292 which also included such noteholder’s accumulated
interest up to their resepctive dates of conversion.
  Breakdown
      of Convertible 12% Secured Note Discount
                
                Initial
                  Discount
                
                
                Regular
                  Accretions
                
                
                Accelerated
      Accretions
                
                
                Net
                  DiscountConvertible
      12% secured note - related party
                
                $
                5,332,383
                
                
                $
                41,758
                
                
                $
                -
                
                
                $
                5,290,625Convertible
      12% secured note - third party
                
                $
                7,000,637
                
                
                $
                54,346
                
                
                $
                110,575
                
                
                $
                6,835,716Totals
                
                $
                12,333,020
                
                
                $
                96,104
                
                
                $
                110,575
                
                
                $
                12,126,341
  The
conditions of the outstanding $5.3 million Note to QAT II  was amended
on June 10, 2010, has accepted a forced conversion of their outstanding $5.3
million Note when an aggregate amount of $11 million is raised in connection
with the 2010  Private Placement Offering. See Item 2, “Unregistered
Sales of Equity Securities and Use of Proceeds,” for further information. The
valuation in Note 17 of the “Conversion Feature” is based upon our
expectation  that we will raise at least $11 million in connection
with the 2010 Private Placement Offering.
  16
  Note 16. Warrant
liabilities
  Outstanding
      warrants consisted of the following as of June 30, 2010:
                
                Initial
      Fair
                  Value
                
                
                Fair
      Mark-to- Market Value as per December 31, 2009
                
                
                Fair
      Mark-to- Market Value as per June 30, 2010Investor
      Warrants - Related to 2009 Prom Note issue
                
                $
                14,284,242
                
                
                $
                14,359,363
                
                
                $
                17,042,503Placement
      Agent Warrants - Related to the 2009 Prom Note issue
                
                $
                2,285,479
                
                
                $
                2,266,762
                
                
                $
                2,418,2502010
      QAT II Loan Warrants (part I)
                
                $
                3,042,617
                
                
                $
                -
                
                
                $
                2,859,2342010
      QAT II Loan Warrants (part II)
                
                $
                5,718,467
                
                
                $
                -
                
                
                $
                5,718,467$
                25,330,805
                
                
                $
                16,626,125
                
                
                $
                28,038,455
 Investor
and placement agent warrants – 12% secured convertible note
  We issued
the Warrants in connection with the 2009 private placement. The Warrants include
conversion provisions that require us to record them at fair value as a
liability in accordance with ASC 815 (formerly EITF 00-19), with subsequent
changes in fair value recorded as a non-operating gain or loss in our statement
of operations. The fair value of the warrants is determined using a
Black-Scholes option pricing model, and is affected by changes in inputs to that
model including our stock price, expected stock price volatility, interest rates
and expected term. The fair value of the Warrants issued to investors and
placement agents in connection with the 2009 private placement was $16,569,721
upon issuance and is valued at $19,460,753 as of June 30, 2010.
 
 During
the second quarter of 2010 some of the Warrants relating to the 2009 private
placement were  exercised. The total outstanding number of Warrants,
including the  warrants issued to the selling agents has decreased by
669,828. The total outstanding Warrants, including the warrants issued to
the selling agent in connection with the 2009 private placement has become
13,636,475 Warrants. The number of shares is not increased by the same number as
the exercised warrants as the warrant agreement includes a cashless exercise
option.
  Outstanding
      warrants consisted of the following as of June 30, 2010:
                
                Initial
      number of warrants issued
                
                
                Exercised
                
                
                Outstanding
      warrantsInvestor
      Warrants - Related to 2009 Prom Note issue
                
                
                12,333,020
                
                
                
                390,000
                
                
                
                11,943,020Placement
      Agent Warrants - Related to the 2009 Prom Note issue
                
                
                1,973,283
                
                
                
                279,828
                
                
                
                1,693,45514,306,303
                
                
                
                669,828
                
                
                
                13,636,475
 
 2010
QAT II loan warrants
  In the
first quarter of 2010, 2,513,195 warrants were issued to QAT IIas part of
the loan agreements for the loans granted for a total amount of € 1,850,000. The
total value of these warrants has initially been valued at $3,042,617 and as per
June 30, 2010 they are valued at $2,859,234. The change in fair value of
$183,383 was recorded in the income statement.
 
 During
the second quarter, we amended the convertible 14% loan agreements with QAT II,
resulting in the issuance of an additional 5,026,390 warrants to QAT II..  These
warrants were valued at $5,718,467 and recorded as a warrant liability on the
balance sheet and as an expense in the income statement.
 
 For
details on the abovementioned amendment see Note 25: “Related Party
Transactions”.
 
 ValidSoft
acquisition warrants
  In the
first quarter of 2010, we acquired ValidSoft Ltd. The former shareholders were
granted warrants on our common shares as part of the acquisition price. The
initial value of these warrants was $3,904,337 and has been accounted for as
capital in the common stock section of the  balance sheet.
  Note 17. Conversion
feature
 
 12%
secured convertible note
 
 A
conversion feature (holders of the Notes will receive a discount of 15% when
converting the Note into shares instead of cash repayment) was recognized at
fair value on the respective issuance dates of the Notes as a discount and will
be amortized using the effective interest rate method from issuance to the
maturity date of the respective Notes. The conversion feature has been marked to
market each previous reporting dates with subsequent changes in fair value which
have been recorded as non-operating gains or losses in our income
statement.
  17
 
 Pursuant
to the terms of the Notes, we determinedthe
conversion price to be $1.35.  This amount is equal to eighty-five
percent (85%) of the twenty (20) day average closing price of our common stock
for the twenty (20) trading days prior to March 31, 2010. Note holders may
convert their Notes into shares of common stock at the conversion price, in full
or in part, at any time before the maturity date. Since this conversion feature
has the characteristics of an option to purchase shares at a fixed price per
share, the fair market value was calculated by using the Black-Scholes option
pricing model. The fair value of the existing conversion feature was $7,479,151
as of June 30, 2010.
 
 The 2010
valuation of the conversion feature described above is based upon our
expectation that the current equity raise of the Private Placement Offering will
be at least $11 million which will cause the automatic conversion of the Note
held by QAT II in accordance with the conversion terms equal to the 2010 Private
Placement Offering of $ 1.20 per share.
 
 2010
QAT II loans
 
 During
the first quarter of 2010, the company received additional loans from QAT II
aggregating a total of €1,850,000 (with a current book value of $2,258,480)
which included the right for QAT II to convert the principal and accrued
interest outstanding as of the date of the consummation of an equity or debt
financing in the amount of at least US$5,000,000 (a “Placement”) into the same
type of equity or debt securities issued in connection with the Placement and
pursuant to the same terms and conditions of such Placement. The conversion
share price has been determined at $1.20 and the conversion date for valuation
purposes has been set at August 31, 2010.  Since this conversion
feature has the characteristics of an option to purchase shares at a fixed price
per share, the fair market value was calculated by using the Black-Scholes
option pricing model. The fair value of the existing conversion feature has been
calculated at $1,256,753 as of June 30, 2010.
  Outstanding
      Conversion Feature Liability consisted of the following as of June 30,
      2010:
                
                Initial
      Fair
                  Value
                
                
                Fair
      Mark-to-
                  Market
      Value
                  as
      per
                  December
      31,
                  2009
                
                
                Fair
      Mark-to- Market Value
                  as
      per
                  June
      30,
                  2010Conversion
      Feature - Related to 15% discount on 2009 Prom Note issue
                
                $
                2,418,819
                
                
                $
                2,899,801
                
                
                $
                7,479,151Conversion
      Feature - Related to conversion right 2010 QAT II Loans
                
                $
                250,000
                
                
                $
                0
                
                
                $
                1,256,753$
                2,668,819
                
                
                $
                2,899,801
                
                
                $
                8,735,904
  Note 18. Stockholders’
Equity
 
 (A)
Common Stock
 
 The
Company is presently authorized to issue 250,000,000 shares common stock. The
Company had 65,812,367 shares of common shares issued and outstanding as of June
30, 2010, an increase of 12,116,383 shares since December 31, 2009, largely due
to the shares issued in connection with the ValidSoft acquisition, the Bridge
Financing, and shares issued as compensation.  The number excludes the
245,900 unreturned and the 2,558,934 escrowed contingent shares mentioned
below. The
number shares issued and outstanding as of August 13, 2010 is 75,699,642,
which includes 245,900 shares which were cancelled by the Company prior to 2006
as well as the 2,558,934 contingent shares issued for the ValidSoft acquisition.
The 245,900 shares were not returned to our transfer agent and never cancelled
on their records. These shares have been blocked for trading by our transfer
agent. The contingent shares are held in escrow for the contingent consideration
of the ValidSoft consideration. The contingent consideration will be recorded
when the contingency is resolved.
 
 ValidSoft
acquisition warrants
  In the
first quarter of 2010, we acquired ValidSoft The former shareholders were
granted warrants on our common shares as part of the acquisition price. The
initial value of these warrants was $3,904,337 and has been accounted for as
capital in the common stock.
 
 (B)
Shares to be issued
 
 Following
the sale of securities under the Bridge Financing, the 2010 Private Placement,
exercise of warrants and shares issued as compensation, a total number of
5,881,733 shares remain to be issued, valued at $ 7,161,795.
  18
  Note 19. Basic and Diluted
Net Loss Per Share
 
 Net loss
per share is calculated in accordance with ASC 260 “Earnings per Share”
(formerly SFAS No.128). Basic net loss per share is based upon the weighted
average number of common shares outstanding. Dilution is computed by applying
the treasury stock method. Under this method, options and warrants are assumed
to be exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period. Weighted average number of shares
used to compute basic and diluted loss per share is the same since the effect of
dilutive securities is anti-dilutive.
 
 Note 20. 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,
2010.
 
 2006
Non-Qualified Stock and Option Compensation Plan
 
 Under our
2006 plan there are, as of June 30, 2010, 344,342 stock options outstanding.
There are remaining 600,000 shares and 55,658 stock options available for
grant.
 
 Options
granted generally vest over a three year period. Options generally expire two
years from the date of vesting.
 
 Common
stock purchase options and warrants consisted of the following as of June 30,
2010:
  Number
      of
                shares
              
              
              Exercise
                Price
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2009
              
              
              344,342
              
              
              $
              2.25
              
              
              $
              453,917Granted
      in 2010
              
              
              —
              
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Cancelled/Forfeited
              
              
              —
              
              
              
              —
              
              
              
              —Outstanding
      as of June 30, 2010
              
              
              344,342
              
              
              $
              2.25
              
              
              $
              453,917
 
 The
options were granted with an exercise price of $2.25, the share closing price as
of September 26, 2007. The options generally vested as of December 31, 2009, or
will vest (if unvested) if there is a change of control in the
Company.
 
 No
options have been issued or granted under this plan in 2010.
  19
 
 Following
is a summary of the status of options outstanding under the 2006 plan at June
30, 2010:
 
 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
              
              
              
              1.86
              
              
              $
              2.25
              
              
              
              269,342
              
              
              $
              2.25
 
 At June
30, 2010, the total compensation cost related to unvested stock-based awards
granted to employees under the provisions of ASC 718 and the Company’s 2006
stock award plan, but not yet recognized was approximately $24,991.
 
 2008
Long-Term Incentive Plan
 
 The 2008
Long-Term incentive plan was adopted on January 15, 2008, and approved by our
shareholders on the same date at our annual meeting. The 2008 Long-Term
incentive 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 effectuated on June 11, 2008. As of June
30, 2010, a total of 3,742,000 stock options and 507,300 shares had been granted
under this plan. Options granted generally begin vesting over a three-year
period after grant date although options have been granted with a shorter period
than three years. Options granted in the beginning expire two years from the
date of vesting but the latest in 2010 issued options remain exercisable
for nine years from the date of vesting. It is expected that future options will
be awarded with the nine-year exercise period after
first vesting.
 
 Common
stock purchase options and warrants consisted of the following as of June 30,
2010:
 
 Number
      of
                shares
              
              
              Average
                Exercise
      Price
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2009
              
              
              976,000
              
              
              $
              0.89
              
              
              $
              758,900Granted
      in 2010
              
              
              2,934,000
              
              
              $
              1.42
              
              
              $
              3,999,228Exercised
              
              
              —
              
              
              
              —
              
              
              
              —Cancelled/Forfeited
              
              
              40,500
              
              
              $
              1.21
              
              
              $
              46,642Outstanding
      as of June 30, 2010
              
              
              3,869,500
              
              
              $
              1.29
              
              
              $
              4,711,486
 
 The
options granted pursuant to this plan in 2010 were granted with an average
exercise price of $1.42. The initial fair market value of the options granted
using the Black-Sholes options model for these options has been valued at
$3,999,228 at their initial grant-dates. In the second quarter we have
reconsidered the churn rate we use in our model for employees leaving the
company before the date of exercise. The churn rate was changed from 16.19% to
1.58% because few employees left the Company during the previous two years. The
results, $112,128 (2009) and $554,446 (2010), have been included in our
income statement for the period ending June 30, 2010.
  Following
is a summary of the status of options outstanding under the 2008 Long-Term
Incentive Plan at June 30, 2010:
 
 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$
              0.60-1.98
              
              
              
              3,869,500
              
              8,26
      years
              
              $
              1.287
              
              
              
              283,334
              
              
              $
              1.09
 
 The
weighted average assumptions used so far for the options granted in 2010 using
the Black-Scholes options model are: volatility of 142%, term of 9.95 years and
a Risk Free Interest Rate assumption of 3.768%. The expected dividend yield is
zero.
  20




At June
30, 2010 the total compensation cost related to unvested stock-based awards
granted to employees under the provisions of ASC 718 and the Company’s 2008
stock award plan, but not yet recognized in the profit and loss was
approximately $3,161,472





Note 21.
Commitments





As of
June 30, 2010 commitments of the Company relating to leases, co-location,
interconnect and office rents are as follows:




December
      31, 2010
            
            $
            1,466,802December
      31, 2011
            
            
            2,884,307December
      31, 2012
            
            
            2,336,598December
      31, 2013
            
            
            2,001,149December
      31, 2014
            
            
            428,492Total
            
            $
            9,117,348




Note
22.Minority
interests in subsidiaries





The
Company had minority interests in several of its subsidiaries. The balance of
the minority interests as of June 30, 2010 and December 31, 2009 were as
follows:




Noncontrolling
      interest
              Balance
      atSubsidiary
            
            Noncontrolling
              Interest
      %
            
            
            June
      30,
              2010
            
            
            December
      31,
              2009ETC
      PRS UK
            
            
            49
            %
            
            $
            8,955
            
            
            $
            10,516ETC
      PRS Netherlands
            
            
            49
            %
            
            
            119,614
            
            
            
            140,462ET
      ME&A Holding WLL
            
            
            40
            %
            
            
            —
            
            
            
            —ET
      Bahrain WLL
            
            
            1
            %
            
            
            5,461
            
            
            
            3,180ET
      ME&A FZ LLC
            
            
            49.46
            %
            
            
            35,244
            
            
            
            35,242ET
      UTS Curacao
            
            
            49
            %
            
            
            —
            
            
            
            —Total
            
            
            
            
            
            $
            169,274
            
            
            $
            189,400




Note 23.
Litigation





(a)
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.




(b) Manu Ohri
Litigation





On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court,
Orange County, in a matter entitled Manu Ohri v. Elephant Talk
Communications, Inc., Case No. 30-20009-00120609.  Ohri alleges breach
of a written contract, breach of an oral contract, and a common count for
services rendered.   Ohri 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.  The Company denies all material allegations of Ohri's
complaint and asserts various affirmative defenses.  The Company also
filed and served a cross-complaint against Ohri, who then filed and served an
answer, denying the material allegations of the Company’s
cross-complaint.




21




The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start December 6, 2010.





(c)
Bruce Barren Litigation





On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled
Bruce Barren v. Elephant Talk Communications, Inc., Case No.
BC429032.  Barren alleges causes of action for breach of a restricted
stock agreement, breach of the implied covenant of good faith and fair dealing,
breach of an oral employment agreement, and common counts for services
rendered—despite entering into a settlement agreement and full release of any
claims against the Company shortly after his resignation in May
2009.  The Company contends that Mr. Barren’s claims are without
merit, and has answered his complaint, denying all material allegations and
asserting various affirmative defenses.





The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start February 7, 2011.





(d)
Chong Hing Bank Litigation





On
December 15, 2009, an action was commenced against the Company by Chong Hing
Bank Limited, fka Liu Chong Hing Bank Limited, a publicly listed Hong Kong
company (the “Bank”), in the California Superior Court, Orange County, in a
mater entitled Chong Hing Bank Limited v. Elephant Talk Communications, Inc.,
Case No. 30-2009-00328467.  The Bank alleges that it entered into
various installment loan agreements and an overdraft account with Elephant Talk
Limited (“ETL”), a Hong Kong subsidiary of the Company.  The Bank
alleges that ETL is in default on the loans and overdraft account, and that
$1,536,792.28 plus interest is currently due.  The Bank alleges that
the Company is liable to repay the loans and overdraft account.  The
Bank is suing the Company for breach of contract and common
counts.  The Company has answered the complaint, denying all material
allegations and asserting various affirmative defenses.





The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start February 14, 2011.




22




Note 24. Segment
Information






Year
ended June 30, 2010


EUROPE
              
              
              Far East
                Hong Kong
      /
              
              
              Middle
              
              
              TheNetherlands
              
              
              Spain
              
              
              Switzerland
              
              
              Others
              
              
              Total
              
              
              China
              
              
              East
              
              
              Americas
              
              
              TOTALRevenues
      from unaffiliatedcustomers:
              
              $
              14,686,376
              
              
              
              845,412
              
              
              
              3,390,316
              
              
              
              171,730
              
              
              $
              19,093,835
              
              
              $
              -
              
              
              $
              498,243
              
              
              $
              25,512
              
              
              $
              19,617,590Operating
      income (loss)
              
              $
              (1,144,634
              )
              
              $
              (150,455
              )
              
              $
              (1,378,778
              )
              
              $
              (1,617,320
              )
              
              $
              (4,291,188
              )
              
              $
              (110,673
              )
              
              $
              83,000
              
              
              $
              (4,041,332
              )
              
              $
              (8,360,192
              )Net
      income (loss):
              
              $
              (1,128,465
              )
              
              $
              (150,455
              )
              
              $
              (1,374,717
              )
              
              $
              (1,634,220
              )
              
              $
              (4,287,858
              )
              
              $
              (568,246
              )
              
              $
              83,000
              
              
              $
              (21,923,616
              )
              
              $
              (26,696,719
              )Identifiable
      assets
              
              $
              7,548,577
              
              
              $
              1,136,100
              
              
              $
              9,391,821
              
              
              $
              17,779,896
              
              
              $
              35,856,394
              
              
              $
              550,564
              
              
              
              524,086
              
              
              
              4,456,005
              
              
              $
              41,387,048Depreciation
      and amortization
              
              $
              (57,131
              )
              
              $
              (106,945
              )
              
              $
              (1,011,735
              )
              
              $
              (857,114
              )
              
              $
              (2,032,925
              )
              
              $
              (27,709
              )
              
              $
              (16,481
              )
              
              $
              (283,007
              )
              
              $
              (2,360,122
              )Capital
      expenditure
              
              $
              1,446
              
              
              $
              1,989
              
              
              $
              1,215,023
              
              
              $
              
              
              
              $
              1,218,458
              
              
              $
              (20,781
              )
              
              $
              -
              
              
              $
              16,609
              
              
              $
              1,214,286
  Year
ended June 30, 2009
 EUROPE
                
                
                Far
      East
                  Hong Kong
    /
                
                
                Middle
                
                
                TheNetherlands
                
                
                Spain
                
                
                Switzerland
                
                
                Others
                
                
                Total
                
                
                China
                
                
                East
                
                
                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


Note 25. Related Party
Transactions





12%
Secured convertible note





On June
10, 2010 and at our request, QAT II entered into an agreement with us calling
for the mandatory conversion of the total principal amounts outstanding under
the Notes to QAT II ($4 million issued July 31, 2009 and $1.3 million issued
October 31, 2009, totaling $ 5.3 million), in case the Company raises a minimum
of $ 11 million in connection with the 2010 Private Placement
Offering.





The
Company and QAT II agreed the
unpaid principal due pursuant to the Notes, excluding any accrued but unpaid
interest or other fees due on such Notes, would be exchanged for
units, at a price of $1.20 per unit and on the same terms and conditions as the
2010 Private Placement Offering, upon our raising an aggregate of $11 million in
connection with our 2010 Private Placement Offering (also see item “Unregistered
Sales of Equity Securities and Use of Proceeds”).





Loan
agreements




On
February 2, 2010, we entered into a loan agreement with QAT II. Pursuant to this
loan agreement, QAT II Investments agreed to lend to us the sum of €350,000
($488,775 based on the February 2, 2010 exchange rate published in the Wall
Street Journal). The proceeds were made available to the Company on February 2,
2010.





On
February 24, 2010, we entered into a loan agreement with QAT
II.  Pursuant to this loan agreement, QAT II Investments agreed to
lend us the sum of €850,000 ($1,150,390 based on the February 24, 2010 exchange
rate published in the Wall Street Journal). The proceeds of the loan agreement
were made available to the Company on February 24, 2010.





On March
22, 2010, we entered into a loan agreement with QAT II. Pursuant to this loan
agreement, QAT II Investments agreed to lend us the sum of €150,000 ($203,280
based on the March 22, 2010 exchange rate published in the Wall Street Journal).
The proceeds of the loan agreement were made available to the Company on March
22, 2010




23




On March
30, 2010, we entered into a loan agreement with QAT II. Pursuant to the loan
agreement, QAT II Investments agreed to lend us the sum of €500,000 ($670,750
based on March 30, 2010 exchange rate published in the Wall Street Journal). The
proceeds of the loan agreement were made available to the Company on March 31,
2010.





Each of
the above mentioned loan agreement initially provided thatwe would pay
QAT IIinterest at
a rate of fourteen percent (14%) per annum on the outstanding balance and
provided the principal and interest shall be due and payable on the earlier of:
(i) within 180 days from the date of the loan or (ii) in the event we consummate
a Placement.  QAT IIhas the
ability to convert the principal and accrued interest outstanding as of the date
of the Placement into the same type of equity or debt securities issued by us
and on the same terms and conditions offered to other investors in the
Placement. The outstanding principal and interest becomes immediately due and
payable in the event we fail to make required payments of principal and
interest, or otherwise breach the loan agreement and fail to cure such breach
upon twenty days notice, or if we dispose of our properties or assets without
QAT II’s prior consent, or if we file a petition for bankruptcy or otherwise
resolves to wind up our affairs.




In
connection with the above-referenced loans, we also issued to QAT II warrants to
purchase common stock in an amount equal to one warrant per each United States
dollar loaned hereunder to the Company (using the Euro-United States dollar
conversion rate published by the Wall Street Journal at the close of business of
the loan date). Such warrants have a term of three years and an exercise price
equal to the OTCBB closing price of our common stock on the loan
date.




The loan
agreements described above were amended on June 10, 2010.  Pursuant to
the amendment, QAT II agreed to extend the existing maturity dates of the loans
to May 1, 2011. The amendment also provides for the automatic conversion of the
Notes if we raise at least $11 million in connection with the 2010 Private
Placement Offering.  The unpaid principal of such loans will convert
into units consisting of common stock and warrants at a price of $1.20 per
unit.  Further, the units will be issued on the same terms and
conditions as the units being offering in the 2010 Private Placement
Offering.   Accrued but unpaid interest and any other fees due on
the QAT II loans will not convert into units.  As additional
consideration for entering into the amendment, QAT II was issued warrants to
purchase common stock at an amount equal to two (2x) the existing warrant
coverage under the terms of such loan agreement.




Note 26. Subsequent
Events





On August
4, 2010, we consummated the second closing 2010 Private Placement Offering to
accredited investors.  The units, consisting of common stock and
warrants, were offered and sold pursuant to an exemption from registration
under Section 4(2) of the Securities Act.  We sold units having an
aggregate value of $1,482,700 at a
price of $1.20 per unit.  In connection with this second closing, we
issued 1,235,857 shares of common stock and warrants to purchase up to 1,235,587
shares of common stock at $1.50 per share. We intend
to use the net proceeds primarily for working capital.





The
warrants entitle the holders to purchase shares of common stock for a period of
five years from the date of issuance and contain standard anti-dilution
rights.  In the event: (i) the trading price of our common stock
exceeds $2.25 for twenty consecutive trading days and (ii) there is an effective
registration statement with a current prospectus on file with the Securities and
Exchange Commission, the Company has the option to redeem the warrants issued in
the 2010 Private Placement Offering.





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, 2009, Amendment No. 1
to the Company’s Annual Report on Form 10-K and the Company’s Current Reports on
form 8-K and 8-K/A  filed in connection with its acquisition of
ValidSoft.




24




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.





Services
and Solutions





Full-MVNE/MVNO
Mobile Services – wholesale services and managed services




As of
2007, we positioned ourselves as an MVNE to MNOs and MVNOs offering a wide range
of mobile enabling/enhancing services through sophisticated, proprietary
technology supported by multi-country operations with a focus on business to
business, outsourcing /partnering strategy. Important milestones in this respect
are:




·
              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 three MNOs in the
      Netherlands. Elephant Talk will, as exclusive MVNE for T-Mobile, connect
      MVNOs in the Netherlands to its platform, making use of the mobile network
      of T-Mobile.·
              In
      June 2009 we signed a hosting agreement with Vizzavi Spain (part of
      Vodafone Group). Elephant Talk to be the exclusive provider to Vizzavi for
      MVNE services in Spain.





·
            Following
      the start of our MVNE services in the Netherlands in the fourth quarter of
      2008, we have entered into heads of terms agreements with MVNOs for
      wholesale services in the Netherlands and have started servicing these
      companies while currently implementing additional ones. In Spain, we have
      provided since June 2009, managed services to Vizzavi (part of the
      Vodafone Group) and are in the process of preparing and implementing new
      ones.





Customized
Mobile Solutions – integrated fraud and security solutions
(ValidSoft)




In line
with our strategy to develop and market customized mobile solutions, we acquired
ValidSoft on March 17, 2010. ValidSoft provides strong authentication and
transaction verification capabilities that allow organizations to quickly
implement solutions that protect against certain of the latest forms of credit
and debit card fraud and on-line transaction and identity theft. By correlating
the relative location of a person’s credit card with the location of their
mobile phone, this service can, for example, tell a bank or card issuer in less
than half a second if the transaction is likely genuine or fraudulent. We
anticipate generating revenues on a per transaction basis (per
verification). This acquisition combines what we believe to be ValidSoft’s best
in class proprietary software with our superior telecommunication platform to
create what we believe is the best integrated electronic fraud prevention
solution available.





Landline
network outsourcing services




Through
our fixed line telecom infrastructure and our centrally operated and managed
IN-CRM-Billing platform, we also provide traditional telecom services like
Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate
Services to the business market.





Support
technology





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. To this we have added mobile access coverage in order to cater for our
mobile services and solutions. Our first mobile partners are T-Mobile in the
Netherlands and Vizzavi (a Vodafone company) in Spain.




25




Business
Support and Operational Support System (“ET BOSS”) and Intelligent Network – IN
– (“ Infitel”)




Through
our European and Chinese development centers, we develop in-house telecom and
media related systems and software, centered around two of the companies’
proprietary platforms ET BOSS and Infitel.





Electronic
fraud prevention products: VALid-POS®,  VALid® and
VALid-VSGTM.





Our
recent acquisition of ValidSoft has given us ownership of technology and
intellectual property to combat fraud relating to card, the internet, and
telephone channels. ValidSoft solutions are marketed under VALid-POS® and
VALid®. For its biometrics based product it trades under
VALid-VSGTM.




Results of
Operations





Our
results of operations for the six months ended June 30, 2010, consisted of the
operations of Elephant Talk , its wholly-owned subsidiaries, Elephant Talk
Limited and its subsidiaries, Elephant Talk Europe Holding BV and its
subsidiaries, Elephant Talk Global Holding BV and its subsidiaries.





Although
the vast majority of our business activities are carried out in Euros, we report
our financial statements in US dollars (“USD”), The conversion of Euros to USD
leads to period-to-period fluctuations in our reported USD results arising from
changes in the exchange rate between the USD and the Euro. Generally, when the
USD strengthens relative to the Euro, it has an unfavorable impact on our
reported revenue and income and a favorable impact on our reported expenses.
Conversely, when the USD weakens relative to the Euro, it produces a favorable
impact on our reported revenue and income, and an unfavorable impact on our
reported expenses. The above fluctuations in the USD/Euro exchange rate
therefore result in currency translation effects (not to be confused with real
currency exchange effects), which impact our reported USD results and may make
it difficult to determine actual increases and decreases in our revenue and
expenses 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 United States generally accepted accounting principles, we also
highlight the impact of any material currency translation effect by providing a
comparison between periods on a 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. Also, since we carry out our business activities primarily
in Euros we do not currently engage in hedging activities.




Three
& Six Month Periods Ended June 30, 2010 compared to the Three & Six
Month Periods Ended June 30, 2009





Revenue




Revenue
for the three months ended June 30, 2010 was $9,673,825, a decrease of
$1,637,573 or (14.5%), compared to $11,311,398 for the three months ended June
30, 2009. The decrease was the result of the lower sales during the period as
well as the unfavorable impact of a $650,056 currency translation effect arising
from a higher USD/Euro exchange rate.





Revenue
for the six months ended June 30, 2010 was $19,617,590, a decrease of $1,122,691
or (5.4%), compared to $20,740,282 for the six months ended June 30, 2009. The
decrease was the result of lower sales and to some extent the
unfavorable impact of a $105,351 currency translation effect arising from a
higher USD/Euro exchange rate.





Revenue
- Constant currency





The
decrease in the first six months of 2010 revenue of $1,017,341 over the first
six months of 2009, in constant currency, was attributable to an increase in our
other landline services of $24,469 and a decline in our premium rate services
(“PRS”) of ($408,148), Mobile revenue of ($528,979) and Middle East pre-paid
calling cards revenue of ($104,682) compared to the same period in 2009. The
lower mobile revenue was the result of a customer in financial disarray leaving
our Company.




revenue
                
                June
      30, 2010
                
                
                June
      30, 2009
                  constant
      currency
                
                
                variance
                  2010
      v 2009
                  constant
      currencyPremium
      Rate Services
                
                $
                16,945,621
                
                
                $
                17,353,796
                
                
                $
                -408,148Mobile
      Services
                
                
                1,651,132
                
                
                
                2,180,112
                
                
                
                -528,979Middle
      East Calling Cards
                
                
                498,243
                
                
                
                602,926
                
                
                
                -104,682Other
      revenue
                
                
                522,594
                
                
                
                498,126
                
                
                
                24,469Total
      Revenue
                
                $
                19,617,590
                
                
                $
                20,634,931
                
                
                $
                -1,017,341




26




Cost
of service




Cost of
service includes origination, termination, network and billing charges from
telecommunications operators, out payment 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, 2010 was $9,005,394, a decrease of
$1,626,811 (or 15.3%), compared to $10,632,205 for the three months ended June
30, 2009. The decrease in cost of service was the result of lower sales volumes
and a favorable impact of a $620,097 currency translation effect arising from a
higher USD/Euro exchange rate.





Cost of
service for the six months ended June 30, 2010 was $18,379,282, a decrease of
$1,400,720 (or 7.1%), compared to $19,780,001 for the six months ended June 30,
2009. The decrease in cost of service was the result of lower sales volumes and
a favorable impact of a $100,710 currency translation effect arising from a
higher USD/Euro exchange rate.





Cost
of service – constant currency





In
constant currency, the cost of service for the first three months of 2010
decreased by $987,516 (or 9.7%) compared to the same period in 2009. Cost of
service, as a percent of revenue, expressed in constant dollar terms was 93.2%
and 94% for the three-month period ended June 30, 2010 and 2009,
respectively.
 
 In
constant currency, the cost of service for the first six months of 2010
decreased by $1,300,010 (or 6.6%) compared to the same period in 2009. Cost of
service, as a percent of revenue, expressed in constant dollar terms was 93.7%
and 95.4% for the six-month periods ended June 30, 2010 and 2009,
respectively.
 
 The
decrease in cost of services is primarily the result of lower levels of PRS
revenue and Mobile revenues on a constant currency
basis.
  Management
expects cost of service will continue to decline as a percent of revenue as a
greater proportion of future revenue is comprised of our mobile services and
ValidSoft solutions, 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, 2010 was $2,079,361, an increase of $295,566 or 16.6 % compared to
$1,783,795 for the same period in 2009.





For the
six months ended June 30, 2010, SG&A expense was $ 3,984,709, an increase of
$737,766 or 24.8%, compared to $3,246,943 in the same period in
2009.





Selling,
general and administrative – constant currency




In
constant currency, total SG&A for the three months ended June 30, 2010
increased by  $387,595 or 22.1% compared to the same period in
2009.  The increase in expenses was mainly attributable to an increase
in legal,  accounting and public relations costs, funding and the
consolidation of the ValidSoft expenses in the second quarter of
2010.





In
constant currency, total SG&A for the six months ended June 30, 2010
increased with $ 749,347 or 23.2 % compared to the same period in
2009.  The increase in expenses was mainly attributable to an increase
in legal,  accounting and public relations costs, funding and the
consolidation of the ValidSoft expenses in the second quarter of
2010.




Non-cash
compensation to officers, directors and employees




Non-cash
compensation for the three and six months ended June 30, 2010, was $2,712,756
and $3,253,669, respectively, compared to $750,406 and $1,019,866, for the
corresponding 2009 periods. The increase in both periods is primarily
attributable to the restricted stock issuance in lieu of cash compensation for
management salaries and board compensation (including a new board and a new
management team member), higher staffing levels due to the acquisition of
ValidSoft and options granted under the 2008 Incentive Plan to employees and
consultants.




27




Depreciation
and amortization




Depreciation
and amortization for the three and six months ended June 30, 2010, was
$1,515,428 and $2,360,122, respectively, compared to $707,763 and $1,337,945 for
the comparable periods in 2009.





Depreciation
and amortization expenses increased due to the consolidation into our financials
as of 1 April 2010 of the amortization of $792,751 for the ValidSoft
intangibles assets.





Other
Income and Expenses




Interest
income for the three months ended June 30, 2010 was $32,520 compared to $12,237
for the same period in 2009. Interest income was $65,119 and $22,307 for the six
months ended June 30, 2010 and 2009 respectively.





For the
three months ended June 30, 2010, interest expense was $535,887 compared to
$136,154 in 2009. Interest expense was $982,427 and $207,939, for the six months
ended June 30, 2010 and 2009, respectively.





For the
three months ended June 30, 2010, the fair value expenses and amortizations
related to the  Notes, associated Warrants and deferred financing
costs were $8,213,459 compared to $0 in 2009. The fair value expenses and
amortizations related to the Notes, associated Warrants and deferred financing
costs were $17,416,136 and $0, for the six months ended June 30, 2010 and 2009,
respectively.





Non-controlling
Interest




Our
majority owned subsidiaries are 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, 2010, we incurred a non-controlling
interest charge of $1,785 and $2,283 respectively. During the same period in
2009, we incurred losses of $653 and $756 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 first six months ended June 30, 2010 and
2009 was ($3,690,746) and ($197,259) respectively. This change is primarily
attributable to the translation effect resulting from the substantial
fluctuations in the USD/Euro exchange rates.




Adjusted
EBITDA




We employ
Adjusted EBITDA, defined as earnings before derivative accounting, such as
warrant liabilities and conversion feature expensing, income taxes, depreciation
and amortization and stock-based compensation, for several purposes, including
as a measure of our operating performance. We use Adjusted EBITDA because it
removes the impact of items not directly resulting from our core operations,
thus allowing us to better assess whether the elements of our growth strategy
are yielding positive results.




28




A
reconciliation of Adjusted EBITDA to net loss, the most directly comparable
measure under U.S. GAAP, for each of the fiscal periods indicated, is as
follows:




Six months endedJune, 302010
              
              
              2009
              
              
              2009
      in
                constant
      currency(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Net
      loss
              
              $
              (26,696,719
              )
              
              $
              (4,831,661
              )
              
              $
              (4,817,530
              )Provision
      for income taxes
              
              
              800
              
              
              
              800
              
              
              
              800Net
      loss attributable to noncontrolling interest
              
              
              2,283
              
              
              
              756
              
              
              
              756Depreciation
      and amortization
              
              
              2,360,122
              
              
              
              1,337,945
              
              
              
              1,332,175Stock-based
      compensation
              
              
              3,253,669
              
              
              
              1,019,866
              
              
              
              1,019,866Other
      expenses
              
              
              18,333,444
              
              
              
              185,632
              
              
              
              184,211Adjusted
      EBITDA
              
              $
              (2,746,401
              )
              
              $
              (2,286,662
              )
              
              $
              (2,279,722
              )




Liquidity
and Capital Resources




We have
an accumulated deficit of $89,030,994 including a net loss of $26,696,719 for
the six months ended June 30, 2010.





In the
first half year of 2010 the Company received loans in the total amount of
€1,850,000 (US $2,513,195) from QAT.  We also raised $2,885,000 in the
Bridge Financing.




In
connection with the first closing of the 2010 Private Placement Offering, we
sold units having an aggregate value of $6,459,800.  Excluding the
second closing of the 2010 Private Placement Offering (described in Note
26-Subsequent Events), we have raised gross proceeds of approximately $11.9
million in 2010, resulting in net proceeds to us of approximately $10.7
million





We
believe that our cash balance at June 30, 2010, in combination with the
additional funding received so far in 2010 and cash generated from operations,
and commitments for additional funding will provide sufficient funds at least to
the beginning of the next year.





In light
of the need to raise additional funds in the immediate short term, we are
focused on capital raising activities, in addition to continuing to control
operating costs and aggressively managing working capital. We are actively
seeking to raise additional debt or equity financing in order to fund our cash
requirements generated by future operations, capital expenditures and potential
acquisitions.





Although
the Company has previously been able to raise capital as needed, such capital
may not continue to be available at all, or if available, on reasonable
terms.  Further, the terms of such financing may be dilutive to
existing shareholders or otherwise on terms not favorable to the Company or
existing shareholders. 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, or do not succeed
in meeting our sales objectives we may not be able to continue operations. As of
June 2010, these conditions raised substantial doubt from our auditors as to our
ability to continue as a going concern.





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




Operating
activities




Net cash
used in operating activities for the six months ended June 30, 2010 was
$6,841,983 compared to $3,063,154 in the first quarter of 2009, an increase of
$3,778,829. This increase is primarily attributable to expenses related to the
consolidation of ValidSoft as of April 1, 2010 and substantial reduction in
accounts payable.




29




Investment
activities




Net cash
used in investment activities for the six months ended June 30, 2010 was
$1,165,689 a decrease of $1,143,433 (or 50%) compared to $2,309,122 in the first
half year of 2009. The increase was primarily attributable to less purchase of
equipment and the elimination of the loans to ValidSoft.





Financing
activities




Net cash
received by financing activities for the six months ended June 30, 2010 was
$10,499,317.  Please see footnotes 2 and 26 for more
information.





As a
result of the above activities, the Company had a cash and cash equivalents
balance of $4,276,714 as of June 30, 2010, a net increase in cash and cash
equivalents of $2,818,814, for the six months ended June 30, 2010.





Application of Critical
Accounting Policies and Estimates





Revenue
Recognition and Deferred Revenue




The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”) (formerly, 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.





Stock-based
Compensation




Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation”,” (“ASC 718”) (formerly SFAS No. 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 ASC 718. Under ASC 718, 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.





Business
Combinations




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 Financial Accounting
Standards Board (FASB) issued revision to Statement of Financial Accounting
Standards  No. 141R, “Business Combinations”. Amounts allocated to
intangible assets are amortized over their estimated useful lives; no amounts
are allocated to in-progress research and development. Goodwill represents the
excess of consideration paid over the net identifiable business assets
acquired.




Intangible Assets and Impairment of
long Lived Assets




In
accordance with ASC 350 (formerly 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 ASC 360, “Property, Plant, and Equipment”
(formerly SFAS No. 144), 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.




30




Impact of Accounting
Pronouncements





In April
2009, the FASB issued guidance, which is now part of ASC 825, “Interim
Disclosures about Fair Value of Financial Instruments” (“ASC 825”) (formerly
Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1). ASC 825 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. ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
ASC 825 did not have an impact on the Company’s consolidated financial
statements.




In May
2009, the FASB issued new guidance for accounting for subsequent events. The new
guidance, which is now part of ASC 855-10, “Subsequent Events” (“ASC 855-10”)
(formerly, SFAS No. 165) is consistent with existing auditing standards in
defining subsequent events as events or transactions that occur after the
balance sheet date but before the financial statements are issued or are
available to be issued, but it also requires the disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date. The
new guidance defines two types of subsequent events: “recognized subsequent
events” and “non-recognized subsequent events.” Recognized subsequent events
provide additional evidence about conditions that existed at the balance sheet
date and must be reflected in the company’s financial statements. Non-recognized
subsequent events provide evidence about conditions that arose after the balance
sheet date and are not reflected in the financial statements of a company.
Certain non-recognized subsequent events may require disclosure to prevent the
financial statements from being misleading. The new guidance was effective on a
prospective basis for interim or annual periods ending after June 15, 2009. We
adopted the provisions of ASC 855-10 as required.





In June
2009, the FASB issued new guidance which is now part of ASC 105-10, “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles” (ASC 105-10) (formerly Statement of Financial Accounting
Standards No. 168), which establishes the FASB Accounting Standards Codification
as the source of authoritative accounting principles recognized by the FASB to
be applied by nongovernmental entities in the preparation of financial
statements in conformity with generally accepted accounting principles. ASC
105-10 is effective for interim and annual periods ending after September 15,
2009. The adoption of ASC 105-10 did not have a material impact on the Company’s
consolidated financial statements.





Item
3. Quantitative and Qualitative Disclosure About Market Risks





Not
applicable.





Item
4T. Controls and Procedures





Evaluation
of Disclosure Controls and Procedures




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





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




31




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 our internal control over financial reporting
during the half year ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item
1. Legal Proceedings





(a)
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.




(b) Manu Ohri
Litigation





On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court,
Orange County, in a matter entitled Manu Ohri v. Elephant Talk
Communications, Inc., Case No. 30-20009-00120609.  Ohri alleges breach
of a written contract, breach of an oral contract, and a common count for
services rendered.   Ohri 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.  The Company denies all material allegations of Ohri's
complaint and asserts various affirmative defenses.  The Company also
filed and served a cross-complaint against Ohri, who then filed and served an
answer, denying the material allegations of the Company’s
cross-complaint.




The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start December 6, 2010.





(c)
Bruce Barren Litigation





On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled
Bruce Barren v. Elephant Talk Communications, Inc., Case No.
BC429032.  Barren alleges causes of action for breach of a restricted
stock agreement, breach of the implied covenant of good faith and fair dealing,
breach of an oral employment agreement, and common counts for services
rendered—despite entering into a settlement agreement and full release of any
claims against the Company shortly after his resignation in May
2009.  The Company contends that Mr. Barren’s claims are without
merit, and has answered his complaint, denying all material allegations and
asserting various affirmative defenses.





The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start February 7, 2011.




32




(d)
Chong Hing Bank Litigation





On
December 15, 2009, an action was commenced against the Company by Chong Hing
Bank Limited, fka Liu Chong Hing Bank Limited, a publicly listed Hong Kong
company (the “Bank”), in the California Superior Court, Orange County, in a
mater entitled Chong Hing Bank Limited v. Elephant Talk Communications, Inc.,
Case No. 30-2009-00328467.  The Bank alleges that it entered into
various installment loan agreements and an overdraft account with Elephant Talk
Limited (“ETL”), a Hong Kong subsidiary of the Company.  The Bank
alleges that ETL is in default on the loans and overdraft account, and that
$1,536,792.28 plus interest is currently due.  The Bank alleges that
the Company is liable to repay the loans and overdraft account.  The
Bank is suing the Company for breach of contract and common
counts.  The Company has answered the complaint, denying all material
allegations and asserting various affirmative defenses.





The
parties are engaged in pretrial discovery, and a jury trial is scheduled to
start February 14, 2011.




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, 2009, and the additional, if any, Risk Factors set forth below.
These Risk Factors could materially impact our business, financial condition
and/or operating results. Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
impact our business, financial condition and/or operating results.





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




Bridge Security Purchase
Agreement





In May
2010 we sold 2,885,000 of units at a purchase price of $1.00 per unit, with each
unit consisting of one share of our restricted common stock and two warrants to
accredited, United States and foreign investors (including affiliates of the
Company) in transactions exempt from registration under the Securities Act
pursuant to Section 4(2), Regulation D and Regulation S (the “Sales”). In
connection with the Sales, the purchasers received (i) warrants to purchase up
to 2,885,000 of shares of our common stock, at an exercise price of $1.25 per
share and (ii) warrants to purchase up to 2,885,000 of shares of our common
stock, at an exercise price of $2.00 per share. None of the warrants contain
cashless exercise provisions. Each warrant contains standard anti-dilution
protection and may be cancelled upon the occurrence of the following: (i) with
respect to the $1.25 warrant, in the event that the average of the last closing
sale price of the common stock on the OTC Bulletin Board, or a national
securities exchange, trading market or inter-dealer electronic quotation system,
exceeds $3.00 for twenty consecutive trading days and the holder fails to
exercise within fifteen days of receipt of notice this target was met, the
warrants will expire worthless and (ii) with respect to the $2.00 warrant, in
the event that the average of the last closing sale price of the common stock on
the OTC Bulletin Board, or a national securities exchange, trading market or
inter-dealer electronic quotation system, exceeds $4.00 for twenty consecutive
trading days and the holder fails to exercise within fifteen days of receipt of
notice this target was met, the warrants will expire worthless.





Private Placement
2010





On June
28, 2010, we consummated the first closing of the 2010 Private Placement
Offering.  In connection with the first closing, we sold units having
an aggregate value of $6,459,800 to accredited investors.  At a price
of $1.20 per unit, we delivered shares of common stock in the amount of
5,383,175 and warrants to purchase an aggregate of 5,383,175 shares of common
stock at a purchase price of $1.20 per share, rounding up to account for any
fractional shares. We intend to use the net proceeds from the Offering primarily
for working capital.  The units were offered and sold pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.





The
warrants issued as part of the units included in the 2010 Private Placement
Offering entitle the holder to purchase shares of our common stock for a period
of five years from the date of issuance and contain certain anti-dilution
rights.  In the event (i) the trading price of the common stock
exceeds $2.25 for twenty (20) consecutive trading days and (ii) there is an
effective registration statement with a current prospectus on file with the
Securities and Exchange Commission, we have the option to redeem the
warrants.




33




The
Company is obligated to register the common stock underlying the units and
warrants ona
registration statement to be filed after the final closing of the 2010 Private
Placement Offering.  In addition, the investors in the 2010 Private
Placement Offering are entitled to unlimited piggy-back registration
rights.





In
addition to the above issuances, during the three months ending June 30, 2010,
we issued an aggregate of 1,671,767 shares to various parties for (i) services
provided and (ii) with respect to contingent condition due pursuant to a stock
purchase agreement. We received no proceeds from the issuance of these
securities.




The
above-referenced securities were offered and sold pursuant to exemptions from
registration provided by the Securities Act.





Item
3. Defaults upon Senior Securities.




None.





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




None.





Item
5. Other Information




None.




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.




34




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
      16, 2010
            By
            /s/
      Steven van der VeldenSteven
      van der VeldenPresident
      and Chief Executive Officer
              (Principal
      Executive Officer)August
      16, 2010
            By
            /s/
      Mark NijeMark
      NijeChief
      Financial Officer
              (Principal
      Financial and Accounting Officer)




35




Index to
Exhibits




Number
                  
                  Exhibit
                  
                  Page31.1
                  
                  Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
                  
                  X-131.2
                  
                  Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
                  
                  X-232.1
                  
                  Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                  
                  X-332.2
                  
                  Certification
      pursuant to 18 U.S.C. §1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
                  
                  X-4





36