**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        DC 20549
 
 
 **FORM
        10-QSB**
 
 
 **x**
        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
        ACT OF 1934
 
 For
        the
        quarterly period ended **September 30, 2007**
 
 
 o
        TRANSITIONAL REPORT
        PURSUANT TO SECTION 13 0R 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
        1934
 
 For
        the
        transition period from __________ to __________
 
 
 Commission
        File Number: **000-30061**
 
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 (Exact
        name of small business issuer as specified in its charter)
 
 **California**
 (State
        or
        other jurisdiction of incorporation or organization)
 
 **95-4557538**
 (IRS
        Employer Identification No.)
 
  **438
        East Katella Avenue, Suite 217, Orange, California 92867**
 (Address
        of principal executive offices)
 
  **(714)
        288-1570**
 (Issuer's
        telephone number)
 
  Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days:
 **Yes****x**No o
 
 Indicate
        by check market whether the registrant is a shell company (as defined in
        Rule
        12b-2 of the Exchange Act):
 Yes
o    
        **No **x****
  As
        of
        November 16, 2007, Elephant Talk Communications, Inc. had 238,265,927 shares
        of
        Common Stock Outstanding.
 
 Transitional
        Small Business Disclosure Format (check one):
 Yes
o**No****x**
  Table
            of Contents







**ELEPHANT
      TALK COMMUNICATIONS, INC. AND
      SUBSIDIARIES**





**TABLE
      OF CONTENTS**





Report
      on
      Form 10-QSB


For
      the
      quarter ended September 30, 2007








**Page****PART
                1 FINANCIAL INFORMATION**Item
                1.  Financial Statements
            3Consolidated Balance Sheet at September 30, 2007
                (Unaudited)
            3Consolidated Statements of Operations for the Three Month and Nine
                Month
                Periods
              ended September 30, 2007 and 2006 (Unaudited)
            4Consolidated Statements of Cash Flows for the Nine Months
              ended September 30, 2007 and 2006 (Unaudited)
            5Notes to the Consolidated Financial Statements (Unaudited)
            6
                -
                15Item
                2.  Management's Discussion and Analysis of Financial Condition and
                Results of Operations
            16Item
                3.  Controls and Procedures
            20**PART
                II OTHER INFORMATION**
            21Item
                1.  Legal Proceedings
            21Item
                2.  Unregistered Sales of Equity Securities and Use of
                Proceeds
            21Item
                3.  Defaults upon Senior Securities
            21Item
                4.  Submission of Matters to Vote of Security
                Holders
            21Item
                5.  Other Information
            21Item
                6.  Exhibits
            21Signatures
            21








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            of Contents





**PART
      1 FINANCIAL INFORMATION**





Item
      1.   Financial Statements





**ELEPHANT
      TALK COMMUNICATIONS, INC. AND
      SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEET AS OF SEPTEMBER 30, 2007


(UNAUDITED)





**ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            3,637,800Restricted
                cash
            
            
            21,408Accounts
                receivable, net
            
            
            4,777,729Deposits
            
            
            410,048Prepaid
                expenses and other current assets
            
            
            463,116Total
                Current Assets
            
            
            9,310,102**PROPERTY
                AND EQUIPMENT - NET**
            
            
            3,013,446**OTHER
                ASSETS**Due
                from related parties
            
            
            318,664Intangible
                assets, net
            
            
            10,949,015Total
                Other Assets
            
            
            11,267,679**TOTAL
                ASSETS**
            
            $
            23,591,227**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****CURRENT
                LIABILITIES**Overdraft
            
            $
            191,804Accounts
                payable and customer deposits
            
            
            5,537,044Deferred
                revenue
            
            
            100,361Accrued
                expenses and other payable
            
            
            2,091,131Advances
                from third parties
            
            
            795,204Loans
                payable
            
            
            885,735Shares
                to be issued
            
            
            15,518,328Convertible
                promissory note -current part
            
            
            3,500,000Due
                to related parties
            
            
            132,533Total
                Current Liabilities
            
            
            28,752,140**LONG-TERM
                LIABILITIES**Convertible
                promissory note
            
            
            2,660,411**MINORITY
                INTEREST**
            
            
            271,549**COMMITMENT
                AND CONTINGENCIES**
            
            
            --**STOCKHOLDERS'
                DEFICIT**Common
                stock, no par value, 250,000,000 shares authorized, 238,265,927 issued
                and
                outstanding
            
            
            17,814,984Comprehensive
                loss
            
            
            (101,004
            )Accumulated
                deficit
            
            
            (25,806,852
            )Total
                Stockholders' Deficit
            
            
            (8,092,873
            )**TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT**
            
            $
            23,591,227





**The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.**





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            of Contents





**ELEPHANT
      TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(UNAUDITED)




**For
                  the three months ended September 30,**
              
              
              **For
                  the nine months ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**REVENUES
              
              $
              11,574,708
              
              
              $
              29,521
              
              
              $
              35,255,160
              
              
              $
              128,363COST
                  OF REVENUE
              
              
              11,602,554
              
              
              
              26,956
              
              
              
              34,942,313
              
              
              
              116,111GROSS
                  PROFIT
              
              
              (27,846
              )
              
              
              2,565
              
              
              
              312,848
              
              
              
              12,252OPERATING
                  EXPENSESSelling,
                  general and administrative
              
              
              704,010
              
              
              
              1,691,509
              
              
              
              8,011,897
              
              
              
              2,818,402Depreciation
                  and amortization
              
              
              165,959
              
              
              
              (1,815
              )
              
              
              489,451
              
              
              
              29,584Total
                  Operating Expenses
              
              
              869,969
              
              
              
              1,689,694
              
              
              
              8,501,348
              
              
              
              2,847,986LOSS
                  FROM OPERATIONS
              
              
              (897,815
              )
              
              
              (1,687,129
              )
              
              
              (8,188,501
              )
              
              
              (2,835,734
              )OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              49,482
              
              
              
              29
              
              
              
              77,978
              
              
              
              182Interest
                  expense
              
              
              (170,751
              )
              
              
              (168,618
              )
              
              
              (590,215
              )
              
              
              (377,149
              )Miscellaneous
                  income
              
              
              -
              
              
              
              2,046
              
              
              
              -
              
              
              
              2,046Total
                  Other Expense, net
              
              
              (121,269
              )
              
              
              (166,543
              )
              
              
              (512,237
              )
              
              
              (374,921
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (1,019,083
              )
              
              
              (1,853,672
              )
              
              
              (8,700,737
              )
              
              
              (3,210,655
              )Income
                  taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (800
              )LOSS
                  FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST
              
              
              (1,019,083
              )
              
              
              (1,853,672
              )
              
              
              (8,700,737
              )
              
              
              (3,211,455
              )Minority
                  interest
              
              
              (31,117
              )
              
              
              67,232
              
              
              
              (23,154
              )
              
              
              51,828LOSS
                  BEFORE DISCONTINUED OPERATIONS
              
              
              (1,050,200
              )
              
              
              (1,786,440
              )
              
              
              (8,723,891
              )
              
              
              (3,159,627DISCONTINUED
                  OPERATIONSIncome
                  (loss) from operations of abandoned entity
              
              
              -
              
              
              
              (115,107
              )
              
              
              -
              
              
              
              245,078Abandonment
                  of investment
              
              
              -
              
              
              
              (1,246,849
              )
              
              
              -
              
              
              
              (1,246,849
              )LOSS
                  FROM DISCONTINUED OPERATIONS
              
              
              
              
              
              
              (1,361,956
              )
              
              
              
              
              
              
              (1,001,771
              )NET
                  LOSS
              
              
              (1,050,200
              )
              
              
              (3,148,396
              )
              
              
              (8,723,891
              )
              
              
              (4,161,398
              )OTHER
                  COMPREHENSIVE INCOMEForeign
                  currency translation gain (loss)
              
              
              351,967
              
              
              
              -
              
              
              
              (111,179
              )
              
              
              -COMPREHENSIVE
                  LOSS
              
              $
              (698,233
              )
              
              $
              (3,148,396
              )
              
              $
              (8,835,070
              )
              
              $
              (4,161,398
              )Net
                  loss per common share and equivalentsBasic
                  and diluted – from continued operations
              
              $
              (0.003
              )
              
              $
              (0.017
              )
              
              $
              (0.037
              )
              
              $
              (0.024
              )Basic
                  and diluted – from discontinued operations
              
              $
              (0.003
              )
              
              $
              (0.009
              )
              
              $
              (0.037
              )
              
              $
              (0.018
              )Weighted
                  average shares outstanding during the period - basic and
                  diluted
              
              
              238,265,927
              
              
              
              184,617,774
              
              
              
              238,265,927
              
              
              
              174,090,939


Weighted
      average shares for dilutive shares has not been calculated as the effect of
      the
      dilutive shares is anti-dilutive.





**The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.**








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            4
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            of Contents





**ELEPHANT
      TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(UNAUDITED)





**For
                the nine months ended**
              **September
                30,****2007**
            
            
            **2006****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (8,723,891
            )
            
            $
            (3,159,627
            )**Adjustments
                to reconcile net loss to net cash used in operating
                activities:**Depreciation
                and amortization
            
            
            1,602,747
            
            
            
            29,584Stock
                issued for acquisition
            
            
            -
            
            
            
            500,000Provision
                for uncollectible amounts
            
            
            111,237
            
            
            
            -Issuance
                of stock for compensation and services
            
            
            4,830,583
            
            
            
            1,189,175Issuance
                of stock for consulting services
            
            
            -
            
            
            
            142,500Minority
                interest
            
            
            23,154
            
            
            
            (51,828
            )**Changes
                in operating assets and liabilities:**Decrease
                in accounts receivable
            
            
            141,945
            
            
            
            (976
            )Decrease
                in prepaid expenses, deposits and other assets
            
            
            (285,722
            )
            
            
            (55,054
            )Increase  in
                accounts payable and customer deposits
            
            
            157,398
            
            
            
            93,975Increase
                in deferred revenue
            
            
            -
            
            
            
            9,366Increase
                in accrued expenses and other payable
            
            
            775,900
            
            
            
            212,369Net
                cash used in operating activities from continued
                operations
            
            
            (1,366,649
            )
            
            
            (1,090,515
            )Net
                cash provided by operating activities from discontinued
                operations
            
            
            -
            
            
            
            695,152**Net
                cash used in operating activities**
            
            
            (1,366,649
            )
            
            
            (395,363
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (1,657,347
            )
            
            
            (112,222
            )Purchase
                of telecom license
            
            
            -
            
            
            
            (124,668
            )Restricted
                cash
            
            
            (21,408
            )
            
            
            -Cash
                paid for acquisition of subsidiary
            
            
            (241,883
            )
            
            
            (1,074,214
            )Earnest
                deposit on acquisitions, net
            
            
            -
            
            
            
            40,002Cash
                received from acquisition of subsidiary
            
            
            382,439
            
            
            
            -Net
                cash used in investing activities from continued
                operations
            
            
            (1,538,199
            )
            
            
            (1,271,102
            )Net
                cash used in investing activities from discontinued
                operations
            
            
            -
            
            
            
            (20,138
            )**Net
                cash used in investing activities**
            
            
            (1,538,199
            )
            
            
            (1,291,240
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Cash
                overdraft
            
            
            19,368
            
            
            
            31,767Advances
                received from investor
            
            
            -
            
            
            
            1,689,480Proceeds
                from bank loans
            
            
            -
            
            
            
            3,746Proceeds
                from note payable
            
            
            635,190
            
            
            
            929,700Proceeds
                from sale of shares
            
            
            5,929,539
            
            
            
            -Proceeds
                from related parties
            
            
            -
            
            
            
            193,993Payments
                to related parties
            
            
            (262,270
            )
            
            
            (818,893
            )Net
                cash provided by financing activities from continued
                operations
            
            
            6,321,826
            
            
            
            2,029,793Net
                cash used in financing activities from discontinued
                operations
            
            
            -
            
            
            
            (95,786
            )**Net
                cash provided by financing activities**
            
            
            6,321,826
            
            
            
            1,934,007**EFFECT
                OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS**
            
            
            (111,179
            )
            
            
            28,881**NET
                INCREASE IN CASH AND CASH EQUIVALENTS**
            
            
            3,305,799
            
            
            
            276,285**CASH
                AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**
            
            
            332,001
            
            
            
            -**CASH
                AND CASH EQUIVALENTS, END OF THE PERIOD**
            
            $
            3,637,800
            
            
            $
            276,285**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid during the period for interest
            
            $
            21,448
            
            
            $
            17,333Cash
                paid during the period for income taxes
            
            $
            800
            
            
            $
            800







**The
      accompanying notes are an integral part of these consolidated unaudited
      financial statements.**








-
            5
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            of Contents





**ELEPHANT
      TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS








**NOTE
      1    Organization and Nature of
      Operations**





Elephant
      Talk Communications, Inc. (herein referred to as “Elephant Talk,” “ETCI” or
“Company,” formerly known as Staruni Corporation), incorporated on February 5,
      1962 under the laws of the state of California as Altius Corporation, was
      involved in manufacturing of freeway signs. In March 1997, Altius acquired
      Starnet Universe Internet, Inc., a web developer and Internet Service Provider
      (ISP) and changed its name to Staruni Corporation. On January 4, 2002, Staruni
      Corporation merged with Elephant Talk Limited, a company incorporated in Hong
      Kong, and filed a Certificate of Amendment of Articles of Incorporation to
      amend
      the corporate name to Elephant Talk Communications, Inc. This name change was
      done in conjunction with the merger and to emphasize that the Company’s new
      focus is the business of Elephant Talk Limited.





On
      January 1, 2007, the Company completed its acquisition of Elephant Talk
      Communications Europe Holding AG, formerly known as Benoit Telecom Holding
      AG
      (herein referred to as “Benoit Telecom”), an international telecom operator and
      multi-media distributor servicing primarily the business-to-business segment
      of
      the telecommunications and media market. Benoit Telecom offers a broad range
      of
      products and services based on the integration of telecom, VoIP, SMS, FAX,
      Conferencing and Streaming services all integrated with a sophisticated Customer
      Relationship Management and Billing application.





Furthermore,
      on June 1, 2007, the Company, through its ET Europe Holding BV, acquired 3U
      Telecom SARL, a private company with limited liability registered in France.
      This Company is actively involved in Carrier Select/Carrier Pre Select
      activities in France.





**NOTE
      2    Basis of Presentation**





The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      information and with the instructions to Form 10-QSB. Accordingly, they do
      not
      include all of the information and footnotes required by generally accepted
      accounting principles for complete financial statements and related notes as
      included in the Company's 2006 Form 10-KSB. These consolidated financial
      statements should be read in conjunction with the audited consolidated financial
      statements of the Company for the year ended December 31, 2006 which were filed
      on April 16, 2007 with the Securities and Exchange Commission and are hereby
      referenced. In the opinion of management, the accompanying unaudited
      consolidated financial statements contain all adjustments (which include only
      normal recurring adjustments) considered necessary for fair presentation has
      been included.





The
      results of operations for the three and nine months ended September 30, 2007
      are
      not necessarily indicative of the results to be expected for the entire year.
      Certain 2006 amounts have been reclassified to conform to current period
      presentation. These reclassifications have no effect on previously reported
      net
      income (loss).





**NOTE
      3    Principles of
      Consolidation**





The
      accompanying consolidated financial statements for the three and nine months
      ended September 30, 2007 includes the accounts of Elephant Talk Communications,
      Inc., its wholly-owned subsidiary Elephant Talk Limited and its subsidiaries,
      Elephant Talk Global Holding BV, and its wholly-owned subsidiary Elephant Talk
      Europe Holding BV and its subsidiaries. The consolidated financial statements
      for the three and nine months ended September 2006 includes the accounts of
      Elephant Talk Communications, Inc., its wholly-owned subsidiary Elephant Talk
      Limited and its subsidiaries. Minority interest principally represents minority
      shareholders’ proportionate share of equity in our consolidated subsidiaries.
      All significant inter-company accounts and transactions have been eliminated
      in
      consolidation.





**NOTE
      4    Foreign Currency
      Translation**





The
      functional currency was Hong Kong Dollar for the subsidiary Elephant Talk
      Limited and Euros for the Elephant Talk Europe Holding BV and Elephant Talk
      Global Holding BV entities. The September 30, 2007 financial statements of
      the
      Company were translated to United States dollars using September 30, 2007
      closing exchange rates as to assets and liabilities and average exchange rates
      as to revenues and expenses. Capital accounts were translated at their
      historical exchange rates when the capital transactions occurred. Net gains
      and
      losses resulting from translation of foreign currency financial statements
      are
      included in the statements of stockholder’s equity as other comprehensive income
      or (loss). Foreign currency transaction gains and losses are included in
      consolidated comprehensive income (loss).





**NOTE
      5    Use of Estimate**





In
      preparing financial statements in conformity with generally accepted accounting
      principles, management is required to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements and revenues
      and
      expenses during the reported period. Actual results could differ from those
      estimates.





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          6
          -
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          of Contents




**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS






**NOTE
      6    Recently Issued Accounting
      Pronouncements**





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the over funded or under funded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity or changes in unrestricted net assets of a
      not-for-profit organization. This Statement also improves financial reporting
      by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. An employer without publicly traded equity securities is
      required to recognize the funded status of a defined benefit postretirement
      plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:





a)
            A
                brief description of the provisions of this
                Statement


b)
            The
                date that adoption is required


c)
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.





The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FASB 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FASB 159 for their first quarter 2007 financial
      statements.





The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FASB 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. The management is currently evaluating the effect of this
      pronouncement on financial statements.





**NOTE
      7    Accounts Receivables, net**





Accounts
      Receivables net of allowance for doubtful debts of $118,133 amounted to
      $4,777,729 as of September 30, 2007.





**NOTE
      8    Property & Equipment**





Property
      and equipment at September 30, 2007 consist of:





Leasehold
                improvements
            
            $
            31,180Communication
                and computer equipment
            
            
            2,254,398Automobiles
            
            
            85,190Furniture
                and fixtures
            
            
            185,965Software
                and network systems
            
            
            1,932,288Construction
                in progress
            
            
            656,1515,145,172Less
                accumulated depreciation
            
            
            (2,131,726
            )$
            3,013,446





Depreciation
      expense for the three and nine month periods ended September 30, 2007 amounted
      to $337,198 and $1,011,595, respectively. Depreciation expense for the three
      and
      nine month periods ended September 30, 2006 amounted to $21,012 and $72,082,
      respectively.





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**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      9    Customer Contracts, Licenses and
      Interconnects**





Customer
      contracts, licenses and interconnects include the acquisitions of large customer
      contracts, telecommunication licenses and integrated multi-country, centrally
      managed switch-based national interconnects in Europe, CRM Billing System and
      software. The telecommunications services acquired and customers obtained are
      primarily in the “service number” industry (also “Premium Rate Services”),
      low-cost telephony services such as Carrier Select and Carrier Pre Select” and
      Freephone (Toll-Free) number services. These services offered and customers
      served are done through ET Europe’s fixed-line switch-based telecom network,
      including the acquired interconnections and licenses with the National
      Incumbents and Regulators in Spain, Netherlands, Italy, Switzerland, Austria,
      France and Belgium.





Customer
      contracts, licenses and interconnects, at September 30, 2007 consist of the
      following:





Customer
                Contracts, Licenses & Interconnect
            
            $
            11,540,167Accumulated
                Depreciation Customer Contracts & Licenses
            
            
            (591,152
            )Customer
                Contracts & Lincenses, net
            
            $
            10,949,015





Amortization
      expense for the three and nine month periods ended September 30, 2007 amounted
      to $162,910 and $591,152, respectively, compared to $0 for the three and nine
      month periods ended September 30, 2006.





Amortization
      expense for the above intangible assets over the next five fiscal years ending
      September 30 is estimated to be approximately $1,225,000 for each
      year.





**NOTE
      10    Acquisition of Elephant Talk Communication Europe
      Holding AG**





On
      January 1, 2007, the Company, through its wholly-owned subsidiary Elephant
      Talk
      Europe Holding BV, completed its acquisition of Elephant Talk Communication
      Europe Holding AG (formerly known as “Benoit Telecom Holding AG” or “Benoit
      Telecom”), a European telecom company. Benoit Telecom is an international
      telecom operator and multi-media distributor servicing primarily the
      business-to-business segment of the telecommunications and media market. Benoit
      Telecom offers a broad range of products and services based on the integration
      of telecom, VoIP, SMS, FAX, Conferencing and Streaming services all integrated
      with a sophisticated Customer Relationship Management and Billing application
      and using its own fixed-line national interconnects and partner interconnects
      in
      numerous European countries. The Company purchased all of the 100,000 issued
      and
      outstanding shares of Benoit Telecom in exchange for a) cash payment of
      $6,643,080 and b) 40,000,000 shares of the Company’s common stock valued at
      $3,000,000. The common shares were valued at the actual date of issuance of
      such
      shares. The total consideration for the purchase of Benoit Telecom was valued
      at
      $9,643,080.





A
      summary
      of the assets acquired and liabilities assumed for Benoit Telecom
      are:





Cash
                & cash equivalents
            
            $
            409,174Accounts
                receivables
            
            
            4,485,259Property
                & equipment
            
            
            2,163,157Customer
                contracts & licenses
            
            
            11,504,192Other
                assets
            
            
            1,299,647Total
                Assets acquired
            
            $
            19,861,430Accounts
                payable
            
            $
            1,535,504Accrued
                expenses and other payables
            
            
            3,631,658Payable
                to third parties
            
            
            4,013,056Others
            
            
            125,160Liabilities
                assumed
            
            $
            9,305,378Net
                assets acquired
            
            $
            10,556,052Consideration
                paid
            
            $
            9,643,080Negative
                goodwill
            
            $
            (912,972
            )





The
      Company has reduced the recorded value of the non-current assets acquired,
      by
      the negative goodwill of $912,972. The purchase price allocation for Benoit
      Telecom acquisition is based on the fair value of assets acquired and
      liabilities assumed. Immediately after the execution of the definitive
      agreement, the Company obtained effective control over Benoit Telecom.
      Accordingly, the operating results of Benoit Telecom have been consolidated
      with
      those of the Company starting January 1, 2007.





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        CONSOLIDATED FINANCIAL STATEMENTS






In
      accordance with paragraph 44 of SFAS 142, any excess of cost over net assets
      acquired shall be allocated as a pro rata reduction of the amounts that
      otherwise would have been assigned to all of the acquired assets except
      financial assets other than investments accounted for by the equity method,
      assets to be disposed of by sale, deferred tax assets, prepaid assets relating
      to pension or other postretirement benefit plans and any other current
      assets.





The
      value
      of the shares issued by the Company in connection with this acquisition exceeded
      the fair market value of the net assets acquired. Thus, “negative goodwill”
generated was allocated to reduce the cost of the non-current assets
      acquired.





The
      Company included the financial results of Benoit Telecom in its consolidated
      2007 financial results from the date of the purchase, January 1, 2007 through
      September 30, 2007.





On
      January 1, 2007, the Company’s subsidiary Elephant Talk Europe Holding BV,
      entered into a Share Purchase Agreement with 3U Telecom AG, and acquired all
      of
      the issued and outstanding shares of 3U Telecom SARL France, for a consideration
      of 180,000 Euros (approximately $241,935). The Agreement entitled the Company
      to
      a 100% share of the economic benefits of the operations of 3U Telecom SARL.
      On
      June 1, 2007, all the terms and conditions of the Agreement were completed,
      and
      the Company acquired total assets $419,365 and assumed liabilities of $177,430
      upon completion of this acquisition.





UNAUDITED
      PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE THREE AND NINE
      MONTHS ENDED SEPTEMBER 30, 2007 AND 2006





The
      following un-audited pro forma consolidated financial information for the nine
      months ended September 30, 2007 and 2006, as presented below, reflects the
      results of operations of the Company as of January 1, 2007 and assuming that
      the
      acquisition occurred on January 1, 2006, 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 January 1, 2007 and 2006 respectively, and may not be indicative of future
      operating results.





**For
                the three months ended**
              **September
                30,**
            
            
            **For
                the nine months ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**REVENUES,
                net
            
            $
            11,678,251
            
            
            $
            10,896,422
            
            
            $
            35,536,002
            
            
            $
            23,236,268LOSS
                FROM OPERATIONS
            
            
            (1,024,649
            )
            
            
            (3,082,841
            )
            
            
            (8,101,485
            )
            
            
            (4,123,958
            )NET
                LOSS
            
            $
            (1,024,649
            )
            
            $
            (4,610,893
            )
            
            $
            (8,636,875
            )
            
            $
            (5,545,844
            )Loss
                per share - basic and fully diluted
            
            
            (0.0043
            )
            
            
            (0.0250
            )
            
            
            (0.0362
            )
            
            
            (0.0319
            )





**NOTE
      11    Due From Related Parties**





The
      Company provided guarantees to third parties for funds advanced by them to
      entities that officers and/or shareholders have an ownership interest in. The
      Company also has receivables from officers and/or shareholders.





The
      balances of funds advanced as of September 30, 2007 are:





Due
                from ET Network Services Ltd.
            
            $
            290,160Due
                from entities related to shareholders
            
            
            28,504$
            318,664





The
      amounts due from related parties are non-interest bearing, due on demand and
      unsecured.





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**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      12    Loans Payable**





Loans
      payable at September 30, 2007 are summarized as follows:





Installment
                loan payable, bank, monthly principal and interest payments of $12,804
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                September 30, 2007, due December 24, 2006, secured by personal guarantees
                of two shareholders, a director, and a third party
            
            $
            327,043Installment
                loan payable, bank, monthly principal and interest payments of $2,921
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                September 30, 2007, due December 24, 2011, secured by personal guarantees
                of three shareholders and a director
            
            $
            190,893Installment
                loan payable, bank, monthly principal and interest payments of $1,749
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                September 30, 2007, due June 28, 2009, secured by personal guarantees
                of
                three shareholders and a director
            
            $
            84,877Term
                loan payable, bank, monthly payments of interest at bank's prime
                rate, 8%
                at September 30, 2007
            
            $
            282,922Total
            
            $
            885,735





The
      Company’s subsidiary Elephant Talk Limited (ET Ltd.) has executed a
      credit facility with a bank in Hong Kong since June 29, 2004 under which ET
      Ltd.
      has borrowed funds from the bank under three installment loans and a term loan
      arrangement. ET Ltd. is in default of making loan payments on all the loans
      and
      as a result, the entire loan balance outstanding at September 30, 2007 is
      immediately due and payable to the bank. Furthermore, ET 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. ET Ltd. has
      recorded $37,697 and $70,221 in interest expense and default interest expense
      for the nine months on loans payable as of September 30, 2007 and $43,905 in
      interest expense and default interest expense on loans payable as of September
      30, 2006. Total unpaid accrued interest and default interest, on the above
      loans, amounted to $273,630 as of September 30, 2007 and is included in the
      accrued expenses in the accompanying financials.





**NOTE
      13    Due to Related Parties**





The
      Company received advances from entities that certain officers and/or
      shareholders have an ownership interest. The balances as of September 30, 2007
      amounted to $132,533.The amount due to entities related to certain officers,
      directors and shareholders is due on demand, unsecured and non-interest
      bearing.





**NOTE
      14    Convertible Promissory
      Note**





On
      December 15, 2005, the Company executed a Convertible Promissory Note (the
      “Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
      an investor, funds to be drawn in stages. The Note is convertible during the
      term, in whole or in part, into shares of common stock at the conversion price
      of three and one-half cents ($0.035) of principal amount per share of common
      stock. The Note did not have any beneficial conversion factor attached to it
      since the conversion rate was equal to the market price of the common stock
      of
      $0.035, on the closing of agreement. The Note is convertible to the extent
      that
      the Company has sufficient authorized common stock. In that regard, there are
      currently 5,586,580 shares out of the Company’s 250,000,000 authorized common
      shares available for issuance upon conversion. The Note has a term of thirty
      (30) months during which time interest at the rate of 10% per annum will accrue
      from the date advances drawn by the Company. The Note is secured by shares
      owned
      or to be owned by (an agent of) the Company in its subsidiaries. The Note would
      have to be paid in full at the end of the thirty month term with a balloon
      payment of principal and accrued interest or converted into common stock. RWC
      has not converted the principal drawn by the Company as of September 30, 2007
      in
      exchange for the common shares of the Company.





On
      May
      26, 2006, the Company executed a second Convertible Promissory Note (the “2nd Note”) in the
      principal sum of $3,000,000 with Rising Water Capital. The 2nd Note has
      a term of
      thirty (30) months, during which time interest on the Principal Amount will
      accrue from the date of this 2nd Note at
      an annual
      interest rate of 10%. The 2nd Note will
      be paid
      in full at the end of the thirty month term with a balloon payment of principal
      and interest accrued. The 2nd Note shall
      be
      convertible during the term, in whole or in part, into common shares at the
      conversion price of seven cents ($0.07) per share provided, however, that this
      2nd Note shall
      not be convertible during the term when the Company has insufficient authorized
      common shares to issue to the 2nd Note holder
      when a
      demand for conversion is made. The Note did not have any beneficial conversion
      factor attached to it since the conversion rate was equal to the market price
      of
      the common stock of $0.07 on the closing of agreement. The 2nd Note is
      secured by
      shares owned or to be owned by (an agent of) the Company in its subsidiaries.
      The Company has received the principal balance of $2,660,411 as of September
      30,
      2007, and has recorded accrued interest of $309,583 in the accompanying
      financial statements as of September 30, 2007. The Company recorded an interest
      of $65,771 and $197,208 for the three and nine month periods ended September
      30,
      2007. The Company recorded an interest of $ 39,168 and $ 61,297 for the three
      and nine month periods ended September 30, 2006. The note has been presented
      as
      a long term liability on the accompanying financials.





On
      November 1, 2007, the Company received a letter of Rising Water Capital A.G.
      regarding the above mentioned Promissory Notes, notifying that they agreed
      to
      waive any and all defaults or continuing defaults under section 5 (a)(6) for
      a
      period of time commencing on the date of the letter and continuing for 3 months
      hereafter.





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        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS






**NOTE
      15    Stockholders’ Equity**





**(A)
      Common Stock**





The
      Company is presently authorized to issue 250,000,000 shares of no par value
      Common Stock. The Company currently has 238,265,927 common shares issued and
      outstanding as of September 30, 2007. The holders of Common Stock, and of shares
      issuable upon exercise of any Warrants or Options, are entitled to equal
      dividends and distributions per share, with respect to the Common Stock when,
      as
      and if declared by the Board of Directors from funds legally available
      therefore. No holders of any shares of Common Stock has a pre-emptive right
      to
      subscribe for any securities of the Company nor are any common shares subject
      to
      redemption or convertible into other securities of the Company. Upon
      liquidation, dissolution or winding up of the Company, and after payment of
      creditors and preferred stockholders, if any, the assets will be divided
      pro-rata on a share-for-share basis among the holders of the shares of Common
      Stock.





All
      shares of Common Stock now outstanding are fully paid, validly issued and
      non-assessable. Each share of Common Stock is entitled to one vote with respect
      to the election of any director or any other matter upon which shareholders
      are
      required or permitted to vote. Holders of the Company’s Common Stock do not have
      cumulative voting rights, so that the holders of more than 50% of the combined
      shares voting for the election of directors may elect all of the directors,
      if
      they choose to do so and, in that event, the holders of the remaining shares
      will not be able to elect any members to the Board of Directors.





**Shares
      to be Issued**





Pursuant
      to a Stock Purchase Agreement, on June 30, 2005, the Company sold to an
      accredited investor Rising Water Capital 195,947,395 restricted common shares
      for a total cash consideration of $7,837,896. As of September 30, 2007, the
      Company has issued to RWC 100,000,000 of its restricted common shares valued
      at
      $4,000,000. The common shares were valued at $0.04 cents per share pursuant
      to
      the terms of the agreement. The remaining 95,947,395 common shares to RWC valued
      at $3,837,896 have not been issued to RWC as of September 30, 2007. The Company
      has recorded such shares to be issued as a liability in the accompanying
      financial statements as of September 30, 2007.





On
      October 30, 2006, the Company agreed to issue to RWC an additional 258,546,313
      shares of common stock as price adjustment for failed acquisitions leading
      to
      lower market value than anticipated and bringing the effective ownership of
      RWC
      in the Company, reckoned at the date of October 30, 2006 for outstanding and
      to
      be issued shares (excluding the hereunder mentioned promissory notes), to 72.5%
      of total of shares of common stock. At that moment RWC is potentially the owner
      of 454,493,708 shares of common stock.





In
      addition RWC could acquire an additional 138,005,871 shares of common stock
      upon
      exercise of its two Convertible Promissory Notes of $3.5 million and $3 million
      to the extend permissible based upon the receipt of all of the $3.5 million
      received on the first Promissory Note and $2,660,411 on the second Promissory
      Note (all share conversion calculations are exclusive of possible conversion
      of
      accrued interest).





On
      December 28, 2006, pursuant to a Stock Purchase Agreement, the Company agreed
      to
      sell 109,480,000 restricted common shares at a share price of 0.0375 to five
      accredited investors for a total consideration of $4,105,500. The shares were
      valued at 50% discount over the last five days average market price on the
      date
      of execution of the agreement. In the second quarter $2,833,500 and in the
      third
      quarter the remaining $1,272,000 was received. The Company has recorded the
      109,480,000 shares to be issued as a liability in the accompanying financial
      statements as of September 30, 2007.





On
      June
      28, 2007, the Board approved to issue over a three years period as of January
      1,
      2007 in total 72,036,800 shares of common stock to its officers and directors
      of
      which 51,761,634 shares of common stock valued at $4,399,739 were recognized
      at
      June 28 as compensation for employment commitments for a term of three years
      as
      of January 1, 2007 as well as 3,379,166 shares of common stock valued at
      $287,229 for compensation for services for the nine months ended September
      30,
      2007. The remaining 16,896,000 valued at $1,436,160 will be amortized over
      a
      period of 30 months commencing June 2007. An amortization of $143,615 for
      1,689,583 shares was recorded during the three month period ending September
      30,
      2007. Total number of shares to be issued to management as of September 30,
      2007
      amounts to 56,830,349 shares valued at $4,830,580. The shares were valued at
      the
      closing market price of eight and one-half cents ($0.085) on June 28, 2007,
      the
      date of grant. The Company has recorded such shares to be issued as a liability
      in the accompanying financial statements as of September 30, 2007.





On
      August
      22, 2007, the Board approved the sale of approximately 104 million restricted
      common shares to 5 accredited investors for a total consideration of €4,530,000
      and $50,000. The shares were valued at a 30% discount over the closing price
      of
      August 22, 2007, resulting in an issuance price of $0.0595, before consultancy
      fee of 5%. In the quarter ended September 30, 2007, the company received a
      cash
      consideration of $2,744,349. The Company has recorded the 47,781,378 shares
      to
      be issued as a liability in the accompanying financial statements as of
      September 30, 2007.





In
      the
      month of October and November of 2007, an additional amount of $2,571,436 has
      been received under the same funding program.





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 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS




**(B)
      Class B Preferred Stock**





The
      Company’s Articles of Incorporation (Articles”) authorize the issuance of
      50,000,000 shares of no par value Class B Preferred Stock. No shares of
      Preferred Stock are currently issued and outstanding. Under the Company’s
      Articles, the Board of Directors has the power, without further action by the
      holders of the Common Stock, to designate the relative rights and preferences
      of
      the preferred stock, and issue the preferred stock in such one or more series
      as
      designated by the Board of Directors. The designation of rights and preferences
      could include preferences as to liquidation, redemption and conversion rights,
      voting rights, dividends or other preferences, any of which may be dilutive
      of
      the interest of the holders of the Common Stock or the Preferred Stock of any
      other series. The issuance of Preferred Stock may have the effect of delaying
      or
      preventing a change in control of the Company without further shareholder action
      and may adversely affect the rights and powers, including voting rights, of
      the
      holders of Common Stock. In certain circumstances, the issuance of preferred
      stock could depress the market price of the Common Stock.





During
      the nine months ended September 30, 2007, the Company did not issue any shares
      and warrants.





**NOTE
      16    Basic and Diluted Net Loss Per
      Share**





Net
      loss
      per share is calculated in accordance with the Statement of financial accounting
      standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net loss per share
      is based upon the weighted average number of common shares outstanding. Dilution
      is computed by applying the treasury stock method. Under this method, options
      and warrants are assumed to be exercised at the beginning of the period (or
      at
      the time of issuance, if later), and as if funds obtained thereby were used
      to
      purchase common stock at the average market price during the period. Weighted
      average number of shares used to compute basic and diluted loss per share is
      the
      same since the effect of dilutive securities is anti-dilutive.





**NOTE
      17    Employee Benefit Plan and Non-Qualified Stock
      Option and Compensation Plan**





**Employee
      Benefit Plan**





The
      Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
      options to acquire the Company’s common stock, no par value, from time to time
      to employees of the Company or its subsidiaries. In addition, at the discretion
      of the Board of Directors, shares may be granted under this Plan to other
      individuals, including consultants or advisors, who contribute to the success
      of
      the Company or its subsidiaries, provided that bona fide services shall be
      rendered by consultants and advisors and such services must not be in
      conjunction with the offer or sale of securities in a capital raising
      transaction. No stock may be issued or options granted under the Plan to
      consultants, advisors or other persons who directly or indirectly promote or
      maintain a market for the Company’s securities. The Plan is intended to aid the
      Company in maintaining and developing a management team, attracting qualified
      officers and employees capable of assuring the future success of the Company,
      and rewarding those individuals who have contributed to the success of the
      Company. The Plan is administrated under the direction of the Board of
      Directors. A total of 4,000,000 (four million) common shares and 4,000,000
      (four
      million) stock options to acquire common shares may be subject to, or issued
      pursuant to, benefits granted under the Plan. At any time any stock option
      is
      granted under the terms of this Plan, the Company will reserve for issuance
      the
      number of shares of Stock subject to such option until it is exercised or
      expired. The Plan Administrator shall determine from time to time the terms,
      conditions and price of the options granted. Options shall not be construed
      to
      be stock and cannot be exercised after the expiration of its term. Under the
      Plan, 300,000 shares of common stock and 4,000,000 stock options remain
      available for grant at September 30, 2007.





**2006
      Non-Qualified Stock and Option Compensation Plan**





The
      Board
      of Directors approved on September 26, 2007 a proposal to issue under the 2006
      Non-Qualified Stock and Option Compensation Plan a total of 7,483,333
      non-qualified stock options.





The
      options were granted with an exercise price of $0.09, the share closing price
      as
      of September 26, 2007. The options will vest on December 31, 2009 or so much
      earlier as there will be a change of control of the Company. The options will
      be
      exercisable though December 31, 2011.





The
      fair
      market value of the options of $460,280 was calculated using the Black-Sholes
      options model. The assumptions used for the Black Scholes calculation are:
      volatility of 102%, term of 3 years and a Discount Rate of 4.5%.





Common
      stock purchase options and warrants consisted of the following as of September
      30, 2007:





AggregateExercise
            
            
            Intrinsic#
                shares
            
            
            Price
            
            
            Value**Options:**Outstanding
                and exercisable, December 30, 2006
            
            
            -
            
            
            
            -
            
            
            $
            -Granted
            
            
            7,483,333
            
            
            $
            0.09
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -Expired
            
            
            -
            
            
            
            -
            
            
            
            -Outstanding
                and exercisable, September 30, 2007
            
            
            7,483,333
            
            
            $
            0.09
            
            
            $
            -




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**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      18    INCOME TAXES**





Income
      tax expense (benefit) for the nine months periods is summarized as
      follows:




**September
                  30,****2007**
              
              
              **2006**Current:Federal
              
              $
              (2,966,123
              )
              
              $
              (1,414,603
              )State
              
              
              (523,433
              )
              
              
              (249,636
              )Deferred taxes
              
              
              3,490,356
              
              
              
              1,665,039Income
                  tax expense (benefit)
              
              $
              800
              
              
              $
              800


The
      following is a reconciliation of the provision for income taxes at the United
      States federal statutory rate to the foreign income tax rate at September 30,
      2007:





**2007**Tax
                expense (credit) at statutory rate-federal
            
            
            (34
            %)State
                tax expense net of federal tax
            
            
            (6
            %)Foreign
                income tax rate difference
            
            
            13.5
            %Change
                in valuation allowance
            
            
            26.5
            %Tax
                expense at actual rate
            
            
            --





The
      tax
      effects of temporary differences that gave rise to significant portions of
      deferred tax assets and liabilities at September, 2007 are as
      follows:





Deferred
                tax assets:Net operating loss carry forward
            
            $
            10,322,741Total gross deferred tax assets
            
            
            10,322,741Less valuation allowance
            
            
            (10,322,741
            )Net
                deferred tax assets
            
            $
            --





At
      September 30, 2007, the Company had accumulated deficit carry forwards of
      approximately $ 8,725,000. Pursuant to Dutch income tax laws, losses may be
      carried forward indefinitely. However, loss carry-back is permitted for three
      years. Utilization of the net operating losses may be prohibited after a change
      of 30% or more of the ultimate control in a company.





The
      net
      change in the valuation allowance during the nine months period ended September
      30, 2007 was $3,537,901.





**NOTE
      19    Commitments**





The
      Company leases its corporate office space under a month-to-month operating
      lease. Monthly rental expense under its lease is $4,924 per month. The Company’s
      majority owned subsidiaries leases its office space in Spain and Hong Kong
      from
      third parties. The lease term is for one year and rent expense is $8,538 per
      month.





Rent
      expense under operating leases for co locations amounted to $211,351 for the
      nine months ended September 30, 2007 compared to $93,408 for the same period
      in
      2006.





Commitments
      of the Company relating to leases, co-location and office rents, regulatory
      and
      interconnection fees as of September 30, 2007 for the twelve months periods
      ended September 30 are as follows:





September
                30, 2008
            
            $
            1,578,255September
                30, 2009
            
            $
            1,612,420September
                30, 2010
            
            $
            1,564,139September
                30, 2011
            
            $
            1,491,652**Total**
            
            **$**
            **6,246,464**





The
      material increase in commitments in 2008 is primarily the results of the fact
      that the Company has entered into an agreement to commit itself to buying a
      certain amount of telecommunications infrastructure, targeted to commence upon
      the moment of delivery of the network currently planned to be March 1
      2008.”





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**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS






**NOTE
      20    Litigation**





**(a)**
            **Beijing
                Chinawind**




In
        the
        previous filings disclosed litigation, the judgment of the Beijing Haiding
        Civil
        Court was recently received. On October the 18th the verdict
        was
        given in the two cases:
  ·
              Beijing
                  China Wind Internet Information Technology Ltd. (CW) as Plaintiff
                  against
                  Guangdong Elephant Talk Network Information Ltd.( GDET), Agent
                  of the
                  Company, as Defendant.
 
 The
        Equity Transfer Agreement signed by CW and GDET on January 4, 2006 is confirmed
        to be effective. All requests from CW are rejected.
 
 ·
              Guangdong
                  Elephant Talk Network Information Ltd. (GDET), Agent of the Company,
                  as
                  Plaintiff against Beijing China Wind Internet Information technology
                  Ltd.
                  (CW) Defendant.
 
 The
        Court
        confirmed the opinion of GDET that the resolutions of the shareholders meeting
        of China Wind held on January 27, 2007 are invalid, as the meeting was not
        conducted in a proper way.
 
 The
        Company is not aware of any timely appeal at the moment of this
        filing.


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





As
      reported in the 10-KSB filing of  April 1, 2005, regarding the fiscal
      year 2004, parties mutually agreed to terminate the in the heading mentioned
      Purchase Agreement. The Company returned the received shares of New Times
      Navigation Limited to the concerned shareholders and received back 2,252,500
      common shares out of the 5,100,000 issued by the Company for the purchase.
      In
      addition, the Company issued 37 unsecured convertible promissory notes for
      a
      total amount of $3,600,000. On request of the Company, 21 were returned with
      a
      total value of $2,040,000.





The
      Company is presently as Plaintiff seeking relieve from the High Court of the
      Hong Kong Special Administrative Region against the holders of the not returned
      shares to return a total of 2,847,500 common shares (valued at $381,565) and
      to
      have them returning the remaining 16 unsecured convertible promissory notes
      representing a total amount of $1,560,000.





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**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      21    Segment Information**





**Nine
      months ended September 30, 2007**





**EUROPE****Netherlands**
            
            
            **Spain**
            
            
            **Switzerland**
            
            
            **Others**
            
            
            **Total**
            
            
            **Far
                East**
              **HK/PRC**
            
            
            **Middle
                East**
            
            
            **USA**
            
            
            **TOTAL**Revenues
            
            $
            24,527,670
            
            
            $
            2,346,806
            
            
            $
            7,880,695
            
            
            $
            401,541
            
            
            $
            35,156,713
            
            
            $
            98,447
            
            
            $
            -
            
            
            $
            -
            
            
            $
            35,255,160Operating
                income (loss)
            
            $
            267,830
            
            
            $
            464,472
            
            
            $
            (2,687,567
            )
            
            $
            (341,212
            )
            
            $
            (804,107
            )
            
            $
            (1,231,985
            )
            
            $
            (33,437
            )
            
            $
            (4,626,602
            )
            
            $
            (8,188,501
            )Identifiable
                assets
            
            $
            4,320,883
            
            
            $
            2,073,341
            
            
            $
            12,959,574
            
            
            $
            920,716
            
            
            $
            20,274,515
            
            
            $
            564,279
            
            
            $
            421,529
            
            
            $
            2,330,903
            
            
            $
            23,591,226Depreciation
                and amortization
            
            $
            133,682
            
            
            $
            149,820
            
            
            $
            1,288,973
            
            
            $
            -
            
            
            $
            1,572,475
            
            
            $
            29,971
            
            
            $
            -
            
            
            $
            301
            
            
            $
            1,602,747Capital
                expenditure
            
            $
            33,859
            
            
            $
            35,763
            
            
            $
            1,638,744
            
            
            $
            25,388
            
            
            $
            1,733,753
            
            
            $
            24,977
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,758,730





**NOTE
      22    Going Concern**





The
      accompanying financial statements have been prepared in conformity with
      generally accepted accounting principle, which contemplate continuation of
      the
      Company as a going concern. The Company has an accumulated deficit of
      $25,806,852 including a net loss of $8,723,891 for the nine month period ended
      September, 2007 and default on its bank loans. This raises a substantial doubt
      about the Company’s ability to continue as a going concern. In view of the
      matters described below, recoverability of a major portion of the recorded
      asset
      amounts shown in the accompanying balance sheet is dependent upon continued
      operations of the Company, which in turn is dependent upon the Company’s ability
      to raise additional capital, obtain financing and to succeed in its future
      operations.





The
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern.





Management
      has taken the following steps to revise its operating and financial
      requirements, which it believes are sufficient to provide the Company with
      the
      ability to continue as a going concern for the coming two quarters. Management
      has devoted considerable efforts during the period ended September 30, 2007
      towards (i) obtaining additional equity financing (ii) controlling of salaries
      and general and administrative expenses (iii) management of accounts payable
      (iv) settlement of debt by issuance of common shares and (v) strategically
      acquire profitable companies that bring synergies to the Company’s products and
      services.





We
      believe our existing available cash, cash commitments, cash equivalents and
      short term investments as of September 30, 2007 in combination with continuing
      contractual commitments will be sufficient to meet our anticipated capital
      requirements until the second quarter of 2008.





Substantial
      additional capital resources will be required to fund continuing expenditures
      related to our research, development, manufacturing and business development
      activities. Management is pursuing a number of alternatives available to meet
      the continuing capital requirements of our operations, such as collaborative
      agreements and public and private financings. Management expects to enter into
      discussions with various potential financing sources regarding funding in the
      form of among others equity investments and (convertible) debt financing. There
      can be no assurance that any of these funding will be consummated in the time
      frames needed for continuing operations or on terms favorable to us. If adequate
      funds are not available, we will be required to significantly curtail our
      operating plans and/or possibly cease operations.





**NOTE
      23    Subsequent Events**





On
      August
      22, 2007, the Company entered into various contracts with certain investors
      for
      additional funding. In the third quarter the Company received $2,744,349 under
      these agreements. In the months October and November an additional amount of
      $2,571,436 has been received.








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**ITEM
      2.****Management Discussion and
      Analysis**





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.





NOTE
      ON
      FORWARD LOOKING STATEMENTS





This
      quarterly report on Form 10-QSB includes and incorporates by reference
      "forward-looking statements" within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934
      with respect to our financial condition, results of operations, plans,
      objectives, future performance and business, which are usually identified by
      the
      use of words such as "will," "may," "anticipates," "believes," "estimates,"
      "expects," "projects," "plans," "predicts," "continues," "intends," "should,"
      "would," or similar expressions. We intend for these forward-looking statements
      to be covered by the safe harbor provisions for forward-looking statements
      contained in the Private Securities Litigation Reform Act of 1995, and are
      including this statement for purposes of complying with these safe harbor
      provisions.





These
      forward-looking statements reflect our current views and expectations about
      our
      plans, strategies and prospects, which are based on the information currently
      available and on current assumptions.





We
      cannot
      give any guarantee that these plans, intentions or expectations will be
      achieved. Investors are cautioned that all forward-looking statements involve
      risks and uncertainties, and actual results may differ materially from those
      discussed in the forward-looking statements as a result of various factors,
      including those Risk Factors set forth in our Form 10-KSB for the year ended
      December 31, 2006. Listed below and discussed elsewhere in this quarterly report
      are some important risks, uncertainties and contingencies that could cause
      our
      actual results, performances or achievements to be materially different from
      the
      forward-looking statements included or incorporated by reference in this
      quarterly report. These risks, uncertainties and contingencies include, but
      are
      not limited to, the following:





·
            competition
                in the industry;


·
            the
                availability of debt and equity
                financing;


·
            future
                acquisitions;


·
            the
                availability of qualified
                personnel;


·
            international,
                national, regional and local economic and political
                changes;


·
            general
                economic and market conditions;


·
            changes
                in applicable laws;


·
            trends
                affecting our industry, our financial condition or results of
                operations;


·
            the
                timing and amount of collections on our receivable
                portfolios;


·
            increases
                in operating expenses associated with the growth of our
                operations.





You
      should read this quarterly report and the documents that we incorporate by
      reference in this quarterly report completely and with the understanding that
      our actual future results may be materially different from what we expect.
      We
      may not update these forward-looking statements, even though our situation
      may
      change in the future. We qualify all of our forward-looking statements by these
      cautionary statements.





Overview





Elephant
      Talk Communications Inc. (“ETCI”), until recently was engaged in the long
      distance telephone business in China and the Special Administrative Region
      Hong
      Kong.





In
      2006
      the Company adopted the strategy to position itself as an international telecom
      operator and enabler to the multi-media industry by facilitating to the
      distribution of all forms of content and telecommunications services to various
      customers all over the globe. Through intelligent design and organizational
      structure the Company pursues this strategy by building a worldwide network
      based on both clear and IP bandwidth that is managed centrally by its
      sophisticated self-developed IN-CRM-Billing platform.





In
      January 2007, through the acquisition of various assets in Europe, the Company
      established a foothold in the European Telecommunications Market, particularly
      in the market of the “Service Number Industry” and to a smaller extent Carrier
      (Pre) Select numbers. Furthermore, through the human and IT resources thereby
      acquired, the company obtained in-depth expertise of telecom and multi-media
      systems, telecom regulations and European markets.





The
      Company currently operates a switch-based telecom network with national licenses
      and direct fixed line interconnects with the Incumbents/National Telecom
      Operators in eight (8) European countries, one (1) in the Middle East (Bahrain),
      licenses in Hong Kong and the U.S.A. and partnerships with telecom operators
      in
      Scandinavia, Poland Germany and Hong Kong. Codec and media streaming servers
      are
      currently located in four centers geographically spread around the world.
      Together with the centrally operated and managed IN-CRM-Billing platform, the
      Company thus offers geographical, premium rate, toll free, personal, nomadic
      and
      VoIP numbers. Services are primarily provided to the business market and include
      traditional telecom services, VOIP, media streaming and distribution including
      the necessary billing and collection. Through its European and Chinese
      development centers, ETCI develops in-house telecom and media related systems
      and software.





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In
      the
      third quarter the Company finalized testing and commissioned additional national
      interconnects in the United Kingdom (British Telecom) and Bahrain (Batelco),
      further enlarging the Company’s footprint in fixed line infrastructure. In the
      Caribbean and the Middle East, the Company installed its first Wifi test sites,
      aimed at creating own broadband mobile access networks in emerging markets
      with
      relatively poor (or relatively expensive) infrastructures.





In
      Europe, a step was made towards building a mobile enabled infrastructure on
      top
      of the Company’s fixed line infrastructure by committing capital expenditure and
      implementation resources towards becoming a Full Mobile Network Operator
      (Full MNO).





In
      order
      to finance this business opportunity the Company entered into stock purchase
      agreements with certain investors for the sale of its common stock. In the
      third
      quarter the Company received $4,159,069 under these agreements. In the months
      October and November, an additional amount of $2,571,436 has been received.
      See
“Part II, Item 2: Unregistered Sales of Equity Securities.”





At
      the
      same time the Company is pursuing above described business opportunities,
      attention is paid by its Management to improve the internal structuring of
      the
      organization and to realize a fully integrated organization. This will have
      to
      be achieved not only on a corporate level but also in the financial, technical
      and operational departments of the Company in order to implement new services,
      connectivity in new countries and extra capacity.





**Material
      Transactions**





**Mobile
      Virtual Network Enabler and Operator**





Elephant
      Talk Communication Premium Rate Services Netherlands BV, a company belonging
      to
      the ETCI group, received on July 3, 2007 from the OPTA, the Dutch
      telecommunications market authority, the definitive license to act as a Mobile
      Network Operator (MNO). Elephant Talk Communication Holding AG entered into
      an
      agreement in June 2007 with one of the four (4) MNO’s in the
      Netherlands.





**Hiring
      of Investor Relations firm Booke & Co.**





The
      Company hired the Investment Relations firm Booke & Co. to advise and assist
      the Company. The contract has a term of 18 months. The engagement started
      October, 1, 2007. The first 6 months the retainer is $5,000 per month. The
      second six months this will be $6,000 per month, and the last six months this
      will be $7,000 per month. After nine months, the contract can be terminated
      with
      a two months notice.





The
      contract includes also the granting of an option on 300,000 shares of ETC,
      Inc.,
      which will be vested immediately. The exercise will expire on January 9,
      2012.





**Retainer
      agreement with Ellenoff & Grossman as our external corporate legal
      counsel**





The
      Company retained per the first of October as external legal counsel the New
      York
      based firm Ellenoff & Grossman. The monthly retainer fee is
      US$5,000.





**The
      Company entered into an Intermediation Agreement with QMG and Amelia &
Associates S.A. to assist the Company in raising funds.**





The
      Board
      approved on August 22, 2007 in writing and confirmed in their meeting of
      September 26, 2007 two agreements with Quercus Management Group and Amelia
&
Associates S.A. to provide intermediation versus investors for additional
      funding on a no cure no pay basis. The commission to be paid for funding through
      these agreements is 5%.





On
      the
      basis of this intermediation as of September 30, 2007 the Company agreed to
      sell
      restricted common shares to five accredited investors for a total consideration
      of EUR 4,530,000 and $50,000. The shares were valued at a 30% discount over
      the
      closing price of August 22, 2007, resulting in an issuance price of
      $0.0595.





The
      Company has received as of September 30, 2007 cash payments in consideration
      of
      $2,744,349 against such shares and recorded such shares to be issued as a
      liability in the accompanying financial statements as of September 30,
      2007.





In
      the
      month of October and November, an additional $2,571,436 has been received under
      the same funding program. The remaining balance is expected to be received
      in
      the last month of the 4th quarter
      2007. The
      Company has not issued any common shares to the investors as of September 30,
      2007.





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**Result
      of Operations**





Our
      results of operations for the three months and nine months ended September
      30,
      2007 consisted of operations of Elephant Talk Communications, Inc., its
      wholly-owned subsidiary Elephant Talk Limited and its subsidiaries, its
      wholly-owned subsidiary Elephant Talk Global Holding BV, and its wholly-owned
      subsidiary Elephant Talk Europe Holding BV and its subsidiaries. The results
      of
      operations of the Company for the three months and nine months ended September
      30, 2006 consisted of our operations of Elephant Talk Communications, Inc.
      and
      our wholly-owned subsidiary Elephant Talk Limited and its subsidiaries. The
      Company reported net losses of $1,050,200 and $8,723,891 for the three months
      and nine months periods ended September 30, 2007 compared to net losses of
      $3,148,396 and $4,161,398 for the same periods in 2006.





**Revenues
      and Cost of Revenues**:





The
      Company reported revenues of $11,574,708 and $35,255,160 for the three months
      and nine months ended September 30, 2007 compared to $29,521 and $128,363 for
      the same periods in 2006.





**Revenues**
      for the three months and nine months ended September 30, 2007 consisted of
      $11,091,708 and $33,975,548 primarily from the premium rate services (“PRS”)
      provided by the Company’s subsidiary Elephant Talk Communication Holding AG to
      its customers.





**Cost
      of revenues** was $11,602,554 and $34,942,313 for the three months and
      nine months periods ended September 30, 2007 compared to $26,956 and $116,111
      for the same period in 2006. Cost of Revenues includes depreciation &
amortization directly attributable to revenue (for 3 months ended September
      30,
      2007: $406,554 and 9 months ended September 30 2007: $1,113,296). Cost of
      revenues for the three months and nine months periods ended September 30, 2007
      consisted of $10,513,185and $31,987,052 for the cost of services provided to
      premium rate services customers of our subscriber base. No premium rate services
      applicable in 2006.





**Gross
      margins** for the three months and nine months ended September 30, 2007
      was negative $(27,846) and $312,848 of revenues as compared to $2,565 and
      $12,252 of gross margins for the same periods in 2006.





As
      a
      consequence, Gross Margin includes depreciation & amortization directly
      attributable to revenue (for 3 months ended September 30, 2007: $406,554 and
      9
      months ended September 30 2007: $1,113,296)





**Operating
      Expenses**: Selling, general and administrative expenses were $704,010
      and $8,011,897 for the three months and nine months ended September 30, 2007
      compared to $1,691,509 and $2,818,402 for the same periods in 2006.





As
      of
      September 30, 2007, the Company recorded an expense of $4,830,583 in stock
      compensation to officers and directors as sign-up bonus for executing employment
      agreements for a 3 year term.





**Other
      Income and Expenses**:





**Interest
      income** was $49,482 and $77,978 for the three months and nine months
      periods ended September 30, 2007 compared to $29 and $182 for the same periods
      in 2006. Interest expense was $170,751 and $590,215 for the three months and
      nine months ended September 30, 2007 compared to $168,618 and $377,149 for
      the
      same periods in 2006. Interest expense increased as a result of the Company’s
      borrowing additional loans from investors and bank.




**Liquidity
      and Capital Resources**: The Company's principal capital requirements
      during the year 2007 are to fund the internal operations and acquire profitable
      growth-oriented telecommunications and related businesses in Asia and Europe.
      The Company raised necessary funds by selling shares of its common stock to
      selected investors and bringing in business partners whose contributions include
      cash. In view of low borrowing interest rates, the Company continues to actively
      pursue additional credit facilities with accredited investors and financial
      institutions in Europe, Middle East and USA as a means to obtain new
      funding.





As
      shown
      in the accompanying financial statements, the Company incurred a net loss of
      $8,723,891 for the nine months period ended September 30, 2007 as compared
      to a
      net loss of $4,161,398 for the same period in 2006. Additionally, the Company’s
      current liabilities exceeded its current assets by $19,442,038 at September
      30,
      2007.





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These
      factors and the Company’s inability to meet its debt obligations from current
      operations, and the need to raise additional funds to accomplish its objectives,
      create a substantial doubt about Elephant Talk's ability to continue as a going
      concern. Furthermore, the Company’s independent auditors have issued a going
      concern opinion on the Company’s audited financial statements for the fiscal
      year ended December 31, 2006 as the Company did not have sufficient funds
      available to operate for the next twelve months.





The
      Company’s forecast of the period of time through which its financial resources
      will be adequate to support its operations is a forward-looking statement that
      involves risks and uncertainties, and actual results could vary as a result
      of a
      number of factors.





**Operating
      Activities**:





Net
      cash
      used in operating activities during the nine months period ended September
      30,
      2007 amounted to $1,366,649 primarily due to a decrease in accounts receivable
      of $141,945, an increase in prepaid expenses of $285,722 and due to an increase
      in Accrued Expenses and Other Payables of $775,900.





**Investing
      Activities**:





Net
      cash
      used in investing activities during the nine months period ended September
      30,
      2007 was $1,538,199 primarily due to the purchase of property and equipment
      of
      $1,657,347 compensated for the proceeds of acquisitions of subsidiaries of
      $382,439 and a negative cash flow from acquisitions $241,883.





**Financing
      Activities**:





Net
      cash
      provided by financing activities during the nine months period ended September
      30, 2007 was $6,321,826. The Company received $5,929,539 in funding against
      the
      sale of shares to accredited investors. The Company received $635,190 from
      third
      parties and paid $262,270 to related parties.





As
      a
      result of the above activities, the Company experienced a net increase in cash
      of $3,305,799 for the nine months period ended September 30, 2007. The ability
      of the Company to continue as a going concern is still dependent on its success
      in obtaining additional financing from the institutional investors, acquiring
      profitable operations or by selling its common shares to accredited investors
      and fulfilling its plan of restructuring as outlined above.





**Application
      of Critical Accounting Policies and Estimates**





Revenue
      Recognition, Cost of Revenue and Deferred Revenue:


The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. The Company derives revenues from activities as a fixed-line
      provider with its own carrier network and its own switching technology and
      from
      transport, internet and VPN solutions. The Company also derives revenues from
      sale of minutes of calling time via sale of its prepaid calling cards. Costs
      of
      revenues of the services supplied to attain the sales comprise the total
      acquisition and production costs and cost of sales for the products and services
      sold during the reporting period. Cost of revenues includes the cost of capacity
      associated with the revenue recognized within the corresponding time period.
      Revenue is deferred upon activation of the calling cards and is recognized
      as
      the prepaid calling card balances are reduced based upon minute usage,
      imposition of administrative fees, or no further obligations exist with respect
      to a calling card. Deferred revenues represent amounts received from its
      customers for the unused minutes of the prepaid calling cards sold to its
      customers since the Company recognizes revenues only on the usage of the
      minutes.





Stock-based
      Compensation:


The
      Company follows the prescribed accounting and reporting standards for all
      stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights in accordance
      with SFAS No. 148 “Accounting for Stock-Based Compensation.” SFAS No. 148
      provides alternative methods of transition for a voluntary change to the fair
      value based method of accounting for stock-based employee compensation. In
      addition, this Statement requires prominent disclosures in both annual and
      interim financial statements about the method of accounting for stock-based
      employee compensation and the effect of the method used, on reported
      results.





Issuance
      of Shares for Services:


The
      Company accounts for the issuance of equity instruments to acquire goods and
      services based on the fair value of the goods and services or the fair value
      of
      the equity instrument at the time of issuance, whichever is more reliably
      measurable.





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**Impact
      of Accounting Pronouncements**





In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’. This Statement improves financial reporting by requiring
      an employer to recognize the over funded or under funded status of a defined
      benefit postretirement plan (other than a multiemployer plan) as an asset or
      liability in its statement of financial position and to recognize changes in
      that funded status in the year in which the changes occur through comprehensive
      income of a business entity or changes in unrestricted net assets of a
      not-for-profit organization. This Statement also improves financial reporting
      by
      requiring an employer to measure the funded status of a plan as of the date
      of
      its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. An employer without publicly traded equity securities is
      required to recognize the funded status of a defined benefit postretirement
      plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      Statement in preparing those financial statements:





a)
            A
                brief description of the provisions of this
                Statement


b)
            The
                date that adoption is required


c)
            The
                date the employer plans to adopt the recognition provisions of this
                Statement, if earlier.





The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.





In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities.





**ITEM
        3.   Controls and Procedures**
 
 Management,
        under the supervision and with the participation of the chief executive officer
        and chief financial officer, conducted an evaluation of the disclosure controls
        and procedures as defined in rule 13a-15(e) as of the end of the period covered
        by this interim report on Form 10-QSB. Based on their evaluation, the chief
        executive officer and chief financial officer have concluded that our disclosure
        controls and procedures are effective.
 
 There
        has
        been no change in our internal control over financial reporting that occurred
        in
        the period covered by this report that has materially affected or is reasonably
        likely to materially affect our internal control over financial
        reporting.


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**PART
      II  OTHER INFORMATION**





**ITEM
      1.****Legal
      Proceedings**





**a)
      Beijing Chinawind**





In
      the
      previous filings disclosed litigation, the judgment of the Beijing Haiding
      Civil
      Court was recently received. On October the 18th the verdict
      was
      given in the two cases:




·
            Beijing
                China Wind Internet Information Technology Ltd. (CW) as Plaintiff
                against
                Guangdong Elephant Talk Network Information Ltd.( GDET), Agent of
                the
                Company, as Defendant.





The
      Equity Transfer Agreement signed by CW and GDET on January 4, 2006 is confirmed
      to be effective. All requests from CW are rejected.





·
            Guangdong
                Elephant Talk Network Information Ltd. (GDET), Agent of the Company,
                as
                Plaintiff against Beijing China Wind Internet Information technology
                Ltd.
                (CW) Defendant.





The
      Court
      confirmed the opinion of GDET that the resolutions of the shareholders meeting
      of China Wind held on January 27, 2007 are invalid, as the meeting was not
      conducted in a proper way.





The
      Company is not aware of any timely appeal at the moment of this
      filing.





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





As
      reported in the 10 KSB filing of April 1, 2005, regarding the fiscal year 2004,
      parties mutually agreed to terminate the in the heading mentioned Purchase
      Agreement. The Company returned the received shares of New Times Navigation
      Limited to the concerned shareholders and received back 2,252,500 common shares
      out of the 5,100,000 issued by the Company for the purchase. In addition the
      Company issued 37 unsecured convertible promissory notes for a total amount
      of
      US$3,600,000. On request of the Company 21 were returned with a total value
      of
      US$2,040,000.





The
      Company is presently as Plaintiff seeking relieve from the High Court of the
      Hong Kong Special Administrative Region against the holders of the not returned
      shares to return a total of 2,847,500 common shares (valued at $381,565) and
      to
      have them returning the remaining 16 unsecured convertible promissory notes
      representing a total amount of US$1,560,000.





**ITEM
      2.  Recent Sales of
      Unregistered****Securities**





On
      August
      22, 2007, the Company agreed to sell approximately 104 million shares of Common
      Stock to five (5) accredited investors. The aggregate consideration to be
      received by the Company in connection with this transaction was approximately
      $6,155,368. The Company is obligated to pay a commission of €225,000 to the
      intermediaries in connection with these transactions.





The
      terms
      and conditions set forth in these Agreements are pursuant to the Securities
      Act
      of 1933, as amended, and Regulation S promulgated there under. The Company
      and
      the investors acknowledged and agreed that the Common Stock offered and are
      sold
      to the investors without such offer and sale being registered under the
      Securities Act, or under any state “blue sky” laws of any state of the U.S., and
      will be issued to the Investors in an offshore transaction outside of the U.S.
      in accordance with a safe harbor from the registration requirements of the
      Securities Act provided by Regulation S. As such, the investors further
      acknowledged and agreed that the Common Stock will, upon issuance, be
“restricted securities” within the meaning of the Securities Act. and may not be
      offered or sold in U.S., directly or indirectly, to U.S. Persons except in
      accordance with the provisions of Regulation S, pursuant to an effective
      registration statement under the Securities Act, or pursuant to an exemption
      from, or in a transaction not subject to, the registration requirements of
      the
      Securities Act and in each case in accordance with applicable state and federal
      securities laws.





**ITEM
      3.   Defaults Upon Senior Securities**





None.





**ITEM
      4.****Submission of Matters to Vote of Securities
      Holders**





None.





**ITEM
      5.****Other Information**





None.





**ITEM
      6.****Exhibits**




**a)
                Exhibit No.**
            
            **Description
                of Document**10.1
            
            Form
                of Stock Purchase Agreement from August, 2007 Financing31.1
            
            Certification
                of Chief Executive Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Chief Financial Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200299.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002





**SIGNATURE**








In
      accordance with the requirements of the Exchange Act, the registrant has caused
      this report signed on its behalf by the undersigned, thereunto duly
      authorized.








**Elephant
                Talk Communications, Inc.**Date:
                November 19, 2007
            
            By:
                /s/ Steven van der VeldenSteven
                van der VeldenPresident
                & Chief Executive Officer








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