**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 
 **FORM
        10-KSB**
 
 
 x ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        fiscal year ended **December
        31, 2006**
 
  ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
        OF
        1934
 
 
 Commission
        file number: **000-30061**
 
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 (Exact
        name of registrant as specified in its charter)
 
 
 **CALIFORNIA**
 (State
        of
        incorporation)
 
 
 **95-4557538**
 (I.R.S.
        Employer Identification No.)
 
 
 **438
        East Katella Avenue, Suite 217, Orange, California
        92867**
 (Address,
        including zip code, of registrant's executive offices)
 
 
 **(714)
        288-1570**
 (Telephone
        number, including area code, of registrant’s executive offices)
 
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 
 Title
        of
        each class
 **None**
 
 
 Name
        of
        each exchange on which registered
 **None**
 
 
 Securities
        registered pursuant to Section 12(g) of the Act: Common Stock
 **No
        par value**
  -
              1
              -
 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 mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act.
 Yes o No x
 
 Check
        if
        disclosure of delinquent filers in response to item 405 of Regulation S-B
        is not
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. x
 
 Issuer's
        revenues for most recent fiscal year: $158,292.
 
 State
        the
        aggregate market value of voting stock held by non-affiliates computed by
        reference to the price at which the stock was sold, or the average bid and
        asked
        prices of such stock, as of a specified date within the past 60 days: As
        of
        April 14, 2007, approximately $20,795,200.
 
 State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date: As of April 14, 2007, there were 238,265,927
        shares of common stock outstanding.
 
  -
            2
            -
  **ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 2006
        Form
        10-KSB Annual Report
 
 **Table
        of Contents**
 
 Page**PART
                  I**Item
                  1. Description of Business
              4Item
                  2. Description of Property
              21Item
                  3. Legal Proceedings
              21Item
                  4. Submission of Matters to a Vote of Security Holders
              22**PART
                  II**Item
                  5. Market for Common Equity and Related Stockholder
                  Matters
              22Item
                  6. Management's Discussion and Analysis or Plan of
                  Operation
              26Item
                  7. Consolidated Financial Statements
              35Item
                  8. Changes in and Disagreements with Accountants on Accounting
                  and
                  Financial Disclosure
              58Item
                  8A. Controls and Procedures
              58Item
                  8B. Other Items
              59**PART
                  III**Item
                  9. Directors, Executive Officers, Promoters and Control Persons;
                  Compliance With Section 16(a) of the Exchange Act
              59Item
                  10. Executive Compensation
              61Item
                  11. Security Ownership of Certain Beneficial Owners and
                  Management
              64Item
                  12. Certain Relationships and Related Transactions
              66**PART
                  IV**Item
                  13. Exhibits, and Reports on Form 8-K
              67Item
                  14. Principal Accountant Fees and Services
              68Signatures
              69
 
  -
            3
            -
  **Explanatory
        Note:**
 
 Unless
        otherwise indicated or the context otherwise requires, all references herein
        to
        the "Company" are to Elephant Talk Communications, Inc., a California
        corporation, its wholly owned subsidiary, Elephant Talk Limited, its wholly
        owned subsidiary Elephant Talk Europe Holding BV, its majority (51%) owned
        subsidiary Elephant Talk Communications PRS UK Ltd., its wholly owned subsidiary
        Full Mark Technology Limited, its majority owned (50.54%) subsidiary Elephant
        Talk Middle East & Africa FZ-LLC, and its majority (51%) owned subsidiary
        Elephant Talk Middle East & Africa Jordon LLC, its majority owned (51%)
        subsidiary Elephant Talk Middle East Holding Bahrain WLL. All share and per
        share information contained herein has been adjusted to reflect a one for
        ten
        reverse split of the Company's common stock completed and effected on January
        22, 2002.
 
 **PART
        I**
 
 **Item
        1: Description of Business**
 
 Organization
        and Nature of Operations
 
 Elephant
        Talk Communications, Inc. (herein referred to as "Elephant Talk," "ETCI,"
        "We,"
        "Our," or "Company" formerly known as Staruni Corporation), was incorporated
        on
        February 5, 1962 under the laws of the state of California as Altius
        Corporation. The Company 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.
 
 Pursuant
        to an Agreement of Merger and Plan of Reorganization, effective August 27,
        2001,
        and through the subsequent transaction that closed on January 4, 2002, Staruni
        Corporation, a California corporation merged with Elephant Talk Limited,
        a
        limited liability company incorporated in Hong Kong. Per the terms of the
        merger
        agreement, Staruni continued its corporate existence under the laws of
        California and Elephant Talk Limited became its wholly-owned subsidiary.
        In
        conjunction with the merger, Staruni changed its name to Elephant Talk
        Communications, Inc. in order to emphasize that the new focus of ETCI will
        be
        the business of Elephant Talk Limited. Each holder of ordinary shares of
        Elephant Talk Limited common stock, par value of HK$1 (One Hong Kong Dollar)
        immediately prior to the effective time of the merger date, by virtue of
        the
        merger and without any action on the part of such holder, was entitled to
        receive, as of the merger date, such number of shares of common stock of
        ETCI,
        no par value, as the number of shares of Elephant Talk Limited common stock
        owned by such holder as of the merger date. Collectively, following the merger,
        the former holders of Elephant Talk Limited common stock held 31,164,210
        shares
        of our common stock, which represented 90% of our issued and outstanding
        shares
        of common stock at the time. The merger caused no change in any of the shares
        of
        the ETCI's common stock outstanding on the merger date, and no other securities
        were converted as a result of the merger. At the conclusion of the merger
        on
        January 4, 2002, The Hartcourt Companies, Inc. ("Hartcourt") retained a majority
        ownership in ETCI.
 
 Per
        the
        terms of the merger agreement, the Company sold its Internet Service Provider
        ("ISP") business to a related party, Vision Aerospace Inc. ("Vision") for
        1,000,000 shares of Vision valued at $10,385. Vision is owned by the former
        President of the Company. The value of the shares was recorded at the book
        value
        of the assets exchanged to acquire the shares of Vision.
 
 Pursuant
        to the terms of the share exchange agreement, control of the combined companies
        passed to the former shareholders of Elephant Talk Limited.
  -
              4
              -
   Prior
        to
        the merger, Elephant Talk Limited was a 51% owned subsidiary of Hartcourt,
        a
        publicly listed company in the US and Germany. On May 16, 2001, Hartcourt
        and
        Elephant Talk Limited executed a Sale and Purchase Agreement whereby Hartcourt
        acquired 51% of the ownership interest in Elephant Talk Limited for a total
        consideration of $4,194,000. The terms of the agreement required Elephant
        Talk
        Limited to increase its authorized capital from 25,000,000 shares to 30,000,000
        shares. Hartcourt subscribed to a block of 5,000,000 new shares; issued
        1,000,000 Hartcourt shares under Rule 144 of the SEC regulations, valued
        at 61.9
        cents per share; and executed a promissory note payable to Elephant Talk
        Limited
        in the amount of $1,250,000 due on February 16, 2002, which was further extended
        for payment to May 31, 2002. In addition, Hartcourt subscribed to another
        block
        of 10,300,000 Elephant Talk Limited shares from private owners for a
        consideration of $2,325,000 and issued 3,756,058 Hartcourt shares under Rule
        144
        for a combined total of 51% ownership interest in Elephant Talk
        Limited.
 
 Pursuant
        to an execution of a Spin-Off Agreement, dated September 12, 2002, and through
        the subsequent transactions that closed on January 4, 2003, the Company
        terminated its relationship with Hartcourt. Pursuant to the terms of the
        Spin-Off Agreement, the Company received from Hartcourt 17,895,579 of its
        common
        shares held by Hartcourt and $349,000 in cash advances, in exchange for
        returning 4,756,000 common shares of Hartcourt held by the Company and its
        affiliates, canceling two promissory notes of Hartcourt held by the Company
        and
        its affiliate in the respective amounts of $1,250,000 and $140,595, and
        canceling the indebtedness of cash advances by issuing 5,000,000 of its
        restricted common shares to Hartcourt. In addition to executing the Spin-Off
        Agreement, the parties executed a mutual release to end their relationship
        and
        place each other in a position whereby no party is indebted to the other
        party.
 
 On
        April
        3, 2004, the Company signed a Share Exchange Agreement with its intent to
        acquire 60% of the equity ownership interest in Urumqi General Systems
        Technology Company Ltd. (known as "General System" or "WestSMS"), a leading
        provider of mobile SMS services in the resource rich province of Xinjiang,
        China. On January 5, 2005, the Company completed the above acquisition where
        it
        formed True Precise Technology Limited ("True Precise"), a limited liability
        company registered in British Virgin Islands, as its investment holding company,
        that acquired 60% of the equity ownership interest in General System from
        Keen
        Solution Group Limited ("Keen Solution"), a limited liability company registered
        under the laws of British Virgin Islands. As consideration for the acquisition,
        the Company issued 23,137,500 restricted common shares valued at $1,436,875
        for
        its 60% equity interest. Upon completion of the transaction, True Precise
        became
        a wholly-owned subsidiary of the Company and General System became a majority
        owned subsidiary of True Precise. On August 8, 2005, Keen Solution sent
        notification informing the Company that it has unilaterally decided to terminate
        the Share Exchange Agreement. The Company placed a stop transfer restriction
        on
        all of the 23,137,500 common shares it issued to Keen Solution. The Company
        has
        treated True Precise’s transaction as discontinued operation and has recorded
        23,137,500 common shares as cancelled shares as of December 31, 2005. Of
        those
        shares, 20,137,500 have been returned to the Company’s treasury, and the Company
        continues to pursue the return of the remainder. The Company has evaluated
        its
        legal options in connection with the termination of the Share Exchange Agreement
        and came to the conclusion that a mutual rescission of the agreement was
        in the
        Company’s best interest. The Company still continues to pursue the return of
        3,000,000 common shares from Keen Solution. In May 2006, True Precise ceased
        its
        existence as it discontinued its operations. The Company recorded $1,923
        in
        expenses of True Precise under general and administrative expenses as of
        the
        date of cease of operations in May 2006.
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        with
        Beltrust AG, a corporation organized and existing under the laws of Switzerland
        (“Beltrust”), to acquire all of the issued and outstanding shares of Benoit
        Telecom Holding AG, a corporation organized and existing under the laws of
        Switzerland (“Benoit Telecom”). Benoit Telecom is a European-based telecom
        company. On November 17, 2006, the Company executed an Agreement of Purchase
        and
        Sale (the “Agreement”), with Beltrust and Elephant Talk Europe B.V. (“ET
        Europe”), a corporation organized and existing under the laws of The
        Netherlands, and a wholly owned subsidiary of the Company, providing for
        the
        purchase and sale of all of the issued and outstanding shares of Benoit Telecom
        by ET Europe.
 -
              5
              -
  Pursuant
        to the Agreement, ET Europe agreed to purchase from Beltrust all of the 100,000
        issued and outstanding shares of Elephant Talk Communications Holding AG,
        formerly known as Benoit Telecom, in exchange for a) cash payment of $6,643,080
        and b) 40,000,000 shares of the Company’s common stock. The parties acknowledged
        that $6,043,080 (equivalent to approximately Euros 4,625,000) had been
        previously paid by the Company on behalf of the ET Europe to an escrow agent
        as
        an earnest deposit. In addition, the parties agreed that the remaining balance
        of the consideration consisting of $600,000 of cash payment and 40,000,000
        shares of common stock of the Company to be transferred to Beltrust within
        30
        days of the closing. As of December 31, 2006, the Company has issued 40,000,000
        shares of its common stock to the assignee of Beltrust, and the cash
        consideration of $600,000 remains unpaid. The 100,000 shares of Elephant
        Talk
        Communications Holding AG were transferred to ET Europe as of the closing
        pursuant to the Agreement. The parties executed the transaction contemplated
        by
        the Agreement on November 17, 2006 to be made effective as of January 1,
        2007.
        Benoit Telecom is a telecommunications service provider that provides various
        premium rate services such as 0900 service and VoIP services to corporations
        and
        content providers within the Europe. The Company believes that it can extract
        considerable synergies with this acquisition by integrating its VOIP platforms
        and extend its reach from China to Europe and vice-versa.
 
 The
        Company agreed to compensate RWC by issuing additional restricted shares
        of
        common stock as compensation for the failed acquisitions of True Precise
        being
        the representation made by the Company in the Stock Purchase Agreement dated
        June 30, 2005 between the Company and RWC. As a result of not concluding
        the
        acquisition, the Company agreed to issue RWC an additional 254,546,313 to
        bring
        RWC’s investment to equal 72.5% of total outstanding shares of the Company as
        of
        December 28, 2006. Such issuance will result in RWC owning a total of
        554,493,708 shares of Company’s common stock, including the shares already
        issued to RWC.
 
 Pursuant
        to the terms of an agency agreement in connection with its acquisition of
        Phonetone Telecom Ltd. (“Phonetone”) from Calfin Trust, the Company agreed to
        issue 40,000,000 restricted common shares, pay a cash consideration of $600,000,
        and share 15% of the yearly total profit margin generated by the Company
        or any
        of its affiliated companies from the Phonetone’s premium rate numbers in the
        years 2006, 2007 and 2008. Phonetone is a European telecom service provider
        registered in the British Virgin Islands with administrative offices in Vaduz,
        Furstentum, Liechtenstein. Phonetone is a resale agent of a unique low rate
        international telephone service based on it’s technical platform. The Company
        advanced $225,562 and 20,000,000 shares of common stock valued at $720,000
        to
        Calfin Trust as an earnest deposit towards the proposed acquisition of
        Phonetone. On October 30, 2006, the Company and Calfin Trust mutually agreed
        to
        terminate the proposed acquisition of Phonetone and executed a Rescission
        Agreement. The Company received cash consideration of $80,000 of earned deposits
        on November 6, 2006 and received and cancelled 20,000,000 shares of its common
        stock on December 27, 2006. The remaining cash balance of $145,562 of earnest
        deposits still remains outstanding and to be returned to the
        Company.
 
 On
        April
        20, 2005, the Company formed a joint venture Free Zone Limited Liability
        company
        to be incorporated in the Dubai Technology, Electronic Commerce and Media
        Free
        Zone, Dubai, United Arab Emirates (UAE) under the name Elephant Talk Middle
        East
& Africa FZ-LLC (“ET ME&A”). The Company, through its wholly owned
        subsidiary Elephant Talk Limited, has incorporated this joint venture company
        on
        November 6, 2005 and contributed $50,953 towards its 50.54% equity share
        capital
        in the joint venture company as of December 31, 2006. ET ME&A is committed
        to spend the necessary funds to keep its share of equity investment and is
        currently seeking regulatory approvals for obtaining trade and business licenses
        from the UAE government to conduct its business. ET ME&A and has not yet
        begun operations and plans to operate various telecom related businesses
        in the
        Middle East and Africa.
 
 After
        evaluating the processes to expand our business and the costs of setting
        up
        regional subsidiaries in the Middle East under the name ET ME&A, the Company
        decided to create a new holding company in Bahrain. On June 17, 2006, the
        Company through its subsidiary Elephant Talk Limited, incorporated a limited
        liability company in the Kingdom of Bahrain under the name Elephant Talk
        Middle
        East & Africa (Holding) W.L.L (“ET ME&A Holding”). The registered
        capital of ET ME&A Holding is $387,787 and Elephant Talk Limited has
        contributed $197,771 towards its 51% equity interest in ET ME&A Holding as
        of December 31, 2006.
 
  -
            6
            -
  On
        July
        11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited formed
        Full Mark Limited, a limited liability company organized under the laws of
        British Virgin Islands, to facilitate acquisitions for the Company in China.
        On
        December 13, 2005, Full Mark formed a wholly owned subsidiary Jinfuyi Technology
        (Beijing) Co. Ltd. (“Jinfuyi”), a limited liability company organized and
        existing under the laws of the Peoples’ Republic of China, with a registered
        capital of $200,000.
 
 On
        January 2, 2006, Jinfuyi and Beijing Chinawind Telecommunication Information
        Technology Company Limited, a limited liability company organized under the
        laws
        of the Peoples’ Republic of China (“Beijing Chinawind”), entered into an
        Exclusive Technical Consulting and Services Agreement (the ”Service Agreement”),
        pursuant to which Jinfuyi has the exclusive right to provide technical and
        consulting services in exchange for services fees of approximately $4,875,000
        per year, subject to the right of Jinfuyi to adjust the service fee depending
        on
        the quantity of the services that it actually provides.
 
 On
        January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (“Guangdong Elephant Talk”) and an agent of the Company, and Beijing
        Zhongrun Chuangtou Technology Co., Ltd., a limited liability company organized
        and existing under the laws of the Peoples’ Republic of China (the “Vendor”),
        entered into an Equity Transfer Agreement (the ”Agreement”), pursuant to which
        Guangdong Elephant Talk agreed to acquire sixty percent (60%) of the registered
        capital of Beijing Chinawind.
 
 Pursuant
        to the Agreement, the purchase price for 60% of Beijing Chinawind was agreed
        to
        $4,800,000, subject to adjustments based on Beijing Chinawind’s audited net
        income for fiscal 2005 and 2006, and is payable (x) in cash of $2,800,000
        in
        five installments the last of which is to be paid on January 31, 2007, and
        (y)
        by the issuance by the Company through its agent to the Vendor of 20,000,000
        shares of restricted common stock valued at $0.10 per share, in four equal
        installments the last of which is to be issued on January 31, 2007. The Vendor
        has the right to exercise an option within 30 days after July 31, 2007 to
        return
        the 20,000,000 shares of restricted common stock either in exchange for a
        25%
        equity interest in Beijing Chinawind or for settlement in cash within 90
        days.
 
 The
        purchase price was financed by a combination of issuing its common stock
        and
        making payments in cash from internal sources, mainly from the $3.5 million
        of
        proceeds advanced to date under the terms of a Convertible Promissory Note
        issued to Rising Water Capital on December 15, 2005. The terms of the Agreement
        imposed several contractual restrictions on the operations of Beijing Chinawind.
        In addition to other contractual restrictions, Guangdong Elephant Talk had
        the
        right to appoint three of five Board of Directors of the Beijing
        Chinawind.
 
 On
        September 25, 2006, the Vendor and a minority shareholder of Beijing Chinawind,
        filed two lawsuits against Guangdong Elephant Talk in the Beijing Civil Courts.
        The lawsuit alleges a) that the agent Guangdong Elephant Talk failed to pay
        the
        remaining consideration of $787,748 under an Equity Transfer Agreement, dated
        January 4, 2006 (the “Agreement”), between Guangdong Elephant Talk and Beijing
        Zhongrun, which provided for the acquisition by Guangdong Elephant Talk from
        Beijing Zhongrun of 60% of the registered capital of Beijing Chinawind; and
        b)
        that Guangdong Elephant Talk induced the minority shareholders of Beijing
        Chinawind to accept, pursuant to the Agreement, consideration of $1,000,000
        through the issuance of 10,000,000 common shares of the Company valued at
        $0.10
        per common share. The lawsuit further alleges that Chinese law prohibits
        citizens of the People’s Republic of China from accepting shares of companies
        listed on the United States Over-The-Counter Bulletin Board Quotation Service,
        which is regulated by the National Association of Securities Dealers, Inc.,
        as
        compensation in an acquisition transaction. Beijing Zhongrun has demanded
        that
        Guangdong Elephant Talk exchange the issued stock for $1,000,000, pay the
        outstanding payment under the Agreement and compensate Beijing Zhongrun for
        breach of contract in the sum of RMB524,664 (approximately $64,773). In the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704). It is important to note that the lawsuits
        are not against ETCI and merely against the agent of the Company.
 
 The
        Company has retained a legal counsel licensed to practice civil law in the
        People’s Republic of China who has advised the Company that Beijing Zhongrun's
        lawsuits are not supported by valid facts nor have sufficient legal evidence.
        Accordingly, the Company considers that the claims of Beijing Zhongrun are
        not
        against the Company and are without merit. The Company is vigorously defending
        these lawsuits. In November 2006, the Company decided to abandon its investment
        in Beijing Chinawind due to loss of control.
  -
            7
            -
  On
        June
        5, 2006, the Company through its subsidiary Elephant Talk Limited formed
        and
        incorporated a wholly owned subsidiary Elephant Talk (Shenzhen) Investments
        Limited (“ET Shenzhen”), a limited liability company organized and existing
        under the laws of the Peoples’ Republic of China, with a registered capital of
        $128,205. As of December 31, 2006, ET Investment has not yet begun operations
        and no capital contributions have been made by Elephant Talk
        Limited.
 
 On
        June
        17, 2006, the Company through its subsidiary Elephant Talk Limited, incorporated
        a limited liability company in the Kingdom of Bahrain under the name **** Elephant
        Talk Middle East & Africa (Holding) W.L.L ("ET ME&A Holding"). The
        registered capital of ET ME&A Holding is $387,787 and Elephant Talk Limited
        has contributed $197,771 towards its 51% equity interest in ET ME&A Holding
        as of December 31, 2006.
 
 On
        June
        19, 2006, the Company through its subsidiary ET ME&A Holding, incorporated a
        limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk
        Bahrain W.L.L. (“ET Bahrain”) to manage the Company’s operations in Bahrain. The
        registered capital of ET Bahrain is $387,787 and ET ME&A Holding owns 99% of
        the equity ownership in ET Bahrain. ET ME&A Holding has contributed $383,909
        as its share of registered capital as of December 31, 2006. ET ME&A Holding
        and ET Bahrain have not yet begun operations.
 
 On
        August
        3, 2006, the Company formed and incorporated an entity under the name Elephant
        Talk Europe Holding BV (“ET Europe”), a private limited liability company
        registered in Amsterdam, Holland with an authorized capital of $113,670 (90,000
        Euros). The Company owns 100% equity in ET Europe. The purpose of forming
        ET
        Europe was to help the Company conclude its pending acquisition of Benoit
        Telecom Holding AG. The Company has contributed $22,734 towards its share
        of the
        registered capital of ET Europe. On November 17, 2006, the Company executed
        the
        definitive Stock Purchase Agreement and completed its acquisition of Benoit
        Telecom Holding AG to be made effective on January 1, 2007.
 
 On
        July
        28, 2006, ET Europe participated in the incorporation of Elephant Talk
        Communications PRS UK Ltd. (“ET UK”), a company registered under the laws of
        United Kingdom. The registered capital of ET UK is $19760 and ET Europe has
        51%
        ownership interest in ET UK. ET Europe has contributed $2,312 towards its
        share
        of ownership interest and $5,882 remains to be contributed as of December
        31,
        2006. ET UK was formed to expand ET Europe’s operations in United Kingdom. The
        operations have not yet begun as of December 31, 2006.
 
 On
        September 12, 2006, the Company through its subsidiary ET ME&A Holding,
        incorporated a limited liability company under the name Elephant Talk Middle
        East & Africa Jordon (“ET Jordon”) to manage the Company’s operations in
        Jordon. The registered capital of ET Jordon is $210,918 (81,585 BHD) and
        ET
        ME&A owns 100% of the equity ownership in ET Jordon. ET ME&A Holding has
        contributed $210,918 as its 100% share of the registered capital as of December
        31, 2006. ET Jordon has applied for the telecommunication licenses and has
        not
        begun its operations.
  In
        order
        to successfully carry out its operations, the Company agreed to sell to Rising
        Water Capital, A.G., a company registered in Zug, Switzerland (“Rising Water
        Capital”) pursuant to the execution of the Stock Purchase Agreement, 195,947,395
        shares of the Company’s common stock for an aggregate purchase price of
        $7,837,896. The Stock Purchase Agreement provided that Rising Water Capital
        would be entitled to appoint six out of eleven directors of the Company.
        In
        addition, Rising Water Capital agreed to retain the current management of
        the
        Company for a five year term. The purpose of this transaction was to enable
        Rising Water Capital to infuse capital so that the Company could complete
        its
        pending acquisitions.
 
 On
        June
        30, 2005, Rising Water Capital closed the purchase of a total of 100,000,000
        shares of common stock at a price of $0.04 per share, representing 49.2%
        of the
        Company’s then issued and outstanding shares of common stock of 203,107,170.
        Inasmuch as the total authorized number of shares of common stock of the
        Company
        was 250,000,000 shares, management could not sell and therefore, Rising Water
        Capital was unable to purchase the remaining 95,947,395 shares.
 -
              8
              -
  On
        December 15, 2005, the Board of Directors of the Company authorized the
        execution and delivery of a Convertible Promissory Note in the principal
        amount
        of $3.5 million (the “Note”) to Rising Water Capital, in exchange for a loan in
        the same principal amount to be drawn down in stages. The Note is convertible
        during the term, in whole or in part, into common shares of the Company at
        the
        conversion price of three and one-half cents ($0.035) of principal amount
        per
        share of common stock. The agreement to issue additional shares was conditional
        subject to the Company obtaining approval for the increase in authorized
        common
        shares. Since the Company has not received the approval to increase its
        authorized common shares and that condition has not been fulfilled as of
        December 31, 2006, the Company is not obliged to issue additional shares.
        The
        Company received funding of all of the $3.5 million against the Note by January
        26, 2006. Assuming that the Note is fully converted into common stock, the
        Company would be obligated to issue 100,000,000 shares of common stock to
        Rising
        Water Capital as of December 31, 2006. None of the principal amount of the
        Note
        has been converted into shares of common stock.
 
 On
        May
        26, 2006, the Company executed a second Convertible Promissory Note (the
        “2 nd Note”)
        in the principal sum of $3,000,000 with Rising Water Capital. The 2 nd Note has
        a term of thirty (30) months, during which time interest on the Principal
        Amount
        will accrue from the date of this 2 nd Note at
        an annual interest rate of 10%. The 2 nd Note
        will be paid in full at the end of the thirty month term with a balloon payment
        of principal and interest accrued. The 2 nd 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 2 nd Note
        shall not be convertible during the term when the Company has insufficient
        authorized common shares to issue to the 2 nd Note
        holder when a demand for conversion is made. The 2 nd Note is
        secured by shares owned or to be owned by the Company in the entities Beijing
        Chinawind, ET ME&A Holding and ET ME&A. This Note is secured by the
        shares owned or to be owned by the Company in its proposed acquisitions of
        entities for which the Company has made earnest deposits. The Company has
        received the principal balance of $2,025,221 against the 2 nd Note as
        of December 31, 2006 and further received cash consideration of $569,520
        as of
        April 14, 2007.
 
 In
        connection with the termination of the True Precise acquisition and cancellation
        of 20,137,500 shares of common stock issued to True Precise, the Company
        agreed
        to reissue to Rising Water Capital all of the 23,137,500 common shares received
        or to be received, as additional compensation for this failed acquisition.
        The
        successful consummation of the True Precise acquisition had been a condition
        of
        Rising Water Capital's obligation to purchase 195,947,395 shares of common
        stock
        pursuant to a Stock Purchase Agreement, dated June 30, 2005. The Company
        agreed
        to compensate RWC by issuing 23,137,500 additional restricted shares of common
        stock as compensation for the failed acquisitions of True Precise being the
        representation made by the Company in the Stock Purchase Agreement dated
        June
        30, 2005 between the Company and RWC.
 
 Appointment
        of Chairman, President and CEO
 
 At
        the
        Annual Meeting of shareholders held on October 24, 2006, Steven van der Velden
        was elected to the Board of Directors, along with Russelle Choi, Lam Kwok
        Hung,
        Manu Ohri, Yves R van Sante, Eric E. De Jonghe and Mr. Johan De Jager to
        a
        one-year term as directors. Additionally, the shareholders ratified the
        appointment of Jimmy Cheung & Company as the Company’s independent
        accountants. Subsequently, the Board of Directors appointed Steven van der
        Velden, Chairman of the Board of QAT Investments S.A., a company organized
        under
        the laws of Luxembourg and the majority shareholder of Rising Water Capital,
        as
        Chairman of the Board, President and Chief Executive Officer of the
        Company.
 
 Resignations
        of Directors and Officers
 
 On
        October 30, 2006, Director Lam Kwok Hung tendered his resignation effective
        as
        of same date. In addition, Director Manu Ohri tendered his resignation to
        become
        effective upon the appointment of an additional director by the remaining
        directors of the Company in accordance with its By-Laws. Such resignation
        became
        effective upon the appointment of a replacement Chief Financial Officer by
        the
        directors of the Company on January 1, 2007 as described below.
 -
              9
              -
  On
        October 30, 2006, Russell Choi, President, resigned from any and all positions
        as an officer of the Company and its subsidiaries. In addition, Lam Kwok
        Hung,
        Chief Operating Officer, resigned from any and all positions as an officer
        of
        the Company and its subsidiaries. Furthermore, Manu Ohri, Chief Financial
        Officer, resigned effective upon the appointment of a replacement Chief
        Financial Officer by the directors of the Company in accordance with its
        By-Law.
        Such resignation became effective on January 1, 2007.
 
 Appointment
        of Board Member and Chief Financial Officer
 
 On
        January 1, 2007, Willem Ackermans was appointed as a Director and Chief
        Financial Officer of the Company.
 
 Appointment
        of Board Member and Chief Operating Officer/ Chief Technical Officer
 
 On
        January 1, 2007, Martin Zuurbier was appointed as a Director and Chief Operating
        Officer/Chief Technical Officer of the Company.
 
 **Background
        of Elephant Talk Limited**
 
 Established
        in late 1994, Elephant Talk Limited is located and operated in Hong Kong.
        The
        Company was previously a provider of international call termination into
        China.
        However, due to the extreme competitive nature of this market, the Company
        has
        chosen to abandon this strategy.
 
 Elephant
        Talk Limited is currently engaged in long distance telephone business but
        is
        actively pursuing to position itself as a telecommunications services and
        multimedia distribution company. It is the company’s ambition to develop and
        exploit a highly flexible, fully standardized and integrated global
        telecommunications network on the basis of national licenses & interconnects
        which are owned or accessed through partnerships. Through an integrated platform
        to be built around this network it is ETCI’s intention to offer its clients a
        turnkey solution for basic, commoditized (voice) telecommunication services,
        premium rate services, content provision and payment provision.
 
 Eventually
        covering the full range of services from (IP based) telecommunications services
        to content delivery and billing and operating its own global communications
        network, ETCI will be able to bring these communications services and content
        to
        the customer, collect payments, and allocate those payments to all parties
        involved in the distribution chain. To realize the above mentioned goals,
        on
        January 17, 2005 the Company entered into a Memorandum of Understanding to
        acquire all of the issued and outstanding shares of Benoit Telecom Holding
        A.G.
        (“Benoit Telecom”), a European telecom company from Beltrust A.G. In the fall of
        2006, Elephant Talk Communications Inc. executed a definitive Stock Purchase
        Agreement to complete the acquisition on November 17, 2006 to be effective
        as of
        January 1, 2007.
 
 Benoit
        Telecom is a telecommunications service provider that provides various premium
        rate services such as 0900 service and VoIP services to corporations and
        content
        providers within the European Union. The Company believes that it can extract
        considerable synergies with this acquisition by integrating its VOIP platforms
        and extend its reach from China to Europe and vice-versa.
 
 **Business
        Activities in 2006**
 
 ·
            mobile
                value-added services, viz., short messaging services (SMS) including
                SMS
                based chat and mobile games, interactive voice response services
                (IVRS),
                ring-tone/wall-paper downloads for mobile handsets and mobile
                e-commerce/payment services; 
 ·
            eTalk,
                our pre-paid calling card for PC to phone service targeted at HK
                to China
                business commuters; international long distance services in wholesale
                market principally to carriers -
              10
              -
  **Technology
        Infrastructure**
 
 Our
        VoIP
        calling card platform has been designed as a PSTN switch with VoIP functions,
        and enables the Group to provide a robust, reliable and quick prepaid product.
        Its architecture includes a backbone switching mechanism that offers an
        integration of circuit-switched and packet-switched networks, and automatically
        detects and adopts the best routing available having regard to carrier cost
        and
        QoS. With the simultaneous use of VoIP and PSTN switching, the company is
        able
        to achieve lower routing costs through VoIP functionality while retaining
        stable
        connections and QoS offered by PSTN platform.
 
 This
        VoIP
        system and other voice related network infrastructure is installed at the
        Company's Network Operation Centre in Kwun Tong, Hong Kong. The Company's
        integrated network infrastructure comprises of a combination of voice switches
        (connected to telephone systems of external carriers) and VoIP gateways
        (connected to the Internet) connecting to each other through its private
        telephone exchange system(s) ("PBX"). The configuration enables the company
        to
        provide telecommunication services to its customers on a 24x7
        basis.
 
 **Markets
        and Customers**
 
 Our
        eTalk
        calling card has attracted a dedicated group of HK-China business commuters
        that
        have successfully realized substantial savings from call back to HK as well
        as
        other parts of the world as they travel throughout China.
 
 We
        continue to provide some international call termination services to China
        and
        other parts of Asia to other carriers around the world. However, due to the
        competitiveness of the market, revenues have all but disappeared and attention
        to this segment has slowly diminished throughout the course of 2004 and
        2005.
 
 **PC-to-phone
        service, eTalk**
 
 In
        Asian
        Pacific markets, especially China, where deregulation is relatively limited
        compared to the U.S., we believe that our customers will look for opportunities
        to lower their long distance bills. This creates what we believe is an
        interesting opportunity for us to the Asian Pacific Market by using the Internet
        to transmit phone calls.
 
 In
        order
        to take advantage of this opportunity, it is our intention to deliver
        high-quality voice-over-IP (VoIP) telephony services to small and medium
        businesses in the Far East. Accompanying the growth of PCs and use of the
        Internet, we believe the market potential is huge. Our solution provides
        many
        benefits to its customers, including:
 
 ·
            Low
                Cost. Our services allow its customers to make telephone calls often
                at a
                fraction of the cost of traditional long distance service. Our low
                cost
                PC-to-phone service is also available all over the
                world. 
 ·
            High
                Voice Quality. We offer carrier-grade voice quality through proprietary
                packet-switching technologies, which reduces packet loss and delay,
                route
                packets efficiently and perform quality-enhancing functions, such
                as echo
                cancellation and massive redundancy. We intend to continue to enhance
                the
                voice quality of our services as our customer base and business
                grows. 
 ·
            Ease
                of Use and Access. Our services are designed to be convenient and
                easy to
                access. No additional telephone lines or special equipment are
                required. 
 ·
            Reliable
                Service. Elephant Talk Limited developed its own PC client software
                and
                Gatekeeper. Our network is reliable because of its technologically
                advanced design. This flexible design allows us to expand our network
                and
                add capacity by adding switches/spans to the existing network. Our
                system
                also provides seamless service and high-quality voice transmission
                through
                its ability to reroute if problems arise. 
 ·
            Scalability.
                Our services platform is a flexible solution that can be readily
                integrated at low cost and in large scale into existing systems.
                Our
                system integrates quickly and seamlessly into the platforms of various
                communications service providers such as medium to large carriers,
                ISPs,
                and enterprises. -
              11
              -
  We
        will
        be able to provide our PC-to-Phone service at rates generally lower than
        those
        charged for traditional circuit switched calls. We will be able to charge
        lower
        rates because its service utilizes packet-switched technology and it routes
        calls directly from the Internet onto our privately-managed IP network and
        to
        the called destination, thus avoiding access and settlement rates associated
        with traditional international and domestic long distance telecommunications
        services.
 
 We
        believe that reliable and flexible billing, information management, monitoring
        and control are critical to our success, and support all of our services.
        Accordingly, we have invested substantial resources to develop and implement
        our
        sophisticated real-time call management information system. Key features
        of this
        system include:
 
 ·
            customer
                provisioning; ·
            customer
                access; ·
            call
                routing; ·
            call
                monitoring; and ·
            detailed
                call records. 
 **Business
        Strategy** **for 2007 and Beyond**
 
 **Growth
        Strategy, in general**
 
 Continuing
        to reposition the Company, in 2006, management has been actively seeking
        other
        business opportunities to steer the Company away from the extremely competitive
        and virtually no margin market of international call termination to the more
        profitable, growing though still competitive, and mobile value added services
        market globally.
 
 The
        Company intends to continue on this path of repositioning by further acquisition
        of a controlling stake in profitable companies in the year 2007 and beyond.
        The
        Company has successfully ended discussions to acquire certain activities
        in
        Europe as well as the formation of new entities in the Middle East:
 
 ·
            Benoit,
                a European based carrier that provides wholesale, free phone, Carrier
                Select and Carrier Pre-Select calls and various premium number rate
                services, such as 0900 service and VoIP services to corporations
                and
                content providers within the European Union. The Company believes
                that we
                can extract considerable synergies with them by integrating our VoIP
                platforms and extend our reach from China into Europe and vice-versa. 
 ·
            Elephant
                Talk Middle East & Africa, a newly incorporated telecom and related
                services operator in the Middle East. Presently, the unit is applying
                for
                the international telecommunication service license, value added
                service
                license and internet service provider license in various countries.
                We
                intend to progressively build a comprehensive IP network to cover
                most of
                the Middle East countries. 
 The
        Company’s interest and as a result its attention for China continues. We believe
        that a business position in China eventually will be beneficial to the Company
        as the telecommunications industry in China experiences continuous growth
        along
        with the development and modernizations of its economy. As customers' needs
        become more sophisticated and price-sensitive, the market demand for a service
        like eTalk is expected to increase. The Accession to WTO makes the demand
        for
        international calling services even bigger. We rely on an increasingly
        transparent regulatory environment in China through her Telecommunications
        Regulations, and its gradual opening up of the domestic market to foreign
        participation which should create massive opportunities that facilitate progress
        toward an improved operating environment.
 
 With
        the
        acquisition of Benoit Telecom and the formation of Middle East
        Telecommunications Company, the Company will expand its world wide network
        into
        the European and Middle East countries. The reach into the European network
        provides the Company with a better opportunity to lower its termination cost
        to
        some European countries and enables ET to assert better quality control over
        the
        network and its associated elements. It is our aim to leverage on our world
        wide
        network to provide the best voice quality at competitive price in the
        industry.
 -
              12
              -
  To
        achieve its mission, ETCI is planning to build a worldwide content distribution
        and telecommunications network through the acquisition or exchange of licenses
        and agreements for interconnection with national incumbents in a bilateral
        way.
        These licenses and agreements include originating traffic, terminating traffic
        and debt collection. The Company’s strategy allows for a rapid expansion of its
        footprint at a low cost and low investment to a number of countries in Europe,
        Middle East and Far East..
 
 Once
        access will be established in a target market, ETCI will provide customers
        with
        telephone services, long distance carrier services, Internet services, content
        distribution facilities, and multimedia applications in combination with
        a
        sophisticated Customer Relation Management and Billing Application. In this
        way,
        customers will be able to resell services of ETCI under their own brand name.
        ETCI thus continuously will increase its portfolio with a broader range of
        value-added services.
 
 The
        Management of the Company believes that reliable and flexible billing,
        information management, monitoring and control are critical to the Company’s
        success. Accordingly, ETCI will invest substantial resources to develop and
        implement a sophisticated real-time management information system. Key features
        of this system will include:
 
 ·
            Reliability ·
            Remote
                Management ·
            Accommodating
                to all current and future payment methods ·
            A
                global reach ·
            Fully
                compliant with the legal framework in each
                market ·
            Standardized
                technology ·
            Rapid
                deployment of services  The
        strategy will be executed at a lower cost and lower investment than is normally
        required through the application of a small organizational structure, the
        remote
        control of switches in each country in which ETCI is operational, the use
        of
        company-owned innovative technology, and the continuous search for optimal
        balance between quality of services and operational costs.
 
 (i)
            Product
                Strategy 
 ETCI
        is
        planning to offer a complete range of wholesale products and services for
        multimedia content distribution and generating revenue, including:
 
 ·
            Voice
                and Data based services (Carrier Select, Carrier PreSelect, Least
                Cost
                Routing, Toll Free, Premium Rate, Calling
                cards) ·
            IP
                based services (VOIP, Multimedia via Mediaphone fixed and mobile,
                WiFi,
                WiMax) ·
            Text
                based services (SMS), MMS ·
            Mobile
                downloads such as Ringtones, games and canned messages, music and
                streaming video. ·
            Value
                Added Services. In order to invoice the services and products over
                the
                network, ETCI is developing an integrated CRM/Billing/Backoffice,
                integrated with Payment Gateways, facilitating end-user payments
                via
                Credit/Debit Cards, Direct Debit and Prepaid Cards. 
 It
        is the
        Company’s intention to offer these products either separately or as a bundled
        package.
 
 (b)
            Partners 
 As
        a
        result of the converging of IT and telecom solutions the amount of engagement
        between ETCI partners and its various partners has increased. On the client
        side, resellers have evolved from indirect channels to true partners bringing
        specialist market knowledge, customer focus and a geographical reach to its
        activities.
 -
              13
              -
  As
        a key
        element of our low-cost and fast deployment strategy, ETCI make extensive
        use of
        partners in all layers of our Multimedia distribution platform. ETCI can
        distinguish the following partners:
 
 ·
            ET
                Exchange Partners secure network access and interconnection on a
                local
                basis. ·
            Network
                Access Partners provide the backbone infrastructure of our network ·
            Content
                Partners are partners as well as clients. They provide content for
                distribution through our network on one hand. On the other hand ETCI
                provide them the means to exploit their content and generate revenue ·
            For
                our Payment partners, the same can be said. Through their clearing
                houses
                and platforms ETCI are able to get paid by the end-customer , using
                any
                form of payment. For Payment partners, working with ET translates
                directly
                in expanding their customer base. 
 (c)
            Goals
                and Competences 
 The
        main
        objective of ETCI is to become a leading Global Multimedia Telecom Services
        and
        Content Distributor. ETCI aims to optimally exploit its global
        telecommunications network (core backbone with switches), leveraging its
        expertise and established relationships with carriers in Europe, Middle East
        & Africa and the Asian-Pacific region to pursue early entry into selected
        deregulating markets.
 
 The
        Company’s unique set of core competences include:
 
 ·
            ETCI’s
                ability to operate a high quality telecom and content delivery services
                network at extremely low costs, ·
            Innovative
                integration of IT technology and Telecommunications ·
            ETCI’s
                exchange approach to obtaining operators licenses in key countries. 
 (i)
            Regional
                Goals 
 ·
            Europe
                (wholesale and retail) 
 As
        Europe
        is a more mature market and therefore highly competitive, ETCI plans to deploy
        its services using a wholesale approach and establish itself either through
        Joint Ventures or through company acquisitions in order to avoid high
        investments costs. ETCI’s European objective is to be established in the
        following countries by the end of 2007: Belgium, Germany, France, Italy,
        Greece,
        Portugal and the United Kingdom, Netherlands, Austria, Switzerland and
        Spain.
 
 ·
            Middle
                East & Africa 
 Our
        Objective in the Middle East and Africa is to be present in three (3) countries
        (Bahrain, Jordon and Egypt) by the end of 2007.
 
 ·
            Far
                East (wholesale market-china, new
                markets) 
 Our
        objective in the Far East is to activate our fiber network in China by 2008
        and
        subsequently to obtain all required licenses in China.
 
 (ii)
            Development
                Goals 
 Next
        to
        the development of its Network and its increasing presence in several countries
        in Europe, Middle East and Far East, it is the company’s intention
        to
 
 ·
            Increase
                e-invoicing level to 100% ·
            Further
                development of the functionalities of our MediaPhone for mobiles,
                PC’as
                and other devices; ·
            Development/Launch
                of a Mini Portal with China Telecom ·
            Further
                development and integration of CRM-billing within the ET Global
                Exchange -
              14
              -
  **RISK
        FACTORS**
 
 An
        investment in our common stock involves a great deal of risk, and should
        be
        considered only by those persons who are able to afford a loss of their entire
        investment. In evaluating an investment in our common stock, the following
        risk
        factors should be carefully considered in addition to the other information
        filed by our company.
 
 Competition
 
 The
        market for value-added services is highly competitive. We face competition
        from
        a variety of sources including large communications service providers with
        more
        resources, longer operating histories and more established positions in the
        telecommunications marketplace. We also compete with small companies who
        have
        focused primarily on Internet telephony or traditional switched services.
        We
        believe that we compete principally on quality of service, price and
        flexibility. It is arguable if any one company dominates the voice and data
        communications market in the same segment as we are. We also expect that
        the
        ability to offer enhanced service capabilities, including new services, will
        become an increasingly important competitive factor in the near future. In
        addition, we compete with and expect continued competition from
        telecommunications companies and long distance service providers, Internet
        Telephony service providers, market competition and pricing
        pressures:
 
 Attempting
        to Develop New Revenue Stream
 
 If
        the
        market for Internet telephony and other new services does not develop as
        we
        expect, or develops more slowly than expected, our business, financial condition
        and results of operations may well be adversely affected. Our customers may
        be
        reluctant to use our Internet telephony services for a number of reasons,
        including:
 
 ·
            perceptions
                that the quality of voice transmitted over the Internet is
                low; ·
            our
                inability to deliver traffic over the Internet with significant cost
                advantages; and ·
            development
                of their own capacity on routes served by
                us. 
 In
        addition, any perceived problems with the reliability or functionality of
        any
        new services that we plan to offer could discourage service providers or
        others
        from offering these services to their customers. In addition, the development
        of
        new capabilities or services may require substantial additional capital and
        marketing-related expenditures to be made well in advance of generating any
        revenue from such services or demonstrating any market acceptance of such
        services.
 
 We
        cannot
        be certain that end-users will continue to purchase services from us or that
        our
        customers will maintain a demand for our services. If the market for these
        services and products does not develop or if we are unable to capture a
        significant portion of that market, either directly or through our partners,
        our
        revenues and our results of operations will be adversely affected.
 
 Our
        future financial performance depends substantially on the revenue share between
        mobile value-added services providers, namely, Beijing Chinawind and China
        Mobile. Any reduction in this revenue share will have a substantial affect
        on
        our earnings capability.
 
 Reliance
        on Third Parties Vendors
 
 We
        rely
        upon third-party vendors to provide us with the equipment that we use to
        transmit calls through our voice networks using principally Nuera, PCM and
        Cisco
        equipment. We cannot assure you that we will be able to continue purchasing
        such
        equipment from our vendors, in such case, we may not be able to maintain
        or
        expand our network to accommodate growth or provide or upgrade certain services
        when needed.
 -
              15
              -
  Parties
        that Maintain Phone and Data Lines
 
 Our
        business is dependent upon the availability of the Internet and traditional
        telephone networks to transmit voice and data, and to provide other value
        added
        services. Third parties maintain and, in many cases, own these networks and
        other components that comprise the Internet and certain switching facilities
        connecting to last mile. Some of these third parties are domestic telephone
        companies in the US and a few are their smaller counterparts in South East
        Asia
        such as GridTel and GreatWall Broadband. They may increase their charges
        for
        using these lines at any time and decrease our profitability. They may also
        fail
        to maintain their lines properly and disrupt our ability to provide service
        to
        our customers. Any failure by these third parties to maintain these lines
        could
        lead to a material disruption of our ability to route calls or provide other
        services. It could discourage our customers from using our network or enhanced
        services, which could have the effect of delaying or preventing our ability
        to
        become profitable.
 
 Strategic
        Relationships
 
 We
        depend
        in part on our strategic relationships to expand our distribution channels
        and
        develop and market our services especially in content distribution. Strategic
        relationship partners may choose not to renew existing arrangements on
        commercially acceptable terms, if at all. If we lose these key strategic
        relationships, or if we fail to maintain or develop new relationships in
        the
        future, our ability to expand revenue stream and hence scope of our network
        would be materially adversely affected.
 
 Fast
        Leap
        in Technology Trends
 
 Our
        business requires that we handle a large number of international calls
        simultaneously. As we expand our operations, we expect to handle significantly
        more calls. We will need to expand and upgrade our hardware and software
        to
        accommodate such increased traffic. If we do not expand and upgrade quickly
        enough, we will not have sufficient capacity to handle the traffic and growth
        in
        our operating performance would suffer. Even with such expansion, we may
        be
        unable to manage new deployments or utilize them in a cost-effective manner.
        In
        addition to lost growth opportunities, any such failure could adversely affect
        customer confidence in the Elephant Talk Network and could result in us losing
        business outright.
 
 As
        the
        Internet telephony industry has grown, sound quality has improved, but the
        technology requires further refinement. Because the Internet telephony market
        and markets for our enhanced services are new and evolving, predicting the
        size
        of these markets and their growth rate is difficult. Transmitting telephone
        calls over the Internet, and other uses of the Internet for our enhanced
        services, must also be accepted by customers as an alternative to traditional
        services. If our market fails to develop, then we will be unable to grow
        our
        customer base and our results of operations will be adversely
        affected.
 
 Key
        Personnel
 
 Our
        future success will depend, in large part, on the continued service of our
        key
        management and technical personnel. If any of such members of senior management
        or others at the Company are unable or unwilling to continue in their present
        positions, our business, financial condition and results of operations could
        well suffer. While many of the members of our management team have been employed
        with us, we cannot ensure their continued employment with us.
 
 Our
        future success will depend, in large part, on our ability to attract, retain
        and
        motivate highly skilled employees, particularly operational and sales personnel.
        Competition for such employees in our industry is intense. We have from time
        to
        time in the past experienced, and we expect to continue to experience in
        the
        future, difficulty in hiring and retaining employees with appropriate
        qualifications. We may not be able to retain our employees or attract,
        assimilate or retain other highly qualified employees in the future. If we
        do
        not succeed in attracting and retaining skilled personnel, we may not be
        able to
        grow at a sufficient rate to attain profitable operations.
 -
              16
              -
  Asian
        and
        European Economy
 
 An
        economic crisis in Asia or Europe where a substantial portion of our client
        base
        is and will be located could result in a decrease in our revenues. Several
        countries in Asia have experienced currency devaluation and/or difficulties
        in
        financing short-term obligations. We cannot assure you that the effect of
        an
        economic crisis on our customers will not impact operations, or that the
        effect
        on our customers in that region will not adversely affect both the demand
        for
        our services and the collectable of receivables.
 
 Foreign
        Currencies
 
 Fluctuations
        in the exchange rate of the U.S. dollar and foreign currencies could have
        a
        material adverse effect on our financial performance and profitability. A
        portion of our costs denominated in foreign currencies. As a result, changes
        in
        the exchange rates of these currencies or any other applicable currencies
        to the
        U.S. dollar will affect our costs of goods and services sold and operating
        margins and could result in exchange losses. We cannot fully predict the
        impact
        of future exchange rate fluctuations on our profitability. From time to time,
        we
        may engage in exchange rate-hedging activities in an effort to mitigate the
        impact of exchange rate fluctuations. However, we cannot assure you that
        any
        hedging technique we may implement will be effective. If it is not effective,
        we
        may experience reduced operating margins. We could suffer adverse tax and
        other
        financial consequences if U.S. or foreign taxing authorities do not agree
        with
        our interpretation of applicable tax laws.
 
 Our
        corporate structure is based, in part, on assumptions about the various tax
        laws, including withholding tax, and other relevant laws of applicable non-U.S.
        jurisdictions. We cannot assure you that foreign taxing authorities will
        agree
        with our interpretations or that they will reach the same conclusions. Our
        interpretations are not binding on any taxing authority and, if these foreign
        jurisdictions were to change or to modify the relevant laws, we could suffer
        adverse tax and other financial consequences or have the anticipated benefits
        of
        our corporate structure materially impaired.
 
 Terrorism
 
 Terrorist
        attacks, such as the attacks that occurred in New York and Washington, D.C.
        on
        September 11, 2001, and other acts of violence or war may affect the markets
        on
        which our securities trade, the markets in which we and our customers operate,
        our operations and our profitability. Terrorist attacks may negatively affect
        our operations and your investment. There can be no assurance that there
        will
        not be further terrorist attacks against the United States or United States
        businesses. These attacks or armed conflicts may directly impact our physical
        facilities or those of our suppliers or customers. Furthermore, these attacks
        may make travel and the transportation more difficult and more expensive
        and
        ultimately affect the sales of our products and services in the United States
        and overseas. Also as a result of terrorism, the United States may enter
        into
        armed conflicts, which could have a further impact on our domestic and
        international sales, our supply chain, our production capability and our
        ability
        to deliver our products and services to our customers. Political and economic
        instability in some regions of the world may also result and could negatively
        impact our business. The consequences of any of these armed conflicts are
        unpredictable, and we may not be able to foresee events that could have an
        adverse effect on our business.
 
 Risks
        Relating to the Greater China and Asian Internet Industry
 
 The
        Greater China and Asian Internet industry is a developing market and has
        not
        been proven as an effective commercial medium
 
 The
        market for Internet services in Greater China and Asia has only recently
        begun
        to develop. Since the Internet is an unproven medium for commercial services,
        our future operating results from eTalk services will depend substantially
        upon
        the increased use of the Internet in Greater China and Asia. Critical issues
        concerning the commercial use of the Internet in Greater China and Asia such
        as
        security, reliability, cost, ease of deployment, administration and quality
        of
        service may affect the adoption of the Internet to solve business needs.
        For
        example, the cost of access may prevent many potential users in Asia from
        using
        the Internet.
 -
              17
              -
  Our
        entry
        into the Chinese Internet market depends on the establishment of an adequate
        telecommunications infrastructure in China by the Chinese
        government
 
 Unlike
        Taiwan and Hong Kong, where the telecommunications infrastructure is comparable
        to U.S. standards and where private companies compete as ISPs, the
        telecommunications infrastructure in China is not well developed. In addition,
        access to the Internet is accomplished primarily by means of the government's
        backbone of separate national interconnecting networks that connect with
        the
        international gateway to the Internet, which is owned and operated by the
        Chinese government and is the only channel through which the domestic Chinese
        Internet network can connect to the international Internet network.
 
 Although
        private sectors ISPs exist in the China, almost all access to the Internet
        is
        accomplished through ChinaNet, the Chinese primary commercial network, which
        is
        owned and operated by the Chinese government. We rely on this backbone and
        China
        Telecom to provide data communications capacity primarily through local
        telecommunications lines. As a result, we will continue to depend on the
        Chinese
        government to establish and maintain a reliable Internet infrastructure to
        reach
        a broader base of Internet users in China. We will have no means of getting
        access to alternative networks and services, on a timely basis or at all,
        in the
        event of any disruption or failure. There can be no assurance that the Internet
        infrastructure in Greater China will support the demands associated with
        continued growth. If the necessary infrastructure standards or protocols
        or
        complementary products, services or facilities are not developed by the Chinese
        government, our business could be materially and adversely
        affected.
 
 Our
        computer network is vulnerable to hacking, viruses and other
        disruptions
 
 Inappropriate
        use of our Internet and phone services could jeopardize the security of
        confidential information stored in our computer system, which may cause losses
        to us. Inappropriate use of the Internet includes attempting to gain
        unauthorized access to information or systems - commonly known as "cracking"
        or
        "hacking." Although we intend to implement security measures to protect our
        facilities, such measures could be circumvented. Alleviating problems caused
        by
        computer viruses or other inappropriate uses or security breaches may require
        interruptions, delays or cessation in our services.
 
 There
        are
        political, economic and regulatory risks associated with doing business in
        China
        and Asia. Europe and the Middle East and Africa
 
 China's
        economy has experienced significant growth in the past decade, but such growth
        has been uneven across geographic and economic sectors and has recently been
        slowing. There can be no assurance that such growth will not continue to
        decrease or that any slow down will not have a negative effect on our
        business.
 
 A
        significant part of our facilities and operations are currently located in
        Hong
        Kong. Hong Kong is a Special Administrative Region ("SAR") of China with
        its own
        government and legislature. Hong Kong enjoys a high degree of autonomy from
        China under the principle of "one country, two systems". We can give no
        assurance that Hong Kong will continue to enjoy autonomy from China. The
        Hong
        Kong dollar has remained relatively constant due to the U.S. dollar peg and
        currency board system that has been in effect in Hong Kong since 1983. We
        can
        give no assurance that the Hong Kong economy will not worsen or that the
        historical currency peg of the Hong Kong dollar to the U.S. dollar will be
        maintained. Continued recession in Hong Kong, deflation or the discontinuation
        of the historical currency peg could adversely affect our business.
 
 Regulation
        of the information industry in China may adversely affect our
        business
 
 China
        has
        enacted regulations governing Internet access and the distribution of news
        and
        other information. We cannot predict the effect of further developments in
        the
        Chinese legal system, particularly with regard to the Internet and mobile
        services including promulgation of the new laws, changes to the existing
        laws or
        the interpretation or enforcement thereof, or the preemption of local
        regulations by national laws.
 -
              18
              -
  Change
        in
        currency exchange rates could increase our costs relative to our
        revenues
 
 In
        future, substantial amount of our revenues, expenses and liabilities will
        be
        denominated in Euros, Hong Kong dollars and Chinese Renminbi. As a result,
        we
        are subject to the effects of exchange rate fluctuations with respect to
        any of
        these currencies. We have not entered into agreements or purchase financial
        instruments to hedge our exchange rate risks although we may do so in the
        future.
 
 Restrictions
        on currency exchange may limit our ability to utilize our revenue
        effectively
 
 Although
        Chinese governmental policies were introduced in 1996 to allow greater
        convertibility of the Renminbi, significant restrictions still remain. We
        provide no assurance that the Chinese regulatory authorities will not impose
        greater restrictions on the convertibility of the Renminbi. Because a
        significant amount of our future revenues may be in the form of Renminbi,
        any
        future restrictions on currency exchanges may limit our ability to utilize
        revenue generated in Renminbi to fund our business activities outside
        China.
 
 Risks
        relating to operating licenses
 
 Currently,
        ETL has been granted two PNETS licenses in Hong Kong, one for the provision
        of
        external telecommunications services (ETS) and the other for the provision
        of
        ISP services (ISP). Under the terms of PNETS licenses, we are subject to
        regulation of the Office of Telecommunications Authority (OFTA), the official
        regulatory body. OFTA's regulatory powers permit it to cancel, withdraw or
        suspend the company's PNETS licenses for a period as it may determine in
        the
        event of any contravention by the Company of the Telecommunications Ordinance
        or
        of any condition to which the company's PNETS License is granted.
 
 PNETS
        licenses are customarily granted for 1-year terms and are renewable annually.
        On
        the basis that ETL has successfully renewed its licenses before, we have
        no
        reason to believe that we would fail to do so in the future. However, there
        can
        be no assurance that our PNETS licenses will be renewed upon expiration.
        The
        failure to obtain a renewal of its PNETS licenses would result in the company
        having to cease to offer telecommunication services through its
        network.
 
 Doing
        business in Middle East & China
 
 Our
        operations in Middle East and China involve certain risks and special
        considerations not typically associated with operations in the United States.
        These risks generally related to: (i) social, economic and political
        uncertainty; (ii) substantial governmental involvement in and control over
        the
        Middle East and Chinese economy; (iii) the possibility that the Middle East
        and
        Chinese government could elect to discontinue its support of the economic
        reform
        programs implemented in the past and return to a completely centrally planned
        economy; and (iv) possible nationalization or expropriation of assets.
        Accordingly, government actions in the future could have a significant effect
        on
        economic conditions in the Middle East and China. Such actions and resulting
        changes in the Middle East and Chinese economy could significantly adversely
        affect, limit or eliminate opportunities for foreign investment, the prospects
        of private sector enterprises operating in the Middle East and China and
        the
        value of our investments in the Middle East and China.
 
 Environmental
        Regulation
 
 Our
        Europe, Middle East and Chinese operations are subject to various governmental
        laws and regulations. The costs and effects of compliance with environmental
        laws and regulations in the respective countries have not been material in
        the
        past and are not anticipated to be material in the future.
 -
              19
              -
  Patents,
        Trademarks and Licenses
 
 We
        actively pursue the protection of intellectual property rights in the United
        States and relevant foreign jurisdictions. We conduct our business under
        the
        "Elephant Talk" brand name and logo. Currently, Elephant Talk Limited owns
        certain trademarks in China, Singapore, Hong Kong, USA and Canada, which
        are
        either registered in the Trademark Office or in the process of being registered.
        Elephant Talk Limited owns External Telecommunications Service License and
        ISP
        licenses to conduct telecommunications business locally in Hong
        Kong.
 
 Employees
 
 We
        currently employ a consultant in the United States at our principal executive
        office located in Orange, California. The consultant provides corporate
        administrative and advisory services to Elephant Talk and its affiliates.
        Elephant Talk Limited employs at its two sites located in Hong Kong eight
        (8)
        full-time employees for networking operation, customer support, administrative,
        sales support and accounting services. Its Research and Development centre,
        located in Guangzhou China, employs twelve (12) highly skilled developers
        who
        are responsible for all the software and network development. The Company
        is
        recruiting skilled employees in the Middle East and Europe and expect to
        fully
        staff its Middle East and Europe facilities by July 2007. We believe that
        our
        future success will depend in part on our continued ability to attract, hire,
        integrate, retain and motivate highly qualified personnel in various
        disciplines, and upon the continued service of our senior management personnel.
        None of our employees are represented by a labor union. We have never
        experienced a work stoppage and believe our relationship with our employees
        is
        good.
 
 Research
        and Development
 
 Elephant
        Talk Limited has spent many months doing research and development of our
        current
        business strategy, the cost of which has been borne through the issuance
        of
        securities in the acquisitions. Because of the continuing technological changes
        that characterize the Internet, Web design and telecommunications and computer
        industries, Elephant Talk’s success will depend, to a considerable extent, upon
        its ability to continue to grow its business by acquiring companies that
        are
        ahead of the competition in our industry and develop competitive technologies
        internally through research and development. Management does not anticipate
        incurring any significant costs for such research and development in the
        near
        term other than through acquisitions.
 
 No
        assurance can be given that the agreements entered into by us will result
        in
        completion of actual agreements or that the terms of the agreements will
        not be
        significantly changed, or that any of the financing needs to consummate the
        agreements discussed in this Annual Report be successfully completed. Elephant
        Talk's management, which has extensive experience and expertise in relevant
        industry sectors, intends to provide Internet technology by merging with
        or
        acquiring companies already active in these businesses. On the financial
        side,
        we have raised and continue to raise the substantial funds necessary to carry
        out the plans of our venture partners by selling our own common shares to
        selected investors/partners. If we are not able to raise the necessary funds
        to
        fund our growth, the agreements will need to be modified or
        cancelled.
 
 There
        are
        insignificant amount spent during the last two fiscal years on research and
        development, as we often use proven technologies available in the market
        which
        reduce the risk of bugs and unsteady performances, especially in initial
        launches of services.
 
 There
        are
        no material costs incurred in order to comply with environment laws in a
        local
        or worldwide basis owing to the nature of the telecom industry.
 -
              20
              -
  **Item
        2. Description of Property**
 
 The
        Company's principal executive office is located at 438 East Katella Avenue,
        Suite 217, Orange, California 92867. The premises consist of approximately
        300
        square feet of office space with a large office and a file room. The lease
        is
        currently renewed on a month-to-month basis. The monthly rent amounts to
        $374
        with an escalation of monthly rent on the lease anniversary date. Elephant
        Talk
        Limited is currently leasing 5,000 square feet of office space at 8/F, 145-159
        Yeung Uk Road, Tsuen Wan, Hong Kong for a period of two years commencing
        May 1,
        2004 for a monthly rent of $4,991. Guangdong Elephant Talk Network Consulting
        Limited is currently leasing 1,200 square feet of office space for a monthly
        rent of $1,084. ET ME&A is sharing with its joint venture partner its office
        facilities located in Dubai at TECOM Zone in Building No. DIC 09 on
        2 nd floor
        Premises No. 222 consisting of a floor space of 699 square feet. The Company
        does not have a lease arrangement in place. The Company is currently leasing
        space for storage of its telecom switches at co-locations for a monthly rent
        of
        $2,730. The Company leases various co-location spaces with square footage
        of
        under 200 square feet in Hong Kong, Guangzhou, Los Angeles, Amsterdam,
        Barcelona, Madrid, Milan and other places where our telecommunications equipment
        are located.
 
 We
        believe that the facilities currently under lease are adequate for the Company's
        present activities, and that additional facilities are available on competitive
        market terms to provide for such future expansion of the Company's operations
        as
        may be warranted.
 
 **Item
        3. Legal Proceedings**
 
 On
        or
        about July 21, 2006, the Company received a notice that a default judgment
        had
        been entered against the Company on July 21, 2004 in a litigation entitled
        Neu-Firmnet, Inc. vs. Elephant Talk Communications, Inc. in Los Angeles Superior
        Court Case No. BC 295776. The Company’s counsel brought a motion to set aside
        the default and default judgment which was granted by the court on October
        11,
        2006. On March 12, 2007, the court dismissed the Neu-Firmnet litigation in
        favor
        of the Company.
 
 On
        August
        25, 2006, the Company was sued as a defendant in a litigation entitled Renren
        Asset Management, Ltd. and Fantastic Fiesta Ltd. vs. Elephant Talk
        Communications, Inc., in Orange County Superior Court Case No. 06CC09415
        in
        California. On November 6, 2006, the case was dismissed without prejudice
        by the
        plaintiffs in that action.
 
 On
        September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
        organized and existing under the laws of the People’s Republic of China
        (“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
        Telecommunication Information Technology Company Limited, a company organized
        and existing under the laws of the People’s Republic of China (“Beijing
        Chinawind”), filed two lawsuits against Guangdong Elephant Talk Network
        Consulting Limited, a company organized and existing under the laws of the
        People’s Republic of China and an agent of the Company (“ETGD”), in the Beijing
        Civil Courts. The lawsuit alleges that a) ETGD failed to pay the remaining
        consideration of $787,748 under an Equity Transfer Agreement, dated January
        4,
        2006 (the “Agreement”), between ETGD and Beijing Zhongrun, which provided for
        the acquisition by ETGD from Beijing Zhongrun of 60% of the registered capital
        of Beijing Chinawind; and b) ETGD induced the minority shareholders of Beijing
        Chinawind to accept, pursuant to the Agreement, consideration of $1,000,000
        through the issuance of 10,000,000 common shares of the Company valued at
        $0.10
        per common share. The lawsuit further alleges that Chinese law prohibits
        citizens of the People’s Republic of China from accepting shares of companies
        listed on the United States Over-The-Counter Bulletin Board Quotation Service,
        which is regulated by the National Association of Securities Dealers, Inc.,
        as
        compensation in an acquisition transaction.
 
 Beijing
        Zhongrun has demanded that ETGD exchange the issued stock for $1,000,000,
        pay
        the outstanding payment under the Agreement and compensate Beijing Zhongrun
        for
        breach of contract in the sum of RMB524,664 (approximately $64,773). In the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704).
 -
              21
              -
  The
        Company has retained a legal counsel licensed to practice civil law in the
        People’s Republic of China who has advised the Company that Beijing Zhongrun's
        lawsuits are not supported by valid facts nor have sufficient legal evidence.
        Accordingly, the Company considers that the claims of Beijing Zhongrun are
        without merit and the Company plans to vigorously defend these lawsuits.
        However, it is important to note that the Company is not a party to the
        lawsuit.
 
 **Item
        4. Submission of Matters to a Vote of Security Holders**
 
 The
        Company held its Annual Shareholders Meeting on October 24, 2006. The
        shareholders elected Mr. Russelle Choi, Mr. Pius Lam, Mr. Manu Ohri, Mr.
        Yves R.
        van Sante, Mr. Steven van der Velden, Mr. Erik E. De Jonghe and Mr. Johan
        De
        Jager to a one-year term as directors. Additionally, the shareholders ratified
        the appointment of Jimmy C. H. Cheung & Company as the Company's independent
        auditor. However, on January 23, 2007, Jimmy C. H. Cheung was dismissed as
        the
        Company’s auditors and replaced by Kabani & Company. Rising Water Capital,
        the Company’s majority shareholder, and certain other affiliates of the Company
        voted by proxy. As a result, all of the agenda items for consideration by
        our
        shareholders received an affirmative vote and were passed.
  **PART
        II**
 
 **Item
        5. Market for Common Equity and Related Stockholder
        Matters**
 
 The
        Company’s common stock is traded on Over the Counter Bulletin Board maintained
        by the National Association of Securities Dealers, Inc. under the symbol
“ETLK”.
        Prior to the merger with Elephant Talk on January 4, 2002, the Company’s common
        stock was traded under the symbol “SRUN”. The following table sets forth the
        range of high and low bid and asked quotations for the common stock (adjusted
        for 1 for 10 reverse stock split effected on January 22, 2002) during the
        two
        most recent years’ calendar quarters ended December 31, 2006 and
        2005:
 
 **High
                  Bid**
              
              **Low
                  Bid**
              
              **High
                  Asked**
              
              **Low
                  Asked**March
                  31, 2005
              $0.04
              
              $0.04
              
              $0.04
              
              $0.04June
                  30, 2005
              0.04
              
              0.04
              
              0.04
              
              0.04September
                  30, 2005
              0.03
              
              0.03
              
              0.03
              
              0.03December
                  31, 2005
              0.06
              
              0.05
              
              0.06
              
              0.05March
                  31, 2006
              0.22
              
              0.05
              
              0.22
              
              0.05June
                  30, 2006
              0.20
              
              0.07
              
              0.20
              
              0.07September
                  30, 2006
              0.16
              
              0.11
              
              0.16
              
              0.11December
                  31, 2006
              0.13
              
              0.07
              
              0.13
              
              0.07
 
 The
        above
        prices were obtained from the National Quotation Bureau, Inc. The prices
        shown
        in the above table represent inter-dealer quotations without retail mark-up,
        mark-down or commission, and may not necessarily represent actual transactions.
        On December 31, 2006, there were broker-dealers publishing quotes for the
        common
        stock.
 
 Holders
 
 At
        December 31, 2006, the Company had approximately 3,120 holders of record
        of its
        common stock. In addition, there are approximately 4,200 holders in the street
        name. The holders of common shares are entitled to one vote for each share
        held
        of record on all matters submitted to a vote of stockholders. Holders of
        common
        shares have no preemptive rights and no right to convert their common stock
        into
        any other securities. There is no redemption of sinking fund provisions
        applicable to the common stock.
 -
              22
              -
  All
        of
        the Company’s issued stock has been issued pursuant to exemptions under the
        Securities Act of 1933, as amended, and nearly all of it would qualify for
        sale
        pursuant to either Rule 144 or Rule 144K under the Securities Act of 1933,
        as
        amended, provided that the conditions of the Rule are met. Approximately
        30,314,174 and 19,116,972 common shares under Rule 144 shares were held by
        officers and directors that existed at December 31, 2006 and 2005,
        respectively.
 
 Dividends
 
 The
        Company has not declared any cash dividends since inception and does not
        anticipate paying any dividends in the foreseeable future. The payment of
        dividends is within the discretion of the Board of Directors and will depend
        on
        the Company’s earnings, capital requirements, financial condition, and other
        relevant factors. There are no restrictions that currently limit the Company’s
        ability to pay dividend on its Common Stock other than those generally imposed
        by applicable state law.
 
 The
        Company has no preferred stock issued or outstanding as of December 31,
        2006.
 
 Recent
        Sales of Unregistered Securities
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        with
        Beltrust AG, a corporation organized and existing under the laws of Switzerland
        (“Beltrust”), to acquire all of the issued and outstanding shares of Benoit
        Telecom Holding AG, a corporation organized and existing under the laws of
        Switzerland (“Benoit Telecom”). Benoit Telecom is a European-based telecom
        company. On November 17, 2006, the Company executed an Agreement of Purchase
        and
        Sale (the “Agreement”), with Beltrust and Elephant Talk Europe B.V., a
        corporation organization and existing under the laws of The Netherlands (the
        “Purchaser”), and a wholly owned subsidiary of the Company, providing for the
        purchase and sale of all of the issued and outstanding shares of Benoit Telecom
        by the Purchaser.
  Pursuant
        to the Agreement, the Purchaser agreed to purchase from Beltrust all of the
        100,000 issued and outstanding shares of Elephant Talk Communications Holding
        AG, formerly known as Benoit Telecom, in exchange for a) cash payment of
        $6,643,080 and b) 40,000,000 shares of the Registrant’s common stock. The
        parties acknowledged that $6,043,080 (equivalent to approximately Euros
        4,625,000) had been previously paid by the Registrant on behalf of the Purchaser
        to an escrow agent as an earnest deposit. In addition, the remaining balance
        of
        the consideration, consisting of $600,000 of a cash payment and issuance
        of
        40,000,000 shares by the Registrant, were to be transferred to Beltrust within
        30 days of the closing. The 100,000 shares of Elephant Talk Communications
        Holding AG will be transferred to the Purchaser as of the closing pursuant
        to
        the terms of the Agreement.
 
 The
        transactions contemplated by the Agreement were consummated on January 1,
        2007,
        and the transaction was deemed to be closed for legal and accounting purposes
        on
        such date.
 
 In
        connection with the acquisition of Benoit Telecom Holding AG from Beltrust
        AG,
        the Company issued a total of 40,000,000 shares of restricted common stock
        under
        the Agreement and the Company intends to rely on the exemption from registration
        provided by Regulation S under the Securities Act of 1933, as amended (the
        “Act”). The bases for the availability of this exemption include that 1)
        Beltrust is not a U.S. person and are not acquiring the shares of common
        stock
        of the Registrant for the account or for the benefit of any U.S. person and
        it
        is not a U.S. person who purchased the shares of common stock in a transaction
        that did not require registration under the Act; (2) Beltrust has agreed
        to
        resell such common stock only in accordance with the provisions of Regulation
        S,
        pursuant to registration under the Act, or pursuant to an available exemption
        from registration; (3) Beltrust has agreed not to engage in hedging transactions
        with regard to such securities unless in compliance with the Act; (4) Beltrust
        has consented to the certificate for the shares of common stock of the
        Registrant to contain a legend to the effect that transfer is prohibited
        except
        in accordance with the provisions of Regulation S, pursuant to registration
        under the Act, or pursuant to an available exemption from registration, and
        that
        hedging transactions involving the shares of common stock may not be conducted
        unless in compliance with the Act; and (5) Beltrust acknowledges that the
        Registrant has agreed to refuse to register any transfer of the shares of
        common
        stock not made in accordance with the provisions of Regulation S, pursuant
        to
        registration under the Act, or pursuant to an available exemption from
        registration.
 -
              23
              -
  On
        December 28, 2006, the Company signed five subscription agreements with the
        investors providing that they agreed to purchase 109,480,000 shares of
        restricted common stock of the Registrant, subject to the satisfaction of
        certain conditions precedent, including, but not limited to, an increase
        in the
        authorized common stock of the Company, in a transaction intended to be exempt
        from registration pursuant to Regulation S under the Securities Act of 1933,
        as
        amended. The consideration for purchase of such common stock amounted to
        $4,105,500. As of December 31, 2006, the Company received a funding of $944,500
        against the purchase of such shares and no shares of common stock have been
        issued. Three of the investors are the directors of the Company. Furthermore,
        all the investors are affiliated with Q.A.T. Investments S.A., an investment
        company organized under the laws of Luxembourg and a control person of the
        Company.
 
 In
        connection with the issuance of a total of 109,480,000 shares of restricted
        common stock under the subscription agreements, the Company intends to rely
        on
        the exemption from registration provided by Regulation S under the Securities
        Act of 1933, as amended (the “Act”). The bases for the availability of this
        exemption include that 1) Each investor is not a U.S. person and is not
        acquiring the shares of common stock of the Registrant for the account or
        for
        the benefit of any U.S. person and each investor is not a U.S. person who
        purchased the shares of common stock in a transaction that did not require
        registration under the Act; (2) Each investor has agreed to resell such common
        stock only in accordance with the provisions of Regulation S, pursuant to
        registration under the Act, or pursuant to an available exemption from
        registration; (3) Each investor has agreed not to engage in hedging transactions
        with regard to such securities unless in compliance with the Act; (4) Each
        investor has consented to the certificate for the shares of common stock
        of the
        Registrant to contain a legend to the effect that transfer is prohibited
        except
        in accordance with the provisions of Regulation S, pursuant to registration
        under the Act, or pursuant to an available exemption from registration, and
        that
        hedging transactions involving the shares of common stock may not be conducted
        unless in compliance with the Act; and (5) Each investor acknowledged that
        the
        Registrant has agreed to refuse to register any transfer of the shares of
        common
        stock not made in accordance with the provisions of Regulation S, pursuant
        to
        registration under the Act, or pursuant to an available exemption from
        registration.
 
 On
        January 30, 2006, the Company issued as a partial consideration 5,000,000
        restricted common shares valued at $250,000 to the owners of Beijing Chinawind
        in connection with its agent ETGD’s acquisition of 60% equity interest in
        Beijing Chinawind. The shares were valued at the closing market price of
        the
        shares on the date of execution of the agreement. On June 2, 2006, the Company
        issued an additional partial consideration of 5,000,000 restricted common
        shares
        valued at $250,000 to the owners of Beijing Chinawind in connection with
        its
        agent ETGD’s acquisition of 60% equity interest in Beijing Chinawind. The shares
        were valued at the closing market price of the shares on the date of execution
        of the agreement. The Company is in litigation with the owners of Beijing
        Chinawind, and has decided to abandoned its investment as of September 30,
        2006.
        The Company has taken protective measures to ensure that the 10,000,000 common
        shares, issued to the owners of Beijing Chinawind through its agent ETDG,
        are
        restricted and non-tradable. The Company continues to pursue the return of
        these
        shares. The 10,000,000 shares issued by the Company were offered pursuant
        to an
        exemption from registration provided by Section 4(2) under the Securities
        Act of
        1933, as amended.
 
 In
        this
        offering, we relied on the exemption from registration of Section 4(2) under
        the
        Securities Act, based on the following facts: (1) the issuance was an isolated
        private transaction which did not involve a public offering; (2) there were
        a
        small number of offerees, (3) the offerees have agreed to the imposition
        of a
        restrictive legend on the face of the stock certificate representing their
        shares, to the effect that they will not resell the stock unless their shares
        are registered or an exemption from registration is available; (4) the offerees
        were sophisticated investors; (5) there were no subsequent or contemporaneous
        public offerings of the stock; (6) the stock was not broken down into smaller
        denominations; and (7) the negotiations for the acquisition by its agent
        ETGD of
        Beijing Chinawind and the issuance of the stock pursuant thereto took place
        directly between the Company on behalf of its agent ETGD and Beijing Chinawind
        shareholders.
 -
              24
              -
  On
        or
        about June 30, 2005, pursuant to the Stock Purchase Agreement, the Company
        agreed to sell to Rising Water Capital 195,947,395 shares of common stock
        for an
        aggregate purchase price of $7,837,896. The purpose of this transaction will
        enable Rising Water Capital to infuse capital into the Company so that the
        Company could complete its pending acquisitions. On or about June 30, 2005,
        Rising Water Capital closed the purchase of a total of 100,000,000 shares
        of
        common stock at a price of $0.04 per share. Inasmuch as the total authorized
        number of shares of common stock of the Company was 250,000,000 shares,
        management could not sell and Rising Water Capital was unable to purchase
        the
        remaining 95,947,395 shares. The 100,000,000 shares issued by the Company
        were
        issued pursuant to an exemption from registration provided by Section 4(2)
        under
        the Securities Act of 1933, as amended.
 
 In
        this
        offering, we relied on the exemption from registration of Section 4(2) under
        the
        Securities Act, based on the following facts: (1) the issuance was an isolated
        private transaction which did not involve a public offering; (2) there was
        only
        one offeree, (3) the offeree agreed to the imposition of a restrictive legend
        on
        the face of the stock certificate representing its shares, to the effect
        that it
        will not resell the stock unless its shares are registered or an exemption
        from
        registration is available; (4) the offeree was a sophisticated investor;
        (5)
        there were no subsequent or contemporaneous public offerings of the stock;
        (6)
        the stock was not broken down into smaller denominations; and (7) the
        negotiations for the sale of the stock and the issuance of the stock pursuant
        thereto took place directly between the offeree and our management.
 
 On
        January 5, 2005, pursuant to a Share Exchange Agreement (“Agreement”), the
        Company completed its purchase of 60% equity ownership interest in True Precise
        Technology Limited (“True Precise”), a limited liability company, registered in
        British Virgin Island, from Keen Solution Group Limited (“Keen Solution”), a
        company registered in British Virgin Island. As consideration for the
        acquisition, the Company issued 23,137,500 restricted common shares to Keen
        Solution valued at $1,436,875. Upon completion of the acquisition on January
        5,
        2005, True Precise became a majority owned subsidiary of the Company. On
        August
        8, 2005, Keen Solutions sent notification informing the Company that it had
        unilaterally decided to terminate the Agreement. The True Precise acquisition
        has been cancelled, and the Company has taken protective measures to ensure
        that
        the 23,137,500 common shares are restricted and non-tradable. Of those shares,
        20,137,500 have been returned to the Company’s treasury, and the Company
        continues to pursue the return of the remainder. The 23,127,500 shares issued
        by
        the Company were offered pursuant to an exemption from registration provided
        by
        Section 4(2) under the Securities Act of 1933, as amended.
 
 In
        this
        offering, we relied on the exemption from registration of Section 4(2) under
        the
        Securities Act, based on the following facts: (1) the issuance was an isolated
        private transaction which did not involve a public offering; (2) there were
        a
        small number of offerees, (3) the offerees have agreed to the imposition
        of a
        restrictive legend on the face of the stock certificate representing their
        shares, to the effect that they will not resell the stock unless their shares
        are registered or an exemption from registration is available; (4) the offerees
        were sophisticated investors; (5) there were no subsequent or contemporaneous
        public offerings of the stock; (6) the stock was not broken down into smaller
        denominations; and (7) the negotiations for the acquisition of True Precise
        and
        the issuance of the stock pursuant thereto took place directly between the
        offerees and our management.
 
 Warrants
 
 As
        of
        March 30, 2007, there was no warrants outstanding convertible to common stock.
        During the years 2006 and 2005, no warrants were converted into shares of
        common
        stock.
 -
              25
              -
  **Item
        6.**  **Management's
        Discussion and Analysis of Financial Condition and Results of
        Operation**
 
 General
 
 The
        following is a summary of certain information contained in this Report and
        is
        qualified in its entirety by the detailed information and financial statements
        that appear elsewhere herein. Except for the historical information contained
        herein, the matters set forth in this Report include forward-looking statements
        within the meaning of the “safe harbor” provisions of the Private Securities
        Litigation Reform Act of 1995. These forward-looking statements are subject
        to
        risks and uncertainties that may cause actual results to differ materially.
        These risks and uncertainties are detailed throughout the Report and will
        be
        further discussed from time to time in Elephant Talk’s periodic reports filed
        with the Commission. The forward-looking statements included in the Report
        speak
        only as of the date hereof.
 
 Plan
        of
        Operation
 
 Elephant
        Talk Communications, Inc. is currently engaged in VOIP telecommunications
        and
        mobile SMS and other value added telecom services provider in China and Europe.
        In addition, it also offers highly reliable and competitively priced
        facility-based international long distance services as well as a PC-phone
        service over IP. With its completion of acquisition of Beijing Chinawind,
        the
        Company provides its mobile value added services to over 1 million customers
        in
        China. Our services include short message service, ring tone/wall-paper
        downloads and mobile e-commerce services. Our international call services
        are
        provided through an integrated network infrastructure comprising both the
        packet-switched system (IP based) and circuit switched system (conventional
        phone based) focusing on the Asia Pacific region as well Europe.
 
 The
        Company’s long term strategy is to become a major player in the mobile
        value-added services market by becoming the preferred platform for our customers
        around the world to access and/or exchange information with one another,
        via
        mediums such as mobile terminals or the internet. The Company intends to
        continue on this path of repositioning by further acquisition of controlling
        stake in profitable companies in the coming year.
 
 Elephant
        Talk, through a combination of expertly managed internal expansion and accretive
        strategic acquisitions, is executing plans to provide a sustainable, growing,
        diversified and profitable revenue base throughout its operations. The company
        is aggressively identifying and pursuing the best business opportunities
        available. Through a continued refinement of operational efficiencies and
        increasing revenue margins, the Company is destined to provide a clear path
        to
        profitability for its current and future businesses.
 
 **Material
        Transactions to an Understanding of our MD&A
        Discussion**
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        to
        acquire all of the issued and outstanding shares of Benoit Telecom Holding
        A.G.,
        a European telecom company from an accredited investor and owner based in
        Europe, and has delivered earnest deposits of $9,043,080 with an escrow trust
        company. The Company has completed its due diligence investigation of Benoit
        and
        completed its acquisition as of January 1, 2007.
 
 On
        April
        20, 2005, the Company formed a joint venture Free Zone Limited Liability
        company
        to be incorporated in the Dubai Technology, Electronic Commerce and Media
        Free
        Zone, Dubai, United Arab Emirates (UAE) under the name Elephant Talk Middle
        East
& Africa FZ-LLC (“ET ME&A”). The Company through its wholly owned
        subsidiary Elephant Talk Limited incorporated the joint venture company on
        November 6, 2005 and contributed $50,907 towards its equity share capital
        as of
        December 31, 2005. The Company owns 50.54% share of this newly formed joint
        venture company. ET ME&A is committed to expend the necessary funds to keep
        its share of equity investment and is currently seeking regulatory approvals
        for
        obtaining trade and business licenses from the UAE government to conduct
        its
        business. ET ME&A has not yet begun the operations and plans to operate
        various telecom related business in the Middle East and Africa.
 -
              26
              -
  After
        evaluating the processes to expand our business and the costs of setting
        up
        regional subsidiaries in the Middle East under the name ET ME&A, the Company
        decided to create a new holding company in Bahrain. On June 17, 2006, the
        Company through its subsidiary Elephant Talk Limited, incorporated a limited
        liability company in the Kingdom of Bahrain under the name Elephant Talk
        Middle
        East & Africa (Holding) W.L.L (“ET ME&A Holding”). The registered
        capital of ET ME&A Holding is $387,787 and Elephant Talk Limited has
        contributed $197,771 towards its 51% equity interest in ET ME&A Holding as
        of December 31, 2006.
 
 On
        June
        17, 2006, the Company through its subsidiary Elephant Talk Limited, incorporated
        a limited liability company in the Kingdom of Bahrain under the name **** Elephant
        Talk Middle East & Africa (Holding) W.L.L ("ET ME&A Holding"). The
        registered capital of ET ME&A Holding is $387,787 and Elephant Talk Limited
        has contributed $197,771 towards its 51% equity interest in ET ME&A Holding
        as of December 31, 2006.
 
 On
        June
        19, 2006, the Company through its subsidiary ET ME&A Holding, incorporated a
        limited liability company in the Kingdom of Bahrain under the name Elephant
        Talk
        Bahrain W.L.L. (“ET Bahrain”) to manage the Company’s operations in Bahrain. The
        registered capital of ET Bahrain is $387,787 and ET ME&A Holding owns 99% of
        the equity ownership in ET Bahrain. ET ME&A Holding has contributed $383,909
        as its share of registered capital as of December 31, 2006. ET ME&A Holding
        and ET Bahrain have not yet begun operations.
 
 On
        August
        3, 2006, the Company formed and incorporated an entity under the name Elephant
        Talk Europe Holding BV (“ET Europe”), a private limited liability company
        registered in Amsterdam, Holland with an authorized capital of $113,670 (90,000
        Euros). The Company owns 100% equity in ET Europe. The purpose of forming
        ET
        Europe was to help the Company conclude its pending acquisition of Benoit
        Telecom Holding AG. The Company has contributed $22,734 towards its share
        of the
        registered capital of ET Europe. On November 17, 2006, the Company executed
        the
        definitive Stock Purchase Agreement and completed its acquisition of Benoit
        Telecom Holding AG to be made effective on January 1, 2007.
 
 On
        July
        28, 2006, ET Europe participated in the incorporation of Elephant Talk
        Communications PRS UK Ltd. (“ET UK”), a company registered under the laws of
        United Kingdom. The registered capital of ET UK is $19760 and ET Europe has
        51%
        ownership interest in ET UK. ET Europe has contributed $2,312 towards its
        share
        of ownership interest and $5,882 remains to be contributed as of December
        31,
        2006. ET UK was formed to expand ET Europe’s operations in United Kingdom. The
        operations have not yet begun as of December 31, 2006.
 
 On
        September 12, 2006, the Company through its subsidiary ET ME&A Holding,
        incorporated a limited liability company under the name Elephant Talk Middle
        East & Africa Jordon (“ET Jordon”) to manage the Company’s operations in
        Jordon. The registered capital of ET Jordon is $210,918 (81,585 BHD) and
        ET
        ME&A owns 100% of the equity ownership in ET Jordon. ET ME&A Holding has
        contributed $210,918 as its 100% share of the registered capital as of December
        31, 2006. ET Jordon has applied for the telecommunication licenses and has
        not
        begun its operations.
  In
        order
        to successfully carry out its operations, the Company agreed to sell to Rising
        Water Capital pursuant to the execution of the Stock Purchase Agreement,
        195,947,395 shares of the Company’s common stock for an aggregate purchase price
        of $7,837,896. The Stock Purchase Agreement provided that Rising Water Capital
        would be entitled to appoint six out of eleven directors of the Company.
        In
        addition, Rising Water Capital agreed to retain the current management of
        the
        Company for a five year term. The purpose of this transaction was to enable
        Rising Water Capital to infuse capital so that the Company could complete
        its
        pending acquisitions.
 
 On
        December 15, 2005, the Board of Directors of the Company authorized the
        execution and delivery of a Convertible Promissory Note in the principal
        amount
        of $3.5 million (the “Note”) to Rising Water Capital, in exchange for a loan in
        the same principal amount to be drawn down in stages. The Company has received
        all of the funding of $3.5 million Note by January 26, 2006. Assuming that
        the
        Note is fully converted into common stock, the Company would be obligated
        to
        issue 100,000,000 shares of common stock to Rising Water Capital as of December
        31, 2006. None of the principal amount of the Note has been converted into
        shares of common stock as of April 14, 2007.
 -
              27
              -
  On
        May
        26, 2006, the Company executed a second Convertible Promissory Note (the
        “2 nd Note”)
        in the principal sum of $3,000,000 with Rising Water Capital. The 2 nd 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 2 nd Note
        shall not be convertible during the term when the Company has insufficient
        authorized common shares to issue to the 2 nd Note
        holder when a demand for conversion is made. The Company has received the
        principal balance of $2,025,221 against the 2 nd Note as
        of December 31, 2006 and further received cash consideration of $569,520
        as of
        April 14, 2007.
 
 In
        connection with the termination of the True Precise acquisition and cancellation
        of 20,137,500 shares of common stock issued to True Precise, the Company
        agreed
        to reissue to Rising Water Capital all of the 23,137,500 common shares received
        or to be received, as additional compensation for this failed acquisition.
        The
        successful consummation of the True Precise acquisition had been a condition
        of
        Rising Water Capital's obligation to purchase 195,947,395 shares of common
        stock
        pursuant to a Stock Purchase Agreement, dated June 30, 2005. The Company
        agreed
        to compensate RWC by issuing 23,137,500 additional restricted shares of common
        stock as compensation for the failed acquisitions of True Precise being the
        representation made by the Company in the Stock Purchase Agreement dated
        June
        30, 2005 between the Company and RWC.
 
 On
        July
        11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited formed
        Full Mark Limited (“Full Mark”), a limited liability company organized under the
        laws of British Virgin Islands, to facilitate acquisitions of profitable
        business in China. On December 13, 2005, Full Mark formed a wholly owned
        subsidiary Jinfuyi Technology (Beijing) Co. Ltd. (“Jinfuyi”), a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China, with a registered capital of $200,000. On January 2, 2006, Jinfuyi
        and
        Beijing Chinawind entered into an Exclusive Technical Consulting and Services
        Agreement (the ”Service Agreement”), pursuant to which Jinfuyi has the exclusive
        right to provide technical and consulting services in exchange for services
        fees
        of approximately $4,875,000 per year, subject to the right of Jinfuyi to
        adjust
        the service fee depending on the quantity of the services that it actually
        provides.
 
 On
        January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
        liability company organized and existing under the laws of the Peoples’ Republic
        of China (“Guangdong Elephant Talk”) and an agent of the Company, and Beijing
        Zhongrun Chuangtou Technology Co., Ltd., a limited liability company organized
        and existing under the laws of the Peoples’ Republic of China (the “Vendor”),
        entered into an Equity Transfer Agreement (the ”Agreement”), pursuant to which
        Guangdong Elephant Talk agreed to acquire sixty percent (60%) of the registered
        capital of Beijing Chinawind.
 
 Pursuant
        to the Agreement, the purchase price for 60% of Beijing Chinawind was agreed
        to
        be $4,800,000, subject to adjustments based on Beijing Chinawind’s audited net
        income for fiscal 2005 and 2006, and is payable (x) in cash of $2,800,000
        in
        five installments the last of which is to be paid on January 31, 2007, and
        (y)
        by the issuance by the Company to the Vendor of 20,000,000 shares of restricted
        common stock valued at US$0.10 per share, in four equal installments the
        last of
        which is to be issued on January 31, 2007. The Vendor has the right to exercise
        an option within 30 days after July 31, 2007 to return the 20,000,000 shares
        of
        restricted common stock either in exchange for a 25% equity interest in Beijing
        Chinawind or for settlement in cash within 90 days.
 -
              28
              -
  On
        September 25, 2006, the Vendor and a minority shareholder of Beijing Chinawind,
        filed two lawsuits against Guangdong Elephant Talk in the Beijing Civil Courts.
        The lawsuit alleges a) that Guangdong Elephant Talk failed to pay the remaining
        consideration of $787,748 under an Equity Transfer Agreement, dated January
        4,
        2006 (the “Agreement”), between Guangdong Elephant Talk and Beijing Zhongrun,
        which provided for the acquisition by Guangdong Elephant Talk from Beijing
        Zhongrun of 60% of the registered capital of Beijing Chinawind; and b) that
        Guangdong Elephant Talk induced the minority shareholders of Beijing Chinawind
        to accept, pursuant to the Agreement, consideration of $1,000,000 through
        the
        issuance of 10,000,000 common shares of the Company valued at $0.10 per common
        share. The lawsuit further alleges that Chinese law prohibits citizens of
        the
        People’s Republic of China from accepting shares of companies listed on the
        United States Over-The-Counter Bulletin Board Quotation Service, which is
        regulated by the National Association of Securities Dealers, Inc., as
        compensation in an acquisition transaction. Beijing Zhongrun has demanded
        that
        Guangdong Elephant Talk exchange the issued stock for $1,000,000, pay the
        outstanding payment under the Agreement and compensate Beijing Zhongrun for
        breach of contract in the sum of RMB524,664 (approximately $64,773). In the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704). It is important to note that the lawsuits
        are not against ETCI and merely against the agent of the Company.
 
 The
        Company has retained a legal counsel licensed to practice civil law in the
        People’s Republic of China who has advised the Company that Beijing Zhongrun's
        lawsuits are not supported by valid facts nor have sufficient legal evidence.
        Accordingly, the Company considers that the claims of Beijing Zhongrun are
        not
        against the Company and are without merit. The Company is vigorously defending
        these lawsuits. In November 2006, the Company decided to abandon its investment
        in Beijing Chinawind due to loss of control.
 
 **Comparison
        of the fiscal years ended December 31, 2006 and December 31,
        2005**
 
 Our
        results of operations for 2006 consist of the operations of Elephant Talk
        Communications, Inc., its wholly owned subsidiary Elephant Talk Limited,
        its
        wholly owned subsidiary Full Mark Limited, its wholly-owned subsidiary Elephant
        Talk Europe Holding BV, its majority owned (51%) subsidiary Elephant Talk
        Communications PRS UK Ltd., its majority owned (51%) subsidiary Elephant
        Talk
        Middle East & Africa Holding Bahrain W.L.L., its wholly owned subsidiary
        Elephant Talk Middle East and Africa Jordon LLC, and its majority owned (50.54%)
        subsidiary Elephant Talk Middle East & Africa FZ-LLC. The operations of
        Bejing China Wind were abandoned as of September 30, 2006 due to loss of
        control
        on the company. Our operations for 2005 consisted of operations of Elephant
        Talk
        Communications, Inc., its wholly owned subsidiary Elephant Talk Limited,
        its
        wholly owned subsidiary True Precise Technology Limited, its wholly owned
        subsidiary Full Mark Limited, and its majority owned (50.54%) subsidiary
        Elephant Talk Middle East & Africa FZ-LLC.
 
 Revenues
        and Cost of Revenues: The Company reported revenues of $158,292 and $282,417
        for
        the years ended December 31, 2006 and 2005, respectively. Revenues consisted
        of
        telecommunications services such as voice and data transmission like IDD,
        pre-paid calling cards, eTalk and facsimile services provided to a wide range
        of
        customers. The decline in revenues comes from price compression for long
        distance business voice services. The Company’s international business continues
        to experience significant pricing pressure on its products as we continue
        to
        penetrate the retail markets although the wholesale market continues to
        represent a large portion of our gross revenues. This, in addition to
        bankruptcies of some customers and industry players, resulted in reduction
        in
        circuits connected to customers related to their internal network consolidation
        and resulted in year-over-year decrease.
 
 Cost
        of
        revenue was $144,727 and $252,900 for the years ended December 31, 2006 and
        2005, respectively. Cost of revenue included cost in providing resale
        arrangements with long distance service providers, cost of leasing transmission
        facilities, international gateway switches for voice, data transmission and
        facsimile services. Gross margin for the year ended December 31, 2006 was
        8.5%
        of the revenues compared to 10.5% of the revenues for the year ended December
        31, 2005. Gross margin decreased in 2006 due to the change in the revenue
        mix
        for the services provided to customers as well as the direct result of increases
        in pricing in the telecom markets without adequate volume offsets. Both the
        local voice revenue and long-distance revenue decreases were impacted by
        continued weakness in the telecommunications industry and ongoing economic
        and
        competitive pressures from other telecommunications services providers in
        Hong
        Kong and around the world.
 -
              29
              -
  Operating
        expenses: Selling, general and administrative (SG&A) expenses were
        $1,992,618 and $631,576 for the years ended December 31, 2006 and 2005,
        respectively. SG&A expenses increased by $1,361,042 or 215.5% in 2006
        compared to 2005 primarily because the Company increased its legal and
        administrative costs in conducting due diligence of potential acquisitions,
        and
        costs incurred in expanding the operations of the Company in Middle East
        and
        Europe. During 2005, the Company controlled its business expenses through
        right-sizing the organization and recovering $330,934 of bad debts that were
        previously written-off in 2004. Stock compensation to officers, directors
        and
        employees were $433,557 and $402,875 for the years ended December 31, 2006
        and
        2005, respectively. Stock compensation expense remained relatively the same
        during 2006 as compared to 2005 primarily due to right sizing the personnel
        needs in 2005. Stock compensation paid to consultants was $0 and $20,000
        for the
        years ended December 31, 2006 and 2005, respectively. Depreciation and
        amortization expense was $42,326 for the year ended December 31, 2006 compared
        to $56,230 for the same period in 2005 as majority of the property and equipment
        had been fully depreciated.
 
 Other
        Income and Expenses: Interest income was $18,943 and $20,467 for the years
        ended
        December 31, 2006 and 2005, respectively. Other income was represented by
        interest income earned on amounts due from entities related to officers,
        directors and shareholders during 2006 and 2005. Interest expense was $592,618
        in 2006 compared to $139,199 in 2005. Increase in interest expense in 2006
        was
        due to Company obtaining additional loans from investor, bank and related
        parties to fund its operations. The Company recorded a gain of $32,031 in
        2005
        in settlement of its payables to a director whereas no such settlements were
        made in 2006.
 
 Minority
        Interest: The Company’s majority owned subsidiaries Elephant Talk Europe BV,
        Elephant Talk Limited, Elephant Talk Middle East & Africa Holding WLL
        Bahrain and Elephant Talk Middle East & Africa FZ-LLC incurred losses of
        $1,794,562 from operations during the year ended December 31, 2006. The Company
        recorded a loss of $117,824 attributable to minority shareholders’ interest in
        the accompanying financial statements as of December 31, 2006. During 2005,
        the
        Company’s majority owned subsidiary Elephant Talk Middle East & Africa
        FZ-LLC incurred a loss of $16,630 from operations from the date of inception
        of
        business on September 26, 2005 through December 31, 2005. The Company recorded
        a
        loss of $8,225 from operations attributable to minority shareholders’ interest
        for the year ended December 31, 2005.
 
 Discontinued
        operations: The Company discontinued operations of Beijing Chinawind and
        abandoned its investment effective September 30, 2006 since the Company’s agent
        lost control over the operations of Beijing Chinawind. The Company recorded
        in
        the accompanying financial statements as of December 31, 2006, an income
        of
        $232,247 from the operations of Beijing Chinawind from January 6, 2006 (the
        date
        of acquisition) to the date of abandonment (September 30, 2006). The Company
        recorded a loss of $2,152,247 on abandonment of its investment in Beijing
        Chinawind in the accompanying financial statements for the year ended December
        31, 2006. The Company discontinued operations of a majority (60%) owned
        subsidiary, True Precise and recorded a loss from discontinued operations
        of
        $7,229 during 2005. The Company recorded a gain of $7,229 from the disposal
        of
        True Precise’s operations during 2005. Upon completion of selling the operations
        of True Precise, the Company acquired the remaining 40% equity in True Precise
        it did not own, making True Precise a wholly owned subsidiary of the Company
        as
        of December 31, 2005.
 
 Comprehensive
        Loss: The Company records foreign currency translation gains and losses as
        comprehensive income or loss. The company recorded a gain of $21,133 for the
        year ended December 31, 2006 compared to a gain of $644 for the year ended
        December 31, 2005 due to foreign currency translations.
 
 Liquidity
        and Capital Resources: The Company's principal capital requirements during
        the
        year 2007 are to fund the internal operations and complete the pending
        acquisitions of growth-oriented telecommunications and related businesses
        in
        Europe, Asia and Middle East. The Company plans to raise the necessary funds
        by
        selling its own common shares to selected investors and bringing in business
        partners whose contributions include the necessary cash. In view of low
        borrowing interest rates, the Company continues to actively pursuing additional
        credit facilities with investors and financial institutions in Hong Kong,
        Europe, Middle East and USA as a means to obtain new funding. The Company’s
        management estimates that it currently has the necessary funds to operate
        for
        the next twelve months without raising additional capital.
 -
              30
              -
  As
        shown
        in the accompanying financial statements, the Company incurred a net loss
        of
        $4,829,665 for the year ended December 31, 2006 as compared to a net loss
        of
        $1,214,193 for the same period in 2005. Additionally, the Company’s current
        liabilities exceeded its current assets by $3,181,589 at December 31, 2006.
        These factors and the Company’s inability to meet its debt obligations from
        current operations, and the need to raise additional funds to accomplish
        its
        objectives, create a substantial doubt about Elephant Talk's ability to continue
        as a going concern. Based upon above, the Company’s independent auditors have
        issued a going concern opinion as the Company does not have sufficient funds
        available to operate for the next twelve months.
  Operating
          activities: Net cash used in operating activities for the year ended December
          31, 2006 was $1,330,061. The increase in net cash used in operating activities
          resulted primarily due to the increase in loss of $3,555,472 in 2006, increase
          in accounts receivable of 81,692, decrease in prepaid expenses, deposits
          and
          other assets of $158,203, increase in accrued expenses and other payable
          of
          $198,291, increase in minority interest of $10,698 and increase in accrued
          interest of $683,548.
 
 Investing
          activities. Net cash used in investing activities for the year ended December
          31, 2006 was $1,705,535. Cash was used by the Company in making payments
          of
          $1,420,000 for its investment in Beijing Chinawind and for purchase of
          property
          and equipment of $113,731, and cash paid for deposits amounting to
          $171,804.
 
 Financing
          activities. Net cash provided by financing activities for the year ended
          December 31, 2006 was $3,124,159. The Company received in cash $2,954,921
          from
          Rising Water Capital against the convertible promissory notes executed
          by the
          Company. The Company received in partial payment $944,500 from sale of
          109,480,000 restricted shares to five investors on December 28, 2006. The
          Company made advances and payments of $941,504 on its bank loans and third
          parties.
  As
        a
        result of the above activities, the Company had a cash and cash equivalent
        balance of $332,001 as of December 31, 2006, a net increase in cash and cash
        equivalents of $133,185 for the year ended December 31, 2006. The ability
        of the
        Company to continue as a going concern is still dependent on its success
        in
        obtaining additional financing from the institutional investors or by selling
        its Common Shares and fulfilling its plan of restructuring as outlined
        above.
 
 **Application
        of Critical Accounting Policies**
 
 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 the sale of minutes
        of
        calling time via sale of its prepaid calling cards. Cost of revenue 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.
 -
              31
              -
  **Impact
        of Accounting Pronouncements**
 
 Effective
        January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment
        (SFAS 123R), which requires companies to measure and recognize compensation
        expense for all stock-based payments at fair value. SFAS 123R is being
        applied on the modified prospective basis. Prior to the adoption of SFAS
        123R,
        the Company accounted for its stock-based compensation plans under the
        recognition and measurement principles of Accounting Principles Board (APB)
        Opinion No. 25, Accounting for Stock Issued to Employees, and related
        interpretations, and accordingly, recognized no compensation expense related
        to
        the stock-based plans. Under the modified prospective approach, SFAS 123R
        applies to new awards and to awards that were outstanding on January 1, 2006
        that are subsequently modified, repurchased or cancelled.
 
 In
        compliance with FAS No. 148, for the fiscal year 2005, the Company elected
        to
        continue to follow the intrinsic value method in accounting for its stock-based
        employee compensation plan as defined by APB No. 25 and has made the applicable
        disclosures below.
 
 The
        Company did not grant any options during the year ended December 31, 2006
        and
        2005.
 
 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.
 
 In
        March
        2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
        Statement amends FASB Statement No. 140, *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities. This Statement:
 
 1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract. 
 2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable. 
 3.
            Permits
                an entity to choose ‘Amortization method’ or ‘Fair value measurement
                method’ for each class of separately recognized servicing assets and
                servicing liabilities: 
 4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value. 
 5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities. 
 This
        Statement is effective as of the beginning of the Company’s first fiscal year
        that begins after September 15, 2006. Management believes that this statement
        will not have a significant impact on the consolidated financial
        statements.
 -
              32
              -
  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.
 
 Off
        Balance Sheet Arrangements
 
 The
        Company has no off Balance Sheet arrangements at December 31, 2006.
 
 The
        Board
        of Directors and its Committees
 
 During
        the calendar year 2006, the Board held four (4) meetings. Messrs Choi, Ohri
        attended 100% of the meetings and the elected Board members attended all
        of the
        meetings since attaining their directorships.
 
 The
        Company has no Compensation or Nominating Committees.
 -
              33
              -
  Options
        Committee
 
 The
        Options Committee’s function is to review, make recommendations, maintain and
        implement those option grants of options promulgated by it and approved by
        the
        Board of Directors. Directors Choi and Lam comprise the membership of this
        committee.
 
 Audit
        Committee
 
 The
        Audit
        Committee’s function is to review with the Company’s independent public
        accountants and management, the annual financial statements and independent
        public accountants’ opinion. Its responsibilities include reviewing the scope
        and results of the examination of the Company’s financial statements by the
        independent public accountants, approving all professional services performed
        by
        the independent public accountants and all related fees paid in connection
        with
        such services and recommending the retention of the independent public
        accountants to the board, subject to ratification by the shareholders.
        Additionally, the Committee periodically reviews the Company’s accounting
        policies, internal accounting and financial controls. The members of the
        Audit
        Committee are Messrs Velden and Ackermans. During the calendar year 2006,
        the
        Audit Committee held one meeting to ratify the appointment of the Company’s
        independent accountants.
 -
              34
              -
  **Item
        7. Consolidated Financial Statements**
 
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 **AND
        SUBSIDIARIES**
  CONSOLIDATED
        FINANCIAL STATEMENTS
 AS
        OF
        DECEMBER 31, 2006
 TABLE
        OF
        CONTENTS
  **PAGE**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
              36
                  - 37CONSOLIDATED
                  BALANCE SHEET AS OF DECEMBER 31, 2006
              38CONSOLIDATED
                  STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005
              39CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
                FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005
              40CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
                FOR
                  THE YEARS ENDED DECEMBER 31, 2006 AND 2005
              41NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              42
                  - 57
 
 
  -
            35
            -
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 To
        the
        Board of Directors of:
 Elephant
        Talk Communications, Inc. and Subsidiaries
 
 We
        have
        audited the accompanying consolidated statements of operations and comprehensive
        loss, changes in stockholders’ equity and cash flows for the year ended December
        31, 2005. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audit.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the consolidated
        financial statements. An audit also includes assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe that our audits provide
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Elephant
        Talk
        Communications, Inc. as of December 31, 2005 and the consolidated results
        of its
        operations and comprehensive loss and its cash flows for the year ended December
        31, 2005 in conformity with accounting principles generally accepted in the
        United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 17 to
        the
        consolidated financial statements, the Company had a loss of $1,214,193,
        a
        working capital deficit of $3,372,917, a stockholders’ equity of $1,671,202 an
        accumulated deficit of $12,132,435 and used cash in operations of $738,018.
        These factors raise substantial doubt about its ability to continue as a
        going
        concern. Management’s plans concerning these matters are also described in Note
        17. The accompanying consolidated financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 
 /s/
        JIMMY C. H. CHEUNG & CO.
 Certified
        Public Accountants
 
 Hong
        Kong
 May
        18,
        2006
 
  -
            36
            -
  REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors of:
 Elephant
        Talk Communications, Inc. and Subsidiaries
 
 We
        have
        audited the accompanying consolidated balance sheet of Elephant Talk
        Communications, Inc. as of December 31, 2006, and the related consolidated
        statements of operations and comprehensive loss, changes in stockholders’ equity
        and cash flows for the year ended December 31, 2006. These financial statements
        are the responsibility of the Company’s management. Our responsibility is to
        express an opinion on these consolidated financial statements based on our
        audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the consolidated
        financial statements. An audit also includes assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe that our audit provides
        a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Elephant
        Talk
        Communications, Inc. as of December 31, 2006 and the consolidated results
        of its
        operations and comprehensive loss and its cash flows for the year ended December
        31, 2006 in conformity with accounting principles generally accepted in the
        United States of America.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note 19 to
        the
        consolidated financial statements, the Company had a loss of $4,829,665,
        a
        working capital deficit of $3,181,589 an accumulated deficit of $16,962,100
        and
        cash used in operations of $1,330,061 .
        These
        factors raise substantial doubt about its ability to continue as a going
        concern. Management’s plans concerning these matters are also described in Note
        19. The accompanying consolidated financial statements do not include any
        adjustments that might result from the outcome of this uncertainty.
 
 
 /s/
        Kabani & Company, Inc.
 Certified
        Public Accountants
 
 Los
        Angeles, California
 March
        30,
        2007
 
 
  -
            37
            -
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        BALANCE SHEET
 DECEMBER
        31, 2006
 
 **ASSETS****CURRENT
                  ASSETS**Cash and cash equivalents
              
              $
              332,001Accounts receivable, net
              
              
              18,929Loans receivable
              
              
              3,606,983Prepaid expenses and other current assets
              
              
              169,810Total
                  current assets
              
              
              4,127,723**PROPERTY
                  AND EQUIPMENT - NET**
              
              
              158,234**OTHER
                  ASSETS**Deposits
              
              
              40,247Due from related parties
              
              
              326,029Earnest deposit for acquisitions
              
              
              9,043,080Total
                  other assets
              
              
              9,409,356**TOTAL
                  ASSETS**
              
              $
              13,695,313**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Overdraft
              
              $
              171,819Accounts payable and customer deposits
              
              
              51,549Deferred revenue
              
              
              105,105Accrued expenses
              
              
              453,551Accrued interest
              
              
              666,048Shares to be issued
              
              
              4,782,396Loans payable
              
              
              883,010Due to related parties
              
              
              195,834Total
                  current liabilities
              
              
              7,309,312**LONG-TERM
                  LIABILITIES**Convertible promissory note
              
              
              5,525,221**TOTAL
                  LIABILITIES**
              
              
              12,834,553**MINORITY
                  INTEREST**
              
              
              127,455**COMMITMENT
                  AND CONTINGENCIES**
              
              
              --**STOCKHOLDERS'
                  EQUITY**Preferred stock Class B, no par value, 5,000,000 shares authorized,none
                  issued and outstanding
              
              
              --Common stock, no par value, 250,000,000 shares authorized,238,265,927
                  issued and outstanding
              
              
              17,814,933Subscriptions receivable
              
              
              (9,683
              )Loans receivable
              
              
              (120,000
              )Accumulated comprehensive income
              
              
              10,175Accumulated deficit
              
              
              (16,962,100
              )Total
                  stockholders' equity
              
              
              733,325**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              13,695,313
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.  -
              38
              -
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 
 **For
                  the years ended December 31,****2006**
              
              **2005****REVENUES,
                  net**
              
              $
              158,292
              
              $
              282,417**COST
                  OF REVENUE**
              
              
              144,727
              
              
              252,900**GROSS
                  PROFIT**
              
              
              13,565
              
              
              29,517**OPERATING
                  EXPENSES**Selling, general and administrative
              
              
              1,992,618
              
              
              635,201Compensation to officers, directors and employees
              
              
              433,557
              
              
              399,250Compensation to consultants
              
              
              --
              
              
              20,000Depreciation and amortization
              
              
              42,326
              
              
              56,230Total
                  operating expenses
              
              
              2,468,503
              
              
              1,110,681**LOSS
                  FROM OPERATIONS**
              
              
              (2,454,938
              )
              
              (1,081,164
              )**OTHER
                  INCOME (EXPENSE)**Interest income
              
              
              18,943
              
              
              20,467Interest expense
              
              
              (592,618
              )
              
              (139,199
              )Loss on currency fluctuations
              
              
              --
              
              
              (53,753
              )Gain on settlement of payables
              
              
              --
              
              
              32,031Miscellaneous income
              
              
              1,923
              
              
              --Total
                  other expense
              
              
              (571,752
              )
              
              (140,454
              )**LOSS
                  BEFORE INCOME TAXES**
              
              
              (3,026,689
              )
              
              (1,221,618
              )Income taxes
              
              
              800
              
              
              800**LOSS
                  FROM CONTINUING OPERATIONS BEFORE MINORITY
                  INTEREST**
              
              
              (3,027,489
              )
              
              (1,222,418
              )****MINORITY
                  INTEREST
              
              
              (117,824
              )
              
              (8,225
              )**LOSS
                  BEFORE DISCONTINUED OPERATIONS**
              
              
              (2,909,665
              )
              
              (1,214,193
              )**DISCONTINUED
                  OPERATIONS**Income from operations of abandoned entity
              
              
              232,247
              
              
              7,229Abandonment of investment
              
              
              (2,152,247
              )
              
              (7,229
              )(1,920,000
              )
              
              --**NET
                  LOSS**
              
              $
              (4,829,665
              )
              $
              (1,214,193
              )**OTHER
                  COMPREHENSIVE INCOME (LOSS)**Foreign currency translation gain
              
              
              21,133
              
              
              64421,133
              
              
              644**COMPREHENSIVE
                  LOSS**
              
              $
              (4,808,532
              )
              $
              (1,213,549
              )Net
                  loss per common share and equivalents - basic and dilutedLoss from continuing operations
              
              $
              (0.02
              )
              $
              (0.01
              )Loss from discontinued operations
              
              $
              (0.01
              )
              $
              0.00$
              (0.03
              )
              $
              (0.01
              )Weighted
                  average shares outstanding during the period - basic and
                  diluted
              
              
              173,863,813
              
              
              109,772,900
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.  -
              39
              -
  **ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
  Common
              
              
              
              Shares
                  Issued as
              
              Subscriptions
              
              Earnest
              
              Other
                  Comprehensive
              
              Accumulated
              
              Total
                  StockholdersDescription
              
              Shares
              
              Amount
              
              Advances
              
              Receivable
              
              Deposit
              
              Income
                  (Loss)
              
              Deficit
              
              Equity
                  (Deficit)Balance
                  - December 31, 2004
              
              
              51,968,681
              
              $
              9,846,748
              
              $
              --
              
              $
              --
              
              $
              480,000
              
              $
              (11,602
              )
              $
              (10,918,242
              )
              $
              (1,563,096
              )Shares
                  issued to directors for fees
              
              
              327,776
              
              
              20,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              20,000Shares
                  issued to officers for compensation
              
              
              7,821,965
              
              
              379,250
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              379,250Shares
                  issued to directors for settlement of debt
              
              
              989,166
              
              
              37,588
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              37,588Shares
                  issued as earnest deposit - PhoneTone acquisition
              
              
              20,000,000
              
              
              720,000
              
              
              --
              
              
              --
              
              
              (720,000
              )
              
              --
              
              
              --
              
              
              --Shares
                  issued for True Precise acquisition
              
              
              19,137,500
              
              
              956,875
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              956,875Cancellation
                  of shares issued for True Precise acquisition
              
              
              (20,137,500
              )
              
              (1,076,875
              )
              
              --
              
              
              --
              
              
              480,000
              
              
              --
              
              
              --
              
              
              (596,875
              )Sale
                  of shares -RWC
              
              
              100,000,000
              
              
              4,000,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              4,000,000Shares
                  issued to consultants for services
              
              
              400,000
              
              
              20,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              20,000Shares
                  cancelled as a result of termination of acquisition
              
              
              (2,252,500
              )
              
              (301,835
              )
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (301,835
              )Shares
                  issued and not cancelled
              
              
              (747,500
              )
              
              (58,165
              )
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (58,165
              )Uncollectible
                  stock subscriptions
              
              
              --
              
              
              --
              
              
              --
              
              
              (8,991
              )
              
              --
              
              
              --
              
              
              --
              
              
              (8,991
              )Comprehensive
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              644
              
              
              --
              
              
              644Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,214,193
              )
              
              (1,214,193
              )Balance
                  - December 31, 2005
              
              
              177,507,588
              
              
              14,543,586
              
              
              
              
              
              (8,991
              )
              
              (720,000
              )
              
              (10,958
              )
              
              (12,132,435
              )
              $
              1,671,202Shares
                  issued to officers for compensation
              
              
              28,108,339
              
              
              348,847
              
              
              
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              348,847Shares
                  issued to consultants for services
              
              
              2,400,000
              
              
              120,000
              
              
              (120,000
              )
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Shares
                  issued to employee for compensation
              
              
              250,000
              
              
              22,500
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              22,500Shares
                  issued as earnest deposit - Beltrust
              
              
              40,000,000
              
              
              3,000,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              3,000,000Cancellation
                  of shares issued for PhoneTone acquisition
              
              
              (20,000,000
              )
              
              (720,000
              )
              
              --
              
              
              --
              
              
              720,000
              
              
              --
              
              
              --
              
              
              --Shares
                  issued for acquisition
              
              
              10,000,000
              
              
              500,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              500,000Stock
                  subscriptions receivable
              
              
              --
              
              
              --
              
              
              --
              
              
              (692
              )
              
              --
              
              
              --
              
              
              --
              
              
              (692
              )Comprehensive
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              21,133
              
              
              --
              
              
              21,133Net
                  loss
              
              
              --
              
              
              --
              
              
              
              
              
              --
              
              
              --
              
              
              --
              
              
              (4,829,665
              )
              
              (4,829,665
              )Balance
                  - December 31, 2006
              
              
              238,265,927
              
              $
              17,814,933
              
              $
              (120,000
              )
              $
              (9,683
              )
              $
              --
              
              $
              10,175
              
              $
              (16,962,100
              )
              $
              733,325
 
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  -
            40
            -
 **ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  **For
                    the year ended****December
                    31,****2006**
                
                **2005****CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss
                
                $
                (4,829,665
                )
                $
                (1,214,193
                )Adjustments to reconcile net loss to net cash used in operating
                    activities:Depreciation and amortization
                
                
                42,326
                
                
                56,230Provision
                    for uncollectible stock subscriptions
                
                
                
                
                
                (8,991
                )Issuance
                    of stock for compensation and services
                
                
                371,347
                
                
                402,250Provision
                    for uncollectible amounts
                
                
                65,968
                
                
                17,293Gain
                    on disposal of subsidiary
                
                
                (232,247
                )
                
                (7,229
                )Loss
                    from discontinued operations
                
                
                2,152,247
                
                
                7,229Minority
                    interest
                
                
                117,824
                
                
                41,638Changes in operating assets and liabilities:(Increase)
                    Decrease in accounts receivable
                
                
                (81,692
                )
                
                1,613(Increase)
                    Decrease in prepaid expenses, deposits and other assets
                
                
                158,203
                
                
                54,777Increase
                    (Decrease) in accounts payable and customer deposits
                
                
                15,420
                
                
                (156,796
                )Decrease
                    in deferred revenue
                
                
                (2,327
                )
                
                (12,466
                )Increase
                    in accrued expenses and other payable
                
                
                198,291
                
                
                80,627Increase
                    in minority interest
                
                
                10,698
                
                
                --Increase
                    in accrued interest
                
                
                683,548
                
                
                --Net cash used in operating activities
                
                
                (1,330,061
                )
                
                (738,018
                )**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Purchase
                    of property and equipment
                
                
                (113,731
                )
                
                (15,020
                )Cash
                    paid for deposits
                
                
                (171,804
                )
                
                --Cash
                    paid for investment in subsidiary
                
                
                1,420,000
                
                
                (792,821
                )Earnest
                    deposit on acquisitions, net
                
                
                --
                
                
                (8,070,977
                )Net
                    cash used in investing activities
                
                
                (1,705,535
                )
                
                (8,878,818
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Payment
                    on notes/loans
                
                
                --
                
                
                (250,000
                )Cash
                    overdraft
                
                
                72,486
                
                
                16,515Proceeds
                    (payments) from bank loans
                
                
                (82,577
                )
                
                55,099Proceeds
                    from note payable
                
                
                2,954,921
                
                
                2,570,300Proceeds
                    from sale of shares
                
                
                944,500
                
                
                7,837,896Cash
                    from formation of subsidiary
                
                
                176,332
                
                
                --Proceeds
                    from related parties
                
                
                --
                
                
                25,314Proceeds
                    (Payments) to related parties
                
                
                --
                
                
                (507,747
                )Net
                    cash provided by financing activities
                
                
                3,124,159
                
                
                9,747,377**EFFECT
                    OF EXCHANGE RATES ON CASH**
                
                
                44,622
                
                
                644**NET
                    INCREASE IN CASH**
                
                
                133,185
                
                
                131,185**CASH,
                    BEGINNING OF THE YEAR**
                
                
                198,816
                
                
                67,631**CASH,
                    END OF THE YEAR**
                
                $
                332,001
                
                $
                198,816**SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                    paid during the period for interest
                
                $
                --
                
                $
                48,308Cash
                    paid during the period for income taxes
                
                $
                800
                
                $
                800
  The
        accompanying notes are an integral part of these consolidated financial
        statements.  -
              41
              -
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 **AND
        SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 
 
 **NOTE
        1**  **SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
        ORGANIZATION**
 
 **(A)
        Organization and Nature of Operations**
 
 Elephant
        Talk Communications, Inc. (herein referred to as “Elephant Talk”, “ETCI” or
“Company” formerly known as Staruni Corporation), was incorporated on February
        5, 1962 under the laws of the state of California as Altius Corporation.
        Altius
        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, the
        Staruni Corporation merged with Elephant Talk Limited, a limited company
        incorporated in Hong Kong, and amended the corporate name to Elephant Talk
        Communications, Inc. This name change was done in conjunction with the
        acquisition, and to emphasize that the Company’s new focus will be the business
        of Elephant Talk Limited. Elephant Talk Limited is currently engaged in long
        distance telephone business and actively pursuing to position itself in mobile
        value-added service provider in China
 
 **(B)
        Use of Estimates**
 
 In
        preparing financial statements in conformity with generally accepted accounting
        principles, management is required to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and revenues
        and
        expenses during the reported period. Actual results could differ from those
        estimates.
 
 **(C)
        Cash and Cash Equivalents**
 
 For
        purposes of the cash flow statements, the Company considers all highly liquid
        investments with original maturities of three months or less at the time
        of
        purchase to be cash equivalents.
 
 **(D)
        Foreign Currency Translation**
 
 The
        functional currency was the Hong Kong Dollar for the subsidiary Elephant
        Talk
        Limited, and Euros for the Elephant Talk Europe Holding BV for the year ended
        December 31, 2006. The December 31, 2006 financial statements of the Company
        were translated to United States dollars using year-end 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 income
        (loss).
 
 **(E)
        Property and Equipment**
 
 Property
        and equipment are stated at cost, less accumulated depreciation. Depreciation
        is
        provided using the straight-line method over the estimated useful life of
        the
        assets from three to seven years. Expenditures for maintenance and repairs
        are
        charged to expense as incurred. Majority of the Company’s property and equipment
        is located in Hong Kong.
 
 **(F)
        Interest Expense**
 
 The
        Company uses a credit facility with a bank for its working capital requirements.
        Interest expense is calculated in accordance with the borrowing rate accepted
        by
        the Company pursuant to a credit arrangement with the bank when funds are
        drawn
        against the credit facility. Interest expense is calculated in accordance
        with
        the interest rate accepted by the Company on its note payable to an investor.
        Interest expense for the years ended December 31, 2006 and 2005 was $592,618
        and
        $139,199, respectively, principally incurred on borrowings under the loans
        received from the bank and notes payable.
  -
            42
            -
  **(G)
        Carrier Deposit**
 
 The
        Company has deposited security deposits with telecommunication carriers during
        the course of its operations. As of December 31, 2006, the Company has made
        security deposits of $40,247 with the telecommunication carriers. The deposits
        are refundable at the conclusion of the business relationship with the
        carriers.
 
 **(H)
        Income Taxes**
 
 The
        Company accounts for income taxes under the Financial Accounting Standards
        Board
        Statement of Financial Accounting Standards No. 109 "Accounting for Income
        Taxes" ('Statement 109"). Under Statement 109, deferred tax assets and
        liabilities are recognized for the future tax consequences attributable to
        differences between the financial statement carrying amounts of existing
        assets
        and liabilities and their respective tax bases. Deferred tax assets and
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years in which those temporary differences are expected to
        be
        recovered or settled. Under Statement 109, the effect on deferred tax assets
        and
        liabilities of a change in tax rates is recognized in income in the period
        that
        includes the enactment date.
 
 **(I)
        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 recognizes sales from telecommunications
        services as services are provided. The Company recognizes revenue from prepaid
        calling cards as the services are provided. Payments received before all
        of the
        relevant criteria for revenue recognition are satisfied are recorded as deferred
        revenue. Cost of revenue includes the cost of capacity associated with the
        revenue recognized within the corresponding time period.
 
 Deferred
        revenue represents amounts received from the customers against future sales
        of
        services since the Company recognizes revenue on the performance of services.
        Deferred revenue was $105,105 as of December 31, 2006.
 
 **(J)
        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. The Company
        had
        11,734,073 and 54,052,605 potentially diluted common shares from the conversion
        of convertible note payable as of December 31, 2006 and 2005,
        respectively.
 
 **(K)
        Long-Lived Assets**
 
 Effective
        January 1, 2002, the Company adopted Statement of Financial Accounting Standards
        No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
        ("SFAS
        144"), which addresses financial accounting and reporting for the impairment
        or
        disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
        the
        Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
        Of,"
        and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
        the Results of Operations for a Disposal of a Segment of a Business." The
        Company periodically evaluates the carrying value of long-lived assets to
        be
        held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
        to be recorded on long-lived assets used in operations when indicators of
        impairment are present and the undiscounted cash flows estimated to be generated
        by those assets are less than the assets' carrying amounts. In that event,
        a
        loss is recognized based on the amount by which the carrying amount exceeds
        the
        fair market value of the long-lived assets. Loss on long-lived assets to
        be
        disposed of is determined in a similar manner, except that fair market values
        are reduced for the cost of disposal. The Company did not impair any property
        and equipment for the years ended December 31, 2006 and 2005,
        respectively.
  -
            43
            -
  **(L)
        Fair Value of Financial Instruments**
 
 Statement
        of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
        Financial Instruments” requires disclosures of information about the fair value
        of certain financial instruments for which it is practicable to estimate
        that
        value. For purposes of this disclosure, the fair value of a financial instrument
        is the amount at which the instrument could be exchanged in a current
        transaction between willing parties, other than in a forced sale or liquidation.
        The carrying amounts of the Company’s accounts and other receivables, accounts
        payable, accrued liabilities, factor payable, capital lease payable and notes
        and loans payable approximates fair value due to the relatively short period
        to
        maturity for these instruments.
 
 **(M)
        Concentrations of Risk**
 
 Financial
        instruments which potentially subject the Company to concentrations of credit
        risk are cash and accounts receivable. The Company places its cash with
        financial institutions deemed by management to be of high credit quality.
        The
        amount on deposit in any one institution that exceeds federally insured limits
        is subject to credit risk. All of the Company’s revenue and majority of its
        assets are derived from operations in Hong Kong and China.
 
 **(N)
        Reporting Segments**
 
 Statement
        of financial accounting standards No. 131, Disclosures about segments of
        an
        enterprise and related information (SFAS No. 131), which superseded statement
        of
        financial accounting standards No. 14, Financial reporting for segments of
        a
        business enterprise, establishes standards for the way that public enterprises
        report information about operating segments in annual financial statements.
        The
        Company has determined it has only one segment.
 
 **(O)
        Stock-based Compensation**
 
 Effective
        January 1, 2006, the Company adopted Statement No. 123R, Share-Based Payment
        (SFAS 123R), which requires companies to measure and recognize compensation
        expense for all stock-based payments at fair value. SFAS 123R is being applied
        on the modified prospective basis. Prior to the adoption of SFAS 123R, the
        Company accounted for its stock-based compensation plans under the recognition
        and measurement principles of Accounting Principles Board (APB) Opinion No.
        25,
        Accounting for Stock Issued to Employees, and related interpretations, and
        accordingly, recognized no compensation expense related to the stock-based
        plans. Under the modified prospective approach, SFAS 123R applies to new
        awards
        and to awards that were outstanding on January 1, 2006 that are subsequently
        modified, repurchased or cancelled.
 
 In
        compliance with FAS No. 148, for the fiscal year 2005, the Company elected
        to
        continue to follow the intrinsic value method in accounting for its stock-based
        employee compensation plan as defined by APB No. 25 and has made the applicable
        disclosures below.
 
 The
        Company did not grant any options during the year ended December 31, 2006
        and
        2005.
 
 **(P)
        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.
 
 **(Q)
        Comprehensive Income**
 
 Statement
        of financial accounting standards No. 130, Reporting comprehensive income
        (SFAS
        No. 130), establishes standards for reporting and display of comprehensive
        income, its components and accumulated balances. Comprehensive income is
        defined
        to include all changes in equity, except those resulting from investments
        by
        owners and distributions to owners. Among other disclosures, SFAS No. 130
        requires that all items that are required to be recognized under current
        accounting standards as components of comprehensive income be reported in
        financial statements that are displayed with the same prominence as other
        financial statements.
  -
            44
            -
  **(R)
        Reclassifications**
 
 For
        comparative purposes, prior years' consolidated financial statements have
        been
        reclassified to conform with report classifications of the current
        year.
 
 **(S)
        New Accounting Pronouncements**
 
 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.
 
 In
        March
        2006 FASB issued SFAS 156 ‘Accounting for Servicing of Financial Assets’ this
        Statement amends FASB Statement No. 140, *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishments of
        Liabilities,* with
        respect to the accounting for separately recognized servicing assets and
        servicing liabilities. This Statement:
 
 1.
            Requires
                an entity to recognize a servicing asset or servicing liability each
                time
                it undertakes an obligation to service a financial asset by entering
                into
                a servicing contract. 
 2.
            Requires
                all separately recognized servicing assets and servicing liabilities
                to be
                initially measured at fair value, if
                practicable. 
 3.
            Permits
                an entity to choose ‘Amortization method’ or ‘Fair value measurement
                method’ for each class of separately recognized servicing assets and
                servicing liabilities: 
 4.
            At
                its initial adoption, permits a one-time reclassification of
                available-for-sale securities to trading securities by entities with
                recognized servicing rights, without calling into question the treatment
                of other available-for-sale securities under Statement 115, provided
                that
                the available-for-sale securities are identified in some manner as
                offsetting the entity’s exposure to changes in fair value of servicing
                assets or servicing liabilities that a servicer elects to subsequently
                measure at fair value. 
 5.
            Requires
                separate presentation of servicing assets and servicing liabilities
                subsequently measured at fair value in the statement of financial
                position
                and additional disclosures for all separately recognized servicing
                assets
                and servicing liabilities. 
 This
        Statement is effective as of the beginning of the Company’s first fiscal year
        that begins after September 15, 2006. Management believes that this statement
        will not have a significant impact on the consolidated financial
        statements.
 
 In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This Statement is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
 -
              45
              -
  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.
 
 **(T)
        Principles of Consolidation**
 
 The
        accompanying consolidated financial statements for the year ended December
        31,
        2006 included the accounts of Elephant Talk Communications, Inc., its wholly
        owned subsidiary Elephant Talk Limited, its wholly owned subsidiary Full
        Mark
        Limited, its wholly-owned subsidiary Elephant Talk Europe Holding BV, its
        majority owned (51%) subsidiary Elephant Talk PRS UK Ltd., its majority owned
        (51%) subsidiary Elephant Talk Middle East & Africa Holding Bahrain W.L.L.,
        its wholly owned subsidiary Elephant Talk Middle East and Africa Jordon LLC,
        and
        its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa
        FZ-LLC. The consolidated financial statements for the year ended December
        31,
        2005 consisted of operations of Elephant Talk Communications, Inc., its wholly
        owned subsidiary Elephant Talk Limited, its wholly owned subsidiary True
        Precise
        Technology Limited, its wholly owned subsidiary Full Mark Limited, and its
        majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa
        FZ-LLC. Minority interest principally represents minority shareholders’
proportionate share of equity in our consolidated subsidiary Elephant Talk
        Middle East and Africa FZ-LLC. All significant inter-company accounts and
        transactions have been eliminated in consolidation.
 
 **(U)
        Supplemental Disclosure of Non-cash Investing and Financing
        Activities**
 
 The
        Company prepares its statements of cash flows using the indirect method as
        defined under the Financial Accounting Standard No. 95. The cash flow statements
        do not include the following non-cash investing and financing
        activities.
 -
              46
              -
  In
        2006,
        the Company issued 10,000,000 common shares valued at $500,000 towards the
        consideration for acquisition of Beijing China Wind. The common shares were
        valued at the closing market price of the share price on the date of execution
        of the agreement. In addition, the Company issued 40,000,000 shares of common
        stock valued at $3,000,000 as earnest deposit for an acquisition of Benoit
        Telecom Holding AG and 2,400,000 shares valued at $120,000 as an advance
        to
        Benoit Telecom Holding AG. The Company also cancelled 20,000,000 restricted
        common shares valued at $720,000 to a third party as earnest deposit for
        acquisition of 100% ownership interest in Phonetone Telecom Limited as the
        transaction was rescinded in 2006.
 
 In
        2005,
        the Company issued 20,000,000 restricted common shares valued at $720,000
        to a
        third party as earnest deposit for acquisition of 100% ownership interest
        in
        Phonetone Telecom Limited.
 
 **NOTE
        2**   **ACCOUNTS
        RECEIVABLE**
 
 Accounts
        receivable at December 31, 2006 amounted to $18,929.
 
 For
        the
        years ended December 31, 2006 and 2005, the Company wrote-off bad and doubtful
        accounts of $0 and $17,293, respectively, in its consolidated statements
        of
        operations.
 
 **NOTE
        3** **PREPAID
        EXPENSES AND OTHER CURRENT ASSETS**
 
 Prepaid
        expenses and other current assets at December 31, 2006 consist of the
        following:
 
 Interest
                  receivable
              
              $
              18,749Prepaid
                  insurance
              
              
              2,495Prepaid
                  VAT taxes
              
              
              3,004Other
              
              
              145,562$
              169,810
 
 Other
        current assets include fully refundable advances made to a third party in
        connection with its proposed acquisition of Phonetone Telecom Limited from
        Calfin Trust. The Company and Calfin Trust mutually agreed to terminate the
        transaction and executed a Rescission Agreement on October 30, 2006. The
        Company
        has received a payment of $80,000 on November 6, 2006 towards its earnest
        deposit and expects to receive the balance of $145,562 in full.
 
 **NOTE
        4**   **PROPERTY
        AND EQUIPMENT**
 
 Property
        and equipment at December 31, 2006 consisted of the following:
 
 Office
                  and computer equipment
              
              $
              2,145,128Network
                  infrastructure
              
              
              10,868Leasehold
                  improvements
              
              
              6,410Furniture
                  and fixtures
              
              
              918792,254,285Less
                  accumulated depreciation and amortization
              
              
              (2,096,051
              )$
              158,234
 
 Depreciation
        and amortization expense for the years ended December 31, 2006 and 2005 was
        $42,326 and $56,230, respectively.
 -
              47
              -
  **NOTE
        5**  **LOAN
        RECEIVABLES**
 
 As
        of
        December 31, 2006, the Company advanced $3,606,983 to Benoit Telecom Holding
        AG
        (“Benoit Telecom”), a European telecom entity for their working capital
        requirements while the Company was completing its due diligence of its proposed
        acquisition of Benoit Telecom (Note 6). The advances made by the Company
        during
        the year ended December 31, 2006, are deemed fully recoverable. Subsequent
        to
        the year ended December 31, 2006, Benoit Telecom was acquired by the Company
        (Note 21).
 
 Pursuant
        to the terms of Funding and Promise of Repayment executed on February 15,
        2005
        for the continuation, built-up of the business and the telecommunications
        network, the Company agreed to assume responsibility for providing funding
        to
        Benoit Telecom, and Benoit Telecom promised to re-pay the amount advance
        to the
        Company. In case parties did not enter into the Securities Purchase Agreement
        (SPA), the funding provided by the Company will be repaid by Benoit Telecom
        to
        the Company. In the event the parties do enter into SPA, Benoit Telecom’s
        obligation to re-pay the funds advanced will be discharged. As security for
        repayment of this funding, the Company was granted a security interest in
        Benoit
        Telecom’s assets.
 
 Pursuant
        to the terms of the Security Agreement executed on February 15, 2005 and
        subsequently amended on April 15, 2005, it was stipulated that the Company
        agreed to provide funding to Benoit Telecom at various interval loans up
        to a
        maximum amount of Four Million Dollars ($4,000,000).
 
 The
        Company also issued 2,400,000 shares to a consultant to perform services
        on
        behalf of Benoit Telecom. The Company has recorded such issuance of shares
        as an
        advance to Benoit Telecom and has recorded the fair value of the shares of
        $120,000 as contra equity in the accompanying financials.
 
 During
        2005, the Company had advanced $65,968 to a third party for its proposed
        acquisition of the operations of its business. The Company completed its
        due
        diligence and mutually agreed with the third party to rescind its proposed
        acquisition. The Company was not able to collect on the advances made to
        the
        third party and wrote-off such advances of $65,968 as bad and doubtful debts
        in
        its consolidated statements of operations as of December 31, 2006. The Company
        did not write off any such advances during the year ended December 31,
        2005.
 
 **NOTE
        6**   **EARNEST
        DEPOSITS FOR ACQUISITIONS**
 
 On
        January 17, 2005, the Company entered into a Memorandum of Understanding
        with
        Beltrust AG, a European investor, to acquire all of the issued and outstanding
        shares of Benoit Telecom. As of December 31, 2006, the Company had made a)
        cash
        advances of $6,043,080 as earnest deposit with an escrow trust company, b)
        issued 40,000,000 restricted common shares valued at $3,000,000. The shares
        were
        valued at the closing market price of the shares of the Company on the date
        of
        their issuances, pursuant to EITF 96-18 which requires that the fair value
        of
        equity instruments to be measured at the fair value of shares as of the earlier
        of the date of performance commitment or when the counterparty’s performance is
        complete. Benoit Telecom has executed a promise to repay and a security
        agreement with the escrow trust company to repay the full earnest deposit
        if the
        acquisition is not consummated for any reason. The Company executed a Definitive
        Agreement and completed its acquisition of Benoit Telecom on January 1, 2007.
        An
        officer and director of a subsidiary of the Company became an officer and
        director of an entity owned by Benoit Telecom.
 
 The
        Company has recorded $9,043,080 as earnest deposits for its proposed acquisition
        of Benoit Telecom in the accompanying financial statements as of December
        31,
        2006.
 -
              48
              -
  **NOTE
        7**  **DISCONTINUED
        OPERATIONS**
 
 On
        January 4, 2006, the Company, through its agent Guangdong Elephant Talk Network
        Consulting Limited (“ETGD”), entered into an agreement to acquire sixty percent
        (60%) of the registered capital of Beijing China Wind. Pursuant to the
        Agreement, the purchase price for 60% of Beijing China Wind was agreed to
        be
        $4,800,000, subject to adjustments based on Beijing China Wind’s audited net
        income for fiscal years 2005 and 2006, and is payable (a) in cash of $2,800,000
        in five installments, the last of which is to be paid on January 31, 2007,
        and
        (b) by issuance of 20,000,000 restricted common shares valued at $0.10 per
        share
        to the owners of Beijing China Wind in four equal installments, the last
        of
        which is to be issued on January 31, 2007. The owners of Beijing China Wind
        have
        the right to exercise an option within 30 days after July 31, 2007 to return
        the
        20,000,000 restricted common shares either in exchange for a 25% equity interest
        in Beijing China Wind or for settlement in cash within 90 days. The Company
        on
        behalf of its agent ETGD has issued 10,000,000 restricted common shares valued
        at $500,000 and has made cash payments of $1,420,000 to the owners of Beijing
        China Wind towards ETGD’s 60% ownership equity in Beijing China Wind as of
        September 30, 2006. The restricted common shares were valued at the closing
        market price of shares on the day of execution of the agreement. If Beijing
        China Wind is able to achieve the net profits and revenue targets for 2006
        as
        agreed pursuant to the terms of the Agreement, ETGD will have a obligation
        to
        pay $1,380,000 in cash and 10,000,000 restricted shares of common stock of
        the
        Company on or before January 31, 2007 for the agreed purchase price of
        $4,800,000 for ETGD’s 60% equity ownership in Beijing China Wind.
 
 **Investment
        in Beijing China Wind Telecommunication Information Technology Co.
        Limited**
 
 Consideration
                  payable for Beijing China Wind on acquisition date January 4,
                  2006:Cash
                  payable
              
              $
              1,600,000Common
                  shares to be issued - 20,000,000 shares
              
              
              1,000,000Total
                  consideration payable
              
              $
              2,600,000Fair
                  value of net assets received on acquisition date January 4,
                  2006:Cash
              
              $
              95,786Accounts
                  receivable, net of allowances
              
              
              1,071,595Other
                  receivables and prepayments
              
              
              36,256Due
                  from directors
              
              
              323,657Due
                  from a related company
              
              
              3,849Property
                  and equipment, net
              
              
              218,471Other
                  assets
              
              
              1,712,510Accounts
                  payable
              
              
              (437,943
              )Other
                  payables and accrued expenses
              
              
              (926,781
              )Value
                  added tax payable
              
              
              (47,289
              )Notes
                  payable
              
              
              (30,544
              )Due
                  to stockholders
              
              
              (27,253
              )1,992,314Minority
                  interest - 40%
              
              
              (796,926
              )$
              1,195,388Goodwill
              
              
              1,404,612Total
                  consideration
              
              $
              2,600,000
 
 The
        Company recorded goodwill on consolidation of its acquired entities in the
        total
        amount of $3,117,123 upon completion of acquisition of Beijing Chinawind.
        Beijing Chinawind revenues and profitability have consistently declined over
        several months due to the change in business outlook and change in telecom
        policies of network carriers in China. The Company is currently in litigation
        with the shareholders of Beijing Chinawind as described in Note 18, and has
        evaluated its legal options in connection with its wholly-owned subsidiary
        ETGD’s investment in Beijing China Wind. The Company has taken a position to
        abandon its investment in Beijing Chinawind since ETGD lost its control over
        the
        operations of Beijing Chinawind. The Company decided to discontinue its
        operations effective September 30, 2006 and recorded a loss of $2,152,247
        from
        abandoning Beijing Chinawind’s operations. The Company has placed restrictions
        on the tradability of the 10,000,000 shares issued to the owners of Beijing
        Chinawind and is pursuing the return of such shares.
  -
            49
            -
  **NOTE
        8**   **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
        funds were advanced to these entities prior to 2002. The balances of funds
        advanced as of December 31, 2006 are:
 
 Due
                  from ET Network Services, Ltd.
              
              $
              311,703Due
                  from entities related to shareholders
              
              
              14,326$
              326,029
 
 The
        amounts are due on demand, unsecured and carry interest at the rate of six
        percent (6%) per year. Total interest income from the related parties amounted
        to $18,749 and $19,716 for the years ended December 31, 2006 and 2005.
 
 **NOTE
        9**   **LOANS
        PAYABLE**
 
 Loans
        payable at December 31, 2006 are summarized as follows:
 
 Installment
                  loan payable, bank, monthly principal and interest payments of
                  $12,804
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  December 31, 2006, due December 24, 2006, secured by personal guarantees
                  of two shareholders, a director, and a third party
              
              $
              326,037Installment
                  loan payable, bank, monthly principal and interest payments of
                  $2,924
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  December 31, 2006, due December 24, 2011, secured by personal guarantees
                  of three shareholders and a director
              
              
              190,306Installment
                  loan payable, bank, monthly principal and interest payments of
                  $1,751
                  including interest at bank's prime rate plus 1.5% per annum, 9.5%
                  at
                  December 31, 2006, due June 28, 2009, secured by personal guarantees
                  of
                  three shareholders and a director
              
              
              84,615Term
                  loan payable, bank, monthly payments of interest at bank's prime
                  rate,
                  8.0% at December 31, 2006
              
              
              282,052$
              883,010
 
 The
        Company has executed a credit facility with a bank in Hong Kong since June
        29,
        2004 under which the Company has borrowed funds from the bank under three
        installment loans and a term loan arrangements. The Company is in default
        of
        making loan payments on all the loans and has recorded an accrued interest
        amounting to $164,950 as of December 31, 2006. As a result of the default,
        the
        entire loan balance outstanding at December 31, 2006 is immediately due and
        payable to the bank. Furthermore, the Company 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. The Company has recorded
        $72,316 and $41,798 in interest expense and default interest expense on loans
        payable as of December 31, 2006 and $29,157 and $21,070 in interest expense
        as
        of December 31, 2005.
 -
              50
              -
  **NOTE
        10**  **CONVERTIBLE
        PROMISSORY NOTE**
 
 On
        December 15, 2005, the Company executed on a Convertible Promissory Note
        (the
“Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
        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 $0.035, on the closing of
        agreement. The conversion right of the Note is not an absolute right of RWC,
        nor
        is it an unconditional obligation of the Company. Rather, the Note is
        convertible to the extent that the Company has sufficient authorized common
        stock. In that regard, there are currently 5,586,573 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 the Company in its proposed
        acquisitions of entities for which the Company has made earnest deposits.
        The
        Note will be paid in full at the end of the thirty month term with a balloon
        payment of principal and accrued interest. RWC has not converted the principal
        drawn by the Company as of December 31, 2006 in exchange for the common shares
        of the Company. As of December 31, 2006, the Company has drawn the entire
        principal of $3.5MM and recorded accrued interest of $376,973 in the
        accompanying financial statements at December 31, 2006.
 
 On
        May
        26, 2006, the Company executed a second Convertible Promissory Note (the
        “2 nd Note”)
        in the principal sum of $3,000,000 with Rising Water Capital, an investor.
        The
        2 nd Note has
        a term of thirty (30) months, during which time interest on the Principal
        Amount
        will accrue from the date of this 2 nd Note at
        an annual interest rate of 10%. The 2 nd Note
        will be paid in full at the end of the thirty month term with a balloon payment
        of principal and interest accrued. The 2 nd 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 2 nd Note
        shall not be convertible during the term when the Company has insufficient
        authorized common shares to issue to the 2 nd Note
        holder when a demand for conversion is made. The 2 nd Note is
        secured by shares owned or to be owned by the Company in the entities Beijing
        China Wind, ET ME&A Holding and ET ME&A. As of December 31, 2006, the
        Company has received the principal balance of $2,025,221 and has recorded
        accrued interest of $113,376 in the accompanying financial statements for
        the
        year ended December 31, 2006.
 
 **NOTE
        11**  **DUE
        TO RELATED PARTIES**
 
 The
        Company received advances from entities that certain officers and/or
        shareholders have an ownership interest. The balances as of December 31,
        2006
        are:
 
 Due
                  to entities related to certain officers, directors and
                  shareholders
              
              $
              158,612Due
                  to directors
              
              
              37,222$
              195,834
 
 The
        amount due to entities related to certain officers, directors and shareholders
        is due on demand, unsecured and carry interest at the rate of six percent
        (6%)
        per year. Total interest expense due to related parties amounted to $11,750
        and
        $9,605 for the years ended December 31, 2006 and 2005,
        respectively.
 
 **NOTE
        12**  **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. 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.
  -
            51
            -
  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.
 
 During
        the year ended December 31, 2006, the Company issued 1,058,475 restricted
        common
        shares valued at $116,625 as compensation to directors for services rendered.
        The shares were valued at the closing market price on the first day of each
        month for the months for which services were performed. The Company issued
        2,111,105 restricted common shares valued at $232,222 as bonus to the directors
        and officers. The common shares were valued at the closing market price of
        the
        shares on the date of issuance. The Company also issued 24,938,759 common
        shares
        to three directors in consideration of such directors raising the capital
        funding pursuant to the share purchase agreement with Rising Water Capital.
        The
        value of common shares issued was adjusted against the funds raised by the
        Company. The Company entered into an agreement with an employee and issued
        250,000 restricted common shares valued at $22,500 for compensation earned.
        The
        common shares were valued at the closing market price of the shares on the
        date
        of issuance. The Company issued as a partial consideration 40,000,000 restricted
        common shares valued at $3,000,000 to the assignee of Beltrust AG in connection
        with its acquisition of Benoit Telecom. The shares were valued at the closing
        market price of the shares on the date of issuance.
 
 On
        May
        24, 2004, the Company issued 5,100,000 restricted common shares to four
        shareholders of New Times Navigation Limited (“New Times”) valued at $683,400
        and 37 unsecured convertible promissory notes amounting to $3,600,000 as
        consideration for purchase of its 30% equity investment interest in New Times.
        Both parties mutually rescinded the purchase transaction on December 10,
        2004
        and the shareholders of New Times were required to return to the Company
        5,100,000 common shares and $3,600,000 of the unsecured convertible promissory
        notes as part of Company’s consideration towards its 30% investment interest in
        New Times. On February 22, 2005, the Company cancelled 2,252,500 common shares
        and $1,860,000 of unsecured convertible promissory notes received from New
        Times
        shareholders. The remaining 2,847,500 common shares valued at $381,565 and
        $1,740,000 of unsecured convertible promissory notes are yet to be received
        by
        the Company from New Times shareholders and will be cancelled upon receipt
        of
        such shares and notes. The Company has taken protective measures to ensure
        that
        the 2,847,500 common shares are restricted and non tradable. The Company
        has
        recorded such common shares as shares issued to be cancelled at December
        31,
        2006.
 
 On
        January 5, 2005, the Company completed its purchase of 60% equity ownership
        interest in True Precise Technology Limited from Keen Solution Group Limited
        in
        a Stock Exchange Agreement (“Agreement”) whereby, the Company issued 23,137,500
        restricted common shares valued at $1,436,875. On August 8, 2005, Keen Solutions
        sent notification informing the Company that it has unilaterally decided
        to
        terminate the Agreement. The Company has received and cancelled 20,137,500
        common shares received from Keen Solution. The remaining 3,000,000 restricted
        common shares valued at $360,000 are yet to be received and will be cancelled
        upon receipt. The Company has taken protective measures to ensure that the
        3,000,000 common shares are restricted and non tradable.
 
 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 December 31, 2006, 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 December 31, 2006. The Company
        has recorded such shares issued to be issued as a liability in the accompanying
        financials as of December 31, 2006.
 
 Pursuant
        to a Stock Purchase Agreement, on December 28, 2006, the Company agreed to
        sell
        109,480,000 restricted common shares to five accredited investors for a total
        consideration of $4,105,500. As of December 31, 2006, the shares were valued
        at
        50% discount over the last five days average market price on the date of
        execution of the agreement. The Company has received a cash consideration
        of
        $946,005 and recorded the amount received as payable to third parties as
        of
        December 31, 2006. The Company has not issued any common shares to the investors
        as of December 31, 2006. The Company has recorded such shares issued to be
        issued as a liability in the accompanying financials as of December 31,
        2006.
  -
            52
            -
  Pursuant
        to an Agreement, on January 2, 2006 the Company advanced 2,400,000 shares
        restricted common shares valued at $120,000 to Benoit Telecom for issuance
        to
        their consultant for services rendered. The Company has recorded the advance
        to
        Benoit as contra equity in the accompanying financial statements as of December
        31, 2006.
 
 **(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.
 
 **(C)
        Common Shares Issued to Officers and Directors for
        Compensation**
 
 During
        the year ended December 31, 2006, the Company issued 1,058,475 restricted
        common
        shares valued at $116,625 as compensation to directors for services rendered.
        The shares were valued at the closing market price on the first day of each
        month for the months for which services were performed. The Company issued
        2,111,105 restricted common shares valued at $232,222 as bonus to the directors
        and officers. The common shares were valued at the closing market price of
        the
        shares on the date of issuance.
 
 The
        Company also issued 24,938,759 common shares to three directors in consideration
        of such directors raising the funding pursuant to the share purchase agreement
        with Rising Water Capital. The value of common shares issued was adjusted
        against the funds raised by the Company.
 
 During
        2005, the Company issued 8,149,741 restricted common shares valued at $399,250
        as compensation to officers and directors for salaries and fees for attending
        Board meetings. The common shares were valued at the closing market price
        of the
        common shares on the first day of each month. The Company recorded $348,847
        and
        $582,602 as compensation expense for the years ended December 31, 2006 and
        2005,
        respectively.
 
 **NOTE
        13**  **RELATED
        PARTY TRANSACTIONS**
 
 **(A)
        Wiseley International Limited**
 
 The
        Company paid $55,846 and $49,725 in business consulting and management advisory
        fees to an entity owned and controlled by a director for the years ended
        December 31, 2006 and 2005, respectively. This amount is reflected as general
        and administrative expenses for the years ended December 31, 2006 and
        2005.
 
 **(B)
        Wellgear Far East Limited**
 
 The
        Company paid $85,385 and $58,500 in business consulting and management advisory
        fees to an entity owned and controlled by a director for the years ended
        December 31, 2006 and 2005, respectively. This amount is reflected as general
        and administrative expenses for the years ended December 31, 2006 and
        2005.
 -
              53
              -
  **NOTE
        14**  **COMMITMENTS
        AND CONTINGENCIES**
 
 Operating
        Leases
 
 The
        Company leases its corporate offices space with an affiliate under a
        month-to-month operating lease. Monthly rental expense under the leases is
        $4,575 per month. The Company’s majority owned subsidiary leases its office
        space from a third party. The lease term is for one year and monthly rent
        expense is $1,085 per month. The Company’s USA hosting facility space is leased
        from a third party at a monthly rent of $2,694. The lease term expires on
        April
        30, 2008. Rent expense under operating leases for the years ended December
        31,
        2006 and 2005 was $53,944 and $40,220, respectively. Lease commitments for
        the
        years ended December 31, 2007 and 2008 are $60,814 and $11,384,
        respectively.
 
 On
        January 4, 2006, the Company, through its agent Guangdong Elephant Talk Network
        Consulting Limited (“ETGD”), entered into an agreement to acquire sixty percent
        (60%) of the registered capital of Beijing Chinawind (Note 7). Beijing Chinawind
        passed a board resolution without ETGD’s consent and also rejected ETGD’s
        request for financial information. The Company is currently in litigation
        with
        the shareholders of Beijing Chinawind. The Company has taken a position to
        abandon its investment in Beijing Chinawind since ETGD lost its control over
        the
        operations of Beijing Chinawind and decided to discontinue its operations
        effective September 30, 2006 and recorded a loss of $2,152,247 from abandoning
        Beijing Chinawind’s operations. The Company has placed restrictions on the
        tradability of the 10,000,000 shares issued to the owners of Beijing Chinawind
        and is pursuing the return of such shares
 
 Beijing
        Chinawind filed a claim on ETGD in order to terminate the “Transfer of Shares
        Agreement”, and is claiming a compensation of RMB1,690,000 (approximately
        $211,250). The litigation started in September 2006 and no decision has been
        awarded. Beijing Chinawind claims that ETGD should issue the remaining shares
        and the termination fee. However, since the net profit of Beijing Chinawind
        did
        not meet the requirement stipulated in the Transfer of Shares Agreement,,
        the
        Company does not believe that the claim would be allowed by the court. ETGD
        filed a reverse claim for a compensation of $515,000 pursuant to the profit
        sharing agreement. If the owners of Beijing Chinawind exercise their option
        within 30 days after July 31, 2007 to return the 20,000,000 restricted common
        shares, then ETGD might have to settle the claim in $1,000,000 cash. ETGD
        has
        filed a claim that Beijing Chinawind shareholders passed a board resolution
        without the consent of ETGD. This claim will be heard in the court on April
        24,
        2007. In addition,, ETGD’s request for financial information for the year 2006
& 2007 from Beijing Chinawind was rejected. ETGD is currently discussing
        with Chinawind about a settlement. The Company believes that if it succeeds
        in
        the claims, then the chances of getting its investment capital of US$1,420,000
        would be high.
  Severance
        and Consulting Agreements
 The
        Company entered into a termination agreement with its former officer and
        a
        current director agreeing to pay a severance of $166,000 over a three-year
        term.
        The Company also entered into a three-year consulting agreement with the
        former
        officer and a current director whereby the Company made available an option
        to
        purchase up to 1 million shares of common stock at the end of each year of
        the
        term of the consulting agreement subject to certain stipulations.
  **NOTE
        15**  **INCOME
        TAXES**
 
 Income
        tax expense (benefit) for the years ended December 31, 2006 and 2005, is
        summarized as follows:
 
 2006
              
              2005Current:Federal
              
              $
              (1,642,086
              )
              $
              (412,826
              )State
              
              
              (289,780
              )
              
              (72,851
              )Deferred taxes
              
              
              1,932,666
              
              
              486,477Income
                  tax expense (benefit)
              
              $
              800
              
              $
              800
 -
              54
              -
  The
        following is a reconciliation of the provision for income taxes at the U.S.
        federal income tax rate to the income taxes reflected in the Consolidated
        Statements of Operations at December 31, 2006 and 2005:
 
 2006
              
              2005Tax
                  expense (credit) at statutory rate-federal
              (34%)
              
              (34%)State
                  tax expense net of federal tax
              (6%)
              
              (6%)Foreign
                  income not recognized in US
              40%
              
              40%PRC
                  income tax
              33%
              
              33%Tax
                  expense at actual rate
              33%
              
              33%
 
 The
        tax
        effects of temporary differences that gave rise to significant portions of
        deferred tax assets and liabilities at December 31, 2006 are as
        follows:
 
 Deferred
                  tax assets:Net operating loss carry forward
              
              $
              6,784,840Total gross deferred tax assets
              
              
              6,784,840Less valuation allowance
              
              
              (6,784,840
              )Net
                  deferred tax assets
              
              $
              --
 
 At
        December 31, 2006, the Company had accumulated deficit carry forwards of
        approximately $16,962,100 for U.S. federal income tax purposes available
        to
        offset future taxable income expiring on various dates through
        2025.
 
 The
        net
        change in the valuation allowance during the year ended December 31, 2006
        and
        2005 was an increase of $1,931,866 and $485,694, respectively.
 
 **NOTE
        16**  **MINORITY
        INTEREST IN SUBSIDIARY**
 
 The
        Company had minority interests in several of its subsidiaries. The balance
        of
        the minority interest as of December 31, 2006 and 2005 was as
        follows:
 
 SUBSIDIARY
              
              MINORITY
                INTEREST
                %
              
              MINORITY
                  INTEREST BALANCE AT12/31/2006
              
              MINORITY
                  INTEREST BALANCE AT12/31/05ETC
                  PRS UK Ltd.
              
              
              49.0
              
              $
              8,327
              
              $
              --ET
                  ME&A Holding, WLL
              
              
              49.0
              
              
              82,234
              
              
              --ET
                  Bahrain WLL
              
              
              1.0
              
              
              515
              
              
              --ET
                  ME&A FZ LLC
              
              
              49.46
              
              
              36,379
              
              
              41,638Total
              
              
              
              
              $
              127,455
              
              $
              41,638
 
 **NOTE
        17**  **EMPLOYEE
        BENEFIT PLAN AND NON-QUALIFIED STOCK OPTION AND COMPENSATION
        PLAN**
 
 **Employee
        Benefit Plan**
 
 On
        May
        30, 2000, the Company adopted an employee benefit plan “The 2000 Employee
        Benefit Plan” (the “Plan”). 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.
  -
            55
            -
  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
        Administrators under the direction of the Board of Directors administers
        the
        Plan. A total of four million (4,000,000) common shares and four million
        (4,000,000) 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 suck 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.
 
 On
        January 17, 2001, the Company granted and issued 1,700,000 common shares
        at a
        price of $0.005 per share for a total consideration of $8,500. On November
        16,
        2004, the Company granted and issued 2,000,000 common shares at a price of
        $0.059 per share for a total consideration of $118,000. Under the Plan 300,000
        shares of common stock and 4,000,000 stock options remain available for grant
        at
        December 31, 2006. The Company did not grant any stock options during the
        years
        ended December 31, 2006 and 2005.
 
 **2006
        Non-Qualified Stock and Option Compensation Plan**
 
 On
        July
        21, 2006, the Company adopted a 2006 Non-Qualified Stock and Option Compensation
        Plan and filed a Registration Statement on Form S-8 with the Commission to
        register shares awarded under the Plan on the same date. The Compensation
        Committee of the Board of Directors issues common stock and awards options
        to
        employees, directors, officers, consultants, advisors and other persons
        associated with the Company. The 2006 Plan is intended to provide a method
        whereby the Company would be stimulated by the personal involvement of our
        employees, directors, officers, consultants, advisors and other persons in
        our
        business and reward such involvement, thereby advancing the interests of
        the
        Company and all of its shareholders. A total of 15,000,000 shares of common
        stock for stock awards and 10,000,000 shares of common stock underlying option
        grants were authorized under the 2006 Plan. None of the shares under the
        plan
        were issued as of December 31, 2006.
 
 **NOTE
        18**  **LITIGATION**
 
 On
        September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
        organized and existing under the laws of the People’s Republic of China
        (“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
        Telecommunication Information Technology Company Limited, a company organized
        and existing under the laws of the People’s Republic of China (“Beijing
        Chinawind”), filed two lawsuits in the Beijing Civil Courts against Guangdong
        Elephant Talk Network Consulting Limited (“ETGD”), a company organized and
        existing under the laws of the People’s Republic of China and an agent of the
        Company. The lawsuit alleges that a) ETGD failed to pay the remaining
        consideration of $787,748 under an Equity Transfer Agreement, dated January
        4,
        2006 (the “Agreement”) between ETGD and Beijing Zhongrun, which provided for the
        acquisition by ETGD from Beijing Zhongrun of 60% of the registered capital
        of
        Beijing Chinawind; and b) ETGD induced the minority shareholders of Beijing
        Chinawind to accept, pursuant to the Agreement, consideration of $1,000,000
        through the issuance of 10,000,000 common shares of the Company valued at
        $0.10
        per common share. The lawsuit
        further alleges that Chinese law prohibits citizens of the People’s Republic of
        China from accepting shares of companies listed on the United States
        Over-The-Counter Bulletin Board Quotation Service, which is regulated by
        the
        National Association of Securities Dealers, Inc., as compensation in an
        acquisition transaction.
 
 Beijing
        Zhongrun has demanded that ETGD exchange the issued stock for $1,000,000,
        pay
        the outstanding payment under the Agreement and compensate Beijing Zhongrun
        for
        breach of contract in the sum of RMB524,664 (approximately $64,773). In the
        alternative, Beijing Zhongrun has asked the Court to void the Agreement and
        award compensation to Beijing Zhongrun for its economic loss in the amount
        of
        RMB6,591,000 (approximately $813,704).
 
 The
        Company has retained a legal counsel licensed to practice Civil law in the
        People’s Republic of China, who has advised the Company that Beijing Zhongrun's
        lawsuits are not supported by valid facts nor have sufficient legal evidence.
        Accordingly, the Company considers that the claims of Beijing Zhongrun are
        without merit and the Company plans to vigorously defend these
        lawsuits.
  -
            56
            -
  **NOTE
        19**  **GOING
        CONCERN**
 
 The
        accompanying consolidated financial statements have been prepared in conformity
        with generally accepted **** accounting
        principles, which contemplate continuation of the company as a going concern.
        The Company has an accumulated deficit of $16,962,100 at December 31, 2006,
        which included a net loss of $4,829,665 for the year ended December 31, 2006.
        The Company’s total current liabilities exceed its total current assets by
        $3,181,589, a stockholders’ equity of $733,325 and the Company used cash in
        operations of $1,330,061 .
        This
        raises a substantial doubt about our ability to continue as a going concern.
        In
        view of the matters described above, recoverability of a major portion of
        the
        recorded asset amounts shown in the accompanying consolidated 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
        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. The Company is actively pursuing
        additional funding and potential merger or acquisition candidates and strategic
        partners, which would enhance stockholders’ investment. Management believes that
        the above actions will allow the Company to continue operations through the
        next
        fiscal year.
 
 **NOTE
        20**  **CORRECTION
        OF TRANSACTION PREVIOUSLY REPORTED**
 
 Subsequent
        to the issuance of the Company's financial statements for the quarter ended
        September 30, 2006, the Company determined that a certain transaction and
        its
        presentation in the financial statements had not been accounted for properly
        in
        the Company's financial statements for the period ending September 30, 2006.
        Specifically, the Company issued 24,938,759 common shares to three directors
        in
        consideration of such directors raising the funding of $7,837,896 for the
        Company pursuant to the share purchase agreement with Rising Water Capital.
        The
        Company recorded such issuance of the common shares valued at $997,550 as
        compensation expense to three directors in its financial statements for the
        period ended September 30, 2006 instead of netting against the cost of raising
        capital by issuance of common shares against the paid in capital. The Company
        also advanced 2,400,000 shares restricted common shares valued at $120,000
        to
        Benoit Telecom Holding AG for issuance to their consultant for services
        rendered. The Company recorded the fair market value of the shares of $120,000
        as an expense in the financial statements instead of recording it as an advance
        to Benoit. The Company has made the correction to its financial statements
        as of
        December 31, 2006.
 
 **NOTE
        21**  **SUBSEQUENT
        EVENTS**
 
 On
        January 1, 2007, the Company completed its acquisition of Benoit Telecom.
        Pursuant to the terms of the agreement, the Company agreed to purchase from
        Beltrust 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. The total consideration for the purchase of Benoit
        Telecom was valued at $9,643,080. An officer and director of a subsidiary
        of the
        Company became an officer and director of an entity owned by Benoit
        Telecom.
 
 Subsequent
        to December 31, 2006, the Company received $569,520 in cash advances against
        the
        $3.00 million Convertible Promissory Note executed by Rising Water Capital
        on
        May 26, 2006.
 -
              57
              -
  **Item
        8. Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure**
 
 On
        January 23, 2007, Jimmy C. H. Cheung & Co. (“Jimmy Cheung”) was dismissed as
        the Company’s auditors. The decision to dismiss Jimmy Cheung was approved by the
        Company’s Board of Directors upon recommendation by its audit committee. Jimmy
        Cheung served as the Registrant's independent auditor for the Company’s fiscal
        year ended December 31, 2005. Jimmy Cheung’s report on the Company’s
        consolidated financial statements for the year ended December 31, 2005 (the
        “Report”) did not contain an adverse opinion or disclaimer of opinion and was
        not qualified or modified as to uncertainty, audit scope or accounting
        principles. However, the Report was modified to include an explanatory paragraph
        wherein Jimmy Cheung expressed substantial doubt about the Registrant’s ability
        to continue as a going concern.
 
 During
        the Company’s fiscal year ended December 31, 2005, and during the period from
        January 1, 2006 until January 23, 2007, there were no disagreements with
        Jimmy
        Cheung on any matter of accounting principles or practices, financial statement
        disclosures, or auditing scope or procedure, which disagreements, if not
        resolved to Jimmy Cheung’s satisfaction, would have caused Jimmy Cheung to make
        reference thereto in their report on the Registrant’s financial statements for
        this fiscal year.
 
 On
        January 24, 2007, the Company engaged Kabani & Company, Inc. (“Kabani”),
        Certified Public Accountants, as the Company's independent accountant to
        report
        on the Company’s consolidated balance sheet as of December 31, 2006, and the
        related consolidated statements of operations, stockholders' equity and cash
        flows for the year then ended. The decision to appoint Kabani was approved
        by
        the Company's Board of Directors upon recommendation by its audit committee.
        Prior to engaging the new accountant, the Company did not consult with Kabani
        regarding the application of accounting principles to any contemplated or
        completed transactions nor the type of audit opinion that might be rendered
        on
        the Company’s financial statements, and neither written nor oral advice was
        provided that would be an important factor considered by the Company in reaching
        a decision as to an accounting, auditing or financial reporting
        issue.
 
 **Item
        8A. Controls and Procedures**
 
 The
        Company maintains controls and procedures designed to ensure that it is able
        to
        collect the information it is required to disclose in the reports it files
        with
        the SEC, and process, summarize, and disclose this information within the
        time
        periods specified in the rules of the SEC. The Company's Chief Executive
        Officer
        and Chief Financial Officer (“Certifying Officers”) are responsible for
        establishing and maintaining these procedures and, as required by the rules
        of
        the SEC, evaluate their effectiveness.
 
 **Disclosure
        Controls and Procedures and Internal Controls**
 
 The
        Company maintains disclosure controls and procedures designed with the objective
        of ensuring that information required to be disclosed in our reports filed
        with
        the Commission under the Exchange Act, such as this Annual report, is recorded,
        processed, summarized and reported within the time period specified in the
        Commission's rules and forms. Disclosure controls are also designed with
        the
        objective of ensuring that material information relating to the Company is
        made
        known to the Certifying Officers by others, particularly during the period
        in
        which the applicable report is being prepared. The Company maintains a system
        of
        internal controls designed to provide reasonable assurance that a) transactions
        are executed in accordance with management's general or specific authorization;
        b) transactions are recorded as necessary, to permit preparation of financial
        statements in conformity with generally accepted accounting principles, and
        to
        maintain accountability for assets; c) access to assets is permitted only
        in
        accordance with management's general or specific authorization; and d) the
        recorded accountability for assets is compared with the existing assets at
        reasonable intervals and appropriate action is taken with respect to any
        differences.
 -
              58
              -
  **Scope
        of Evaluation in Disclosure Controls**
 
 The
        Certifying Officers’ evaluation of our disclosure controls and internal controls
        are done periodically so that the conclusions concerning the effectiveness
        of
        our controls can be reported in our quarterly reports on Form 10-QSB and
        Annual
        reports on Form 10-KSB. The overall goals of these various evaluation activities
        are to monitor our disclosure controls and our internal controls, and to
        make
        modifications, if and as necessary. Our independent external auditors also
        review internal controls in connection with their audit and review activities.
 
 The
        Securities and Exchange Commission rules embodied in the Sarbanes-Oxley Act
        of
        2002, in particular, Section 404, require that a company's internal controls
        over financial reporting be based upon a recognized internal control framework.
        The Certifying Officers have evaluated the effectiveness of our disclosure
        controls and procedures and internal controls over financial reporting (as
        such
        terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
        Act of 1934, as amended) as of the end of the period covered by the filing
        of
        the Report, and concluded that, as of the end of such period, our disclosure
        controls and procedures were adequate and effective.
 
 Except
        as
        noted above, there have not been any changes in our disclosure controls and
        procedures and internal control over financial reporting (as such term is
        defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
        first fiscal quarter that have materially affected, or are reasonably likely
        to
        materially affect, our internal control over financial reporting.
 
 **Item
        8B. Other Information**
 
 None.
 
 
 **PART
        III**
 
 **Item
        9.**  **Directors,
        Executive Officers, Promoters and Control Persons;**  **Compliance
        with Section 16(a) of the Exchange Act**
 
 The
        following table sets forth certain information about the directors and executive
        officers of Elephant Talk.
 
 Director
                  Name
              
              Age
              
              Position
              
              SinceMr.
                  Steven van der Velden
              
              51
              
              President
                  and Chief Executive Officer
              
              2006Mr.
                  Yves R. van Sante
              
              46
              
              Director
              
              2006Mr.
                  Johan De Jager
              
              47
              
              Director
              
              2006Mr.
                  Manu Ohri
              
              51
              
              Executive
                  Vice-President of Finance and Chief Financial Officer
              
              2002Mr.
                  Russelle Choi
              
              52
              
              Director
              
              2002Mr.
                  Erik De Jonghe
              
              59
              
              Director
              
              2002
  -
            59
            -
 **Steven
        van der Velden, President and Chief Executive Officer and Director:**Mr.
        van
        der Velden has gained extensive entrepreneurial experience in consultancy,
        logistics, real estate development, and telecommunications, e-commerce and
        investment management. He founded his first consultancy in 1983 and since
        then
        Mr. van der Velden has successfully started over a dozen companies, among
        which
        IMD Curacao NV, the largest independent consultancy firm in the Dutch Antilles
        and Hato Handling NV, a Curacao Airport freight and passenger handling company.
        Mr. van der Velden is involved in various ICT ventures throughout Europe,
        North
        America and the Far East, and currently serves as Chairman of the Board of
        QAT
        Investments SA in Luxembourg. In 2000, he co-founded E-commerce Park NV,
        which
        has developed a 50,000 sq. ft. data centre and Internet hosting facility,
        located on top of the various fiber optic landing points in Curacao. In 1994,
        Mr. van der Velden co-founded the ITA International Telemedia Association,
        known
        today as the Network for Online Commerce, and served as its first Chairman.
        In
        the same year, he co-founded InTouch Telecom SA/NV to offer a wide range
        of
        business and consumer telecom applications to the Belgian Market, and served
        as
        its CEO until the company was successfully sold to GTS in 1999. From 1988
        until
        1992 he served as the first Managing Director of Antillephone NV. Currently
        he
        is still a Director of Unicom NV. Between 1986 and 1988, Mr. van der Velden
        co-headed a team of 16 high level consultants, which advised on and implemented
        a wide range of measures to balance budgets and to restructure the internal
        organizations of the Governments of both the Dutch Antilles and the island
        of
        Curacao. Mr. van der Velden earned his Master’s Degree in Business
        Administration from Rotterdam School of Management, the Netherlands, and
        a
        Master’s Degree in Law from Leiden University, the Netherlands. He splits his
        time between Curacao, Dutch Antilles and Brussels, Belgium.
  **Yves
        R. van Sante, Director:** In
        2002,
        Mr. Van Sante founded QAT Investments S.A., where he currently serves as
        the
        Chief Executive Officer. Concurrently, Mr. Van Sante has held various Management
        and Board functions in companies supported by QAT and is a member of the
        Business Club ‘De Warande’. In 2000, Mr. Van Sante became the Managing Director
        of E-port NV in Ostend, Belgium, a call centre owned by the Port of Ostend,
        with
        the mission to lead the company to profitability. When E-port was sold after
        six
        months to the Dutch call-centre Call-IT, Mr. Van Sante was asked to become
        Advisor to the Management Board of Call-IT. In 1999, Mr. Van Sante became
        Vice-President Business Services with GTS, a Pan European Telecom operator.
        In
        this position, Mr. Van Sante had to consolidate acquisitions and turn a voice
        Telco operator around into an IP operator. In 1994, Mr. Van Sante co-founded
        and
        became partner of InTouch Telecom, a privately owned Belgium Telco company.
        As
        its Managing Director, Mr. Sante was responsible for Business Development,
        Sales
        and Marketing. From 1987 until 1993, Mr. Van Sante served as Sales and Marketing
        Manager for Central Europe at 3C Communications (currently named Tele-2)
        in
        Luxemburg, where he launched Credit Card Telephony across Europe. Prior to
        this
        position, Mr. Van Sante became a Business Unit Manager of Public Telephony
        at
        Belgacom, the Belgian incumbent, where he managed a department of over 650
        employees with a € 40 million business. Mr. Van Sante started his career as an
        Advisor at United Brokers in 1982. Mr. Van Sante studied Marketing,
        Communication and Commercial Management at the High School for Business
        Economics and Commercial Management in Ghent, Belgium in 1980.
 
 **Johan
        De Jager, Director** :
        Mr.
        Dejager is managing director and owner of several companies, including Osta
        Carpets, a specialized niche producer of area rugs with production plants
        in
        Belgium and a distribution center in Barcelona, and Gaverdal, a finishing
        plant
        for the carpet industry. He
        is
        also Managing Director of Ligne Pure, a company specialised in the design
        and
        manufacturing of handmade carpets for the decorator market. Mr.
        Dejager serves
        as a member of the Board of Directors of QAT Investments SA. Mr. Dejager
        brings
        to QAT a profound and varied knowledge of Belgium industry. In addition,
        he is a
        shareholder and director of Keyware, a provider of identity-related solutions
        and services, and of SPARNEX, an engineering company developing and
        industrializing DSL products for the telecom industry. Mr. Dejager is a member
        of the Board of Directors of FEBELTEX (the Federation of the Belgian Textile
        Companies). As Vice-President of the company, Mr. Dejager is in charge of
        the
        subdivision of interior textiles. Mr. Dejager holds a Bachelors degree (1981)
        and a Masters degree in Commercial Engineering from the University of Leuven,
        Belgium (1981) and an MBA from Insead Fontainebleau, France (1982).
 
 **Manu
        Ohri, Executive Vice President, Finance & Chief Financial Officer and
        Director:** Mr.
        Ohri
        currently serves as a Director and Executive Vice President of Finance &
Chief Financial Officer for Elephant Talk Communications, Inc. From December
        1999 to September 2002, Mr. Ohri served as Director and Executive Vice President
        & Chief Financial Officer for The Hartcourt Companies, Inc. From June 1999
        to November 1999, Mr. Ohri served as the President and Chief Executive Officer
        of Pego Systems, Inc., an industrial air and gas equipment manufacturer’s
        representative organization, an affiliate of The Hartcourt Companies, Inc.
        From
        January 1997 to March 1999, Mr. Ohri served as Chief Operating Officer and
        Chief
        Financial Officer of Dynamic Cooking Systems, Inc., a privately-held
        manufacturing company of upscale commercial and kitchen appliances. From
        September 1989 to December 1996, Mr. Ohri served as Chief Financial Officer
        of
        Startel Corporation, a NASDAQ company in software development business. Mr.
        Ohri’s multi-faceted experience includes operations, finance as well as
        administrative functions in the manufacturing, distribution and software
        development industries. Mr. Ohri is a Certified Public Accountant with over
        six
        years experience with Deloitte & Touche, LLP and PriceWaterhouseCoopers,
        LLP. Mr. Ohri earned his Masters degree in Business Administration from
        University of Detroit in 1979 and Bachelors degree in Accounting from University
        of Delhi in India in 1975.
 -
              60
              -
  **Russelle
        Choi, President, Chief Executive Officer and Director** :
        Mr.
        Choi is a co-founder of the Elephant Talk Limited, a wholly owned subsidiary
        of
        ETCI. Mr. Choi is responsible for the overall strategic direction of ETCI,
        and
        is appointed as the President and Chief Executive Officer of the Company.
        Mr.
        Choi has over 20 years experience in management and leadership in a wide
        range
        of industries including media, garment and telecommunication industries in
        Hong
        Kong, China and U.S. In 1981, Mr. Choi established “Happy Days Association”
which earned him fame and connections in the media and entertainment industry
        in
        Hong Kong. Mr. Choi serves as Chairman of WKA Association, a leading association
        for Thai-style boxing for the South East Asia Region. In 1985, Mr. Choi opened
        his own garment factory in Canada with branches in Hong Kong and China, before
        jointly founding Elephant Talk Limited in Hong Kong 1994. Mr. Choi earned
        his
        Bachelor’s degree in Business Administration from the University of Toronto,
        Canada.
 
 **Erik
        E. De Jonghe, Director:** Since
        2001, Mr. Dejonghe has been active as an independent consultant, specialized
        in
        organizational development and technology assessment. Presently, he is a
        Board
        member of the Vlerick School for Management. He is also a visiting professor
        at
        University of Ghent, lecturing on the subject of Social Impact of New
        Communication Technologies. Mr. Dejonghe holds a seat on the Board of UCO
        Textiles NV and Traficon NV. Since April 2003, he is Chairman of the Board
        of
        IPTE, quoted on the Brussels Stock Exchange. Mr. Dejonghe started his career
        as
        a researcher at the University of Ghent and a Project Manager for Siemens
        NV. In
        1982, he joined Barco Electronic NV as a Project and Product Manager and
        member
        of the Management Committee, and was appointed General Manager only one year
        later. After a successful turnaround, Barco Electronic was quoted on the
        Brussels Stock Exchange in 1987 and Mr. Dejonghe became the board member
        of
        Barco Electronic in 1988. Barco Electronic and Barco Industries merged to
        form
        Barco NV in 1989. In the new organization, Mr. Dejonghe was Senior Vice
        President and Chief Operating Officer until May 2001 and remained a member
        of
        the Board until February 2002. Mr. Dejonghe holds an engineering degree in
        Electronic and Computer Sciences from the University of Ghent and a PhD in
        Applied Sciences. Furthermore, he followed the MBA program at The Vlerick
        School
        of Management Ghent, Belgium (1983), the International Senior Management
        Program
        at the Harvard Business School in Cambridge (1990) and the International
        Forum
        Program at Wharton School in Philadelphia (1994).
 
 Directors
        serve for a term of one year or until their successors are elected and
        qualified. Executive officers are appointed by and serve at the will of the
        Board of Directors. There are no family relationships between or among any
        of
        the directors or executive officers of the Company.
 
 **Item
        10. Executive Compensation**
 
 Summary
        Compensation Table*
 
 The
        following table sets forth the total compensation earned by or paid to the
        executive officers greater than $100,000 for the last three fiscal
        years.
 
 ANNUAL
                  COMPENSATION
              LONG
                  TERM COMPENSATIONAwards
              PayoutsYear
              Salary
                  ($)
              Bonus
                  ($)
              Other
                  Annual Compensation ($)
              Restricted
                  Stock Awards ($)
              Securities
                  Underlying Options/SARs (#)
              LTIP
                  Payouts ($)
              All
                  Other Compensation ($)
              Total
                  CompensationRusselle
                  Choi, President and CEO
              2006
              $120,000
              $0
              $15,000
              $332,517
              -0-
              $0
              $0
              $467,1572005
              $127,500
              $0
              $5,000
              $0
              -0-
              $0
              $0
              $132,5002004
              $120,000
              $0
              $20,000
              $0
              -0-
              $0
              $0
              $140,000Steven
                  van der Velden
              2006
              $0
              $0
              $0
              $0
              -0-
              $0
              $0
 
 *
        All
        dollar amounts set forth in the Summary Compensation Table are in
        US$.
 
 No
        options or SARs were granted to any executive officers.
 -
              61
              -
  Employment
        and Related Agreements
 
 On
        August
        21, 2006, the Board of Directors of the Company authorized the Employment
        Agreements (the “Agreements”) with Russelle Choi, President, Pius Lam, Chief
        Operating Officer, and Manu Ohri, Chief Financial Officer (the
”Executives”) .
        The
        Board of Directors also authorized to Messrs Choi, Lam and Ohri, an award
        of
        24,938,759 shares of common stock for their efforts in raising capital for
        the
        Company pursuant to Section 5(g) of that certain Stock Purchase Agreement,
        dated
        June 30, 2005, between the Company and Rising Water Capital AG (the “Stock
        Purchase Agreement”). The Company had agreed to issue said shares to management
        pursuant to the terms of the Stock Purchase Agreement. Accordingly, the Company
        awarded Messrs Choi and Lam 8,312,920 shares of common stock individually,
        and
        Mr. Ohri 8,312,919 shares of common stock in consideration of their exemplary
        services to the Company during their term as Officers in negotiating and
        raising
        capital for the Company in accordance with the Stock Purchase Agreement with
        Rising Water Capital and agreement to stay in their respective management
        positions for a period of at least fifteen (15) months from the date of
        execution of the Stock Purchase Agreement. All of the stock awards were intended
        to be issued pursuant to an exemption from registration provided by Section
        4(2)
        under the Securities Act of 1933, as amended.
 
 On
        August
        21, 2006, the Board of Directors of the Company authorized the Employment
        Agreements (the “Agreements”) with Russelle Choi, President, Pius Lam, Chief
        Operating Officer, and Manu Ohri, Chief Financial Officer (the ”Executives”).
        All three Agreements are identical, containing, among other things, a thirty-six
        month term, provisions for the election of the Executive to the Board of
        Directors at the next Annual Meeting of Shareholders, severance provisions,
        confidentiality provisions, covenants not to compete and indemnity provisions.
        However, the Base Compensation (as hereafter defined) varies for each Executive.
        Mr. Choi is entitled to receive as Base Compensation the sum of $150,000
        for the
        period of August 1, 2006 through July 31, 2007, $172,500 for the period of
        August 1, 2007 through July 31, 2008 and $198,375 for the period of August
        1,
        2008 through July 31, 2009. Mr. Lam is entitled to receive as Base Compensation
        the sum of $144,000 for the period of August 1, 2006 through July 31, 2007,
        $165,600 for the period of August 1, 2007 through July 31, 2008 and $190,440
        for
        the period of August 1, 2008 through July 31, 2009. Mr. Ohri is entitled
        to
        receive as Base Compensation the sum of $140,000 for the period of August
        1,
        2006 through July 31, 2007, $161,000 for the period of August 1, 2007 through
        July 31, 2008 and $185,150 for the period of August 1, 2008 through July
        31,
        2009. Upon termination of the Executive’s employment for any reason, the Company
        shall pay to the Executive any accrued but previously unpaid Base Compensation
        prorated to the effective date of such termination. As an inducement for
        Executives to enter into the Agreement, in the event that the Registrant
        terminates the Executive’s employment for any reason, the Company shall, within
        ten (10) days from the date of termination, pay a lump sum severance payment
        to
        the Executive equal to the sum of his remaining and unpaid Base Compensation
        for
        the full term of the Employment Agreement and his annual target bonuses,
        a
        prorated annual bonus through the date of termination based on target
        performance, and Executive’s medical benefits cost during the full term of the
        Agreement. In addition, upon termination of Executive’s employment by the
        Company, all equity options, restricted equity grants and similar rights
        held by
        the Executive with respect to securities of the Company shall automatically
        become vested and shall become immediately exercisable.
 
 On
        October 30, 2006, Director Pius Lam tendered his resignation effective as
        of
        same date. In addition, Director Manu Ohri tendered his resignation effective
        upon the appointment of an additional director by the remaining directors
        of the
        Registrant in accordance with its By-Laws. Such resignation became effective
        upon the appointment of a replacement Chief Financial Officer by the directors
        of the Registrant on January 1, 2007.
 
 On
        October 30, 2006, Russell Choi, President, resigned from any and all positions
        as an officer of the Company and its subsidiaries. On the same day, Pius
        Lam,
        Chief Operating Officer, resigned from any and all positions as an officer
        of
        the Company and its subsidiaries. Resignations of Messrs Choi and Lam were
        accepted by the Company and became effective immediately. Furthermore, Manu
        Ohri, Chief Financial Officer, resigned from his position effective upon
        the
        appointment of a replacement Chief Financial Officer by the directors of
        the
        Company in accordance with the Company’s By-Law. Mr. Ohri’s resignation became
        effective on January 1, 2007.
 -
              62
              -
  The
        Company entered into a Termination and General Release Agreement with Pius
        Lam
        effective November 1, 2006 whereby the Company a) agreed to ratify issuance
        of
        8,312,919 shares of common stock issued to Mr. Lam as stock grants, and b)
        agreed to severance pay of $76,000 payable in 36 monthly installments of
        $2,125
        per month. In addition, the Company signed a Consulting Agreement with Mr.
        Lam
        for a three year term whereby, the Company agreed to pay a monthly consulting
        fee of $4,250 and made available an option to purchase up to 1,000,000 shares
        of
        common stock at the end of each year of the term of the Consulting Agreement
        subject to certain stipulations.
 
 The
        Company entered into a Termination and General Release Agreement with Russelle
        Choi effective November 1, 2006 whereby the Company a) agreed to ratify issuance
        of 8,312,919 shares of common stock issued to Mr. Choi as stock grants, and
        b)
        agreed to severance pay of $90,000 payable in 36 monthly installments of
        $2,500
        per month. In addition, the Company signed a Consulting Agreement with Mr.
        Choi
        for a three year term whereby, the Company agreed to pay a monthly consulting
        fee of $2,500 and made available an option to purchase up to 1,000,000 shares
        of
        common stock at the end of each year of the term of the Consulting Agreement
        subject to certain stipulations.
 
 There
        are
        no employment agreements with any other executive officers that provide for
        their continuing service. There are no salary, bonus or incentive plans covering
        cash or company at the present time.
 
 On
        January 1, 2003, the Company entered into an employment agreement with Mr.
        Russelle Choi to provide salary, bonuses, and other fringe benefits through
        December 31, 2005. Annual base salary payable to Mr. Russelle Choi under
        the
        agreement was $120,000 per annum in the first year, $132,000 in the second
        year
        and $150,000 in the third year. Payments are to be made in equal monthly
        installments. In the event the Company did not have sufficient cash flow
        to pay
        compensation in cash, Mr. Choi has the option to accept Elephant Talk’s
        restricted common shares for the same amount of compensation. Share price
        is to
        be calculated at 50% of the market trading bid price on the first trading
        day of
        the month for which the compensation is paid. Mr. Choi received a total
        compensation of $127,500 for the year 2005 and elected to receive 2,813,096
        restricted common shares in lieu of compensation of $67,500. During 2005,
        Mr.
        Choi also received 81,944 restricted common shares valued at $5,000 for
        attending Board meetings. Mr. Choi elected to receive $120,000 as compensation
        for the year ended 2004 and was issued 1,078,702 restricted common shares.
        In
        addition, Mr. Choi received 179,783 restricted common shares valued at $20,000
        as Directors fees for attending Board meetings in 2004. The Company issued
        989,009 restricted common shares valued at $120,000 to Mr. Choi towards his
        2003
        compensation and 164,835 restricted common shares valued at $20,000 as Director
        fees for attending Board meetings in 2003. The share price used in calculating
        stock compensation for the months of January 2005 to June 2005 was discounted
        by
        50% of the market trading bid price on the first trading day of the month
        for
        which the compensation was paid. The share price used in calculating stock
        compensation for Mr. Choi for the years 2004 and 2003 was not
        discounted.
 
 Compensation
        of Directors
 
 For
        attending Board meetings, the Board of Directors approved the compensation
        of
        the Company’s directors with $5,000 worth of restricted common shares valued at
        the closing market price of the common shares on first day of each month
        of each
        fiscal quarter, starting January 1, 2003. During the fiscal year ended December
        31, 2006 and 2005, the directors were issued 680,690 shares and 2,111,105
        shares
        of common stock valued at $75,000 and $95,000 for attending the Board meetings
        for the three quarters ending September 30, 2006 and for the year ended December
        31, 2005. The common shares were valued at the market price of the Company’s
        shares on the first day of each month of each fiscal quarter in 2006 and
        2005,
        respectively. The Company terminated the director’s compensation policy to
        attend Board meetings effective October 1, 2006, and, therefore, no additional
        compensation was paid to directors for attending Board meetings.
 
 Code
        of
        Ethics
 
 In
        April
        2006, our Board of Directors adopted a Code of Ethics, which applies to all
        officers, directors and employees. We will provide a copy of the Code of
        Ethics,
        without charge, to any person who sends a written request to Russelle Choi,
        President of the Company, at 438 East Katella Avenue, Suite 217, Orange,
        California 92867. A copy of the Code of Ethics has been filed as exhibit
        14.1 to
        this Annual Report. The Company intends to disclose any waivers or amendments
        to
        the Code of Ethics in a Report on Form 8-K rather than from its
        Website.
 -
              63
              -
  **Item
        11. Security Ownership of Certain Beneficial Owners and
        Management**
 
 The
        following table sets forth information as of December 31, 2006 with respect
        to
        persons known to the Company to be the beneficial owners of more than 5%
        of its
        voting securities and with respect to the beneficial ownership of such
        securities by each director of the Company and by all directors and executive
        officers of the Company as a group.
 
 Title
                  of Class
              
              Name
                  & Address
                of
                  Beneficial Owner
              
              Amount
                  and Natureof
                  Beneficial Ownership(A)
              
              PercentCommon
                  stock
              
              Rising
                  Water Capital, A.G. (B)
                Baarerstrasse
                  12
                Zug,
                  Switzerland 6300
              
              100,000,000
              
              42.0%Common
                  stock
              
              Calfin
                  Trust
                Postfach
                  1518 Lettstrasse 10
                FL-9490
                  Vaduz, Liechtenstein
              
              40,000,000
              
              16.8%Common
                  stock
              
              Steven
                  van der Velden (C)
                President,
                  CEO and Director
                Avenue
                  Louise 109
                Brussels,
                  Belgium 1050
              
              -
              
              0.0%Common
                  stock
              
              Russelle
                  Choi, Director (G) (H)
                8/F,
                  145-159 Yeung Uk Road
                Tsuen
                  Wan, Hong Kong
              
              18,289,953
              
              7.7%Common
                  stock
              
              Lam
                  Kwok Hung, (H)
                8/F,
                  145-159 Yeung Uk Road
                Tsuen
                  Wan, Hong Kong
              
              13,318,803
              
              5.6%Common
                  stock
              
              Manu
                  Ohri
                CFO
                  and Director
                438
                  E. Katella Avenue, Suite 217
                Orange,
                  California 92867
              
              12,024,221
              
              5.0%Common
                  stock
              
              Yves
                  R. van Sante, Director (D)
                Avenue
                  Louise 109
                Brussels,
                  Belgium 1050
              
              --
              
              0.0%Common
                  stock
              
              Eric
                  E. Dejonghe, Director (F)
                Koning
                  Boudewijnlaan 14
                TDe
                  Pinte, Belgium B9840
              
              --
              
              0.0%Common
                  stock
              
              Johan
                  Dejager (E)
                Nijverheidslaan
                  70
                Deerlijk,
                  Belgium 8540
              
              --
              
              0.0%All
                  Officers and Directors as a group
              
              30,314,174
              
              12.7%
  -
            64
            -
  A.
            Except
                as otherwise indicated, each of the parties listed has sole voting
                and
                investment power with respect to all shares of common stock indicated.
                Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
                under
                the Securities Exchange Act of 1934, as
                amended. 
 B.
            Rising
                Water Capital, A.G. (“RWC”) is the record owner of 100,000,000 shares of
                common stock, representing 42.0% of the total outstanding shares
                as of
                December 31, 2006, and could be the beneficial owner of 583,425,437
                shares
                of common stock, representing 71.1% of the total outstanding shares.
                The
                additional 483,425,437 shares could be acquired within 60 days by
                RWC upon
                exercise of conversion of its two Convertible Promissory Notes of
                $3.5
                million and $3.0 million to the extent permissible based upon the
                receipt
                of all of the $3.5 million received on the Convertible Promissory
                Note and
                $2,025,221 received against the $3.0 million Convertible Promissory
                Note.
                In addition, the Company has agreed to issue 23,137,500 shares of
                common
                stock as part compensation for the failed True Precise acquisition
                that
                Rising Water Capital indirectly funded, and an additional issuances
                of
                258,546,313 shares of common stock as compensation to Rising Water
                Capital
                to bring its effective ownership in the Company to be 72.5% upon
                the above
                stated issuances of shares. In the event that RWC converts all of
                its
                convertible promissory notes and receives 23,137,500 shares as aforesaid,
                RWC would beneficially own 597,350,851 shares of common stock representing
                65.0% of the then outstanding shares of common stock. Currently,
                there is
                not sufficient authorized capital to convert the Convertible Promissory
                Note into more shares of common stock. In that regard, the Company
                has
                filed with the Commission a preliminary information statement on
                Schedule
                14C to authorize an increase of its common
                stock. 
 C.
            Steven
                van der Velden is a beneficial owner of approximately 32.15% of the
                issued
                and outstanding shares of QAT Investments SA, which is the majority
                (51.3%) shareholder of RWC. In addition, Mr. Velden owns directly
                approximately 17% of the issued and outstanding shares of RWC. On
                December
                28, 2006, Mr. Velden purchased an additional 25,186,667 shares of
                common
                stock valued at $944,500. The purchase share price of the shares
                was at a
                50% discount of the closing market price. As a result of the above
                transaction, Mr. Velden is the beneficial owner of 220,593,057 shares
                of
                common stock of the Company as of December 31,
                2006. 
 D.
            Yves
                R. van Sante is the beneficial owner of approximately 6.21% of the
                issued
                and outstanding shares of QAT Investments SA, which is the majority
                (51.3%) shareholder of RWC. On December 28, 2006, Mr. Sante purchased
                an
                additional 2,911,111 shares of the common stock valued at $109,167.
                The
                purchase share price of the shares was at a 50% discount of the closing
                market price. As a result of the above transaction, Mr. Sante is
                the
                beneficial owner of 21,497,470 shares of common stock of the Company
                as of
                December 31, 2006. 
 E.
            Johan
                DeJager is the beneficial owner of approximately 7.28% of the issued
                and
                outstanding shares of QAT Investments SA, which is the majority (51.3%)
                shareholder of RWC. On December 28, 2006, Mr. Dejager purchased an
                additional 25,186,667 shares of the common stock valued at $944,500.
                The
                purchase share price of the shares was at a 50% discount of the closing
                market price. As a result of the above transaction, Mr. Dejager is
                the
                beneficial owner of 46,975,507 shares of common stock of the Company
                as of
                December 31, 2006. 
 F.
            Erik
                DeJonghe is the beneficial owner of approximately 0.43% of the issued
                and
                outstanding shares of QAT Investments SA, which is the majority (51.3%)
                shareholder of RWC. Mr. Dejager is the beneficial owner of 1,286,978
                shares of common stock of the Company as of December 31,
                2006. 
 G.
            Russelle
                Choi is a beneficial owner of 2,286,080 shares of common stock held
                by
                Wellgear Far East Limited, and 235,116 shares of common stock held
                by
                Wiselink Technologies Limited, which shares are included in the ownership
                figure reported. 
 H.
            Lam
                Kwok Hung is a beneficial owner of 805,739 shares of common stock
                held by
                Wiseley International Limited, which shares are included in the ownership
                figure reported. Lam Kwok Hung is married to Russelle Choi’s
                sister. 
 Stock
        Option Plan
 
 On
        July
        21, 2006, the Company adopted a 2006 Non-Qualified Stock and Option Compensation
        Plan and filed a Registration Statement on Form S-8 with the Commission to
        register shares awarded under the Plan on the same date. The Compensation
        Committee of the Board of Directors issues common stock and awards options
        to
        employees, directors, officers, consultants, advisors and other persons
        associated with our Company. The 2006 Plan is intended to provide a method
        whereby our company would be stimulated by the personal involvement of our
        employees, directors, officers, consultants, advisors and other persons in
        our
        business and reward such involvement, thereby advancing the interests of
        our
        Company and all of its shareholders. A total of 15,000,000 shares of common
        stock for stock awards and 10,000,000 shares of common stock underlying option
        grants were authorized under the 2006 Plan. None of the shares have been
        issued
        to date.
 -
              65
              -
  Employee
        Benefit Plan
 
 The
        Company adopted an employee benefit plan called “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 shares 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 Administrator under the direction of the Board of Directors
        administers the Plan.
 
 A
        total
        of four million (4,000,000) common shares and four million (4,000,000) 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 suck 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.
 
 On
        January 17, 2001, the Company granted and issued 1,700,000 common shares
        at a
        price of $0.005 per share for a total consideration of $8,500. On November
        16,
        2004, the Company granted and issued 2,000,000 common shares to certain officers
        and directors at a price of $0.059 per share for a total consideration of
        $118,000. Under the Plan 300,000 shares of common stock and 4,000,000 stock
        options remain available for grant at December 31, 2005.
 
 Warrants
 
 The
        Company did not have any warrants outstanding at December 31, 2006.
 
 Stock
        Split and Stock Issuances
 
 As
        a
        condition precedent to the acquisition of Elephant Talk Limited and plan
        of
        reorganization that completed on January 4, 2002, the Company authorized
        a
        reverse stock split of its common shares pursuant to which for every ten
        (10)
        shares of the issued and outstanding common shares one (1) common share was
        exchanged. On January 22, 2002 the Company completed and effected a one (1)
        for
        ten (10) reverse stock split of its outstanding common stock. This reduced
        the
        number of shares outstanding from 34,626,899 shares to 3,464,000 shares after
        having 1,311 partial shares redeemed.
 
 As
        part
        of the acquisition and plan of reorganization, the Company issued 31,164,210
        common shares to the former shareholders of Elephant Talk Limited. In addition,
        pursuant to a letter of understanding, on January 2, 2002, the Company sold
        the
        business operations of Vision Aerospace, Inc., owned principally by a former
        officer of the Company for 1,000,000 shares of the common stock of Vision
        Aerospace, Inc. The Company has valued the investment in Vision Aerospace,
        Inc.
        at $10,835 being the net value of assets and liabilities in exchange for
        1,000,000 shares of Vision Aerospace, Inc.
 
 **Item
        12: Certain Relationships and Related Transactions**
 
 Steven
        van der Velden is a beneficial owner of approximately 32.15% of the issued
        and
        outstanding shares of QAT Investments SA, which is the majority (51.3%)
        shareholder of RWC. In addition, Mr. Velden owns directly approximately 17%
        of
        the issued and outstanding shares of RWC. On December 28, 2006, Mr. Velden
        purchased an additional 25,186,667 shares of common stock valued at $944,500.
        The purchase share price of the shares was at a 50% discount of the closing
        market price. As a result of the above transaction, Mr. Velden is the beneficial
        owner of 220,593,057 shares of common stock of the Company as of December
        31,
        2006.
 -
              66
              -
  Yves
        R.
        van Sante is the beneficial owner of approximately 6.21% of the issued and
        outstanding shares of QAT Investments SA, which is the majority (51.3%)
        shareholder of RWC. On December 28, 2006, Mr. Sante purchased an additional
        2,911,111 shares of the common stock valued at $109,167. The purchase share
        price of the shares was at a 50% discount of the closing market price. As
        a
        result of the above transaction, Mr. Sante is the beneficial owner of 21,497,470
        shares of common stock of the Company as of December 31, 2006.
 
 Johan
        DeJager is the beneficial owner of approximately 7.28% of the issued and
        outstanding shares of QAT Investments SA, which is the majority (51.3%)
        shareholder of RWC. On December 28, 2006, Mr. Dejager purchased an additional
        25,186,667 shares of the common stock valued at $944,500. The purchase share
        price of the shares was at a 50% discount of the closing market price. As
        a
        result of the above transaction, Mr. Dejager is the beneficial owner of
        46,975,507 shares of common stock of the Company as of December 31,
        2006.
 
 Erik
        DeJonghe is the beneficial owner of approximately 0.43% of the issued and
        outstanding shares of QAT Investments SA, which is the majority (51.3%)
        shareholder of RWC. Mr. Dejager is the beneficial owner of 1,286,978 shares
        of
        common stock of the Company as of December 31, 2006.
 
 Russelle
        Choi is a beneficial owner of 2,286,080 shares of common stock held by Wellgear
        Far East Limited, and 235,116 shares of common stock held by Wiselink
        Technologies Limited, which shares are included in the ownership figure
        reported. The Company paid $85,385 and $58,500 in business consulting and
        management advisory fees to Wellgear Far East Limited, an entity owned and
        controlled by Mr. Choi for the years ended December 31, 2006 and 2005,
        respectively.
 
 **PART
        IV**
 
 **Item
        13. Exhibits and Reports on Form 8-K**
 
 The
        following list describes the exhibits filed as part of this Annual Report
        Form
        10-KSB and reports on Form 8-K within the last fiscal quarter.
 
 Exhibit
                  No.
              Description
                  of Document31.1
              Certification
                  of Chief Executive Officer Pursuant to the Securities Exchange
                  Act of
                  1934, Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 200231.2
              Certification
                  of Chief Financial Officer Pursuant to the Securities Exchange
                  Act of
                  1934, Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 200232.1
              Certification
                  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002
 
 Reports
        on Form 8-K :
 
 ·
            Entry
                into Material Definitive Agreement and Unregistered Sales of Equity
                Securities - Equity Transfer Agreement - Beijing Chinawind
                Telecommunication Information Technology Limited - Filed on January
                13,
                2006 - Film No. 06530780 ·
            Changes
                in Control - Rising Water Capital - Filed on March 1, 2006 - Film
                No.
                06655719 ·
            Changes
                in Certifying Accountant - Filed on May 17, 2006 - Film No.
                06848958 ·
            Financial
                Statements and Exhibits - Beijing Chinawind Telecommunication Information
                Technology Limited - Filed on May 22, 2006 - Film No.
                06859521 ·
            Unregistered
                Sale of Securities - Convertible promissory Note to RWC - Filed on
                June 5,
                2006 Film No. 06886407 ·
            Entry
                into Material Definitive Agreements and Unregistered Sale of Equity
                Securities - Filed on September 5, 2006 - Film No.
                061072937 ·
            Entry
                into a Material Definitive Agreement and Unregistered Sales of Equity
                Securities - Benoit Telecom Holding AG - Filed on December 1, 2006
                - Film
                No. 061252074.  -
            67
            -
  **Item
        14.**  **Principal Accountant Fees and Services**
 
 During
        the past two fiscal years, our principal accountants have billed for their
        services as follows.
 
 Audit
        Fees for the year ended December 31, 2006:
 
 ·
            The
                aggregate fees billed by our auditors, Kabani & Company, Inc. for
                professional services rendered for the audit of our annual financial
                statements for the year ended December 31, 2006 were $60,000. The
                aggregate fees billed by our former auditors, Jimmy Cheung & Company
                for professional services rendered for the reviews of the financial
                statements included in our Quarterly Reports on Form 10-QSB during
                that
                fiscal year 2006 were $83,310. 
 Audit
        Fees for the year ended December 31, 2005:
 
 ·
            We
                incurred no audit fees to Kabani & Company during for the year ended
                December 31, 2005. The aggregate fees billed by our former auditors,
                Jimmy
                Cheung & Company, for professional services rendered for the audit of
                our annual financial statements for the year ended December 31, 2005
                were
                $45,454. The aggregate fees billed by our former auditor Webb &
                Company, PA, for the reviews of the financial statements included
                in our
                Quarterly Reports on Form 10-QSB during that fiscal year 2005 were
                $16,769. 
 Audit
        Related Fees for the year ended December 31, 2006 and 2005 - None.
 
 Tax
        Fees
        for the years ended December 31, 2006 and 2005 - None
 
 All
        Other
        Fees for the years ended December 31, 2006 were $79,420 and for the year
        ended
        December 31, 2005 were $0.
 
 (i)
        The
        Audit Committee requires that prior to the engagement of the Company’s principal
        accountant to audit the financial statements of the Company or to perform
        other
        Audit Related or Non-Audit Related services, the engagement be reviewed to
        consider the scope of services to be rendered and the expected fees to be
        charged by the principal accountant in connection with rendering such
        services.
 
  -
            68
            -
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
        the
        registrant has duly caused this registration statement to be signed on its
        behalf by the undersigned, thereunto duly authorized.
 
 
 **ELEPHANT
        TALK COMMUNICATIONS, INC.**
 
 Date:
                  April 14, 2007
              By:
                  /s/ Steven van der VeldenSteven
                  van der VeldenChairman
                  of the Board, President & Chief Executive Officer(Principal
                  Executive Officer)Date:
                  April 14, 2007
              By:
                  /s/ Willem AckermansWillem
                  AckermansChief
                  Financial Officer(Principal
                  Financial Officer and Principal Accounting
                  Officer)
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
 
 
 Signature
              
              Title
              
              Date/s/
                  Steven van der Velden
              
              President,
                  Chief Executive Officer and Director
              
              April
                  14, 2007Steven
                  van der Velden/s/
                  Russelle Choi
              
              Director
              
              April
                  14, 2007Russelle
                  Choi/s/
                  Willem Ackermans
              
              Chief
                  Financial Officer & Director
              
              April
                  14, 2007Willem
                  Ackermans/s/
                  Yves van Sante
              
              Director
              
              April
                  14, 2007Yves
                  van Sante/s/
                  Erik DeJonghe
              
              Director
              
              April
                  14, 2007Erik
                  DeJonghe/s/
                  Johan DeJager
              
              Director
              
              April
                  14, 2007Johan
                  DeJager/s/
                  Martin Zuurbier
              
              Chief
                  Technology Officer & Director
              
              April
                  14, 2007Martin
                  Zuurbier
 -
              69
              -