UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended December 31, 2008





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934







For the
transition period from ____________________ to ____________________





Commission
file number 000-30061





Elephant
Talk Communications, Inc.


(Exact
name of registrant as specified in its charter)





California
            
            95-4557538(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





Schiphol
      Boulevard 249
              1118
      BH Schiphol
              The
      Netherlands
            
            N/A(Address
      of principal executive offices)
            
            (Zip
      Code)





Issuer’s
telephone number:  31
0 20 653 5916





Securities
registered pursuant to Section 12(b) of the Act:  None





Securities
registered pursuant to Section 12(g) of the Act:





Common
Stock, no par value


(Title of
class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  o





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  o








Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.  x







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









Large
      accelerated filer o
            
            Accelerated
      filer oNon-accelerated
      filer o
            
            Smaller
      reporting company x(Do
      not check if a smaller reporting company)





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




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2008 was approximately $19,247,001 based on the
closing sale price of the company’s common stock on such date of U.S. $1.53
 per share, as reported by the OTC BB.




State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: As of March 31, 2009 there were 53,758,445
shares of common stock outstanding.









Elephant Talk Communications Inc.


Form
10-K


For
the fiscal year ended December 31, 2008








TABLE
OF CONTENTS




Note
      on Forward-Looking StatementsPART IItem 1.
              
              Description
      of Business.
              
              2Item
      2.
              
              Description
      of Property.
              
              18Item
      3.
              
              Legal
      Proceedings.
              
              19Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders.
              
              20PART IIItem
      5.
              
              Market
      for Common Equity and Related Stockholder Matters.
              
              20Item
      6.
              
              Selected
      Financial Data.
              
              22Item
      7.
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
              
              22Item
      8.
              
              Financial
      Statements.
              
              31Item 9.
              
              Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.
              
              61Item 9A(T).
              
              Controls
      and Procedures.
              
              62PART IIIItem
      10.
              
              Directors,
      Executive Officers and Corporate Governance.
              
              63Item
      11.
              
              Executive
      Compensation.
              
              68Item
      12.
              
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
              
              71Item
      13.
              
              Certain
      Relationships and Related Transactions, and Director
      Independence.
              
              73Item
      14.
              
              Principal
      Accountant Fees and Services.
              
              76PART IVItem
      15.
              
              Exhibits,
      Financial Statement Schedules.
              
              77









NOTE
ON FORWARD LOOKING STATEMENTS





This
Report, including the documents incorporated by reference in this Report,
includes forward-looking statements.  We have based these
forward-looking statements on our current expectations and projections about
future events.  Our actual results may differ materially from those
discussed herein, or implied by, these forward-looking
statements.  Forward-looking statements are generally identified by
words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,”
“project” and other similar expressions. In addition, any statements that refer
to expectations or other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements included in this Report
or our other filings with the SEC include, but are not necessarily limited to,
those relating to:







·
            risks
      and uncertainties associated with the integration of the assets and
      operations we have acquired and may acquire in the
  future;




·
            our
      possible inability to raise or generate additional funds that will be
      necessary to continue and expand our
operations;




·
            our
      potential lack of revenue growth;




·
            our
      potential inability to add new products and services that will be
      necessary to generate increased
sales;




·
            our
      potential lack of cash flows;




·
            our
      potential loss of key personnel;




·
            the
      availability of qualified
personnel;




·
            international,
      national regional and local economic political
  changes;




·
            general
      economic and market conditions;




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




·
            the
      possibility of telecommunications rate changes and technological
      changes;




·
            the
      potential for increased competition;
and




·
            other
      unanticipated factors.







The
foregoing does not represent an exhaustive list of risks. Please see “Risk
Factors” for additional risks which could adversely impact our business and
financial performance. Moreover, new risks emerge from time to time and it is
not possible for our management to predict all risks, nor can we assess the
impact of all risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ from those contained in
any forward-looking statements. All forward-looking statements included in this
Report are based on information available to us on the date of this Report.
Except to the extent required by applicable laws or rules, we undertake no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained throughout this Report.




1




PART
I





Item
1.  Description Of Business.





Overview





Our
business plan is to position ourselves as an international telecom and
multimedia content distributor specialized in carrier grade mobile enabling
platforms.  We facilitate the distribution of all forms of content to
the multimedia industry, as well as offer international mobile and fixed telecom
services to its global telecommunications customers. We provide traditional
telecom services, media streaming, and distribution services primarily to the
business-to-business (B2B) community within the telecommunications market where
we have a presence.  Our global footprint as a fully licensed carrier,
supported by our propriety Intelligent Network and Billing/Client Relationship
Management Systems, has been designed to offer cutting-edge solutions to the
increasingly competitive global multimedia industry.  The seamless
utilization of our infrastructure through our customized software offers our
clients a superior solution due to the ease of compatibility and simplicity in
the use of our product.




Our
telecommunications platform eliminates the usual limitations caused by national
borders, networks, devices or media and, therefore enables our B2B customers to
operate as independent telecom and multimedia distribution organizations. In
line with this positioning, we are a growing proprietary provider of carrier
grade enabling platforms for mobile telecom and content distribution solutions
and, as a Mobile Virtual Network Enabler (“MVNE”), we have positioned ourselves
as the premier outsourcing partner for both certain Mobile Network Operators
(“MNO’s”) as well as for certain Mobile Virtual Network Operators. MVNO’s are
sales and marketing organizations that repackage, market and sell mobile
services provided through the antenna network and spectrum of a MNO. Without any
need for upfront capital expenditures or telecommunication knowledge and related
development cost, we can help MVNO’s to a quick and cost effective market-entry,
thereby enabling our clients to fully focus on distribution, marketing and
sales. At the same time, we assist our MNO partners to more efficiently provide
a broad range of services to their own existing base of MVNO
clients




We view
ourselves as a specialized enabler, offering various parts of the back office
network including messaging platforms, data platforms and billing
solutions.  As a result, we believe we are positioning ourselves as
the MVNE partner of choice of these larger, global Mobile Network
Operators.  We also currently operate MVNE platforms in the
Netherlands and Spain on top of our own sophisticated networks in over a dozen
markets in Europe and the Middle East. We expect to expand the presence of its
MVNE platforms to at least two more countries during 2009.




This
set-up is supported by a switch-based telecom network with full national
licenses and direct fixed line interconnections with the Incumbents/National
Telecom Operators in seven (7) European countries and one (1) in the Middle
Eastern (Bahrain), complimented with partnerships with telecom operators in
France, Germany, Scandinavia, and Poland.




Proprietary
Technology Infrastructure and Software




To
maintain flexibility and to allow growth, we have chosen to develop our own
proprietary software and systems including: 1) a fully integrated rating,
mediation, provisioning, Customer Relationship Management and Billing system for
multi-country and multimedia use and applications; 2) an advanced Intelligent
Network Platform; and 3) a sophisticated streaming technology. Our development
management activities are located in Gerona, Spain, while the actual development
and testing is carried out by our own software engineering staff in Guangzhou
(China). In addition, our global 24/7 Network Operating Center is located in
Guangzhou.




2




Our
in-house proprietary Customer Relationship Management/Billing software system is
the backbone of our operations. It ensures proper support for all of our
services and the reliability of data provided by these systems is the ultimate
basis for long enduring high levels of our business customer satisfaction. We
believe our network and system platforms are able to handle the extremely high
demands of both national incumbents and other fixed line operators as well as
all the mobile telecom operators accessed through our globally interconnected
network.   We believe we are able to add value to our clients
through our ability to create a seamless utilization of our infrastructure
through our customized software which offers our clients simplicity and
compatibility in a cost-effective manner.




Our
network is based on fixed-line telecommunications licenses, mobile access
agreements and network interconnections. Our geographical cross-border presence,
established through existing relationships with national telecom incumbents and
mobile network operators, is, in our opinion, especially well-positioned for
international traffic because we have established our own facilities-based
infrastructure on four continents. Currently, as a fully licensed carrier, we
are interconnected with incumbents in the Netherlands (KPN), Spain (Telefonica),
Austria (Telekom Austria), Belgium (Belgacom), Switzerland (Swisscom), Italy
(Telecom Italia), the United Kingdom (BT) and Bahrain (Batelco). Through our
partners, we have added access to interconnections in France, Germany, Poland,
Finland, Sweden, and Norway.




Our
facilities for the distribution of third party content such as movies, ring
tones and sports is centrally managed and integrated through a network of
content management platforms strategically located in data centers around the
world.  Currently, we maintain such presence in data centers in
Amsterdam, Hannover, Barcelona, Bahrain and Curacao.




Products
and Markets




As mobile
and wireless access play an increasingly vital role in communication success, we
continue to expand our mobile access coverage for clients on top of our fixed
line access. In June 2007, we signed a MVNE agreement with T-Mobile/Orange in
the Netherlands. Subsequently our first Mobile Virtual Network Operator started
in September 2008 in The Netherlands, followed by the second MVNO at the end of
the first quarter of 2009. We have entered into contracts with an additional
three MVNO’s, in which we expect to begin service in the second quarter of 2009.
In September of 2008, Vodafone Spain granted us an MVNE contract to better
service Spanish MVNO’s. We expect to start to deliver commercial services to the
first Vodafone MVNO in May 2009. Based upon current growth ratios, we expect to
service over a dozen MVNO’s in the Spanish and Dutch markets by the end of 2009.
Furthermore we are in advanced stages of negotiation to contract, install and
operate full MVNE platforms in at least 3 more countries in Europe within the
next 12 months.




Traditional
Fixed Line Services




Even
though we offer a wide range of traditional telecom services like Carrier Select
and Carrier Pre-Select Services, and Toll Free and Premium Rate Services, which
have historically generated the bulk of our revenue, the future of our company
lies in combining these long lasting capabilities, mostly based upon fixed line
access services, with mobile access services in combination with sophisticated
proprietary service delivery platforms. Thereby we can fully profit from our
decade-long experience as an outsourcing partner in the field of
telecommunications services managed by our propriety Intelligent
Network/Customer Relationship Management/Billing platform. This platform has
always been designed to put our customers, who purposely chose to outsource
their telecommunication requirements to a specialized company like us, in
control: our customers can work with our technology and our delivery platforms
as if these are their own. We empower and likewise facilitate our
customers  to harness, to manage and to fully apply the power of some
of the most powerful mobile/fixed line delivery systems in the world through a
web-based self care user friendly interface, without the need to initiate,
install, fund, operate and support those global systems on a 24/7
basis.




3




Mobile
Services- Mobile Virtual Network Enabler (MVNE) and Mobile Virtual Network
Operator(MVNO)




We are
positioning ourselves as a complete MVNE with our own integrated platforms,
switches and network capabilities for back-office and customer interaction
solutions. The back-office services range from provisioning and administration
to Operation Service Support (“OSS”) and Business Service Support (“BSS”)
running on our global IN/CRM/Billing platform. Our IN/CRM/Billing platform is
designed to provide an all in one solution for both the traditional MNO’s: the
operators of vast Antenna Networks and managers of wireless spectrum granted
through mostly very expensive licenses by national governments, as well as for
the MVNO’s.  MVNO’s are generally fast-moving sales and marketing
companies reselling refocused, re-priced, re-bundled and repackaged mobile
telecom services. We partner with MNO’s to bypass their legacy systems to
profitably accommodate these wholesale MVNO customers with service levels and
applications that satisfy the instant service flexibility and pricing capability
that MVNO’s require to specifically address their  niche markets. At
the same time, we can offer additional market share to MNO’s by marketing and
contracting our own range of MVNO’s that look for the very specific capabilities
that our mobile service delivery platforms may offer. Bundled together with
attractively priced wholesale airtime packages, provided by our MNO partners,
our MVNO’s are positioned to run their operations effortlessly without the
technical and financial burden associated with the development, maintenance and
ownership of their own mobile network, while at the same time being able to
fully focus on sales, marketing and distribution and being able to apply all
elements required to be successful in these mainly fast moving consumer
markets.




These
in-depth MVNE platform services are now fully operational in The Netherlands as
of the end of the third quarter of 2008 and will also become commercially
operational in Spain during the second quarter of 2009.




For
companies that aspire to enter the mobile telephone market, the MVNO business
model is attractive because it eliminates the expenses associated with
establishing and managing a mobile network of their own.  The initial
capital expenditures required to enter the field are very low as are the
corresponding operational costs. Traditionally MNO and MVNO propositions
required substantial capital and operational expenditures and attention to
multiple technical components. Our business model offers a solution for MVNOs
which allows them to concentrate on sales and marketing, and allows MNOs to
cater to often smaller, niche market MVNOs without the cumbersome burden of
their legacy systems and other resources, which are not designed to efficiently
service such wholesale customers.




Next to
more traditional voice and SMS services, we are focusing our MVNE platform on
wireless data services, content, applications and E-commerce. The traditional
voice services of MVNO’s are likely to be marginalized over time and will follow
a similar price erosion pattern as fixed telecom services. Therefore, it is
unlikely MVNO’s will be able to effectively compete over time without
value-added services. Moreover, the emerging market of 3G/3.5/4G mobile
services, including WIFI, WIMAX and LTE, create great opportunities to attract
new subscribers with new and improved business models.  Mobile devices
are an effective medium to communicate commercial messages to subscribers,
especially if supported by proper customer profiling tools in combination with
our IN/CRM/Billing platform. Mobile messages can be personalized per subscriber
becoming contextual relevant and thereby migrate from being perceived as
intruding advertising to meaningful information, segmented within the client
base or just to be used as a mass communication means. A mobile device is one of
the most personal communication tools to connect with and stimulate customers,
thus an MVNO channel might offer excellent opportunities to a variety of
companies with a non-telecommunication core business, like fast moving consumer
goods companies looking to expand and broaden their markets, while at the same
time creating focused marketing communication channels with their existing
customer bases, providing these contextual services that, we believe, will be
perceived as adding value to communications. We are well positioned to provide
such market entrants with a one stop, full service and instantly available
platform to effectively cater to these markets, and thereby support any
application that might help our customers to quickly offer a truly
differentiating service into the marketplace. We believe that many new business
models, especially within Security, Logistics, Heath Care and Banking, will
become viable through its networked environment, thereby helping such businesses
to enter such models without having to go through yearlong learning cycles to
understand, master and manage all the relevant technologies. We are positioning
ourselves as the enabling partner for all these new entrants whereby we will
cover all these elements on their behalf, coach and guide them and lastly
deliver all the tools these future business partners may require from time to
time to drive these new business models successfully.




4




Through
an integrated platform built around our network we offer our customers a turnkey
solution for both pre-paid and post-paid mobile services as well as more
traditional fixed line telecommunication services like toll free, shared cost
and premium rate services, supported by content & payment provisioning
systems.




Our
global network enables our customers to distribute all their information in a
fully managed environment that we believe is more secure than the Internet.
Together with a fully integrated back office system, we are opening up these
networked platforms to our B2B customers, providing them with an efficient and
effective tool designed to substantially improve their productivity.
Additionally, through a customer friendly, web-based interface, our customers
may run these networked delivery platforms as if they were their own. This
feature will allow our B2B customers to see mobile, fixed, Internet, WiFi, WiMax
and local, regional or multi-country, as just one integrated network, with all
of the advantages of one single network interface, centralized customer
recognition and financial controls.




With the
support of our back office system combined with the fully integrated Intelligent
Network, Billing and Customer Relationship Management systems, we believe our
B2B customers have all the necessary tools to create their own virtual telecom
business environment; thereby enabling our customers to recognize and serve
their own clients, employees, partners or affiliates through any device, at any
place and at any time. Our vision is that access to our global network will
revolve around our central data and information base which will allow our
customers to provide their clients with worldwide access authorization to our
services through a familiar interface and/or workplace, preferred format and
language.




As a
consequence of the above, we are positioning ourselves as the preferred telecom
outsourcing partner to all of our B2B customers. These long term business
partners include a wide variety of marketing organizations and content providers
who fundamentally require telecommunications services to drive their own revenue
and growth as a necessary element of their overall product, market and
distribution offering. Thereby we empower our partners as if they are a fully
networked telecommunications company themselves, by providing them with all the
tools and resources necessary to manage their businesses, particularly the
telecommunications segment, as an integrated component of their overall
offering. Additionally, and for many reasons both strategic and financial in
nature, we see an increasing interest by other telecom companies to partner with
us to easily expand their geographical footprint or services offered, without
first having to commit to substantial telecom and IT related capital and
operational  expenditures.




Business
and Growth Strategy for 2009 and Beyond




Elephant
Talk is actively seeking additional MNO partners that understand the symbioses
between a mobile network operator and an applications-focused enabler that
brings all the right services in the right format through a secure delivery
platform within reach of all business customers that may require such services
as part of their overall market and product strategy. We believe that over the
next couple of years MNO’s will proactively seek partners like our company, as
it will be the preferred way to successfully expand from retail focused markets
to wholesale markets, thereby more effectively using their core antenna networks
and spectrum capabilities. Especially in markets where direct retail customer
penetration reaches 80% plus levels, it has been shown that MVNO’s can bring
market penetration and network usage levels to new heights. However, only if
these MVNO’s will be capable of bringing significantly differentiated service
bundles into the market place, reflecting the specific requirements of
individualized communities, they may be less vulnerable to what has been
undermining the MNO’s basic business models: churn. Most important to an
operator’s success is to understand that a uniquely serviced community far
outweighs the pricing alone of any basic underlying service.




5




New
Adjacent Markets; security, fraud prevention, location based services,
and  personal care




The
growing importance of converging services is an area where we see excellent
possibilities to combine our decade long in-depth experience in providing fixed
line service with our sophisticated mobile delivery platform to support both our
MNO as well as our MVNO customers to bring newly bundled services into the
marketplace, delivered through one device, capable of using fixed line, IP,
mobile, and wireless connectivity for any voice, data and multi-media
application, provisioned and managed through one single customer account and
through one integrated bill, and supporting any possible relevant payment
mechanism.




We see
opportunities in customized mobile service, combining the individual profile of
a mobile customer and his or her exact location, with the “always-on” secured
connectivity of a mobile network, supported by our powerful mobile delivery
platforms. We believe these elements will create completely new business models
for MNOs and MVNOs alike, bringing personalized, contextual and time-wise
relevant services to billions of customers worldwide. One can easily think of
new applications in the areas of security, protection and logistics of people,
goods and services, remotely monitoring and escalating medical care,
individualized and contextual marketing communications for broad ranges of goods
and services, and supporting secure financial transactions.




Most of
these new business models, driven by customized mobile services, will be created
and operated by independent third party application providers that may be
directly or indirectly connected to mobile service delivery platforms like our
MVNE platform. In areas we see attractive opportunities to create, operate and
market such services ourselves, we may actively invest in such developments or
may acquire other companies that already have developed such applications. A
good example of such a service is the fraud prevention application that the
company, ValidSoft (www.validsoft.com) has developed to greatly reduce bank
transaction fraud by correlating the location of someone’s bankcard with the
location of his or her mobile phone: there may be an indication of potential
transaction fraud if both locations do not match. Such red flags, the result of
combining ValidSoft’s interface with global banking systems and Elephant Talk’s
interface with global mobile systems, management believes will trigger
ValidSoft’s escalation and resolution applications.  Our management
believes this will assist banks and financial institutions not only in
preventing losses due to fraud, but also in reducing the operational and
handling cost associated with such fraudulent transactions while at the same
time increasing service levels to their customers. Because of the global market
potential of such services if properly integrated, our management and that of
ValidSoft are negotiating a 2-stage acquisition of ValidSoft by us. Similar
acquisition may follow in the future.




Growth
in Partnerships




As a
result of the convergence of information technology and telecommunication
solutions, our involvement with various partners has increased.  On
the supply side we work closely together with dozens of other carriers and
content providers to either originate or terminate our traffic around the globe.
On the customer side resellers have evolved from indirect channels to true
partners bringing specialized market knowledge, customer focus and a
geographical reach to its activities.




As a key
element of our low-cost and fast deployment strategy, we make use of partners in
all layers of our distribution platform. Our partners typically come from the
following disciplines:




Fixed
Network Interconnect Partners




As a
fully licensed telecommunications carrier, we are entitled to be interconnected
with a variety of incumbent operators and cable companies as well as more
recently established telecom providers in over a dozen countries that provide
both network origination and termination, mostly at regulated
costs.




Mobile Network
Partners.




As a
provider of full Mobile Virtual Network Enabling platforms, we partner with
Mobile Network Operators to strongly support them in better addressing the
specific needs of Mobile Virtual Network Operators, the sales, marketing and
distribution organizations that (re)package, (re)bundle and (re)position mobile
telecommunications as part of their overall service offering. Likewise, we help
our partner MNOs to improve the usage of their networks by also directly
contracting additional MVNOs for which we attractively bundle our systems
capabilities with the partner MNO’s airtime.




6




Network
Exchange Partners




Our
Network Exchange Partners secure mutual network access and interconnection on a
country by country and voluntary basis.  Through this cooperation, we
are able to leverage our own network of regulated interconnections by exchanging
these interconnections with network access in countries where we are not
present. Thus, Network Exchange Partners allow us to enlarge our network without
any of the often prohibitively high capital expenditures.




Content & Customized Mobile
Services Partners




These
partners can have a dual purpose whereby they are both a supplier as well as a
marketing client. Essentially Content and Customized Mobile Services Partners
provide a broad array of content and services available for distribution through
our mobile and fixed line networks which are then promoted and sold by a variety
of our marketing partners.  However, at the same time we may also
generate revenue from such Content and Customized Mobile Services Partners by
providing them with all of the tools required to exploit and promote their
content and services through our delivery platforms.




Roaming
& LCR Wholesale Origination/Termination Partners




Our
network is connected to over a dozen Wholesale Partners that work together on a
commercial basis to provide each other with “Least Cost Routing” and roaming
capabilities to globally originate and terminate fixed and mobile calls at the
best possible cost/quality levels.




Management
& Personnel




During
2008 we further strengthened our organization in order to prepare ourselves for
our current operational and revenue growth strategy, especially in the area of
mobile services, by hiring engineers and software developers to expand our VoIP,
Intelligent Network Platform, and Billing-CRM capabilities. We furthermore
contracted, also through the acquisition of Moba, high level project managers
that are capable of covering the whole process of customer acquisition,
customized design, implementation and provisioning of the mobile platform
capabilities required by our MNO and MVNO customers.




On
December 15, 2008 our board of directors appointed Mark Nije as the Chief
Financial Officer after Willem Ackermans resigned from the board of directors
and from his position as CFO.




In
addition to our corporate management staff, as of December 31, 2008 we employed
47 full time and 2 part time employees. We have retained, on a long term basis,
the services of 21independent contractors. We consider relations with our
employees and contractors to be good. Each of our current employees and
contractors has entered into confidentiality and non-competition agreements with
us.




At the
same time we are pursuing the aforementioned opportunities, Management is
attempting to improve the internal structure of the organization in order to
realize a fully integrated organization. This will have to be achieved not only
on a corporate level but also in the financial, technical and operational
departments of the Company in order to implement new services, connectivity in
new countries, and additional capacity.




Competition




We
experience fierce competition in each of the market segments in which we
operate.




Traditional
Telecom Services




In all
segments where we offer traditional telecom services like carrier (pre)
select/dial around/2-stage dialing services, premium rate and toll free
services, we encounter heavy competition. Our stiffest competition comes from
each of the incumbent telecom operators such as BT, France Telecom, KPN,
Telefonica, Telecom Italia and Telekom Austria. The strongest price competition
usually comes from smaller, locally established and/or regional players,
although also newer Pan-European carriers like Colt Telecom position themselves
more and more as very aggressively priced competition




7




Mobile
Services




We face
competition from other MVNE’s, as well as from the traditional
MNO’s.




An
average MNO may have a few dozen technology suppliers; each may deliver a part
of the overall network, switching, control and administrative systems that
together create a mobile carrier that may service millions and millions of
retail customers. Likewise, many companies are aiming to become a vendor/partner
of a MNO in order to assist the MNO to better service their wholesale business
towards MVNO’s. Some companies try to achieve this by selling various core
components as a more traditional vendor: stand alone switching systems, billing
systems, CRM systems, Intelligent Network systems, etc. Examples of our
competition in this market are companies like Highdeal, Comverse, Geneva, Amdocs
and Artilium. In such cases the MNO often contracts with a system integrator
like Cap Gemini or Atos Origin to help them to integrate all these components
into effectively working systems. Recently, more and more of these system
integrators not only position themselves anymore as onetime integrators, but
they are also looking to assume the role as an on-going service providers,
keeping (part of) the system up and running on behalf of the MNO; examples are
Cap Gemini, Atos Origin, EDS, Accenture, and IBM. Likewise, various vendors
themselves assumed such roles of managing and operating the systems they
supplied. As such, we also face competition from traditional telecom
infrastructure companies like Nokia-Siemens, Ericsson and Alcatel.




As a
consequence of these purchasing and outsourcing policies, many MNO’s have over
the years assembled large teams, sometimes as large as a dozen or more
vendors/integrators/service providers, whereby each of them delivers a crucial
part of the overall required capabilities. Not only have such larger teams,
usually involving hundreds of full time consultants, been requiring very intense
vendor management attention from the MNO to coordinate them, the result was
often a very complex operational structure and work environment for both the MNO
as well as the MVNO to work with. Instead of bringing superior, flexible
services at affordable cost levels that were supposed to better position the MNO
to easily go after MVNO business, the MNO is often struck with a whole range of
hard to manage, inflexible and expensive (and sometimes even incompatible)
platforms, that actually undermine the capability of the MNO to successfully and
profitably compete for MVNO business. Existing MVNO’s threaten to migrate to
another network provider, while new prospect are lost to other MNO’s that do
provide more flexible and affordable service.




Being
positioned for many years as an outsourcing partner for other businesses that
require telecoms as a part of their overall service offering, we believe we can
assist MNO’s to simplify and streamline these outsourced system requirements.
One of the key elements in our offering in fixed telecommunications has always
been that all network, switching, control and administrative elements would
function within one system, and that our B2B customer would be able to
self-manage such system through an easy to use web based interface. In designing
its MVNE platform, our company has kept the same philosophy in place. As a
result, a MNO would only require one managed service provider to fully offer any
possible service requirement any type of MVNO may have. We therefore believe
that we not only eliminate an intense and costly vendor management role, but at
the same time offer flexible, superior service levels at a much lower
operational cost.




Other
companies that have positioned themselves as a MVNE platform provider, aiming to
assume the same role of a one stop solution provider to MNO’s, and as such are
direct competitors of us, include Aspider, primarily active in the Netherlands,
Vistream/Materna, primarily active in Germany, Effortel, primarily active in
Belgium and Italy,  Transatel, primarily active in France, Telcordia,
primarily active in North America, Virtel, primarily active in Australia and the
combination Artilium/Atos Origin, active throughout Europe. However, none of
them cover the same depth and width of platform capabilities as Elephant Talk
provides. On top of that, on the supplier/vendor side we believe we compete
favorably with all the earlier mentioned telecom system vendors and integrators.
Even though we believe our company has a very good offering at a competitive
pricing level, many of our competitors may develop a comparable, fully
integrated MVNE platform in the near future. As many of these competitors are
much larger companies than ours, with much higher profiles, it may very well be
that these competitors will successfully sell their higher priced, less capable
solutions  than comparable Elephant Talk systems.




8




Although
we believe we will continue to create excellent opportunities for MNOs to
increase the addressable market they can service profitably, many MNOs may still
prefer to compete directly with us, not only for the business of larger MVNOs,
but also in servicing the many smaller MVNOs. This situation may become more
likely if new technologies make it easier for the MNOs to service both larger
and smaller non-retail customers directly on a lower cost basis. Also, other
MVNEs may create strong competition, especially if such new MVNEs will be
created by competing MNOs as a consequence of our success in profitably
cooperating with other MNOs that already have a successful MVNE relationship
with us.




Legal
Structure of our Company




The
following chart illustrates our structure as of December 31, 2008.




flowchart logo




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




9




In 2007
we grew substantially primarily as a result of the acquisition, effective
January 1, 2007, of Elephant Talk Communication Holding AG (formerly known as
“Benoit Telecom Holding AG”) by Elephant Talk Europe Holding B.V. In addition we
acquired 3U Telecom Srl (renamed to Elephant Talk Communications France S.A.S.)
and incorporated Elephant Talk Global Holding B.V (The Netherlands)., Elephant
Talk Business Services W.L.L. (Bahrain) and Elephant Talk Communications
Luxembourg S.A. (Luxembourg




On
February 4, 2008 Elephant Talk Guangzhou IT LTD, was incorporated in the Peoples
Republic of China, as a 100% subsidiary of Elephant Talk Global Holding BV. The
purpose of this company is to provide software development and network
maintaining services for us.
  On March
20, 2008 Elephant Talk Caribbean BV was incorporated in the Netherlands as a
100% subsidiary of Elephant Talk Global Holding B.V. The purpose of this
subsidiary is to act as the joint venture partner with United Telecom Services
NV (UTS N.V.) in an entity to be formed in Curacao, Netherlands Antilles. ET-UTS
NV was incorporated in Curacao, the Netherland Antilles, on April 9, 2008 as a
51% subsidiary of Elephant Talk Caribbean B.V. with the remaining 49% owned
by our joint venture partner UTS N.V. The purpose of ET-UTS NV is to design,
install, maintain and exploit WIFI and WIMAX networks in the Caribbean area
and Surinam.
  On
August 14, 2008 we changed the name of Cardnet Clearing Services BV, a
wholly-owned subsidiary of Elephant Talk Europe Holding BV, to Elephant Talk
Mobile Services BV. This company’s primary objective is to act as our vehicle to
contract Mobile Virtual Network Operators in the Netherlands.
  On
September 1, 2008 Elephant Talk Europe Holding BV acquired 100% of Moba
Consulting Partners BV to obtain expertise and manpower for certain aspects of
the implementation of the Mobile Virtual Network Operators on our
platform.
  In 2008
the following entities were dissolved/de-registered as they were not active and
we did not foresee any future purpose for them: ET Stream Limited, Full Mark
Technology Limited and Jinfuyi Technology Limited. These entities were all full
subsidiaries of Elephant Talk Limited.
  10


Reverse
Stock Split





On
December 28, 2007, our board of directors approved a 1-for-25 reverse stock
split (the “Reverse Split”) of our outstanding common stock, no par value per
share (the “Common Stock”). The Reverse Split was duly approved by a majority of
our stockholders on January 15, 2008.   Pursuant to the Reverse Split,
every twenty-five (25) shares of our issued and outstanding Common Stock as then
classified were, as of the open of business on June 11, 2008, reclassified and
combined into one (1) whole post-split share of our Common Stock. No fractional
shares of our Common Stock will be issued in connection with the Reverse Split.
Any fractional shares were rounded up. There was not a corresponding reduction
in our authorized Common Stock. The Reverse Split was effected at the open of
business on June 11, 2008 (the “Record Date”), and the post-split shares began
trading on the OTC Bulletin Board at the opening of business on the Effective
Date.  Upon effecting the Reverse Split, we satisfied our obligations
to issue approximately 31,124,255 shares of Common Stock.





Presentation
of Stock quantities in the current Annual Report





As a
result of the Reverse Stock split all numbers in this Annual Report relating to
shares are denominated and (where relevant) recalculated into post-split
quantities.




11





RISK
FACTORS





Risks
Related to Our Company





Our
substantial and continuing losses, coupled with significant ongoing operating
expenses, raise doubt about our ability to continue as a going
concern.





We have
incurred net losses of $16,015,359 and $12,057,732 for the years ended
December 31, 2008 and 2007, respectively. As of December 31, 2008, we had an
accumulated deficit of $44,695,109 which has resulted in our need to raise
capital from certain related parties totaling $35.3 million through December 31,
2008.





Such
losses will continue during 2009 due to ongoing operating expenses and a lack of
revenues sufficient to offset operating expenses plus the need to fund the
future development to satisfy our potential customers’ needs. We have raised
capital to fund ongoing operations by private sales of our securities, some of
which sales have been highly dilutive and involve considerable expense, and will
continue to do so - provided market conditions allow us.




In our
present circumstances, there is substantial doubt about our ability to continue
as a going concern absent significant sales of our products and
telecommunication services, substantial revenues from new licensing or
co-development contracts, or the sale of our securities.




Recent
economic events and, in particular, the “credit crisis” may have an adverse
effect in the markets in which we operate.





Much of
our business is consumer driven, and to the extent there is a decline in
consumer spending, we could experience a reduction in the demand for our
services and a decrease in our revenues, net income and an increase in bad debts
arising from non-payment of our trade receivables. Although we have seen a
slow-down in our existing revenues, it is too early to predict what effect the
current “credit crisis” may have on us and we will need to carefully monitor our
operating costs as the effects of the current economic issues become
known.





We expect
to continue to spend significant amounts to acquire businesses and to expand our
current technology. As a result, we will need to raise additional capital until
we generate significant additional revenue to achieve
profitability.  Such capital may not be available on favorable terms,
if at all.





We
currently derive virtually all of our revenue from the premium rate services
business activity.





If
significant changes occur in market conditions pertaining to this type of
service it could have an adverse impact on our business, results of operations
and financial condition.





We
have recently shifted our business strategy, and we may not prove successful in
our new focus.





In 2006,
we began to expand our focus from the market of fixed line telecommunication
services to mobile telecommunication and system integration services. We have
limited experience in these areas, therefore we may not be able to enter and
compete in these markets, or achieve profitability.





We
did not maintain effective financial reporting processes due to lack of
personnel and technological resources.





We have a
small number of employees dealing with general administrative and financial
matters as well as with matters relating to the reporting requirements of the
Securities Exchange Act of 1934. This constitutes a weakness in our internal
controls over financial reporting.




12





At
present, our ability to rectify the weaknesses relating to our internal controls
over financial reporting is limited due to budgetary constraints. If we cannot
rectify these material weaknesses through remedial measures and improvements to
our systems and procedures, management may encounter difficulties in timely
assessing business performance and identifying incipient strategic and oversight
issues. Management is reviewing possible improvements to internal controls, and
compensating controls, and this focus will require management from time to time
to devote its attention away from other planning, oversight and performance
functions.





These
efforts may not result in an improvement to our internal controls over financial
reporting. We cannot be certain that any measures we take will ensure that we
implement and maintain adequate internal controls in the future. Any failure to
implement required new or improved controls, or difficulties encountered in
their implementation, could harm our operating results or cause us to fail to
meet our reporting obligations.





We
may not be able to integrate new technologies and provide new services in a
cost-efficient manner.




The
telecommunications industry is subject to rapid and significant changes in
technology, frequent new service introductions and evolving industry standards.
We cannot predict the effect of these changes on our competitive position, our
profitability or the industry generally. Technological developments may reduce
the competitiveness of our systems & networks and require additional capital
expenditures or the procurement of additional products that could be expensive
and time consuming. In addition, new products and services arising out of
technological developments may reduce the attractiveness of our services. If we
fail to adapt successfully to technological advances or fail to obtain access to
new technologies, we could lose customers and be limited in our ability to
attract new customers and/or sell new services to our existing customers. In
addition, delivery of new services in a cost-efficient manner depends upon many
factors, and we may not generate anticipated revenue from such
services.





Disruptions
in our networks and infrastructure may cause us to lose customers and incur
additional expenses.




To be
successful, we will need to continue to provide our customers with reliable and
timely service over our networks. We face the following risks to our networks
and infrastructure:




·
              our
      territory can have significant weather events which physically damage
      access lines;


·
              power
      surges and outages, computer viruses or hacking, and software or hardware
      defects which are beyond our control; and


·
              unusual
      spikes in demand or capacity limitations in our or our suppliers’
      networks.




Disruptions
may cause interruptions in service or reduced capacity for customers, either of
which could cause us to lose customers and/or incur expenses, and thereby
adversely affect our business, revenue and cash flow.





Integration
of acquisitions ultimately may not provide the benefits originally anticipated
by management and may distract the attention of our personnel from the operation
of our business.





We strive
to broaden our solutions offerings as well as to increase the volume of voice
and data traffic that we carry over our existing global network in order to
reduce transmission costs and other operating costs as a percentage of net
revenue, improve margins, improve service quality and enhance our ability to
introduce new products and services. We may pursue acquisitions in the future to
further our strategic objectives. Acquisitions of businesses and customer lists
involve operational risks, including the possibility that an acquisition does
not ultimately provide the benefits originally anticipated by management.
Moreover, we may not be successful in identifying attractive acquisition
candidates, completing and financing additional acquisitions on favorable terms,
or integrating the acquired business or assets into our own. There may be
difficulty in integrating technologies and solutions, migrating the customer
bases and in integrating the service offerings, distribution channels and
networks gained through acquisitions with our own. Successful integration of
operations and technologies requires the dedication of management and other
personnel, which may distract their attention from the day-to-day business, the
development or acquisition of new technologies, and the pursuit of other
business acquisition opportunities.  Therefore, successful integration
may not occur in light of these factors.




13




Uncertainties and
risks associated with international markets could adversely impact our
international operations.





We have
significant international operations in Europe, the Middle East and the Far
East. In international markets, we are smaller than the principal or incumbent
telecommunications carrier that operates in each of the foreign jurisdictions
where we operate. In these markets, incumbent carriers are likely to control
access to, and the pricing of, the local networks, enjoy better brand
recognition and brand and customer loyalty, generally offer a wider range of
product and services, and have significant operational economies of scale,
including a larger backbone network and more correspondent agreements. Moreover,
the incumbent carrier may take many months to allow competitors, including us,
to interconnect to our switches within our territory, and we are dependent upon
their cooperation in migrating customers onto our network. We may not be able to
obtain the permits and operating licenses required for us to operate, obtain
access to local transmission facilities on economically acceptable terms or
market services in international markets. In addition, operating in
international markets generally involves additional risks, including unexpected
changes in regulatory requirements, taxes, tariffs, customs, duties and other
trade barriers, difficulties in staffing and managing foreign operations,
problems in collecting accounts receivable, political risks, fluctuations in
currency exchange rates, restrictions associated with the repatriation of funds,
technology export and import restrictions, and seasonal reductions in business
activity. Our ability to operate and grow our international operations
successfully could be adversely impacted by these risks.





Because a significant portion of our
business is conducted outside the United States, fluctuations in foreign
currency exchange rates could affect our reported results.





Currently
all of our net revenue is derived from sales and operations outside the United
States. The reporting currency for our consolidated financial statements is the
United States dollar (USD). The local currency of each country is the functional
currency for each of our respective entities operating in that country.
Considering the fact that most income and expenses are not subject to relevant
exchange rate differences, it is only at a reporting level that the translation
needs to be made to the reporting unit of USD. In the future, we expect to
continue to derive a significant portion of our net revenue and incur a
significant portion of our operating costs outside the United States, and
changes in exchange rates have had and may have a significant, and potentially
distorting effect (either negative or positive) on the reported results of
operations, not necessarily being the result of operations in real terms. Our
primary risk of loss regarding foreign currency exchange rate risk is caused by
fluctuations in the following exchange rates: USD/EUR, USD/CHF, USD/HKD, USD/CNY
and USD/BHD.





We
historically have not engaged in hedging transactions but continue to assess on
a regular basis the need to do so. However, the operations of affiliates and
subsidiaries in foreign countries have been funded with investments and other
advances denominated in foreign currencies. Historically, such investments and
advances have been long-term in nature, and we accounted for any adjustments
resulting from currency translation as a charge or credit to accumulated other
comprehensive loss within the stockholders’ deficit section of our consolidated
balance sheets.





We
are substantially smaller than our major competitors, whose marketing and
pricing decisions, and relative size advantage, could adversely affect our
ability to attract and retain customers that could adversely affect our net
revenues, results of operations and financial condition.




The long
distance telecommunications, Internet, broadband, DSL, data and wireless
industry is significantly influenced by the marketing and pricing decisions of
the larger long distance, Internet access, broadband, DSL and wireless business
participants. Prices in the long distance industry have continued to decline in
recent years, and as competition continues to increase within each of our
service segments and each of our product lines, we believe that prices are
likely to continue to decrease. Customers frequently change long distance,
wireless and broadband providers, and ISPs in response to the offering of lower
rates or promotional incentives, increasingly as a result of bundling of various
services by competitors. Moreover, competitors’ VOIP and broadband product
rollouts have added further customer choice and pricing pressure. As a result,
generally, customers can switch carriers and service offerings at any time. Many
of our competitors are significantly larger than us and have substantially
greater financial, technical and marketing resources, larger networks, a broader
portfolio of service offerings, greater control over network and transmission
lines, stronger name recognition and customer loyalty, long-standing
relationships with our target customers, and lower debt leverage ratios. As a
result, our ability to attract and retain customers may be adversely affected.
Many of our competitors enjoy economies of scale that result in low cost
structures for transmission and related costs that could cause significant
pricing pressures within the industry. We compete on the basis of price,
particularly with respect to our sales to other carriers, and also on the basis
of customer service and our ability to provide a variety of telecommunications
products and services. If such price pressures and bundling strategies
intensify, we may not be able to compete successfully in the future, may face
quarterly revenue and operating results variability, and may have heightened
difficulty in estimating future revenues or results.




14





Our
positioning in the marketplace as a smaller provider places a significant strain
on our resources, and if not managed effectively, could result in operational
inefficiencies and other difficulties.





Our
positioning in the marketplace may place a significant strain on our management,
operational and financial resources, and increase demand on our systems and
controls. To manage this position effectively, we must continue to implement and
improve our operational and financial systems and controls, invest in
development & engineering, critical systems and network infrastructure to
maintain or improve our service quality levels, purchase and utilize other
system and solutions, and train and manage our employee base. As we proceed with
our development operational difficulties could arise from additional demand
placed on customer provisioning and support, billing and management information
systems, product delivery and fulfillment, sales and marketing and
administrative resources. For instance, we may encounter delays or cost-overruns
or suffer other adverse consequences in implementing new systems when required.
In addition, our operating and financial control systems and infrastructure
could be inadequate to ensure timely and accurate financial
reporting.





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. Foreign taxing authorities may not agree with our interpretations
or reach different 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.




We
must attract and retain skilled personnel. If we are unable to hire and retain
technical, sales and marketing and operational employees, our business could be
harmed.





Our
ability to manage our growth will be particularly dependent on our ability to
develop and retain an effective sales force and qualified technical and
managerial personnel. We intend to hire additional employees, including software
engineers, sales and marketing employees and operational employees. The
competition for qualified sales, technical, and managerial personnel in the
communications industry is intense, and we may not be able to hire and retain
sufficient qualified personnel. In addition, we may not be able to maintain the
quality of our operations, control our costs, maintain compliance with all
applicable regulations, and expand our internal management, technical,
information and accounting systems in order to support our desired growth, which
could have an adverse impact on our operations.




If
we are not able to use and protect our intellectual property domestically and
internationally, it could have a material adverse effect on our
business.





Our
ability to compete depends, in part, on our ability to use
intellectual property internationally. We rely on a combination of trade
secrets, trademarks and licenses to protect our intellectual property. We
are also subject to the risks of claims and litigation
alleging infringement of the intellectual property rights of others.
 The telecommunications industry is subject to
frequent litigation regarding patent and other intellectual
property rights. We rely upon certain technology, including hardware
and software, licensed from third parties. The technology licensed by us may not
continue to provide competitive features and functionality. Licenses
for technology currently used by us or other technology that we may seek to
license in the future may not be available to us on commercially reasonable
terms or at all.





15





Risks
Related to Our Industry





If
competitive pressures continue or intensify and/or the success of our new
products is not adequate in amount or timing to offset the decline in results
from our legacy businesses, we may not be able to service our debt or other
obligations.





There are
substantial risks and uncertainties in our future operating results,
particularly as aggressive pricing and bundling strategies by certain incumbent
carriers and incumbent local exchange carriers have intensified competitive
pressures in the markets where we operate, and/or if we have insufficient
financial resources to market our services. The aggregate anticipated margin
contribution from our new products may not be adequate in amount or timing to
offset the declines in margin from our traditional fixed line telecommunication
services.




We
experience intense domestic and international competition which may adversely
affect our results of operations and financial condition.





The local
and long distance telecommunications, data, broadband, Internet, VOIP and
wireless industries are intensely competitive with relatively limited barriers
to entry in the more deregulated countries in which we operate and with numerous
entities competing for the same customers. Recent and pending deregulation in
various countries may encourage new entrants to compete, including ISPs,
wireless companies and cable television companies, who would offer voice,
broadband, Internet access and television, and electric power utilities who
would offer voice and broadband Internet access. Moreover, the rapid enhancement
of VOIP technology may result in increasing levels of traditional domestic and
international voice long distance traffic being transmitted over the Internet,
as opposed to traditional telecommunication networks. Currently, there are
significant capital investment savings and cost savings associated with carrying
voice traffic employing VOIP technology, as compared to carrying calls over
traditional networks. Thus, there exists the possibility that the price of
traditional long distance voice services will decrease in order to be
competitive with VOIP. Additionally, competition is expected to be intense to
switch customers to VOIP product offerings, as is evidenced by numerous recent
market announcements in the United States and internationally from industry
leaders and competitive carriers concerning significant VOIP initiatives. Our
ability to effectively retain our existing customer base and generate new
customers, either through our traditional network or our own VOIP offerings, may
be adversely affected by accelerated competition arising as a result of VOIP
initiatives, as well as regulatory developments that may impede our ability to
compete, such as restrictions on access to broadband networks owned and operated
by others. As competition intensifies as a result of deregulatory, market or
technological developments, our results of operations and financial condition
could be adversely affected.




The
telecommunications industry is rapidly changing, and if we are not able to
adjust our strategy and resources effectively in the future to meet changing
market conditions, we may not be able to compete effectively.





The
telecommunications industry is changing rapidly due to deregulation,
privatization, consolidation, technological improvements, availability of
alternative services such as wireless, broadband, DSL, Internet, VOIP, and
wireless DSL through use of the fixed wireless spectrum, and the globalization
of the world’s economies. In addition, alternative services to traditional fixed
wire line services, such as wireless, broadband, Internet and VOIP services, are
a substantial competitive threat. If we do not adjust our contemplated plan of
development to meet changing market conditions and if we do not have adequate
resources, we may not be able to compete effectively. The telecommunications
industry is marked by the introduction of new product and service offerings and
technological improvements. Achieving successful financial results will depend
on our ability to anticipate, assess and adapt to rapid technological changes,
and offer, on a timely and cost-effective basis, services including the bundling
of multiple services that meet evolving industry standards. If we do not
anticipate, assess or adapt to such technological changes at a competitive
price, maintain competitive services or obtain new technologies on a timely
basis or on satisfactory terms, our financial results may be materially and
adversely affected.





If
we are not able to operate a cost-effective network and system solutions, we may
not be able to grow our business successfully.




16





Our
long-term success depends on our ability to develop, design, implement, operate,
manage and maintain reliable systems and cost-effective networks. In addition,
we rely on third parties to enable us to expand and manage our global systems
and networks and to provide local, broadband Internet and wireless
services.





We
are subject to potential adverse effects of regulation which may have a material
adverse impact on our growth and financial performance.





Our
operations are subject to constantly changing regulation. Future regulatory
changes may have a material adverse effect on us, and regulators or third
parties may raise material issues with regard to our compliance or noncompliance
with applicable regulations, any of which could have a material adverse effect
upon us. As a multinational telecommunications company, we are subject to
varying degrees of regulation in each of the jurisdictions in which we provide
our services. Local laws and regulations, and the interpretation of such laws
and regulations, differ significantly among the jurisdictions in which we
operate. Enforcement and interpretations of these laws and regulations can be
unpredictable and are often subject to the informal views of government
officials. Potential future regulatory, judicial, legislative, and government
policy changes in jurisdictions where we operate could have a material adverse
effect on us. Domestic or international regulators or third parties may raise
material issues with regard to our compliance or noncompliance with applicable
regulations, and therefore may have a material adverse impact on our growth and
financial performance.





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.




Risks
Related to Our Securities




Because
our executive officers, directors and their affiliates own a large percentage of
our voting stock, other shareholders’ voting power may be limited.




As of
December 31, 2008, Steven van der Velden, Martin Zuurbier, Johan Dejager, Yves
van Sante, Mark Nije, Bruce Barren and Roderick de Greef, our executive officers
and directors, beneficially owned or controlled approximately 76% of our shares.
 In particular, as of March 31, 2009, Rising Water Capital AG, an entity
affiliated with the certain of the aforementioned individuals, beneficially
owned 28,188,087 shares of our common stock.  If those shareholders act
together, they will have the ability to control matters submitted to our
shareholders for approval, including the election and removal of directors and
the approval of any merger, consolidation or sale of all or substantially all of
our assets. As a result, our other shareholders may have little or no influence
over matters submitted for shareholder approval. In addition, the ownership of
suchshareholders
could preclude any unsolicited acquisition of us, and consequently, materially
adversely affect the price of our common stock. These shareholders may make
decisions that are adverse to your interests.




We
have no dividend history and have no intention to pay dividends in the
foreseeable future.





We have
never paid dividends on or in connection with our common stock and do not intend
to pay any dividends to common stockholders for the foreseeable
future.





Our
common stock is considered a penny stock. Penny stocks are subject to special
regulations, which may make them more difficult to trade on the open
market.




17





Securities
in the OTC market are generally more difficult to trade than those on the NASDAQ
Capital Market or other stock exchanges. In addition, accurate price quotations
are also more difficult to obtain. The trading market for our common stock is
subject to special regulations governing the sale of penny stock.





A “penny
stock” is defined by regulations of the Securities and Exchange Commission as an
equity security with a market price of less than $5.00 per share. The market
price of our common stock has been less than $5.00 for several
years.





If you
buy or sell a penny stock, these regulations require that you receive, prior to
the transaction, a disclosure explaining the penny stock market and associated
risks. Furthermore, trading in our common stock would be subject to Rule 15g-9
of the Exchange Act, which relates to non-NASDAQ and non-exchange listed
securities. Under this rule, broker-dealers who recommend our securities to
persons other than established customers and accredited investors must make a
special written suitability determination for the purchaser and receive the
purchaser's written agreement to a transaction prior to sale. Securities are
exempt from this rule if their market price is at least $5.00 per
share.





Penny
stock regulations will tend to reduce market liquidity of our common stock,
because they limit the broker-dealers' ability to trade, and a purchaser's
ability to sell the stock in the secondary market. The low price of our common
stock will have a negative effect on the amount and percentage of transaction
costs paid by individual shareholders. The low price of our common stock may
also limit our ability to raise additional capital by issuing additional shares.
There are several reasons for these effects. First, the internal policies of
many institutional investors prohibit the purchase of low-priced stocks. Second,
many brokerage houses do not permit low-priced stocks to be used as collateral
for margin accounts or to be purchased on margin. Third, some brokerage house
policies and practices tend to discourage individual brokers from dealing in
low-priced stocks. Finally, broker's commissions on low-priced stocks usually
represent a higher percentage of the stock price than commissions on higher
priced stocks. As a result, our shareholders will pay transaction costs that are
a higher percentage of their total share value than if our share price were
substantially higher.





Item
2.  Description of Property





Our
principal executive office is located at Schiphol Boulevard 249, 1118 BH
Schiphol, The Netherlands. The office is comprised of two offices with monthly
rental of $3,805 and $3,324 with leases that expire on September 2011 and April
2013, respectively.  Since September 2008 we also lease office space
at Wattstraat 52, 1171 TR, Sassenheim The Netherlands. We lease this office
space for a monthly rental of $1,814 on a year-to-year basis. Elephant Talk
Communications S.L.U. is currently leasing two office spaces at Paratge Bujonis,
despacho 1 and 20, 17220 Sant Feliu de Guixols, (Girona) Spain, on a
quarter-to-quarter lease at a monthly rent of $2,484. Elephant Talk Limited is
currently leasing an office space at Room 2116, 21/F, Metro Centre II, 21 Lam
Hing Street, Kowloon, Hong Kong, which lease expires on Aug 15, 2009 at a
monthly rent of $3,090. In Guangzhou, China, we lease office space for a monthly
rental of $4,213.





We are
currently leasing space for its telecom switches, servers and IT platforms at
data centers (“co-locations”) at a monthly rent of $29,626. We lease various
co-location spaces in Guangzhou, Amsterdam, Madrid, Barcelona, Milan, Zurich,
London, Paris, Vienna, Frankfurt and other locations where our
telecommunications equipment are located.





We
believe that the facilities currently under lease are adequate for our present
activities, and that additional facilities are available on competitive market
terms to provide for such future expansion of our operations as may be
warranted.




18





Item
3.   Legal Proceedings





(a)
Beijing Chinawind





On
September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
organized and existing under the laws of the People’s Republic of China
(“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), filed two
lawsuits against Guangdong Elephant Talk Network Consulting Limited, a company
organized and existing under the laws of the People’s Republic of China and an
agent of ours (“ETGD”), in the Beijing Civil Courts. The lawsuit alleged that a)
ETGD failed to pay the remaining consideration of $787,748 under an Equity
Transfer Agreement, dated January 4, 2006 (the “CW Agreement”), between ETGD and
Beijing Zhongrun, which provided for the acquisition by ETGD from Beijing
Zhongrun of 60% of the registered capital of Beijing Chinawind; and b) ETGD
induced the minority shareholders of Beijing Chinawind to accept, pursuant to
the CW Agreement, consideration of $1,000,000 through the issuance of our
400,000 common shares valued at $2.50 per common share. The lawsuit further
alleged that Chinese law prohibits citizens of the People’s Republic of China
from accepting shares of companies listed on the United States Over-The-Counter
Bulletin Board Quotation Service, which is regulated by the National Association
of Securities Dealers, Inc., as compensation in an acquisition
transaction





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





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





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





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





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





(c) Russelle Choi
Litigation





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





(d)
Manu Ohri Litigation




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




19





Item
4.  Submission Of Matters To A Vote Of Security
Holders




None




PART
II




Item 5.  Market For The Registrant’s Common Equity,
Related Stockholder Matters, And Purchases Of Equity
Securities




Our
common stock is listed for quotation on the OTC BB under the symbol
“ETAK”.  The following chart sets forth the high and low per share bid
prices as quoted on the OTC Bulletin Board for each quarter from
January 1, 2007 through March 31, 2009, as adjusted for the 1-for-25
reverse stock split which took effect on June 12, 2008. These quotations reflect
prices between dealers do not include retail mark-ups, mark-downs or commissions
and may not reasonably represent actual transactions.





Common
      StockQuarter
      Ended
              
              High
              
              
              LowMarch
      31, 2009
              
              $
              0.70
              
              
              $
              0.51December
      31, 2008
              
              $
              0.90
              
              
              $
              0.50September
      30, 2008
              
              $
              1.75
              
              
              $
              0.90June
      30, 2008
              
              $
              2.00
              
              
              $
              1.42March
      31, 2008
              
              $
              1.75
              
              
              $
              1.25December
      31, 2007
              
              $
              2.38
              
              
              $
              1.50September
      30, 2007
              
              $
              2.25
              
              
              $
              1.12June
      30, 2007
              
              $
              2.55
              
              
              $
              1.75March
      31, 2007
              
              $
              2.75
              
              
              $
              2.12





At March
31, 2009, we had approximately 3,264 record holders of our common
stock.





Securities Authorized for Issuance
under Equity Compensation Plans








Plan
      category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options and rights
            
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            
            Number of securities
              remaining available
              for future issuance(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            732,018
            
            
            $
            1.43
            
            
            
            4,827,982Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            $
            —
            
            
            
            —Total
            
            
            732,018
            
            
            $
            1.43
            
            
            
            4,827,982





20





Recent Sales of Unregistered
Securities





Pursuant
to a Consulting Agreement dated June 20, 2008, as amended July 9, 2008, we
issued 325,000 shares of our common stock pursuant to our 2008 Long-Term
Incentive Plan to a consultant in exchange for services to be rendered. The
shares of common stock were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933.




In August
of 2008, we consummated a final closing (the “Closing”) of our private placement
offering (the “Offering”), an offering that started in May 2008, of Units
comprised of shares of common stock (the “Shares”) and warrants to purchase
shares of common stock (the “Warrants”, together with the Shares, the
“Securities”) to accredited European investors (“Investors”). The Securities
were offered and sold pursuant to an exemption from registration under Section
4(2) of the Securities Act of 1933, as amended (the “Securities
Act”).




In the
second quarter of 2008 we sold an aggregate of 3,148,929 Shares at a exercise
price of $1.05 per Share and delivered Warrants to purchase an aggregate of
3,148,926 shares of our common stock at a exercise price of $1.26 per share and
Warrants to purchase an aggregate of 1,574,462 shares of our common stock at a
exercise price of $1.47 per share.




In the
third quarter of this year we sold an aggregate of 3,898,177 Shares at a
exercise price of $1.05 per Share and delivered Warrants to purchase an
aggregate of 3,898,653 Shares of our common stock at a exercise price of $ 1.26
per share and Warrants to purchase an aggregate of 1,949,327 shares of our
common stock at a exercise price of $1.47 per share.




We sold
in total 7,047,106 Shares at an exercise price of $1.05 and delivered
Warrants to purchase an aggregate of 7,047,579 shares of our common stock at
an exercise price of $1.26 per share and Warrants to purchase an aggregate
of 3,523,789 shares of our common stock at an exercise price of $1.47 per
share.




In
2008 we realized gross proceeds of $7,400,127 and net proceeds of
$6,372,132 after the payment of placement fees which totaled
$1,027,995.





On
September 30, 2008, we issued 30,000 shares of our common stock to Redchip
Companies, Inc. in consideration for consulting services related to investor
relations.





On June 9, 2008, we and Rising Water
Capital AG (“RWC”) entered into a settlement agreement, effective May 13, 2008
(the “Settlement Agreement”), whereby RWC agreed to convert the Note held by it
in the amount of $3,500,000 and accumulated interest of $889,881 into our common
stock. As a result, total number of shares post reverse stock split issued as a
result of the conversion was 5,017,007, based on a post reverse stock split
conversion price of $0.875.





On May 26, 2006, we executed a second
Convertible Promissory Note (the “2nd Note”)
in the principal sum of $3,000,000 with RWC.  On June 9, 2008, we and
RWC entered into the Settlement Agreement whereby RWC agreed to convert the
2nd
note principal amount of $3,000,000 and interest of $549,289 into our common
stock. RWC also agreed to fund the remaining balance under the $3,000,000 note.
In order to induce RWC to convert the promissory note, we agreed to reduce the
conversion price of the $3,000,000 note to the price at which we offer our
common stock in a subsequent financing with a minimum of $1,000,000 in gross
proceeds. The conversion price was adjusted to reflect the reverse stock split.
As a result, the total number of shares (pre Reverse Split 1:25) amounted to
84,506,891.  The number of post Reverse Stock Split shares issued as a
result of the conversion was 3,380,276 (post reverse stock split price of
$1.05).





21


Pursuant
to the terms of the Settlement Agreement, upon conversion of the 2nd Note,
we agreed to make an incentive payment to RWC, commensurate with any fees paid
in connection with a financing, pro rata, based upon the aggregate amount raised
in such financing, whether equity or debt, of at least $1.0 million (the
“Incentive Payment”).




On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment.  As a result of our private placement of securities
in excess of $1.0 million, RWC is additionally entitled, as an Incentive
Payment, approximately $451,915 in cash and was issued warrants to purchase
338,029 shares of our common stock at $1.05 per share, warrants to purchase
338,029 shares of our common stock at $1.26 per share and warrants to purchase
169,015 shares of our common stock at $1.47 per share.  In lieu of the
cash payment to RWC was entitled, on January 2, 2009, RWC accepted 742,000
shares of our common stock, based on a conversion price of $0.60 per
share.




In the
fourth quarter of 2008, pursuant to four restricted stock agreements, we issued
an aggregate of 2,420,833 to our non-executive directors in consideration for
services rendered in connection with their positions on our board of
directors.





The
aforementioned securities were issued in reliance upon the exemptions from
registration provided by Section 4(2) of promulgated under the Securities
Act.





Dividends





We have
not declared any cash dividends since inception and do not anticipate paying any
dividends in the foreseeable future. The payment of dividends is within the
discretion of our Board of Directors and will depend on our earnings, capital
requirements, financial condition, and other relevant factors. There are no
restrictions that currently limit our ability to pay dividend on our common
stock other than those generally imposed by applicable state law.





Item
6. Selected Financial Data





We are a
“smaller reporting company” as defined by Regulation S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.




Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





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





Any
forward looking statements made herein are based on our current expectations,
involve a number of risks and uncertainties and should not be considered
indicative of future performance. The factors that could cause actual results to
differ materially include, but are not limited to: interruptions or cancellation
of existing contracts, inability to integrate acquisitions, impact of
competitive products and pricing, product demand and market acceptance risks,
the presence of competitors with greater financial resources than us, product
development and commercialization risks, changes in governmental regulations,
and changing economic conditions in developing countries and an inability to
arrange additional debt or equity financing.




22





European
telecommunications presence established





In
January 2007, through the acquisition of various assets in Europe, we
established a presence in the European Telecommunications Market, particularly
in the market of Service Numbers like Toll Free and Premium Rate Services and to
a smaller extent Carrier (Pre) Select Services. Furthermore, through the human
and IT resources thereby acquired, we obtained additional expertise of telecom
and multi-media systems, telecom regulations and European markets.





Telecom
infrastructure & network





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





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





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





Mobile
Services (MVNE/MVNO)





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





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





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





Comparison of the fiscal
years ended December 31, 2008 and December 31, 2007





Revenues
and Cost of service





Change
in reporting Income Statement





For
comparison purposes we revised the classification categories of the 2008 income
statement (versus previous filings) to telecommunication industry standards. To
allow comparison, the 2007 Income Statement has been adjusted
accordingly.




23





Revenue





Revenue
recorded was $44,359,007 and $47,361,028 for the years ended December 31, 2008
and 2007, respectively. Revenue consisted of fixed line telecommunications
services such as premium rate, carrier select, carrier pre-select, Freephone
(toll free) and pre-paid calling cards services provided to a wide range of
customers. Revenue decreased by $3,002,021 (-6%) in 2008 compared to 2007,
primarily due to a declining demand in the European markets. The new
geographical market for pre-paid calling cards, the Middle East, contributed to
growth only on a minor level. The revenues from our mobile services as of the
fourth quarter of 2008 are included in the revenue, but did not contribute
materially to our overall revenue.





The
variance between 2008 and 2007 revenue include a positive translation effect of
$2.9 million.





Cost ofservice





Cost of
service was $43,336,111 and $45,608,557 for the years ended December 31, 2008
and 2007, respectively. Cost of service include origination, termination,
network and billing charges from telecommunications operators, outpayment costs
to content and information providers, network costs, data center costs, facility
cost of hosting network and equipment and cost in providing resale arrangements
with long distance service providers, cost of leasing transmission facilities,
international gateway switches for voice, and data transmission
services.  The cost of service increased from 96.3% to 97.7% of the
total revenue as a result of diminishing contribution of higher margin services
such as two stage dialing and carrier (pre) select.  The varience
between 2008 and 2007 cost of service included a negative translation effect of
$2.8 million.




Selling,
general and administrative expenses





Selling,
general and administrative (SG&A) expenses were $7,569,583 and
$5,825,884 for the years ended December 31, 2008 and 2007, respectively.
SG&A expenses increased by $1,743,699 (30%) in 2008 compared to 2007. The
increase compared to 2007 was mainly caused by higher management & personnel
expenses, cost of consultancy and legal expenses. Compared to 2007, 2008
SG&A include a translation effect of $0.5 million.





Non
cash compensation to officers, directors and employees





Non cash compensation to officers,
directors and employees was $1,266,155 and $5,045,502 for the years ended
December 31, 2008 and 2007, respectively. Non-cash compensation is
comprised of the expense related to shares of restricted common stock that are
issued to management in connection with a compensation plan originated in the
first quarter of 2007. The 2007 amounts include the expense associated with the
initial sign on bonus provided to the management team. The variance between
2008 and 2007 non-cash compensation to officers, directors and employees include
a negative translation effect of $0.1 million.





Depreciation
and amortization of intangibles assets





Depreciation
and amortization of intangibles assets expenses were $2,903,244 and
$2,233,454 for the years ended December 31, 2008 and 2007, respectively. The
variance between 2008 and 2007 depreciation and amortization of intangible
assets includes a negative translation effect of $0.2 million.





Intangible
assets impairment charge





The
December 31, 2008 consolidated balance sheet includes: $4.5 million of
intangible assets, net, and $6.3 million of fixed assets, net. Management
updated its analysis of intangible assets and long-lived assets as of
December 31, 2008, and we determined that certain assets were impaired and we
recorded a charge to intangible assets of $3,730,524.








24





We
assessed the carrying value of its intangible assets as of December 31,
2008.  As a result of this assessment, we determined that the value of
certain specific intangible assets was higher than the estimated recoverable
value, and as a result, incurred an impairment charge of $3,730,524 in
2008.





We have
acquired several companies in the last few years and our current business
strategy includes continuing to make additional acquisitions in the future.
These acquisitions may continue to give rise to goodwill and other intangible
assets which will need to be assessed for impairment from time to
time.





Beneficial
conversion feature charge





In
connection with the conversion of the second RWC Note we determined that in
accordance with EITF 96-19 "Debtors Accounting for a Modification or Exchange of
Debt Instruments" the $1,200,000 Beneficial Conversion feature resulting from
the reduction in the conversion price as an inducement for the note holder to
convert should be expensed in the P&L; accordingly, this adjustment was
recorded in the third quarter of 2008.





Other
Income and Expenses





Interest
income was $42,258 and $101,324 for the years ended December 31, 2008 and 2007
respectively. Interest income was interest received on bank balances. Interest
Expenses was $499,015 and $849,212 for the year ended December 31, 2008 and
2007, respectively. The interest expense decrease resulted from the
conversion of promissory notes into equity.





Minority
Interest





Our
majority owned subsidiaries Elephant Talk Communications PRS U.K. Limited,
Elephant Talk Communications Premium Rate Services Netherlands B.V., Elephant
Talk Communications Luxembourg SA, Elephant Talk Middle East & Africa
(Holding) W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan
L.L.C., Elephant Talk Middle East & Africa Bahrain W.L.L., Elephant Talk
Middle East & Africa FZ-LLC incurred losses with a resultant positive charge
of $88,808 attributed to minority shareholders’ interest in the year ended
December 31, 2008.





Since two
of these subsidiaries showed a negative stockholders equity position in the year
ended December 31, 2008, we had to expense an additional minority interest
charge in the income statement of $91,044.


During
the year ended December 31, 2007, our majority owned subsidiaries Elephant Talk
Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
W.L.L., Elephant Talk Middle East & Africa FZ-LLC incurred losses with a
resultant positive charge of $43,325 attributed to minority shareholders’
interest.




OtherComprehensive Income
(Loss)





We record
foreign currency translation gains and losses as comprehensive income or loss.
We recorded a loss of ($490,239) and a gain $1,426,498 for the year ended
December 31, 2008 and 2007 respectively. The decrease is a result of the
translation loss due to the changes of exchange value from Euro to
USD.





Liquidity
and Capital Requirements





We have
an accumulated deficit of $45,035,192 at December 31, 2008. Historically we have
relied on a combination of debt and equity financings to fund our ongoing cash
requirements.  In June 2008, all outstanding debt financing was
converted into equity.  In addition to the conversion of debt, in 2008
we received a total $7.4 million from the sale of our common stock and warrants
to purchase our common stock to various investors.





Our cash
balance at December 31, 2008, in combination with cash generated from
operations, was sufficient to fund our operations into the first quarter of
2009.  In January, February and March of 2009, we received
approximately $3.25 million (all agreements and amounts were entered into in
Euro’s with a conversion rate of 1.30 EUR/USD.  Deviations may occur
with our prior 8-K filings due to the use of different exchange rates) from QAT
II Investments SA (“QAT”), a related party, pursuant to four separate loan
agreements.  The loan agreements will be secured by future revenue
streams arising out of any contractual relationship we may enter into in the
Spanish mobile telecom market.  We believe that the additional capital
provided by these agreements will fund our operations into the second quarter of
2009.  We are in ongoing discussions with QAT regarding additional
borrowings to fund our capital requirements in the immediate future until a more
permanent source of funding can be secured.  Although QAT and other
related parties have invested, or have arranged for the investment of, a total
of $35.4 million since 2005 – excluding the above referenced $3.25 million
invested since December 31, 2008, and have since January 2009 demonstrated a
willingness to fund our immediate capital requirements, there can be no
assurance that they will continue to do so.




25





Given our
need to raise additional funds, potentially in the immediate short term, we are
actively engaged in discussions with potential financing sources in order to
fund our expected cash requirements generated by future operations, capital
expenditures and potential acquisitions.  Although we have previously
been able to raise capital as needed, such capital may not continue to be
available at all, or if available, the terms of such financing may be dilutive
to existing stockholders or otherwise on terms not favorable to us. Further, the
current global financial situation may offer additional challenges to raising
the capital we require. If we are unable to secure additional capital, as
circumstances require, we may not be able to continue our
operations.





As a
result of our financial position our auditors’ have included in their report for
our 2008 financial statements, a statement concerning our ability to continue as
a “going concern”.  If we are unable to continue as a going concern,
we may be unable to realize our assets and discharge our liabilities in the
normal course of business. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or to the amounts and classification of liabilities that may be
necessary should we be unable to continue as a going concern.





Operating
Activities





Net cash
used in operating activities was $6,278,741 versus a use of $3,449,351 in
2007. This increase in use of cash is largely due to an increase of operating
losses (after adjusting for non-cash items) in 2008 versus 2007 and to a smaller
extent the deterioration of working capital compared to 2007.





Investment
Activities





Net cash
used in investment activities for the year ended December 31, 2008 was
$2,347,133. Cash used to purchase plant and equipment was $2,178,478, increase
in restricted cash of $168,654 and cash paid for the acquisition of subsidiary
was $1.





Financing
Activities





Net cash
received by financing activities for the year ended December 31, 2008 was
$6,192,132. We received $7,400,127 from the sales of shares, received $402,425
of payments from our joint venture partner in Curacao and paid $1,737,915 for
placement fees of funding received.





As a
result of the above activities, we had a cash and cash equivalent balance
of $1,656,546 as of December 31, 2008, a net decrease in cash and cash
equivalent of ($2,709,766) for the year ended December 31, 2008. Our ability to
continue as a going concern is still dependent on our success in obtaining
additional financing in the immediate term.




Application of Critical
Accounting Policies and Estimates




Revenue Recognition, Cost
ofServiceand Deferred
Revenue





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




26





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





Stock-based
Compensation





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




Intangible
Assets & Impairment of long lived assets & business
combinations





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





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





Impact
of Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
non-controlling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, we do not expect the
adoption of SFAS 160 to have a significant impact on its results of operations
or financial position.




27





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called
the purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control. This statement requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date, with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. We do not expect the adoption of SFAS 141 to have a
significant impact on its results of operations or financial
position.





Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements”, or SFAS No.
157. In February 2008, the Financial Accounting Standards Board or FASB issued
FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”,
which provides a one year deferral of the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually (fair value of reporting units for goodwill impairment tests,
non-financial assets and liabilities acquired in a business
combination).Therefore, we adopted the provisions of SFAS No. 157 with respect
to our financial assets and liabilities only. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements.
Fair value is defined under SFAS No. 157 as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation
techniques used to measure fair value under SFAS No. 157 must maximize the use
of observable inputs and minimize the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the
first two are considered observable and the last unobservable, that may be used
to measure fair value which are the following:





·
                Level
      1 - Quoted prices in active markets for identical assets or
      liabilities




·
              Level
      2 - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities


·
                  Level
      3 - Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.





The adoption
of this statement with respect to our financial assets and liabilities, did not
impact our consolidated results of operations and financial condition and
disclosures





Effective
January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows companies to
elect to fair value financial assets and liabilities. We chose not to make the
election, and therefore the adoption of this statement with respect to our
financial assets and liabilities, did not impact our consolidated results of
operations, financial condition and disclosures.





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





In March,
2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB 161 achieves
these improvements by requiring disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It also provides
more information about an entity’s liquidity by requiring disclosure of
derivative features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement users to locate
important. Based on current conditions, we do not expect the adoption of SFAS
161 to have a significant impact on its results of operations or financial
position.





28




In May of 2008, FASB issued SFAS No.162,
“The Hierarchy of Generally Accepted Accounting Principles”. The pronouncement
mandates the GAAP hierarchy reside in the accounting literature as opposed to
the audit literature. This has the practical impact of elevating FASB Statements
of Financial Accounting Concepts in the GAAP hierarchy. This pronouncement will
become effective 60 days following SEC approval. We not believe this
pronouncement will impact its financial statements.





In May of
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. We do not believe this pronouncement will impact its
financial statements.





EITF 07-5
provides that an entity should use a two step approach to evaluate whether an
equity-linked financial instrument (or embedded feature) is indexed to its own
stock, including evaluating the instrument's contingent exercise and settlement
provisions. It also clarifies on the impact of foreign currency denominated
strike prices and market-based employee stock option valuation instruments on
the evaluation. EITF 07-5 is effective for fiscal years beginning after December
15, 2008.




Material
Transactions





Settlement
Agreement, entered by and between the Company and Rising Water Capital
AG.




On
June 9, 2008, we and Rising Water Capital, AG, or RWC, entered into a settlement
agreement, effective May 13, 2008, which we refer to as the Settlement
Agreement, whereby RWC agreed to convert certain promissory notes held by it in
the amount of $3.5 million and $3 million (excluding accrued but unpaid
interest) respectively, into our  common stock. RWC also agreed to
fund the remaining balance under the $3 million note. In order to induce RWC to
convert the promissory notes, we agreed to reduce the conversion price or the $3
million note to the price at which we offered our common stock in a subsequent
financing with a minimum of $1,000,000 in gross proceeds. The conversion price
was also adjusted to reflect our one-for-twenty five reverse stock split,
effective June 11, 2008.





At the
time of execution of the Settlement Agreement, Steven van der Velden, our Chief
Executive Officer and Director, as well as our Directors Johan Dejager and Yves
van Sante, were directors of Q.A.T. Investments SA, or QAT. Mr. van der Velden
owns approximately 30.79% of QAT, which owns approximately 51% of the
outstanding capital stock of RWC. In addition, Messrs. Dejager and van Sante own
approximately 7.28% and 6.21% of the outstanding capital stock of QAT,
respectively. Additionally Mr. van der Velden owns indirectly approximately 17%
in RWC. The Settlement Agreement was negotiated by our independent
directors.




Private
Placement Offering




In August
of 2008, we consummated a final closing of our private placement offering, an
offering that started in May 2008, of Units comprised of shares of common stock
and warrants to purchase our shares of common stock to accredited European
investors.  We sold in total 7,047,106 shares of common stock at a
exercise price of $1.05 and delivered warrants to purchase an aggregate of
7,047,579 shares of our common stock at an exercise price of $1.26 per
share and warrants to purchase an aggregate of 3,523,789 shares of our common
stock at an exercise price of $1.47 per share.




29




Letter
of Intent signed withVodafone Espaňa S.A.U.





On
September 11, 2008, we executed a Head of Agreement by and among us and Vodafone
España, S.A.U. pertaining to the implementation and operation of a Mobile
Service Platform for the Spanish Market. The Head of Agreement provides that we
will work with Vodafone España, S.A.U. in good faith towards the signing of a
definitive agreement with respect to the development and implementation of the
Mobile Service Platform on or before March 31, 2009, and that during such period
neither we nor Vodafone España, S.A.U. shall negotiate or reach any agreement
with a third party to launch a Mobile Service Platform in the Spanish
market.





Mobile
Virtual Network Enabler Hosting Agreement by and among Elephant Talk
Communication Holding AG and T-Mobile





On
September 17, 2008, Elephant Talk Communication Holding AG (“ETAG”), our
wholly-owned subsidiary, entered into a Mobile Virtual Network Enabler Hosting
Agreement, which we refer to herein as the T-Mobile Agreement, with T-Mobile
Netherlands B.V., pursuant to which T-Mobile Netherlands B.V. agreed to provide
hosting services to ETAG in order to enable ETAG to market and sell MVNE
services to its MVNO customers using T-Mobile Netherlands B.V.’s network. ETAG
agreed to purchase the hosting services as an independent contractor and to sell
to third parties for its own account. The T-Mobile Agreement has a term
commencing on the date of the agreement and ending on the five year anniversary
of the date upon which ETAG commercially launches the hosting services. As of
September 18, 2008, the platform for the hosting services was
operational.





30




Item
8.  Financial Statements




ELEPHANT
TALK COMMUNICATIONS, INC.


AND
SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS


AS OF
DECEMBER 31, 2008





TABLE OF
CONTENTS




PAGEREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, BDO SEIDMAN,
      LLP
              
              31REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, KABANI & COMPANY,
      INC.
              
              32CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2008 AND 2007
              
              33CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2008 AND
      2007
              
              34CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
      ENDED DECEMBER 31, 2008 AND 2007
              
              35CONSOLIDATED
      STATEMENTES OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2008 AND
      2007
              
              36NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
              
              37-59









REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors


Elephant
Talk Communications, Inc.




We have
audited the accompanying consolidated balance sheet of Elephant Talk
Communications, Inc. as of December 31, 2008 and the related consolidated
statement of operations and comprehensive loss, stockholders’ equity (deficit),
and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on this financial statement 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, 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 financial position of Elephant Talk
Communications, Inc. at December 31, 2008, and the results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company had a net loss of $16.0 million, used cash in operations
of $6.3 million and had an accumulated deficit of $44.7 million that raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.




/s/ BDO
Seidman, LLP




April 15,
2009





31




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors


Elephant
Talk Communications, Inc.





We have
audited the accompanying consolidated balance sheet of Elephant Talk
Communications, Inc and Subsidiaries as of December 31, 2007, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year ended December 31, 2007. These consolidated 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated 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 and Subsidiaries as of December
31, 2007 and the consolidated income statements and their consolidated cash
flows for the  year ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.




The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 23 (as per
the Form 10k filed on April 15, 2008) to the consolidated financial statements,
the Company had a net loss of $12,057,732, a working capital deficit of
$24,429,464 an accumulated deficit of $29,019,832 and cash used in operations of
$3,449,351. 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 23. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.




The
Company has made certain reclassifications to the consolidated financial
statements for 2007 to conform to the presentation reflected in the consolidated
financial statements for 2008.




/s/ Kabani & Company,
Inc.




Los
Angeles, California




March 20,
2008




32




ELEPHANT
      TALK COMMUNICATIONS, INC AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      AT DECEMBER 31, 2008 AND 2007




2008
              
              
              
              2007*)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              1,656,546
              
              
              $
              4,366,312Restricted
      cash
              
              
              191,209
              
              
              
              23,266Accounts
      receivable, net of allowance for doubtful accounts of $503,102 and
      $146,215 at December 31, 2008 and December 31, 2007
      respectively
              
              
              4,574,013
              
              
              
              4,438,224Prepaid
      expenses and other current assets
              
              
              1,916,967
              
              
              
              372,331Due
      from related parties
              
              
              —
              
              
              
              18,514Total
      Current Assets
              
              
              8,338,735
              
              
              
              9,218,647LONG
      TERM DEPOSITS
              
              
              310,356
              
              
              
              442,853PROPERTY
      AND EQUIPMENT, NET  *)
              
              
              6,345,113
              
              
              
              5,336,935INTANGIBLE
      ASSETS, NET *)
              
              
              4,461,869
              
              
              
              9,609,793TOTAL
      ASSETS
              
              $
              19,456,073
              
              
              $
              24,608,228LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
              
              $
              322,903
              
              
              $
              197,815Accounts
      payable and customer deposits
              
              
              5,809,211
              
              
              
              4,857,229Deferred
      revenue
              
              
              220,058
              
              
              
              93,661Accrued
      expenses and other payables
              
              
              1,890,004
              
              
              
              3,011,267Shares
      to be issued
              
              
              619,057
              
              
              
              18,255,065Convertible
      promissory note - related parties
              
              
              —
              
              
              
              6,484,063Advances
      from third parties
              
              
              274,762
              
              
              
              201,191Loans
      payable
              
              
              881,035
              
              
              
              875,432Due
      to related parties
              
              
              —
              
              
              
              115,241Total
      Current Liabilities
              
              
              10,017,030
              
              
              
              34,090,964LONG
      TERM DEBT
              
              
              402,425
              
              
              
              —MINORITY
      INTEREST
              
              
              191,767
              
              
              
              231,575STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 50,433,260 issued and
      outstanding  as of December 31, 2008 compared to 9,536,107
      shares issued and outstanding as of December 31, 2007
              
              
              52,933,209
              
              
              
              17,868,448Accumulated
      other comprehensive income
              
              
              946,834
              
              
              
              1,437,073Accumulated
      deficit
              
              
              (45,035,192
              )
              
              
              (29,019,832
              )Total
      Stockholders' Equity (Deficit)
              
              
              8,844,851
              
              
              
              (9,714,311
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              19,456,073
              
              
              $
              24,608,228
  *)
      2007 figures are reclassified for comparison reasons




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




33




ELEPHANT
      TALK COMMUNICATIONS, INC AND SUBSIDIARIES
              CONSOLIDATED
      STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSSFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND
2007




2008
              
              
              2007REVENUES
              
              $
              44,359,007
              
              
              $
              47,361,028COSTS
      AND OPERATING EXPENSESCost
      of service
              
              
              43,336,111
              
              
              
              45,608,557Selling,
      general and administrative expenses
              
              
              7,569,583
              
              
              
              5,825,884Non
      cash compensation to officers, directors and employees
              
              
              1,266,155
              
              
              
              5,045,502Depreciation
      and amortization of intangibles assets
              
              
              2,903,244
              
              
              
              2,233,454Intangible
      assets impairment charge
              
              
              3,730,524
              
              
              
              —Total
      Costs and Operating Expenses
              
              
              58,805,617
              
              
              
              58,713,397LOSS
      FROM OPERATIONS
              
              
              (14,446,610
              )
              
              
              (11,352,369
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              42,258
              
              
              
              101,324Interest
      expense
              
              
              (499,015
              )
              
              
              (849,212
              )Benificial
      conversion feature charge
              
              
              (1,200,000
              )
              
              
              —Total
      Other Income (Expense)
              
              
              (1,656,757
              )
              
              
              (747,888
              )LOSS
      BEFORE INCOME TAXES AND MINORITY INTEREST
              
              
              (16,103,367
              )
              
              
              (12,100,257
              )Provision
      for income taxes
              
              
              (800
              )
              
              
              (800
              )LOSS
      BEFORE MINORITY INTEREST
              
              
              (16,104,167
              )
              
              
              (12,101,057
              )Minority
      interest
              
              
              88,808
              
              
              
              43,325NET
      LOSS
              
              
              (16,015,359
              )
              
              
              (12,057,732
              )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation (loss) gain
              
              
              (490,239
              )
              
              
              1,426,498(490,239
              )
              
              
              1,426,498COMPREHENSIVE
      LOSS
              
              $
              (16,505,598
              )
              
              $
              (10,630,434
              )Net
      loss per common share and equivalents - basic and diluted
              
              $
              (0.53
              )
              
              $
              (1.27
              )Weighted
      average shares outstanding during the period - basic and
      diluted
              
              
              30,263,376
              
              
              
              9,530,637




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




34




ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY (DEFICIT)


FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007


Description
                  
                  
                  Common
      Shares
                  
                  
                  
                  Common
      Amount
                  
                  
                  
                  Subscrip-
                    tions
                    receivable
                  
                  
                  
                  Other
      compre-hensive income (loss)
                  
                  
                  
                  Accum-mulated
      Deficit
                  
                  
                  
                  Total
      stock-holders Equity (Deficit)Balance
      - December 31, 2006
                  
                  
                  238,265,927
                  
                  
                  $
                  17,694,933
                  
                  
                  $
                  (9,683
                  )
                  
                  $
                  10,175
                  
                  
                  $
                  (16,962,100
                  )
                  
                  $
                  733,325Reverse
      split
                  
                  
                  (228,729,820
                  )Advance
      adjusted against the purchase consideration
                  
                  
                  
                  
                  
                  
                  120,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  120,000Subscription
      receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,683
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,683Amortization
      of Stock Options expense
                  
                  
                  
                  
                  
                  
                  53,515
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  53,515Other
      Comprehensive income due to foreign exchange rate
    translation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,426,898
                  
                  
                  
                  
                  
                  
                  
                  1,426,898Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (12,057,732
                  )
                  
                  
                  (12,057,732
                  )Balance
      - December 31, 2007
                  
                  
                  9,536,107
                  
                  
                  $
                  17,868,448
                  
                  
                  $
                  —
                  
                  
                  $
                  1,437,073
                  
                  
                  $
                  (29,019,832
                  )
                  
                  $
                  (9,714,311
                  )Shares
      issued sold before 2008
                  
                  
                  22,198,905
                  
                  
                  $
                  13,423,636
                  
                  
                  $
                  
                  
                  
                  $
                  
                  
                  
                  $
                  
                  
                  
                  $
                  13,423,636Conversion
      of RWC Promissory note 1
                  
                  
                  5,017,007
                  
                  
                  
                  4,389,881
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,389,881Conversion
      of RWC Promissory note 2
                  
                  
                  3,380,276
                  
                  
                  
                  3,549,289
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,549,289Shares
      issued and sold in 2008
                  
                  
                  7,047,106
                  
                  
                  
                  7,400,127
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,400,127Shares
      issued for management compensation
                  
                  
                  2,882,192
                  
                  
                  
                  6,123,128
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  6,123,128Shares
      issued for consultants
                  
                  
                  355,000
                  
                  
                  
                  532,500
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  532,500Shares
      issued for placement fee agent
                  
                  
                  16,667
                  
                  
                  
                  25,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25,000Placement
      fees
                  
                  
                  
                  
                  
                  
                  (1,737,915
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,737,915
                  )Beneficial
      Conversion Feature
                  
                  
                  
                  
                  
                  
                  1,200,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,200,000Amortization
      of Stock Options expense
                  
                  
                  
                  
                  
                  
                  159,113
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  159,113Other
      Comprehensive loss due to foreign exchange rate
translation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (490,239
                  )
                  
                  
                  
                  
                  
                  
                  (490,239
                  )Net
      Loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (16,015,359
                  )
                  
                  
                  (16,015,359
                  )Balance
      - December 31, 2008
                  
                  
                  50,433,260
                  
                  
                  $
                  52,933,208
                  
                  
                  $
                  —
                  
                  
                  $
                  946,834
                  
                  
                  $
                  (45,035,191
                  )
                  
                  $
                  8,844,851




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




35




ELEPHANT
      TALK COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2008 AND 2007


2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (16,015,359
              )
              
              $
              (12,057,732
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              2,903,244
              
              
              
              2,233,454Provision
      for doubtful accounts
              
              
              381,783
              
              
              
              135,877Stock
      based compensation
              
              
              1,266,154
              
              
              
              5,045,502Minority
      interest
              
              
              (88,808
              )
              
              
              (43,325
              )Amortization
      of Shares issued for Consultancy
              
              
              135,417
              
              
              
              —Beneficial
      conversion feature charge
              
              
              1,200,000
              
              
              
              —Intangible
      assets impairment charge
              
              
              3,730,524
              
              
              
              —Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              (717,991
              )
              
              
              991,412(Increase)
      decrease in prepaid expenses, deposits and other assets
              
              
              542,528
              
              
              
              (183,556
              )Increase
      (decrease) in accounts payable, proceeds form related parties and customer
      deposits
              
              
              1,157,354
              
              
              
              (916,376
              )Increase
      (decrease) in deferred revenue
              
              
              126,171
              
              
              
              (11,444
              )Increase
      (decrease) in accrued expenses and other payables
              
              
              (899,758
              )
              
              
              1,356,837Net
      cash used in operating activities
              
              
              (6,278,741
              )
              
              
              (3,449,351
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (2,178,478
              )
              
              
              (2,154,559
              )Restricted
      cash
              
              
              (168,654
              )
              
              
              (23,266
              )Cash
      paid for  acquisition of subsidiary, net of cash
      acquired
              
              
              (1
              )
              
              
              140,556Net cash used in investing activities
              
              
              (2,347,133
              )
              
              
              (2,037,269
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
              
              
              127,495
              
              
              
              26,000Placement
      fees
              
              
              (1,737,915
              )
              
              
              —Proceeds
      from note payable
              
              
              —
              
              
              
              561,520Proceeds
      from sale of shares
              
              
              7,400,127
              
              
              
              8,498,471Payments
      from related parties
              
              
              402,425
              
              
              
              —Net cash provided by financing activities
              
              
              6,192,132
              
              
              
              9,085,991EFFECT
      OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
              
              
              (276,023
              )
              
              
              434,940NET
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              (2,709,766
              )
              
              
              4,034,311CASH
      AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
              
              
              4,366,312
              
              
              
              332,001CASH
      AND CASH EQUIVALENTS, END OF THE PERIOD
              
              $
              1,656,546
              
              
              $
              4,366,312SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
              
              $
              7,527
              
              
              $
              25,467
  2008
                  
                  
                  2007SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING & FINANCING
    ACTIVITIES:Shares
      issued to convert the notes payable to related parties and accrued
      interest
                  
                  $
                  7,939,171
                  
                  
                  $
                  —Beneficial
      Conversion Feature as a result of loss on conversion of the above Note to
      related party
                  
                  $
                  1,200,000
                  
                  
                  $
                  —


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




36





Note
1.  Introduction





Elephant
Talk Communications is positioning itself as an international telecom operator
and enabler/systems integrator to the multimedia industry by facilitating the
distribution of all forms of content as well as mobile and fixed telecom
services to its global telecommunications customers. The Company provides
traditional telecom services, media streaming, and distribution services
primarily to the business-to-business (B2B) community within the
telecommunications market where it has a presence. Up until the reporting period
the Company has mainly derived its revenues from traditional fixed-line
services, whereby the first revenues from mobile services (MVNE/MVNO) have
started as of the end of the reporting period.





Note
2.  Financial Condition and Going Concern





The
Company has an accumulated deficit of $45,035,192 at December 31, 2008.
Historically the Company has relied on a combination of debt and equity
financings to fund ongoing cash requirements.  In June 2008, all
outstanding debt financing was converted into equity.  In addition to
the conversion of debt, in 2008 the Company received a total $7.4 million from
the sale of shares of common stock and warrants to purchase common stock to
various investors.





The cash
balance at December 31, 2008, in combination with cash generated from
operations, was sufficient to fund the Company’s operations into the first
quarter of 2009.  From January until April 2nd of
2009, the Company received approximately $3.25 million (all agreements and
amounts were entered in euro’s with a conversion rate used of 1.30 EUR/USD,
deviations may occur with 8-K filings due to different exchange rate usage) from
QAT II Investments SA (“QAT”), a related party, pursuant to four separate loan
agreements.  The loan agreements will be secured by future revenue
streams arising out of any contractual relationship the Company may enter into
in the Spanish mobile telecom market.  The Company’s management
believes that the additional capital provided by these agreements will fund
operations into the second quarter of 2009.  Management is in ongoing
discussions with QAT regarding additional borrowings to fund the capital
requirements in the immediate future until a more permanent source of funding
can be secured.  Although QAT and other related parties have
invested, or have arranged for the investment of, a total of $35.4 million since
2005 through December 31, 2008, and have since January 2009 demonstrated a
willingness to fund the Company’s immediate capital requirements for an
additional $3.25 million, there can be no assurance that they will continue to
do so.





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





As a
result of the Company’s financial position our auditors’ have included in their
report for our 2008 financial statements, a statement concerning our ability to
continue as a “going concern”.  If we are unable to continue as a
going concern, we may be unable to realize our assets and discharge our
liabilities in the normal course of business. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or to the amounts and classification of liabilities that
may be necessary should we be unable to continue as a going
concern.





37





Note
3. Basis of Presentation and Significant Accounting Policies





Principles
of Consolidation





The
accompanying consolidated financial statements for the years ended December 31,
2008 and December 31, 2007 include the accounts of Elephant Talk Communications,
Inc., its wholly-owned subsidiary Elephant Talk Europe Holding B.V., its
wholly-owned subsidiary Elephant Talk Communication Holding AG, its wholly-owned
subsidiary Elephant Talk Communications S.L.U., its wholly-owned subsidiary
Elephant Talk Mobile Services B.V.( formerly known as Cardnet Clearing Services
B.V), its wholly-owned subsidiary Elephant Talk Communication Austria GmbH, its
wholly-owned subsidiary Vocalis Austria GmbH, its wholly-owned subsidiary
Elephant Talk Communications Italy S.R.L., its wholly-owned subsidiary ET-Stream
GmbH, its wholly-owned subsidiary Elephant Talk Communication Carrier Services
GmbH, its wholly-owned subsidiary Elephant Talk Communication (Europe) GmbH, its
wholly-owned subsidiary Elephant Talk Communication Schweiz GmbH, its
wholly-owned subsidiary Moba Consulting Partners B.V.,its majority owned (51%)
subsidiary Elephant Talk Communications Premium Rate Services Netherlands B.V.,
its wholly-owned subsidiary Elephant Talk Communications France S.A.S., its
majority owned (51%) subsidiary Elephant Talk Communications PRS U.K. Limited,
its wholly-owned subsidiary Elephant Talk Communications Luxembourg SA, its
wholly-owned subsidiary Elephant Talk Global Holding B.V., its wholly-owned
subsidiary Elephant Talk Business Services W.L.L., its wholly-owned subsidiary
Guangzhou Elephant Talk Information Technology Limited., its wholly-owned
Elephant Talk Caribbean B.V., its majority owned (51%) subsidiary ET-UTS N.V.,
its wholly-owned subsidiary Elephant Talk Limited, its wholly-owned subsidiary
Full Mark Technology Ltd., its wholly-owned subsidiary Jinfuyi Technology
Limited, its majority owned (51%) subsidiary Elephant Talk Middle East &
Africa (Holding) W.L.L., its majority owned (51%) subsidiary Elephant Talk
Middle East & Africa (Holding) Jordan L.L.C., its majority owned (50.49%)
subsidiary Elephant Talk Middle East & Africa Bahrain W.L.L and its majority
owned (50.54%) subsidiary Elephant Talk Middle East & Africa
FZ-LLC.





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





Use
of Estimates





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





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 and
requires reporting of selected information about operating segments in interim
financial statements regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performances. The Company allocates its
resources and assesses the performance of its sales activities based upon
geographic locations of its subsidiaries.





Foreign
Currency Translation





The
functional currency was Euros for its wholly-owned subsidiary Elephant Talk
Europe Holding B.V. and subsidiaries, and Euros for its wholly-owned subsidiary
Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its wholly-owned
subsidiary Elephant Talk Limited. The financial statements of the Company were
translated to USD using period-end exchange rates as to assets and liabilities
and average exchange rates as to revenues and expenses, and capital accounts
were translated at their historical exchange rates when the capital transaction
occurred. In accordance with SFAS 52, net gains and losses resulting from
translation of foreign currency financial statements are included in the
statements of stockholder’s equity as other comprehensive income (loss). Foreign
currency translation gains and losses are included in consolidated income
(loss). The accumulated other comprehensive income as December 31, 2008 and 2007
was $946,834 and $1,437,073, respectively. The foreign currency translation gain
(loss) for the years 2008 and 2007 was ($490,239) and $1,426,498,
respectively.




38





Cash
and Cash Equivalents





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





Restricted
Cash





Restricted
cash represents cash deposited as bank guarantee for interconnects.





Accounts
Receivables, net





The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains an allowance for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these allowances. Allowances are recorded primarily on
a specific identification basis.  As of December 31, 2008 and December 31,
2007 the allowance for doubtful accounts was $503,102 and $146,215,
respectively.





Revenue
Recognition and Deferred Revenue





The
Company's revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Revenue is recognized only when the price is fixed or
determinable, persuasive evidence of arrangement exists, the service is
performed and the collectability of the resulting receivable is reasonably
assured. The Company derives revenue from activities as a fixed-line and mobile
services provider with its network and its own switching technology. Revenue
represents amounts earned for telecommunication services provided to customers
(net of value added tax and inter-company revenue).  The Company
recognizes revenue from prepaid calling cards as the services are
provided.  Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as deferred revenue. Deferred
revenue represents amounts received from the customers against future sales of
services since the Company recognizes revenue upon performing the services.
Deferred revenue was $220,058 and $93,661 as of December 31, 2008 and December
31, 2007, respectively.





Cost
of service





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





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.





39




Income
Taxes





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





Effective
October 1, 2007, we adopted Financial Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN
No. 48”), which contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates that it is more likely than not that
the position will be sustained on audit, including resolution of related appeals
or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount that is more than 50% likely of being realized upon
settlement. Significant judgment is required in evaluating our uncertain tax
positions and determining our provision for income taxes. Although we believe
our reserves are reasonable, no assurance can be given that the final tax
outcome of these matters will not be different from that which is reflected in
our historical income tax provisions and accruals. We adjust these reserves in
light of changing facts and circumstances, such as the closing of a tax audit or
the refinement of an estimate. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences will affect the
provision for income taxes in the period in which such determination is made.
The provision for income taxes includes the effect of reserve provisions and
changes to reserves that are considered appropriate, as well as the related net
interest.





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





Comprehensive
Income/(Loss)





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




40




Property
and Equipment, Internally Developed and third party Software





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





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





Intangible
Assets





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





Fair
Value Measurements





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





Effective
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 allows companies to elect to fair value
financial assets and liabilities. The Company chose not to make the election,
and therefore the adoption of this statement with respect to the Company’s
financial assets and liabilities, did not impact the Company’s consolidated
results of operations, financial condition and disclosures.





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





Recently
Issued Accounting Pronouncements





In May
2007, the FASB issued FASB Staff Position (“FSP”) No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48, which provides guidance on how an
enterprise should determine whether a tax position is effectively settled for
the purpose of recognizing previously unrecognized tax benefits. The amendment
had no impact on the Company’s financial position, results of operations or cash
flows.




41





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”, which is an amendment of Accounting Research
Bulletin (“ARB”) No. 51.  This statement clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements.  This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent and the
non-controlling interest.  This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008.  Based on current conditions, the Company does not
expect the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations.”  This statement replaces FASB Statement No. 141,
“Business Combinations.” This statement retains the fundamental requirements in
SFAS 141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be used for all business combinations and for an acquirer to be
identified for each business combination. This statement defines the acquirer as
the entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control. This statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company is currently evaluating internal processes to
ensure that it addresses the accounting implications of SFAS 141 (R) for any
future acquisitions.





In March
of 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities”. The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. The new standard also improves transparency about the location and
amounts of derivative instruments in an entity’s financial statements; how
derivative instruments and related hedged items are accounted for under
Statement 133; and how derivative instruments and related hedged items affect
its financial position, financial performance, and cash flows. FASB Statement
No. 161 achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular format. It
also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important. Based on current conditions, the Company does not expect
the adoption of SFAS 161 to have a significant impact on its results of
operations or financial position.





In May of
2008, FASB issued SFASB No.162, “The Hierarchy of Generally Accepted Accounting
Principles”. The pronouncement mandates the GAAP hierarchy reside in the
accounting literature as opposed to the audit literature. This has the practical
impact of elevating FASB Statements of Financial Accounting Concepts in the GAAP
hierarchy. This pronouncement will become effective 60 days following SEC
approval. The Company does not believe this pronouncement will impact its
financial statements.





In May of
2008, FASB issued SFASB No. 163, “Accounting for Financial Guarantee Insurance
Contracts-an interpretation of FASB Statement No. 60”. The scope of the
statement is limited to financial guarantee insurance (and reinsurance)
contracts. The pronouncement is effective for fiscal years beginning after
December 31, 2008. The Company does not believe this pronouncement will impact
its financial statements.





In
February 2008, the Financial Accounting Standards Board or FASB issued FASB
Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which
provides a one year deferral of the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually (fair value of reporting units for goodwill impairment tests,
non-financial assets and liabilities acquired in a business
combination).Therefore, the Company adopted the provisions of SFAS No. 157 with
respect to its financial assets and liabilities only.









42





Note
4.  Acquisitions and New Incorporations





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








Elephant
Talk Caribbean BV was incorporated in the Netherlands on March 20, 2008 as a
100% subsidiary of Elephant Talk Global Holding B.V. The purpose of the Company
is to act as the Joint Venture Partner of UTS N.V. in a specially to be created
entity in Curacao, Netherlands Antilles. ET-UTS NV was incorporated in
Curacao, the Netherland Antilles, on April 9, 2008 as a subsidiary for 51% of
Elephant Talk Caribbean B.V. and for 49% of the Joint Venture partner UTS N.V.
The total issued capital amounts to US$ 100,000.00. Purpose of the Company is to
design, install, maintain and exploit WIFI and WIMAX networks in the Caribbean
area and Surinam, with the objective to provide in each of the Areas a complete
range of services over such networks.





On August
14, 2008 the name of Cardnet Clearing Services BV, a 100% affiliate of Elephant
Talk Europe Holding BV, was changed to Elephant Talk Mobile Services BV. The
renamed Company’s main objective to act as the ET entity to contract Mobile
Virtual Network Operators in the Netherlands.





On August
20, 2008 an agreement for the 100% acquisition of Moba Consulting Partners BV
was signed by Elephant Talk Europe Holding BV, with effective date September 1,
2008. The acquisition price was $1.00 plus 50,000 warrants of ETC (exercise
price of $2.25), Inc. The main objective of this acquisition is to acquire
expertise and manpower for certain aspects of the implementation of Mobile
Virtual Network Operators on the platform of Elephant Talk.




Note
5.  Long term earnest deposit





Long term
earnest deposits to various telecom carriers during the course of its operations
amount to $310,356 as at December 31, 2008 compared with $442,853 for the same
period of 2007.  The deposits are refundable at the termination of the
business relationship with the carriers.





Note
6.  Prepaid expenses and other current assets





Prepaid
expenses and other current assets recorded as $1,916,967 as of December 31,
2008, compared with $372,331 for the same period in 2007.  The 2008 amount
consists of prepaid VAT and stock related compensations for management and
consultants.




43




Note
7.  Property and Equipment





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




·
            Intelligent
      Network (IN) platform


·
            CRM
      software


·
            Mediation,
      Rating & Pricing engine


·
            Operations
      and Business Support software


·
            Network
      management tools





Property
and equipment at December 31, 2008 and 2007 consist of:





AverageEstimated
      UsefulLives
            
            
            2008
            
            
            
            2007*)Leasehold
      improvements
            
            
            3
            
            
            $
            10,433
            
            
            $
            36,897Furniture
      and fixtures
            
            
            5
            
            
            
            78,278
            
            
            
            194,322Computer,
      communication and network equipment
            
            
            3 -
      10
            
            
            
            6,395,032
            
            
            
            6,083,545Automobiles
            
            
            5
            
            
            
            133,202
            
            
            
            137,726Construction
      in progress
            
            
            
            
            
            
            1,047,248
            
            
            
            687,9627,664,193
            
            
            
            7,140,452Software
      (added to PP&E; see note below *)
            
            
            5
            
            
            
            4,632,430
            
            
            
            2,517,771Total
      Cost
            
            
            
            
            
            
            12,296,623
            
            
            
            9,658,223Less:
      accumulated depreciation
            
            
            
            
            
            
            -4,501,243
            
            
            
            -3,656,228Less:
      accumulated depreciation software *)
            
            
            
            
            
            
            -1,450,267
            
            
            
            -665,060Total
      accumulated depreciation
            
            
            
            
            
            
            -5,951,510
            
            
            
            -4,321,288$
            6,345,113
            
            
            $
            5,336,935




*)
Software reclassed from Intangibles to Property and equipment




Depreciation
expense amounted to $1,645,137 as of December 31, 2008, compared with
$652,478 for the same period in 2007.




Included
in the amounts for the period ended December 31, 2007, are reclassifications as
follows: $2,517,771 reclassification of software from Intangible assets to
Property and Equipment and $665,060 reclassification of software amortization
from Intangible assets to Property and Equipment depreciation.




Note
8.  Intangible assets - Customer contracts, licenses and
interconnections





Intangible
assets include customer contracts, telecommunication licenses and integrated,
multi-country, centrally managed switch-based interconnects acquired as part
Benoit Telecom Holdings AG in January 2007.





The
Company assessed the carrying value of its intangible assets as of December 31,
2008.  As a result of this assessment, the Company determined that the
value of certain specific intangible assets was higher than the estimated
recoverable value, and as a result, incurred an impairment charge of $3,730,524
in 2008.




44




Intangible
assets as of December 31, 2008 and 2007 consisted of the
following:





AverageEstimated
      UsefulLives
              
              
              2008
              
              
              
              2007*)Customer
      Contracts, Licenses & Interconnect
              
              
              5 -
      10
              
              
              $
              16,737,064
              
              
              $
              15,219,998Software
      (reclassed to PP&E; see note below *)
              
              
              5
              
              
              
              -4,632,430
              
              
              
              -2,517,771Total
      Cost
              
              
              
              
              
              
              12,104,634
              
              
              
              12,702,227Less:
      Accumulated Amortization
              
              
              
              
              
              
              -5,362,508
              
              
              
              -3,757,494Reclass
      accumulated amortization Software *)
              
              
              
              
              
              
              1,450,267
              
              
              
              665,060Impairment
      of intangible assets
              
              
              
              
              
              
              -3,730,524
              
              
              
              —Total
      Accumulated Amortization
              
              
              
              
              
              
              -7,642,765
              
              
              
              -3,092,434$
              4,461,869
              
              
              $
              9,609,793


*)
Software reclassed from Intangibles to Property and equipment





Estimated
amortization for:




Years
      Ending December 31,2009
                
                $
                711,9092010
                
                
                672,5572011
                
                
                672,5572012
                
                
                668,1452013
                
                
                647,306Thereafter
                
                
                1,089,395$
                4,461,869





Intangible
asset amortization expense for the year ended December 31, 2008 totaled
$1,258,107, compared to $1,580,976 for the same period of 2007.




Included
in the amounts for the period ended December 31, 2007, are reclassifications as
follows: $$2,517,771 reclassification of software from Intangible assets to
Property and Equipment and $665,060 reclassification of software amortization
from Intangible assets to Property and Equipment depreciation.





Intangible
Assets Impairment charge 2008





The
Company assessed the carrying value of its intangible assets as of December 31,
2008.  As a result of this assessment, the Company determined that the
value of certain specific intangible assets was higher than the estimated
recoverable value, and as a result, incurred an impairment charge of $3,730,524
in 2008. In the evaluation of its Intangible Assets, the Company estimated the
discounted future cash flows directly associated with the asset and compared
these to the asset's carrying amount. The assets impaired pertained primarily to
the acquired two-stage dialing business and customer contracts and to a minor
extent to obsolete licenses and registrations.




Note
9.  Due from related parties





There
were no amounts due from related parties as of December 31, 2008.  In
2007, the Company advanced $18,514 to entities that officers and/or shareholders
have an ownership interest in.




45




Note
10.  Overdraft





In 2004,
the Company executed a credit facility with a bank in Hong Kong pursuant to
which the Company has borrowed funds from the bank. As of December 31, 2008 the
overdraft balance included accrued interest amounted to $223,663 compared to
$197,815 as of December 31, 2007.  The interest rate and default
payment interest rate were charged at 2% and 6% per annum above the Lender’s
Hong Kong Dollar Prime Rate quoted by the Lender from time to time (see Note
12).  The newly acquired company Moba Consulting Partners B.V. had an
overdraft of $99,240 on one of the company’s bank accounts.




Note
11.  Accrued Expenses




2008
                
                
                2007Accrued
      Selling, General & Administrativeexpenses
                
                $
                513,722
                
                
                $
                877,901Placement
      fees
                
                
                491,100
                
                
                
                —Accrued
      cost of sales and network
                
                
                14,140
                
                
                
                521,398Accrued
      taxes
                
                
                227,896
                
                
                
                43,941Accrued
      interest payable
                
                
                439,290
                
                
                
                1,473,811Other
                
                
                203,856
                
                
                
                94,216Total
      accrued expenses
                
                $
                1,890,004
                
                
                $
                3,011,267





Note
12.  Advances from Third Parties





As at
December 31, 2008 and 2007 the Company had $274,762 and $201,191, respectively
as payable to third parties related to two litigations as mentioned in the legal
proceedings section in this annual report.








Note
13.  Loans Payable





Loans
payable at December 31, 2008 and 2007 are summarized as
follows:




Installment
      loan payable due December 24, 2006, secured by personal guarantees of two
      shareholders, a director, and a third party
                
                $
                320,520
                
                
                $
                318,481Installment
      loan payable, bank, monthly principal and interest payments of $2,797
      including interest at bank's prime rate plus 1.5% per annum, 8.75% at
      December 31, 2008, due December 24, 2011, secured by personal guarantees
      of three shareholders and a director
                
                
                191,516
                
                
                
                190,299Installment
      loan payable, bank, monthly principal and interest payments of $1,729
      including interest at bank's prime rate plus 1.5% per annum, 8.75% at
      December 31, 2007, due June 28, 2009, secured by personal guarantees of
      three shareholders and a director
                
                
                85,154
                
                
                
                84,612Term
      loan payable, bank, monthly payments of interest at bank's prime rate,
      7.0% at December 31, 2007
                
                
                283,845
                
                
                
                282,040$
                881,035
                
                
                $
                875,432




46




Elephant
Talk Ltd has executed a credit facility with a bank in Hong Kong since June 29,
2004 under which Elephant Talk Ltd has borrowed funds from the bank under three
installment loans and a term loan arrangement. Elephant Talk Ltd is in default
of making loan payments on all the loans and has recorded an accrued interest
amounting to $424,046 as of December 31, 2008. As a result of the default, the
entire loan balance outstanding at December 31, 2007 is due and payable to the
bank. Furthermore, Elephant Talk Ltd is obligated to pay a default interest rate
at the rate of 4.25% per annum in addition to the prescribed interest rate of
the installment loans and term loan. Elephant Talk Ltd has recorded $ 9,062 and
$103,560 in interest expense and default interest expense, respectively, on
loans payable as of December 31, 2008 and $12,218 and $132,262 in interest
expense as of December 31, 2007.





Note
14.  Due to related parties





The
Company received advances from entities that certain shareholders and former
officers have an ownership interest and has payables to individuals who are
shareholders of the company. These amounts are due on demand, unsecured and
non-interest bearing.





As at
December 31, 2008 and 2007, the due to related parties were as
follows:





2008
            
            
            2007Due
      to an entity related to a shareholder and former officer
            
            $
            —
            
            
            
            14,755Due
      to shareholders and former officers
            
            
            —
            
            
            
            100,486$
            —
            
            
            
            115,241




Note
15.  Long term debt





The
company’s 51% owned subsidiary ET-UTS N.V. has received $402,425 in interest
bearing (8% per annum) unsecured loans from UTS N.V., the 49% shareholder in the
subsidiary. No maturity has been fixed.




Note
16.  Convertible promissory notes payable to related
party





On
December 15, 2005, the Company executed a Convertible Promissory Note (the
“Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
an investor and an entity controlled by the Chief Executive Officer (see note 17
- Related Party Transactions), with funds to be drawn in stages. The Note was
convertible during the term, in whole or in part, into shares of common stock at
the conversion price of eighty seven and one-half cents ($0.875) of principal
amount per share of common stock. The Note did not have any beneficial
conversion feature attached to it since the conversion rate was equal to the
market price of the common stock of $0.875, on the closing of agreement. The
Note was convertible to the extent that the Company had sufficient authorized
common stock. The Note had a term of thirty (30) months during which time
interest at the rate of 10% per annum accrued from the date advances were drawn
by the Company. The Note was secured by shares owned by an agent of the Company
in its subsidiaries. The Note provided for a balloon payment of principal and
accrued interest at maturity or conversion into common stock.





As of
December 31, 2007, the entire principal of $3,500,000 had been received. The
Company recorded a total accrued interest of $889,881. On June 9, 2008, the
Company and RWC entered into a settlement agreement, effective May 13, 2008 (the
“Settlement Agreement”), whereby RWC agreed to convert the aforementioned
Promissory Note held by it in the amount of $3,500,000 and accumulated interest
of $889,881 into common stock of the Company.


The
Company recorded accrued interest expense of $154,583 and $350,000 for the year
ended December 31, 2008 and 2007 respectively. The conversion price was $0.875
and a number of shares issued of 5,017,007.




47




On May
26, 2006, the Company executed a second Convertible Promissory Note (the “2nd
Note”) in the principal sum of $3,000,000 with RWC. The 2nd Note had a term of
thirty (30) months, during which time interest on the principal amount would
accrue from the date of this 2nd Note at an annual interest rate of 10%. The 2nd
Note provided for a balloon payment of principal and interest accrued at
maturity. The 2nd Note is secured by shares owned or to be owned by (an agent
of) the Company in its subsidiaries. The 2nd Note was also convertible during
the term, in whole or in part, into common shares at a conversion price of one
dollar and seventy five cents ($1.75) per share. The 2nd Note did not have any
beneficial conversion feature attached to it since the conversion rate was equal
to the market price of the common stock of $1.75 on the closing of
agreement.




The
Company recorded accrued interest of $549,289 and $417,321 as of December 31,
2008 and December 31, 2007 respectively.





The Company had received the entire
principal of $3,000,000 as of June 9, 2008. Total accrued interest recorded was
$549,289.  On June 9, 2008, the Company and RWC entered into the Settlement
Agreement whereby RWC agreed to convert the aforementioned promissory note held
by it in the amount of $3,000,000 and interest of $549,289 into common stock of
the Company. RWC also agreed to fund the remaining balance under the $3,000,000
note. In order to induce RWC to convert the promissory note, the Company agreed
to reduce the conversion price of the $3,000,000 note to the price at which the
Company offers its common stock in a subsequent financing with a minimum of
$1,000,000 in gross proceeds. The conversion price was $1.05 and a number of
shares issued of 3,380,276.




In
connection with the conversion of the second RWC Note the Company determined
that in accordance with EITF 96-19 "Debtors Accounting for a Modification or
Exchange of Debt Instruments" the $1,200,000 Beneficial Conversion feature
should be expensed.




Note
17.  Related Party Transactions




RWC is
the beneficial owner of 28,188,087 shares of the Company’s common stock. 
Quercus Aimer Trust Investments SA (“QAT Investments”) holds a 51.3% ownership
interest in RWC.  Additionally, Mr. van der Velden, the Company’s
President and Chief Executive Officer, is the Chairman of QAT Investments, on
the management board of QAT Investments and holds a 30.79% ownership interest in
QAT Investments.  Mr. Nije, the Company’s Chief Financial Officer, is
a principal at QAT Investments and holds a 0.32% ownership interest in QAT
Investments.  Mr. van Sante, a Director of the Company, is the Chief
Executive Officer of QAT Investments, on the management committee of QAT
Investments and also holds a 33% ownership interest in Amelia & Associates
SA (“Amelia”) which holds an 18.4% ownership interest in QAT
Investments.  Mr. Dejager, a Director of the Company, is on the
management board of QAT Investments and holds a 7.28% ownership interest in QAT
Investments.  Interfield Consultancy CI Ltd. (“IFC”), a company
wholly-owned by Mr. van der Velden, holds a 34% interest in RWC, of which
approximately 17% is held in a fiduciary capacity for the benefit of Mr.
Zuurbier, the Company’s Chief Operating Officer, Chief Technical Officer, and
Director.




On August
22, 2007, the Board approved the sale of approximately 4,160,000 shares of
restricted common stock of the Company to accredited investors.  As part of
this transaction, CMV Invest CVA (“CMV”) agreed to purchase 1,728,697 shares of
restricted common stock in the Company.  Mr. van der Velden holds a 27.25%
ownership interest in CMV.




On May 8,
2008 the Company entered into a placement agent agreement with Quercus
Management Group N.V. (“QMG”) and Amelia pursuant to which QMG and Amelia were
each issued 16,667 shares of common stock of the Company in connection with
their participation in the financing (the “2008 Financing”).  In
addition, pursuant to the terms of the placement agent agreement, and as part of
their compensation for acting as placement agent in a private offering of
securities, QMG was paid a commission of $469,764 and issued warrants to
purchase 357,172 shares of the Company’s common stock at $1.05 per share,
warrants to purchase 357,172 shares of the Company’s common stock at $1.26 per
share and warrants to purchase 178,586 shares of the Company’s common stock at
$1.47 per share. QAT Investments owns 100% of the outstanding capital stock of
QMG. Amelia was paid a commission of $458,231 and issued warrants to purchase
347,587 shares of the Company’s common stock at $1.05 per share (the market
price of the common stock), warrants to purchase 347,587 shares of the Company’s
common stock at $1.26 per share and warrants to purchase 173,794 shares of the
Company’s common stock at $1.47 per share.




48





Pursuant
to the terms of the Settlement Agreement, upon conversion of the 2nd Note, the
Company agreed to make an incentive payment to RWC, commensurate with any fees
paid in connection with a financing, pro rata, based upon the aggregate amount
raised in such financing, whether equity or debt, of at least $1.0 million (the
“Incentive Payment”).   See Note 15 – “Subsequent Events –
Related Party Transactions”.




On
September 26, 2008 CMV Invest II CVA (“CMV II”) purchased approximately
2,400,000 shares of common stock in the Company for approximately $2.5
million.  On September 30, 2008 CMV II purchased approximately 1,000,000
shares of common stock in the Company for approximately $1.1
million.  Additionally, CMV II holds warrants to purchase
approximately 3,500,000 shares of common stock in the Company at $1.26 per share
and warrants to purchase approximately 1,750,000 shares of common stock in the
Company at $1.47 per share.  Mr. van der Velden holds a 40.75% ownership
interest in CMV II.





Subsequent
Events – Related Party Transactions




Loan
agreements




On
January 27, 2009, QAT II Investments SA, a closed-end fund of QAT Investments,
entered into a loan agreement with the Company whereby QAT II Investments will
provide the Company with $1,300,000.  According to the terms, the loan will
bear interest at a rate of twelve percent (12%) per annum and shall be repaid
either: (1) if QAT II Investments and the Company sign an investment agreement,
the amount due under the loan will be reduced by the investment amount pursuant
to the investment agreement, or (2) if no investment agreement is executed, the
principal amount of the loan plus interest is due and payable by June 30, 2009.
 On February 15, 2009, February 23, and March 31, 2009 QAT II Investments
entered into three loan agreements with the Company whereby QAT II Investments
agreed to provide the Company with $650,000, $650,000 and $650,000
respectively.  The outstanding principal and interest shall become
immediately due and payable in the event the Company fails to make required
payments of principal and interest, or otherwise breaches the agreements and
fails to cure such breach upon twenty (20) days notice, or if it disposes of its
properties or assets without QAT II Investments’ prior consent, or if it files a
petition for bankruptcy or otherwise resolves to wind up its
affairs.  All agreements and amounts were entered in euro’s with a
conversion rate used above of 1.30 EUR/USD, deviations may occur with 8-K
filings due to different exchange rate usage.




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




Payments
made in connection with the 2008 Financing




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




Due
Diligence Agreement.





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





49




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




Stock
issuance




On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment.  As a result of the Company’s private placement of
securities in excess of $1.0 million, RWC is additionally entitled, as an
Incentive Payment, approximately $451,915 in cash and was issued warrants to
purchase 338,029 shares of the Company’s common stock at $1.05 per share,
warrants to purchase 338,029 shares of the Company’s common stock at $1.26 per
share and warrants to purchase 169,015 shares of the Company’s common stock at
$1.47 per share. In lieu of the cash payment to RWC was entitled, on February 2,
2009 RWC accepted 742,000 shares of our common stock, based on a conversion
price of $0.60 per share.




Note
18.  Stockholders’ equity





(A)
Common Stock





On
December 28, 2007, our board of directors approved a 1-for-25 Reverse Split of
our outstanding common stock, no par value per share (the “Common Stock”). The
Reverse Split was duly approved by a majority of our stockholders on January 15,
2008.   Pursuant to the Reverse Split, every twenty-five (25) shares
of our issued and outstanding Common Stock as presently classified were, as of
the open of business on June 11, 2008, reclassified and combined into one (1)
whole post-split share of our Common Stock. No fractional shares of our Common
Stock will be issued in connection with the Reverse Split. Any fractional shares
will be rounded up. There will not be a corresponding reduction in our
authorized Common Stock. The Reverse Split was effected at the open of business
on June 11, 2008 (the “Record Date”), and the post-split shares began trading on
the OTC Bulletin Board at the opening of business on Effective Date, or at such
time thereafter as trading occurs. Following the reverse stock split the Company
executed a number of delayed share issuances which can also be found
below.





The
Company is presently authorized to issue 250,000,000 shares of no par value
Common Stock. The Company currently has 50,433,260 common shares issued and
outstanding as of December 31, 2008.  The shares issued and
outstanding as per the stock transfer agent’s records are 50,679,153, and
includes 245,900 shares which were cancelled by the Company prior to
2006. However, these shares were not returned to the stock transfer agent
and never cancelled on records. These shares have been blocked for trading by
the Stock Transfer Agent.





Pursuant
to a Stock Purchase Agreement dated June 30, 2005, the Company sold to an
accredited investor Rising Water Capital (RWC) (an entity controlled by the
Chief Executive Officer) 7,837,896 shares of restricted common stock for a total
cash consideration of $7,837,896.  As of December 31, 2006, the
Company has issued to RWC 4,000,000 of its restricted common shares valued at
$4,000,000. The common shares were valued at $1.00 cents per share pursuant to
the terms of the agreement. As a result, per that same date the Company still
had to issue 3,837,896 common shares, valued at $3,837,896 to RWC. The Company
has recorded such shares to be issued as a liability in the accompanying
financials as of December 31, 2007. In 2008 these shares were
issued.





Shares
sold 2006 and issued in 2008





On
October 30, 2006, the Company agreed to issue to RWC an additional 10,341,853
shares of common stock as price adjustment for failed acquisitions by the
Company leading to lower market value than anticipated. The result of the price
adjustment was to bring the ownership of RWC in the Company, as of October 30,
2006, to 72.5% of total of shares of common stock (excluding the hereunder
mentioned promissory notes).




50





Pursuant
to a Stock Purchase Agreement, on December 28, 2006, the Company agreed to sell
4,379,200 restricted common shares to five accredited investors for a total
consideration of $4,105,500. The shares were valued at 50% discount over the
last five days average market price on the date of execution of the
agreement.





Shares
sold 2007and issued in 2008





On
August 22, 2007, the Board approved the sale of 3,639,952 shares of common
shares to 5 accredited investors.


The
shares were valued at a 30% discount over the closing price of August 22, 2007,
resulting in an issuance price of $1.4875, before placement fees to related
parties QMG and Amelia. The company has received a cash consideration of
$5,414,128 in 2007 and paid for placement fees $264,820.





Shares
sold and issued in 2008





In 2008
the Company sold in total 7,047,106 Shares at a exercise price of $1.05 and
delivered Warrants to purchase an aggregate of 7,047,579 shares of the Company’s
common stock at a exercise price of $1.26 per share and Warrants to purchase an
aggregate of 3,523,789 shares of the Company’s common stock at a exercise price
of $1.47 per share. The company has received a cash consideration in dollars of
$7,400,127 in 2008 and paid for placement fees $887,995. The Investors of
this Offering are not entitled to any registration rights with respect to the
Securities





Shares
issued in 2008 for Officers compensation





On June
28, 2007, the Board approved to issue over a three years periods as of January
1, 2007 in total 2,882,192 shares of common stock to its officers and directors
of which 2,070,464 shares of common stock valued at $4,399,736 were recognized
at June 28, 2007 as compensation for employment commitments for a term of three
years as of January 1, 2007. The shares were valued at the closing market
price of $2.125 on June 28, 2007, the date of grant.




Conversion
of promissory note I





On June
9, 2008, the Company and RWC entered into a settlement agreement, effective May
13, 2008 (the “Settlement Agreement”), whereby RWC agreed to convert the
aforementioned Promissory Note held by it in the amount of $3,500,000 and
accumulated interest of $889,881 into common stock of the Company.


The
Company recorded accrued interest expense of $154,583 and $350,000 for the year
ended December 31, 2008 and 2007 respectively. The conversion price was $0.875
and a number of shares issued of 5,017,007.





Conversion
of promissory note II





In order
to induce RWC to convert the promissory note, the Company agreed to reduce the
conversion price of the $3,000,000 note to the price at which the Company offers
its common stock in a subsequent financing with a minimum of $1,000,000 in gross
proceeds. The conversion price was $1.05 and a number of shares issued of
3,380,276.





Shares
issued for consulting services





On
September 30, 2008, the Company issued 30,000 shares of our common stock to
Redchip Companies, Inc. in consideration for consulting services related to
investor relations.




51





The
following table summarizes the shares issued for the year ended December 31,
2008:





Number
      of shares issuedComputation
      of Full Dilution - December 31, 2008December
      31, 2007 Total number of shares issued
              
              
              9,530,638Shares
      issued for  - Rising Water Capital  June 3, 2005 SPA @
      $1.00 - sale of shares
              
              
              3,837,896
              *Shares
      issued for Settlement Oct. 2006 with Rising Water Capital regarding June
      30, 2005 SPA
              
              
              10,341,853
              *Issuing
      of Shares sold to 5 accredited investors in 2006 for $4,105,500 @ $ 0.9375
      per share
              
              
              4,379,200
              *Issuing
      of Shares sold to 5 accredited investors in 2007 for $5,414,428 @ $ 1.4875
      per share
              
              
              3,639,956
              *Issuing
      of Shares sold to 9 accredited investors in 2008 for $7,400,627 @ $ 1.0500
      per share
              
              
              7,047,106Shares
      issued for  - Rising Water Capital - $3.5 MM Convertible
      Promissory Note @ $ 0.875
              
              
              5,017,007Shares
      issued for  - Rising Water Capital - $3.0 MM Convertible
      Promissory Note @ $ 1.050
              
              
              3,380,276Shares
      issued for  - Consulting Services @ $ 1.50
              
              
              355,000Shares
      issued for  - Officers compensation @ $ 2.125
              
              
              2,882,192
              *Shares
      issued for placement fee agent
              
              
              16,667Rounding
      due to reversed Stock split
              
              
              5,470December
      31, 2008 Total number of shares issued
              
              
              50,433,260




Per
December 31, 2007 the total number of shares to be issued amounted to 24,539,700
(excluding Promissory Notes) valued at $18,255,065. The (*) marked line items
add up to the 2007 shares to be issued number except for the shares issuance for
Officers compensation which also include the 2008 and 2009 share compensations
(541,397 shares).





Note
to Warrants





The
Warrants entitle the holders to purchase shares of the Company’s common stock
reserved for issuance there under (the “Warrant Shares”) for a period of five
years from the date of grant at an exercise price of $1.26 and $1.47
respectively. The Warrants contain certain anti-dilution rights on terms
specified in the Warrants. The above warrants were issued as of September 30,
2008. All the share and dollar amounts detailed above in relation to the
Offering are presented to reflect the impact of the Company’s 1-for-25 reverse
stock split which was affected on June 11, 2008.




(B)
Preferred Stock





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





During
2008 the Company did not issue any shares of Preferred Stock.




52




Note
19.  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.





December
      31,
                
                2008
                
                
                2007Basic
      weighted-average shares outstanding:
                
                
                30,263,376
                
                
                
                9,530,637Effect
      of dilutive common shares equivalents:Non-qualified
      stock options
                
                
                392,961
                
                
                
                81,189Warrants
                
                
                2,864,473
                
                
                
                147,288Diluted
      weighted-average shares outstanding
                
                
                33,520,810
                
                
                
                9,759,114Total
      Net Loss
                
                $
                -16,015,359
                
                
                $
                12,057,732Total
      Earnings Per Share basic & diluted
                
                $
                -0.53
                
                
                $
                -1.27




Note
20.  Employee benefit plan and non-qualified stock option and
compensation plan





2000
Employee Benefit Plan





The
Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
options to acquire the Company’s common stock, no par value, from time to time
to employees of the Company or its subsidiaries. In addition, at the discretion
of the Board of Directors, shares may be granted under this Plan to other
individuals, including consultants or advisors, who contribute to the success of
the Company or its subsidiaries, provided that bona fide services shall be
rendered by consultants and advisors and such services must not be in
conjunction with the offer or sale of securities in a capital raising
transaction. No stock may be issued or options granted under the Plan to
consultants, advisors or other persons who directly or indirectly promote or
maintain a market for the Company’s securities. The Plan is intended to aid the
Company in maintaining and developing a management team, attracting qualified
officers and employees capable of assuring the future success of the Company,
and rewarding those individuals who have contributed to the success of the
Company. The Plan is administrated under the direction of the Board of
Directors. A total of 160,000 common shares and 160,000 stock options to acquire
common shares may be subject to, or issued pursuant to, benefits granted under
the Plan. At any time any stock option is granted under the terms of this Plan,
the Company will reserve for issuance the number of shares of Stock subject to
such option until it is exercised or expired. The Plan Administrator shall
determine from time to time the terms, conditions and price of the options
granted. Options shall not be construed to be stock and cannot be exercised
after the expiration of its term. Under the Plan, 12,000 shares of common stock
and 160,000 stock options remain available for grant at December 31,
2008.





2006
Non-Qualified Stock and Option Compensation Plan





Under
this plan there are as of December 31, 2008, 366,009 stock options outstanding.
There are remaining 600, 000 shares and 33,991 stock options available for
grant.





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





Common stock purchase options and
warrants consisted of the following as of December 31, 2008:





Number
      of shares
            
            
            Exercise
      Price
            
            
            Aggregate
      Intrinsic ValueOptions:Outstanding
      as of December 31, 2006
            
            
            —
            
            
            $
            —
            
            
            $
            —Granted
      in 2007
            
            
            299,334
            
            
            
            2.25
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled/Forfeited
            
            
            14,500
            
            
            
            —
            
            
            
            —Outstanding
      as of December 31, 2007
            
            
            284,834
            
            
            
            2.25
            
            
            
            —Granted
      in 2008
            
            
            142,600
            
            
            
            2.25
            
            
            
            —Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled/Forfeited
            
            
            61,425
            
            
            
            2.25
            
            
            
            —Outstanding
      as of December 31, 2008
            
            
            366,009
            
            
            $
            2.25
            
            
            $
            0




53




At
December 31, 2008 the share price at closing was $ 0.60 which results in a $
0.00 intrinsic value.





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





For 2008
the fair market value of the options granted of $479,090 (2007: $460,280) was
calculated using the Black-Sholes options model. The assumptions used in 2007
for the Black Scholes calculation are: volatility of 102%, term of 3 years and a
Risk Free Interest Rate assumption of 4.5%. The expected dividend yield is
nil.









Following
is a summary of the status of options outstanding at December 31,
2008:




Options
      outstanding
              
              Options
      exercisableRange
      of Exercise Prices
              
              Total
                Options
      Outstanding
              
              Weighted
      Average Remaining Life
                (Years)
              
              Weighted
      Average Exercise Price
              
              Options
      Exercisable
              
              Weighted
      Average Exercise Price$2.25
              
              366,009
              
              4.34
      years
              
              $2.25
              
              0
              
              $2.25




At
December 31, 2008 the total compensation cost related to unvested stock-based
awards granted to employees under the provisions of SFAS 123(R) and the
Company's 2006 stock award plan, but not yet recognized was approximately $0.3
million.





2008
Long-Term Incentive Plan





The 2008
plan was adopted on January 15, 2008, and approved by our stockholders on the
same date at our annual meeting. This incentive plan authorizes awards of up to
5,000,000 shares of common stock, in the form of incentive and non-qualified
stock options, stock appreciation rights, performance units, restricted stock
awards and performance bonuses.  The amount of common stock underlying
the awards to be granted remained the same after the 25 to one reverse
stock-split.  As of December 31, 2008, a total of 366,009 stock
options had been granted under this plan. Options granted generally begin
vesting over a 2 year period. Options generally expire 2 years from the date of
vesting.





Common stock purchase options and
warrants consisted of the following as of December 31, 2008:





Number
      of shares
            
            
            Exercise
      Price
            
            
            Aggregate
      Intrinsic ValueOptions:Outstanding
      as of December 31, 2007
            
            
            —
            
            
            
            —
            
            
            
            —Granted
      2008
            
            
            366,009
            
            
            $
            0.60
            
            
            $
            0Exercised
            
            
            —
            
            
            
            —
            
            
            
            —Cancelled
            
            
            —
            
            
            
            —
            
            
            
            —Outstanding
      as of December 31, 2008
            
            
            366,009
            
            
            $
            0.60
            
            
            $
            0




54




At
December 31, 2008 the share-price at closing was $ 0.60 which results in a $
0.00 intrinsic value.





Following
is a summary of the status of options outstanding at December 31,
2008:




Options
      outstanding
              
              Options
      exercisableRange
      of Exercise Price
              
              Total
                Options
      Outstanding
              
              Weighted
      Average Remaining Life
                (Years)
              
              Weighted
      Average Exercise Price
              
              Options
      Exercisable
              
              Weighted
      Average Exercise Price$0.60
              
              366,009
              
              4.88
      years
              
              $0.60
              
              —
              
              —





The
options were granted with an exercise price of $0.60. The fair market value of
the options granted of $174,042 was calculated using the Black-Sholes options
model. The assumptions used for the Black Scholes calculation are: volatility of
171%, term of 3 years and a Risk Free Interest Rate assumption of 1.53%. The
expected dividend yield is nil.




At
December 31, 2008 the total compensation cost related to unvested stock-based
awards granted to employees under the provisions of SFAS 123(R) and the
Company's 2008 stock award plan, but not yet recognized was approximately $0.2
million.




Stock-Based
Compensation Expense




Under the
provisions of SFAS 123(R), the Company recorded $159,113 and $53,515 of
stock-based compensation expense in its Statement of Operations for the years
ended December 31, 2008 and 2007 respectively. The Company utilized the
Black-Scholes valuation model for estimating the fair value of the stock-based
compensation granted after the adoption of SFAS 123(R).




Note
21.  Income taxes





Income
tax expense (benefit) for the year ended December 31, 2008 and 2007 is
summarized as follows:





December
      31,
              2008
            
            
            December
      31,
              2007Current:Federal
            
            $
            (5,444,950
            )
            
            $
            (4,099,629
            )State
            
            
            (960,874
            )
            
            
            (723,464
            )Deferred
      Taxes
            
            
            6,406,624
            
            
            
            4,823,893Income
      tax expense
            
            $
            800
            
            
            $
            800




55





The
following is a reconciliation of the provision for income taxes at the United
States federal statutory rate to the foreign income tax rate at December 31,
2008:





2008
            
            
            2007Tax
      expense (credit) at statutory rate-federal
            
            
            (34
            %)
            
            
            (34
            %)State
      tax expense net of federal tax
            
            
            (
      6
            %)
            
            
            (
      6
            %)Foreign
      income tax rate difference
            
            
            6,5
            %
            
            
            13.5
            %Change
      in valuation allowance
            
            
            33,5
            %
            
            
            26,5
            %Tax
      expense at actual rate
            
            
            —
            
            
            
            —





The tax effects of temporary differences that gave
rise to significant portions of deferred tax assets and liabilities at December
31, 2008 are as follows:





Deferred
      tax assets:
            
            2008
            
            
            2007Deferred
      Tax Asset
            
            $
            18,013,756
            
            
            $
            11,607,933Total
      gross deferred tax assets
            
            
            18,013,756
            
            
            
            11,607,933Less:  Valuation
      allowance
            
            
            (18,013,756
            )
            
            
            (11,607,933
            )Net
      deferred tax assets
            
            $
            —
            
            
            $
            —





At December 31, 2008, the Company had accumulated
deficit carry forwards of approximately $45,035,192. Pursuant to Dutch income
tax laws, losses may be carried forward indefinitely. However, loss carry-back
is permitted for three years. Utilization of the net operating losses may be
prohibited after a change of 30% or more of the ultimate control in a
company.





The net
change in the valuation allowance during the twelve months period ended December
31, 2008 was $6,405,823.





At
December 31, 2007, the Company had accumulated deficit carry forwards of
approximately $29,019,832. Pursuant to Dutch income tax laws, losses may be
carried forward indefinitely. However, loss carry-back is permitted for three
years. Utilization of the net operating losses may be prohibited after a change
of 30% or more of the ultimate control in a company.




The net
change in the valuation allowance during the twelve months period ended December
31, 2007 was $4,823,093.




A
valuation allowance of $ 18,013,756 and $11,607,933 at December 31, 2008 and
2007, respectively, has been recorded against deferred tax assets as the Company
was unable to conclude that it is more likely than not that such deferred tax
assets will be realized.




As of
December 31, 2008, we had net federal operating loss carry forwards and state
operating loss carry forwards of approximately $ 15.9 respectively $ 14.8
million. The net federal operating loss carry forwards begin to expire in 2018
and the net state operating loss carry forwards begin to expire in 2012. The net
operating loss carry forwards for foreign countries amounts to approximately $
30.6 million. In all foreign countries various periods of expiration dates are
applicable.




Section
382 of the Internal Revenue Code limits the use of net operating loss and tax
credit carry forwards in certain situations where changes occur in the
stock ownership of a company.  In the event we have a change in ownership,
utilization of the carry forward could be restricted.”




In
June 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes. FIN 48 requires that companies recognize in the
consolidated financial statements the impact of a tax position, if that position
is more likely than not of being sustained on audit, based on the technical
merits of the position. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective for years beginning after
December 15, 2006. We adopted FIN 48 on January 1, 2007 with no impact to our
consolidated financial statements. We file income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions. Due to the net
operating loss, all the tax years are open for tax examination. There are
no current income tax audits in any jurisdictions for open tax years and, as of
December 31, 2008, there have been no material changes to our FIN 48
position.




56





Note
22.  Minority interest in subsidiaries





The
Company had minority interest in several of its subsidiaries. The balance of the
minority interest as of December 31, 2008 and 2007 was as follows:




Minority
      Interest
                Balance
      at December 31,Subsidiary
              
              
              Minority
      Interest %
              
              
              
              2008
              
              
              
              2007ETC
      PRS UK
              
              
              49
              %
              
              $
              10,807
              
              
              $
              10,807ETC
      PRS Netherlands
              
              
              49
              %
              
              
              144,344
              
              
              
              144,344ET
      ME&A Holding WLL
              
              
              49
              %
              
              
              —
              
              
              
              39,254ET
      Bahrain WLL
              
              
              1
              %
              
              
              1,388
              
              
              
              1,955ET
      ME&A FZ LLC
              
              
              49.46
              %
              
              
              35,227
              
              
              
              35,215ET
      UTS Curacao
              
              
              49
              %
              
              
              —
              
              
              
              —Total
              
              
              
              
              
              $
              191,767
              
              
              $
              231,575




Since two
of these subsidiaries showed a negative stockholders equity position in the year
ended December 31, 2008, the Company had to expense an additional minority
interest charge in the income statement of $91,044.





Note
23.  Commitments





Commitments
of the Company relating to leases, co-location and office rents, regulatory and
interconnection fees are as follows:




Years
      ending December 31,
              
              2008
              
              
              20072008
              
              $
              2,265,841
              
              
              
              3,279,5802009
              
              
              2,532,822
              
              
              
              1,649,3152010
              
              
              1,859,472
              
              
              
              1,600,2722011
              
              
              1,792,862
              
              
              
              1,518,6342012
              
              
              1,497,817
              
              
              
              1,472,900Total
              
              $
              9,948,815
              
              
              
              9,520,701




As of December 31, 2008 the commitments of the
Company relating to purchase orders are valued at cost of $
618,359.





Note
24.  Contingencies and litigation





(a)
Beijing Chinawind





On
September 25, 2006, Beijing Zhongrun Chuantou Technology Co., Ltd., a company
organized and existing under the laws of the People’s Republic of China
(“Beijing Zhongrun”) and a minority shareholder of Beijing Chinawind
Telecommunication Information Technology Company Limited, a company organized
and existing under the laws of the People’s Republic of China (“CW”), filed two
lawsuits against Guangdong Elephant Talk Network Consulting Limited, a company
organized and existing under the laws of the People’s Republic of China and an
agent of the Company (“ETGD”), in the Beijing Civil Courts. The lawsuit alleged
that a) ETGD failed to pay the remaining consideration of $787,748 under an
Equity Transfer Agreement, dated January 4, 2006 (the “CW Agreement”), between
ETGD and Beijing Zhongrun, which provided for the acquisition by ETGD from
Beijing Zhongrun of 60% of the registered capital of Beijing Chinawind; and b)
ETGD induced the minority shareholders of Beijing Chinawind to accept, pursuant
to the CW Agreement, consideration of $1,000,000 through the issuance of 400,000
common shares of the Company valued at $2.25 per common share. The lawsuit
further alleged that Chinese law prohibits citizens of the People’s Republic of
China from accepting shares of companies listed on the United States
Over-The-Counter Bulletin Board Quotation Service, which is regulated by the
National Association of Securities Dealers, Inc., as compensation in an
acquisition transaction




57





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





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





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





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





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





(c)
Russelle Choi Litigation





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





(d)
Manu Ohri Litigation





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





58




Note 25.Segment
information


Year
ended December 31, 2008




EUROPENetherlands
            
            
            
            Spain
            
            
            
            Switzerland
            
            
            
            Others
            
            
            
            Total
            
            
            
            Far
      East
              Hong
      Kong / China
            
            
            
            Middle
      East
            
            
            
            The
      Americas
            
            
            
            TOTALRevenues
      from unaffiliated customers:
            
            $
            32,745,079
            
            
            $
            2,772,295
            
            
            $
            7,350,985
            
            
            $
            1,183,707
            
            
            $
            44,052,067
            
            
            $
            10,832
            
            
            $
            296,108
            
            
            $
            -
            
            
            $
            44,359,007Operating
      income (loss)
            
            $
            (2,551,663
            )
            
            $
            234,895
            
            
            $
            (6,276,743
            )
            
            $
            602,475
            
            
            $
            (7,991,035
            )
            
            $
            (975,766
            )
            
            $
            (255,682
            )
            
            $
            (5,224,126
            )
            
            $
            (14,446,610
            )Net
      income (loss):
            
            $
            (2,526,822
            )
            
            $
            234,889
            
            
            $
            (6,276,716
            )
            
            $
            610,213
            
            
            $
            (7,958,435
            )
            
            $
            (1,817,334
            )
            
            $
            (215,861
            )
            
            $
            (6,023,728
            )
            
            $
            (16,015,359
            )Identifiable
      assets
            
            $
            3,713,315
            
            
            $
            1,626,346
            
            
            $
            8,835,496
            
            
            $
            629,304
            
            
            $
            14,804,462
            
            
            $
            219,608
            
            
            $
            801,527
            
            
            $
            3,630,475
            
            
            $
            19,456,073Depreciation
      and amortization & impairment charge
            
            $
            (195,105
            )
            
            $
            (229,930
            )
            
            $
            (3,446,152
            )
            
            $
            (82,823
            )
            
            $
            (3,954,011
            )
            
            $
            (48,250
            )
            
            $
            (8,774
            )
            
            $
            (2,622,733
            )
            
            $
            (6,633,768
            )Capital
      expenditure
            
            $
            45,297
            
            
            $
            1,242
            
            
            $
            1,998,496
            
            
            $
            —
            
            
            $
            2,045,036
            
            
            $
            58,490
            
            
            $
            34,664
            
            
            $
            40,289
            
            
            $
            2,178,478




Year
ended December 31, 2007


EUROPENetherlands
              
              
              Spain
              
              
              Switzerland
              
              
              Others
              
              
              Total
              
              
              Far
      East
                Hong
      Kong / China
              
              
              Middle
      East
              
              
              The
      Americas
              
              
              TOTALRevenues
      from unaffiliated customers:
              $
              33,455,599
              
              $
              3,644,270
              
              $
              9,449,789
              
              $
              698,594
              
              $
              47,248,253
              
              $
              112,775
              
              $
              —
              
              $
              —
              
              $
              47,361,028Operating
      income (loss)
              $
              (2,391,884)
              
              $
              777,797
              
              $
              (1,714,001)
              
              $
              (654,951)
              
              $
              (3,983,039)
              
              $
              (1,211,476)
              
              $
              (87,951)
              
              $
              (6,069,903)
              
              $
              (11,352,369)Net
      income (loss):
              $
              (2,368,518)
              
              $
              777,797
              
              $
              (1,714,001)
              
              $
              (654,951)
              
              $
              (3,959,673)
              
              $
              (1,431,595)
              
              $
              (87,951)
              
              $
              (6,578,513)
              
              $
              (12,057,732)Identifiable
      assets
              $
              10,256,348
              
              $
              1,924,809
              
              $
              10,748,723
              
              $
              1,029,314
              
              $
              23,959,195
              
              $
              393,108
              
              $
              245,582
              
              $
              10,343
              
              $
              24,608,228Depreciation
      and amortization
              $
              (182,074)
              
              $
              (205,041)
              
              $
              (1,823,900)
              
              $
              15,885
              
              $
              (2,195,129)
              
              $
              (38,023)
              
              $
              —
              
              $
              (301)
              
              $
              (2,233,454)Capital
      expenditure
              $
              32,472
              
              $
              51,405
              
              $
              2,018,901
              
              $
              24,348
              
              $
              2,127,125
              
              $
              27,434
              
              $
              —
              
              $
              —
              
              $
              2,154,559






Note 26.  Subsequent
events





On
January 27, 2009, QAT II Investments SA, a closed-end fund of QAT Investments,
entered into a loan agreement with the Company whereby QAT II Investments will
provide the Company with $ 1,300,000.  According to the terms, the loan
will bear interest at a rate of twelve percent (12%) per annum and shall be
repaid either: (1) if QAT II Investments and the Company sign an investment
agreement, the amount due under the loan will be reduced by the investment
amount pursuant to the investment agreement, or (2) if no investment agreement
is executed, the principal amount of the loan plus interest is due and payable
by June 30, 2009.  On February 15, 2009, February 23, and March 29, 2009
QAT II Investments entered into two loan agreements (in euro’s) with the Company
whereby QAT II Investments agreed to provide the Company with the equivalent of
(at 1.30 exchange rate EUR/USD, deviations may occur with 8-K filings due to
different exchange rate usage) $650,000, $650,000 and $650,000
respectively.  The outstanding principal and interest shall become
immediately due and payable in the event the Company fails to make required
payments of principal and interest, or otherwise breaches the agreements and
fails to cure such breach upon twenty (20) days notice, or if it disposes of its
properties or assets without QAT II Investments’ prior consent, or if it files a
petition for bankruptcy or otherwise resolves to wind up its
affairs.




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




59




Heads of Terms,Saleand Purchase Agreement;
Collaboration Agreement





On
February 23, 2009, Elephant Talk Communications, Inc. (the “Registrant”) entered
into a non-binding heads of terms agreement (the “HOT Agreement”) with ValidSoft
Limited (“ValidSoft”), a corporation organized under the laws of the Republic of
Ireland.  Under the proposed terms of the HOT Agreement the Registrant
expects to enter into a definitive agreement to acquire 50.1% of ValidSoft (the
“First Acquisition Agreement”) by effecting a subscription for new shares
in ValidSoft as well as a purchase of shares of ValidSoft from existing
ValidSoft shareholders.  The definitive agreement will also include
terms for the sale and purchase of the remaining 49.9% of ValidSoft by
Registrant.





The HOT
Agreement includes the payment of a binding break fee (i) if ValidSoft breaches
an exclusivity provision described in the HOT Agreement; provided, however, such
exclusivity is conditional upon the timely satisfaction of conditions precedent
by Registrant and certain third parties; (ii) if either party to the HOT
Agreement terminates negotiations before December 31, 2009 without good cause;
or (iii) subject to Registrant’s ability to raise at least $17,500,000, if
either party is unable to complete the transactions as contemplated
substantially upon the terms set forth in the HOT Agreement by December 31,
2009, the party terminating the HOT Agreement or unable to complete the HOT
Agreement will owe to the other party a break fee in the equivalent USD amount
(at the exchange rate of 1.30 EUR/USD) of  $ 2,600,000.





In
connection with the acquisition of ValidSoft, on March 16, 2009, the Registrant
entered into an agreement with Quercus Management Group NV (“QMG”), an affiliate
of the Registrant, pursuant to which QMG will conduct due diligence of ValidSoft
in exchange for: (i) an amount equal to 3% of the consideration paid by
Registrant for the First Acquisition Agreement.





Additionally,
subject to certain conditions precedent which must be met, the Registrant may be
required to make loan facilities of up to $650,000 available for drawdown by
ValidSoft by April 30, 2009, $299,000 available for drawdown by ValidSoft on
July 1, 2009 and $282,000 available for drawdown by ValidSoft on November 1,
2009. (all amounts converted from Euro to USD with an exchange rate of 1.30
EUR/USD)





On
February 23, 2009, the Registrant entered into a non-binding heads of terms
agreement (the “Collaboration HOT Agreement”) with ValidSoft, pursuant to which
the parties have set out the principal terms and conditions of a proposed joint
venture (the “Proposed Joint Venture”) for the joint marketing and sale of their
respective products (the “JV Products”).  The JV Products shall
include, but not be limited to telecommunication based mutual authentication and
transaction verification software. The Proposed Joint Venture is intended to be
established and operated through a formal, definitive agreement (the
“Collaboration Agreement”), which shall be executed simultaneously with the
First Acquisition Agreement.  The Collaboration Agreement shall be for
an initial term of ten years. In addition, net revenues generated from the sale
of the JV Products shall be distributed equally between the
parties.





On March
30, 2009, we entered into a Letter Agreement with Spencer Clarke LLC (“”Spencer
Clarke”).   In consideration of our payment to Spencer Clarke of
$50,000 in cash and 300,000 warrants to purchase shares of our common stock at
an exercise price of $1.25, Spencer Clarke agreed to reduce certain compensation
to which it may be entitled pursuant to a prior engagement agreement by and
between Spencer Clarke and us. The Letter Agreement provides that in
connection with certain possible future offerings of our securities, to the
extent such securities are sold to certain investors listed in the Letter
Agreement we shall pay to Spencer Clarke 5.5% of the gross proceeds raised from
such investors, or 2.75% of gross proceeds to the extent they are raised on a
back-stop funding provided by Spencer Clarke from these investors.  We also
agreed to issue to Spencer Clarke warrants to purchase our common stock in an
amount equal to 5.5% of the number of shares sold to such investors in an
offering.  The warrants will be exercisable at a price per share equal to
the lower of (i) the exercise price of the warrants sold in such offering; or
(ii) 100% of the price of the shares of common stock sold in the offering or
issuable upon conversion of equity linked securities sold in the
offering.





On March
31, 2009, we entered into an agreement with OTC Global Partners, LLC (“OTC
Global”).  As consideration for financial consulting services to be
provided through September 30, 2009, we agreed to pay OTC Global $10,000 per
month, budget expenses of up to $50,000 subject to our prior approval, and
100,000 restricted shares of our common stock.




60





On January 20, 2009, we entered into an
agreement with Alliance Advisors LLC. As consideration for investor relations,
consulting services to be provided through January 20, 2010 we agreed to pay
Alliance $20,000 to $ 25,000 per quarter plus 200,000 restricted shares already
issued in 2009.





Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure.




On
January 23, 2007, Jimmy C. H. Cheung & Co. (“Jimmy Cheung”) was replacedas
our independent public auditor. The decision to dismiss Jimmy Cheung was
approved by our Board of Directors upon recommendation by our audit committee.
Jimmy Cheung served as our independent auditor for our fiscal year ended
December 31, 2005. Jimmy Cheung’s report on the our consolidated financial
statements for the year ended December 31, 2005 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, this 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
our fiscal year ended December 31, 2005, and during the period from January 1,
2006 until January 23, 2007, there were (i) no disagreements between us and
Jimmy Cheung on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Jimmy Cheung, would have caused Jimmy Cheung to
make reference to the subject matter of the disagreement in its reports on the
consolidated financial statements for such years, and (ii) no “reportable
events” as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.




On
January 24, 2007, we engaged Kabani & Company, Inc. (“Kabani”), Certified
Public Accountants, as the our independent accountant to report on our
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 our board of directors
upon recommendation by the Audit and Finance Committee (the “Audit Committee").
Prior to engaging the new accountant, we 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 our
financial statements, and neither written nor oral advice was provided that
would be an important factor considered by us in reaching a decision as to an
accounting, auditing or financial reporting issue.





As a
result of a review process undertaken by our Audit Committee, on September 2,
2008, we engaged BDO Seidman, LLP (“BDO”), Certified Public Accountants, as our
independent accountant to report on our consolidated balance sheet as of
December 31, 2008, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. The decision to
appoint BDO was approved by our board of directors upon recommendation by the
Audit Committee. During our two most recent fiscal years ended December 31, 2007
and 2006 and through September 3, 2008, neither we nor anyone on our behalf has
consulted with BDO regarding (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on our financial statements, and neither a
written report nor oral advice was provided to us that BDO concluded was an
important factor considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a “disagreement” (as that term is defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions to Item 304 of Regulation S-K) or a
“reportable event” (as that term is defined in Item 304(a)(1)(v) of Regulation
S-K).  In deciding to select BDO, the Audit Committee reviewed auditor
independence issues and existing commercial relationships with BDO and concluded
that BDO has no commercial relationship with us that would impair its
independence.




On
September 3, 2008, Kabani was replaced as our auditors. The decision to dismiss
Kabani was approved by our board of directors upon recommendation by the Audit
Committee.  The change in accountants did not result from any
dissatisfaction with the quality of professional services rendered by
Kabani. Kabani served as the Registrant's independent auditor for our
fiscal year ended December 31, 2006 and December 31, 2007 and during the period
from January 24, 2007 to September 3, 2008. Kabani’s reports on our
consolidated financial statements for each of the two most recent fiscal years
ended December 31, 2007 and 2006 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles but was modified as to a going concern.
During the two most recent fiscal years ended December, 2007 and 2006, and in
the subsequent interim period through September 3, 2008, there were (i) no
disagreements between us and Kabani on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Kabani, would have caused
Kabani to make reference to the subject matter of the disagreement in its
reports on the consolidated financial statements for such years, and (ii) no
“reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.




61




Item
9A (T).  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on the foregoing,
our chief executive officer and our chief financial officer concluded that our
disclosurecontrolsandprocedureswerenoteffective
as of the end of the period covered by this annual report due to the significant
deficiencies described below in "Management’s Report on Internal Control
over Financial Reporting.”





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




Limitations
on the Effectiveness of Controls





Our
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met. Because of inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Our Chief Executive Officer and Chief Financial
Officer have concluded, based on their evaluation as of the end of the period
covered by this Report, that our disclosure controls and procedures were not
effective to provide reasonable assurance that the objectives of our disclosure
control system were met.





Management’s
Report on Internal Control Over Financial Reporting





As
required by the SEC rules and regulations for the implementation of
Section 404 of the Sarbanes-Oxley Act, our management is responsible for
establishing and maintaining adequate internal control over financial reporting
as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
consolidated financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that:





1.
            pertain to the maintenance of
      records that, in reasonable detail, accurately and fairly reflect the
      transactions and dispositions of the assets of our
      company,




62




2.
            provide reasonable assurance that
      transactions are recorded as necessary to permit preparation of
      consolidated financial statements in accordance with accounting principles
      generally accepted in the United States of America, and that our receipts
      and expenditures are being made only in accordance with authorizations of
      our management and directors,
and


3.
            provide reasonable assurance
      regarding prevention or timely detection of unauthorized acquisition, use
      or disposition of our assets that could have a material effect on the
      consolidated financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements in our consolidated financial statements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may
deteriorate. Management assessed the effectiveness of our internal control over
financial reporting at December 31, 2008. In making these assessments,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework.Based on an initial assessment as of December 31, 2008 as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, Our management
determined that a material weakness within its internal control over financial
reporting exists.





Our
management has, based on above mentioned evaluation, concluded that our internal
controls over financial reporting according to the standards of the Integrated
Framework issued by the COSO were not effective as of the end of the period
covered by this report due to a lack of personnel and technological
resources.





Our
management has identified this lack of personnel and technological resources as
a material weakness in our internal control over financial reporting. While
management believes the financial reports included in this Annual Report
fairly represent our financial condition, no guarantee can be given that the
financial reports accurately represent our financial condition.





Changes
in Internal Control over Financial Reporting





In order
to remediate the material weakness described above we have started a
Sarbanes-Oxley (“SOX”) program strengthening internal controls over financial
reporting in 2008. Key risks and key controls have been identified and assessed
and many improvements were implemented, but remediation of all material
weaknesses was not complete at year end. We aim to complete the remediation in
2009.





Auditor
attestation on Internal Control over Financial Reporting





This
Report does not include an attestation report of our registered public
accounting firm regarding our internal controls over financial reporting. The
disclosure contained under this Item 9A(T) was not subject to attestation
by our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only the disclosure under this Item 9A(T) in this
Report.





PART
III





Item
10.  Directors, Executive Officers, And Control Persons; Compliance
With Section 16(A) Of The Exchange Act.




Our
directors and executive officers and their ages as of March 31, 2009 are as
follows:




Name
            
            Age
            
            Position
            
            Director
              SinceSteven
      Van der Velden
            
            52
            
            Chairman
      of the Board President, Chief Executive Officer and
    Director
            
            2006Martin
      Zuurbier
            
            50
            
            Chief
      Operating Officer, Chief Technical Officer and Director
            
            2007Yves
      R. Van Sante
            
            49
            
            Director
            
            2006Johan
      Dejager
            
            50
            
            Director
            
            2006Bruce
      W. Barren (1)(2)(3)
            
            67
            
            Director
            
            2008Roderick
      de Greef (1)(2)(3)
            
            48
            
            Director
            
            2008Mark
      Nije
            
            47
            
            Chief
      Financial Officer (>15dec08), General Manager, Europe
      (<15dec08)
            
            n/a





(1)
            Member
      of Audit and Finance Committee.




(2)
            Member
      of Nominating and Corporate Governance
  Committee.




(3)
            Member
      of Compensation Committee





63




Background





The
following is a brief summary of the background of each Director of the
Company:





Steven van der Veldenhas been
a director since October 24, 2006 and our Chairman, President and Chief
Executive Officer since October 30, 2006. Mr. van der Velden has experience in
consultancy, logistics, real estate development, and telecommunications,
e-commerce and investment management. He founded his first consultancy firm in
1983 and since then Mr. van der Velden has started over a dozen companies. Mr.
van der Velden is involved in various Information Communication Technology
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 sold to Global
TeleSystems, Inc. in 1999.  From 1988 until 1992 he served as the
first Managing Director of Antillephone NV. Currently he is a Director of Unicom
NV. Between 1986 and 1988, Mr. van der Velden co-headed a team of 16
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.





Martin Zuurbierhas beenourChief Operating
Officer/Chief Technical Officer and a director since January 1, 2007. From
January 2005 until January 1, 2007, Mr. Zuurbier had been the Chief Operating
Officer and Chief Technology Officer of Benoit Telecom Holding AG, a telecom service provider
inEuropethat was acquired byuson January 1, 2007. From
December 1999 to December 2004, Mr. Zuurbier served as director and was the
founder of Vocalis Telecom Group located in The Netherlands andSwitzerland. Mr. Zuurbier was responsible for building,
maintaining and operating a telecommunications network spanning eight countries
inEurope, including all back-office,
billing and Client Relation Management systems. From January 1995 to June 1999,
Mr. Zuurbier was directly involved in the
telecommunications industry and was involved in the development of new switching
technology in collaboration with hardware manufacturer Dialogic, implementation
of the Amsterdam Carrier Ring in 1999 withCOLT Telecom BVas the launch
customer,and negotiating increased
capacity on behalf of various international telecommunications companies. Prior
to 1995, Mr. Zuurbier was involved in the production of television commercials
for the European market.





Yves R. van Santehas been a
director since October 24, 2006.  Mr. van Sante founded QAT
Investments S.A. in 2002, where he currently serves as the Chief Executive
Officer. Concurrently, Mr. van Sante has held various Management and Board
functions in companies supported by Quercus Aimer Trust Investments (“QAT”), the
majority shareholder of our company, such as being a member of the Business Club
‘De Warande’ since 1998. 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. 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 consolidated acquisitions and turned 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. van 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, a former Belgian owned telecom
operator, where he managed a department of over 650 employees. 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.





64




Johan Dejagerhas been a
director since October 24, 2006. Mr. Dejager is managing director and owner of
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. 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).





Bruce W. Barren has been a
director since January 15, 2008.  Mr. Barren has been Group Chairman
of The EMCO/Hanover Group, a privately held, international merchant banking
company since 1971. Under EMCO/Hanover's Executive Loan Program, Mr. Barren has
assumed a number of senior on-line managerial positions, ranging from small- and
medium-sized companies to those in the multi-national marketplace. Under this
program, Mr. Barren has acted as a Chief Executive Officer of a California bank
under FDIC approval; President of a HMO medical provider, with 23 offices in
Southern California, under the State of California, Department of Insurance's
approval; Chairman of a printing/graphic design business and as a Chief
Executive and Administrative Officer for various companies in the
construction/real estate industry, both commercial and residential. Through
2004, Mr. Barren acted as the lead consultant for a medical services company
whose primary activities focused on Mainland China. Mr. Barren also has
experience in the telecommunications industry and experience in
Europe.  Mr. Barren received his Bachelor Science Degree in Accounting
and Finance from Babson College in 1962, and received a Master of Science Degree
in Finance and Economics in 1963 from Bucknell University.




Roderick de Greef has served
on our Board of Directors since January, 2008.  Mr. de Greef is the
principal of Taveyanne Capital Advisers, Inc., a firm providing corporate
finance consulting services.  Since November 2008, Mr. de Greef has
been chairman of the board of Cambridge Heart, Inc. Previously Mr. de Greef has
served as the Chief Financial Officer of Cambridge Heart from October 2005 to
July 2007.  Mr. de Greef served as the Executive Vice President, Chief
Financial Officer and Secretary of Cardiac Science, Inc. from March 2001 to
September 2005.  From 1995 to 2001, Mr. de Greef provided corporate
finance advisory services to a number of early stage companies including Cardiac
Science, where he was instrumental in securing equity capital beginning in 1997,
and advising on merger and acquisition activity. Mr. de Greef also serves on the
board of directors of Endologix, Inc., a public medical device company located
in Irvine, California, and BioLife Solutions, Inc., a public life sciences
company based in Bothell, Washington.




Executive
Officers





Mark Nije,our Chief Financial
Officer, has been
general manager Europe since January 1 2007, a function he held since the end of
2004 within the acquired Benoit Telecom Group. Mr. Nije was appointed or Chief
Financial Officer on December 15, 2008. Mr. Nije has experience in project
management, business development, investment management, logistics and
telecommunications. Mr. Nije started as project manager and management
consultant for Tebodin Consulting Engineers and Reitsma & Wertheim M&A
specialists, the Netherlands. In 1990 he co-founded Logistic Management
International NV (LMI), an international cargo transportation and airport
handling company at the airport of Curacao, Netherlands Antilles. During those
years he served as a board member and vice-chairman of the Curacao Exporters
Association. From 2000-2002 Mr. Nije was co-founder and director of
PickYourGifts BV, an internet start-up. In 2003 he became partner of QAT
Investments SA, the Luxemburg venture capital fund, where he has been active as
investment manager and/or board member in various ICT related ventures of QAT.
Currently he is member of the Dutch Association of CEO’s and Directors
(NCD). Mr. Nije earned his Master’s Degree in Business Administration from the
Rotterdam School of Management, the Netherlands, and a Bachelor of Science
Degree in Building Construction Management from the University of Reading,
United Kingdom.





65




Mr. Nije
is a cousin of the wife of Mr. van der Velden.  Other than the
aforesaid, there are no family relationships between any director or executive
officer. There are no arrangement between our directors and any other person
pursuant to which our directors were nominated or elected for their positions
other than the following:




We have
agreed with Rising Water Capital, A.G., our majority shareholder, to use our
best efforts to retain our current management, including Mr. van der Velden,
pursuant to a settlement agreement dated May 13, 2008.




Committee
Membership, Meetings and Attendance





During
the fiscal year ended December 31, 2008, there
were:




·
              6 meetings of the
      Board of Directors;




·
              3 meetings of the
      Audit Committee;
  ·
                2 meetings of the
      Compensation Committee; and
  ·
                  1 meeting of the
      Nominating
Committee.


Each
director attended or participated in at least 2/3rd of the
meetings of the Board of Directors and his respective committees held during our
fiscal year ended December 31, 2008 and during his term of service.





We
encourage all of our directors to attend our annual meetings of stockholders.
One of our current directors, who was a director at that time, attended last
year's annual meeting of stockholders





Board
Committees





Our board
of directors has established three standing committees: Audit and Finance,
Nominating and Corporate Governance, and Compensation. Each Committee operates
under a charter that has been approved by our board of directors.





Audit
and Finance Committee





We have a
separately designated standing Audit & Finance Committee established in
accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (the
“Exchange Act”). Our Audit Committee is currently composed of Roderick de Greef
and Bruce W. Barren, each of whom were appointed on January 15, 2008, and is
involved in discussions with management and our independent registered public
accounting firm with respect to financial reporting and our internal accounting
controls. The board of directors has determined that Mr. de Greef is an “audit
committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K.
The Audit Committee has the sole authority and responsibility to select,
evaluate and replace our independent registered public accounting firm or
nominate the independent auditors for stockholder approval. The Audit Committee
must pre-approve all audit engagement fees and terms and all non-audit
engagements with the independent auditors. The Audit Committee consults with
management but does not delegate these responsibilities.





The Audit
Committee reviewed and discussed our audited financial statements as of and for
the year ended December 31, 2008 with the Board of Directors.





The Board
of Directors reviewed and discussed with representatives of BDO Seidman, LLP,
our independent registered public accounting firm, the matters required to be
discussed by Statement on Auditing Standards No.61 (Codification of Statements
on Auditing Standards, AU §380), as amended. The Board of Directors has also
received and reviewed the written disclosures and the letter from BDO Seidman,
LLP, required by PCAOB Rule 3526, and has discussed with BDO Seidman, LLP their
independence.





66




Compensation
Committee





Our
Compensation Committee was formed on January 15, 2008 and consists of Roderick
de Greef and Bruce Barren. Our Compensation Committee will award stock options
to officers and employees. The Compensation Committee has overall responsibility
for approving and evaluating the executive officer compensation plans, policies
and programs of the company.





In 2008
this Committee reviewed the Board and Management compensation, including bonus
awards upon  the realization of defined  targets. Stock
options were granted to staff and consultants. A company wide bonus stock plan
is under study of the Committee.




Nominating
and Corporate Governance Committee





Our
Nominating and Corporate Governance Committee was formed on January 15, 2008 and
consists of Roderick de Greef and Bruce Barren. The Nominating and Corporate
Governance Committee is responsible for (1) reviewing suggestions of candidates
for director made by directors and others; (2) identifying individuals qualified
to become Board members, and recommending to the Board the director nominees for
the next annual meeting of stockholders; (3) recommending to the Board director
nominees for each committee of the Board; (4) recommending to the Board the
corporate governance principles applicable to the company; and (5) overseeing
the annual evaluation of the Board and management. Pursuant to the Nominating
and Corporate Governance Committee charter, there is no difference in the manner
in which a nominee is evaluated based on whether the nominee is recommended by a
stockholder or otherwise.





Guidelines
for Business Conduct and Governance Guidelines





Our board
of directors has adopted a Code of Business Ethics and Standards of Conduct
which has been designated as the code of ethics for directors, officers and
employees in performing their duties. The Code of Business Ethics and Standards
of Conduct also sets forth information and procedures for employees to report
ethical or accounting concerns, misconduct or violations of the Code in a
confidential manner. The Code of Business Ethics and Standards of Conduct may be
found on our website at www.elephanttalk.com.  We
intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics by
posting such information on our website, at the address specified
above.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that our
directors and executive officers and persons who beneficially own more than 10%
of our common stock (referred to herein as the “reporting persons”) file with
the SEC various reports as to their ownership of and activities relating to our
common stock. Such reporting persons are required by the SEC regulations to
furnish us with copies of all Section 16(a) reports they file. Based solely upon
a review of copies of Section 16(a) reports and representations received by us
from reporting persons, and without conducting any independent investigation of
our own, in 2008, all Forms 3, 4 and 5 were timely filed with the SEC by such
reporting persons except for the following:





1.
            Mr.
      Steven van der Velden did not file timely, but did ultimately file, three
      Form 4’s pertaining to an aggregate of 25
  transactions.


2.
            Mr.
      Bruce Barren failed to file timely, but did ultimately file, 2 Form 4’s
      pertaining to an aggregate of 2
transactions.




67




Item 11.  Executive
Compensation.




The
following table sets forth all annualized compensation paid to our named
executive officers at the end of the fiscal years ended December 31, 2008 and
2007. Individuals we refer to as our "named executive officers" include our
Chief Executive Officer and our most highly compensated executive officers whose
salary and bonus for services rendered in all capacities exceeded $100,000
during the fiscal year ended December 31, 2008.




SUMMARY
COMPENSATION TABLE




Name
      and principal position
              
              Year
              
              Salary
      ($)
              
              Bonus
      ($)
              
              Stock
      Awards ($)(1)
              
              
              Total
      ($)Steven
      van der Velden
              
              2008
              
              —
              
              —
              
              $
              287,168
              (2)
              
              $
              287,168President
      and CEO
              
              2007
              
              —
              
              —
              
              $
              1,932,992
              (3)
              
              $
              1,932,992Martin
      Zuurbier
              
              2008
              
              $
              193,149
              
              —
              
              $
              107,712
              (4)
              
              $
              300,861COO,CTO
              
              2007
              
              $
              164,247
              
              —
              
              $
              855,848
              (5)
              
              $
              1,020,095Mark
      Nije, CFO (>15dec08), General Manager Europe
    (<15dec08)
              
              2008
              
              $
              182,175
              
              —
              
              $
              107,712
              (6)
              
              $
              289,887Mark
      Nije, General Manager, Europe
              
              2007
              
              $
              164,247
              
              —
              
              $
              953,088
              (7)
              
              $
              1,117,335Willem
      Ackermans
              
              2008
              
              
              266,494
              
              —
              
              
              17,952
              (8)
              
              
              284,446CFO
      (resigned 12/15/2008)
              
              2007
              
              
              246,371
              
              —
              
              
              852,848
              (9)
              
              
              1,099,219




(1)
            The
      amounts included in these columns are the aggregate dollar amounts of
      compensation expense recognized by us for financial statement reporting
      purposes in accordance with FAS 123R for the fiscal years ended December
      31, 2008 and December 31, 2007, and thus include amounts from stock awards
      granted in and prior to the indicated year. Pursuant to SEC rules, the
      amounts in this column exclude the impact of estimated forfeitures related
      to service-based vesting conditions. For information on the valuation
      assumptions used in calculating these dollar amounts, see Note 1 to our
      audited financial statements included in this Report for the fiscal years
      ended December 31, 2008 and December 31, 2007, each as filed with the SEC.
      These amounts reflect our accounting expense for these awards and do not
      correspond to the actual value that may be recognized by the individuals
      upon sale. During the fiscal year ended December 31, 2008, there were no
      award forfeitures related to service-based vesting
      conditions.  Changes in compensation in the above table may
      arise as a result of exchange rate differences.  Any changes in
      compensation in real terms can be found in the notes
  below.






68




(2)
            Comprised
      of 135,168 shares of restricted stock paid as salary for 2008 but excludes
      135,168 shares issued in 2008 as salary for
  2009.


(3)
            Comprised
      of 770,240 shares of restricted stock granted as a signing bonus, plus
      135,168 shares of restricted stock paid as salary for
  2007.




(4)
            Comprised
      of 50,688 shares of restricted stock paid as salary for
      2008 but excludes 50,688 shares issued in 2008 as salary for
      2009.


(5)
            Comprised
      of 352,064 shares of restricted stock granted as a signing bonus, plus
      50,688 shares of restricted stock paid as salary for
  2007.


(6)
            Comprised
      of 50,688 shares of restricted stock paid as salary for
      2008 but excludes 50,688 shares issued in 2008 as salary for
      2009.


(7)
            Comprised
      of 397,824 shares of restricted stock granted as a signing bonus, plus
      50,688 shares of restricted stock paid as salary.


(8)
            Comprised
      of 8,448 shares of restricted stock paid as
  salary.


(9)
            Comprised
      of 394,304 shares of restricted stock granted a s a signing bonus, plus
      8,448 shares of restricted stock paid as
salary.





Narrative Disclosure to Summary
Compensation Table.




Employment
Agreements




Except as
set forth below, we currently have no written or unwritten employment agreements
with any of its officers, directors or key employees.




Steven van der Velden, President and
Chief Executive Officer -We currently have a verbal agreement with Mr.
van der Velden which provides for his continued employment in his present
capacity as President and Chief Executive Officer through December 31, 2009. In
the interim, we issued to Mr. van der Velden 770,240 shares of restricted common
stock, effective January 1, 2007, as an entrance bonus, and have agreed to
compensate him with an annual award of 135,168 shares of restricted common stock
annually through 2009.  We have currently issued all such shares
payable through 2009, and such shares have vested; provided, however, all
restricted shares of common stock are subject to a lockup period until the
earlier of (i) December 31, 2009, or (ii) a change in control of our company. In
the event Mr. van der Velden becomes disabled for a consecutive period greater
than 12 months, his compensation shall be terminated.   Our board
of directors and management are currently in discussions regarding modifications
to the original compensation plan and expect to finalize a revised written
agreement in 2010. In the event of his death, his compensation terminates
immediately; provided, however, his estate will be entitled six months of
compensation. In the case we terminate his employment, any compensation payable
through the end of the calendar year shall become due any payable immediately.
In the case Mr. van der Velden terminates his employment with us, compensation
shall cease immediately, provided, however, that he is entitled to keep all
issued and vested shares of common stock.  Mr. van der Velden is also
entitled to twenty-five vacation days per year, reimbursement of reasonable
travel costs and other expenses, and the use of a laptop computer and
telephone.




Willem Ackermans, former Chief
Financial Officer - Mr. Ackermans resigned from
our board of directors and from his position as CFO effective December 15, 2008.
We had agreed to issue Mr. Ackermans 394,304 shares of restricted common stock,
effective January 1, 2007, as an entrance bonus, and to compensate him with an
annual award of 8,448 shares of restricted common stock and an annual cash
salary of $266,494.  Pursuant to a Settlement Agreement, dated
December 15, 2008, Mr. Ackermans agreed to forfeit the aggregate 420,368 shares
of our common stock to which he was entitled in exchange for a payment in the
aggregate amount of 202,960, payable in installments through December 31,
2010.





69




Martin Zuurbier, Chief Operating
Officer, Chief Technical Officer -We currently have a verbal
employment agreement with Mr. Zuurbier which will provide for his continued
employment in his present capacity as Chief Operating Officer and Chief
Technical Officer through December 31, 2009. In the interim, we have issued Mr.
Zuurbier 352,064 shares of restricted common stock, effective January 1, 2007,
as an entrance bonus, and to compensate him with an annual award of 50,688
shares of restricted common stock and an annual cash salary of $175,590. His
salary was increased effective September 1, 2008, to $228,267. We have currently
issued all such shares payable through 2009, and such shares have vested;
provided, however, all restricted shares of common stock are subject to a
lockup period until the earlier of (i) December 31, 2009, or (ii) a change in
control of our company.   Our board of directors
and management are currently in discussions regarding modifications to the
original compensation plan and expect to finalize a revised plan in 2010. In the
event Mr. Zuurbier becomes disabled for a consecutive period greater than 12
months, his compensation shall be terminated. In the event of his death, his
compensation terminates immediately; provided, however, his estate will be
entitled six months of compensation. In the case we terminate his employment,
any compensation payable through the end of the calendar year shall become due
any payable immediately. In the case Mr. Zuurbier terminates his employment with
us, compensation shall cease immediately provided, however, that he is entitled
to keep all issued and vested shares of common stock. Mr. Zuurbier is also
entitled to twenty-five vacation days per year, reimbursement of reasonable
travel costs and other expenses, and the use of a laptop computer and
telephone.





Mark Nije, Chief Financial Officer,
-We currently have a verbal employment agreement with Mr. Nije which
will provide for his continued employment following the function of General
Manager Europe he held until 15 December 2008 and subsequent function as Chief
Financial Officer through December 31, 2009. In the interim, we have issued to
Mr. Nije 397,824 shares of restricted common stock, effective January 1, 2007,
as an entrance bonus, and to compensate him with an annual award of 50,688
shares of restricted common stock and an annual cash salary of $175,590. His
salary was increased effective September 1, 2008, to $201,929. We have currently
issued all such shares payable through 2009, and such shares have vested;
provided, however, all restricted shares of common stock are subject to a
lockup period until the earlier of (i) December 31, 2009, or (ii) a change in
control of our Company.  Our board of directors
and management are currently in discussions regarding modifications to
the original compensation plan and expect to finalize a revised plan in 2008. In
the event Mr. Nije becomes disabled for a consecutive period greater than 12
months, his compensation shall be terminated. In the event of his death, his
compensation terminates immediately; provided, however, his estate will be
entitled six months of compensation.  In the case we terminate his
employment, any compensation payable through the end of the calendar year shall
become due any payable immediately. In the case Mr. Nije terminates his
employment with us, compensation shall cease immediately. Mr. Nije is also
entitled to twenty-five vacation days per year, reimbursement of reasonable
travel costs and other expenses, and the use of a laptop computer and
telephone.





Outstanding
Equity Awards





There
were no outstanding equity awards at the end of fiscal 2008 with respect to our
named officers.




70




DIRECTOR
COMPENSATION




Compensation
of Directors Summary Table





The
following table represents compensation paid in 2008 to our directors who are
not “named executive officers.”





Name
            
            Fees
      Earned or
              Paid
      in Cash
              ($)
            
            
            Stock
      Awards ($)(1)
            
            
            Option
      Awards
              ($)
            
            
            Non-Equity
      Incentive Plan Compensation
              ($)
            
            
            Non-Qualified
      Deferred Compensation Earnings ($)
            
            
            All
      Other Compensation
            
            
            Total
              ($)Bruce
      Barren
            
            
            —
            
            
            $
            222,750
            (2)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            222,750Johan
      de Jager
            
            
            —
            
            
            $
            110,000
            (3)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            110,000Yves
      van Sante
            
            
            
            
            
            $
            110,000
            (3)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            110,000Roderick
      de Greef
            
            
            
            
            
            $
            89,833
            (4)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            89,833






(1)
            Calculated
      in accordance with FAS 123R, and valued at $0.22.(2)
            Consists
      of 1,012,500 shares of common
stock.





(3)
            Consists
      of 500,000 shares of common stock.


(4)
            Consists
      of 408,333 shares of common stock.





Narrative
to Director Compensation




Effective
November 15, 2008, we issued 1,012,500 shares of our common stock to Mr. Barren
for his service through December 31, 2010.  We also issued to QAT
Investments SA on behalf of each of Messrs. Dejager and van Sante, on November
18 and November 15, 2008, respectively, 500,000 shares of our common stock for
their service through December 31, 2010.  Finally, effective November 15,
2008, we issued 408,333 shares of our common stock to Mr. de Greef for his
service through December 31, 2009.  These shares of common stock vested
immediately.  In the event the directors are no longer in our service,
they will not be required to return the shares of common stock.




Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.





Beneficial Ownership of Principal
Stockholders, Officers and Directors




The
following table sets forth, based on 53,758,445 shares of common stock
outstanding and as of March 31, 2009, certain information as to the stock
ownership of each person known by us to own beneficially five (5%) percent or
more of the outstanding common stock, of each of the our named officers and
directors who owns any shares and of all officers and directors as a group. In
computing the outstanding shares of common stock, we have excluded all shares of
common stock subject to options or warrants that are not currently exercisable
or exercisable within 60 days and are therefore not deemed to be outstanding and
beneficially owned by the person holding the options or warrants for the purpose
of computing the number of shares beneficially owned and the percentage
ownership of that person. Unless otherwise indicated, the address for each
person listed below is c/o Elephant Talk Communications, Inc., Schiphol Blvd
249, 1118 BH Schiphol, The Netherlands.




71




Name
      of Beneficial Holder
            
            Number
      of Shares of Common Stock Owned*
            
            
            Percent
      of Class as of 31 March 2009Rising
      Water Capital AG (1)
            
            
            28,188,087
            (2)
            
            
            51.65
            %CMV
      Invest II CVA (3)
            
            
            8,689,660
            (4)
            
            
            14.74
            %Q.A.T.
      Investments SA (5)
            
            
            29,499,300
            (6)
            
            
            53.19
            %Steven
      van der Velden
            
            
            43,218,949
            (7)
            
            
            72.45
            %Johan
      Dejager
            
            
            33,054,387
            (8)
            
            
            58.61
            %Yves
      van Sante
            
            
            31,734,269
            (9)
            
            
            56.33
            %Martin
      Zuurbier
            
            
            28,692,235
            (10)
            
            
            52.58
            %Mark
      Nije
            
            
            384,913
            (11)
            
            
            0.72
            %Bruce
      Barren
            
            
            850,000
            
            
            
            1.58
            %Roderick
      de Greef
            
            
            408,333
            
            
            
            0.76
            %All
      Officers and Directors as a Group
            
            
            47,144,971
            
            
            
            76.03
            %





*
Calculated in accordance with Rule 13d-(3)(d)(1) under the Securities Exchange
Act of 1934.





(1) As further described below, Messrs.
van der Velden, Zuurbier, Dejager and van Sante hold shared voting power and
dispositive power over the shares held by RWC.  To our knowledge,
RWC’s address of record is Baarerstrasse 135, 6301 Zug,Switzerland.





(2)
Includes warrants to purchase 338,029 shares of our common stock at $1.05 per
share, warrants to purchase 338,029 shares of our common stock at $1.26 per
share, and warrants to purchase 169,015 shares of our common stock at $1.47 per
share.





(3) Mr.
van der Velden owns a 40.75% ownership interest in CMV Invest II CVA (“CMV II”),
and therefore controls shared voting and dispositive power over the securities
held by this entity. To our knowledge, CMV II’s address of record is Rubensheide
73, 2950 Kappellen, Belgium.





(4)
Includes warrants to purchase 3,475,864 shares of our common stock at $1.26 per
share, and warrants to purchase 1,737,932 shares of our common stock at $1.47
per share.





(5) Mr.
van der Velden holds a 30.79% ownership interest in QAT. Messrs. Dejager and van
Sante hold a direct 3.73% and an indirect 3.11% interest in QAT,
respectively.   By virtue of their ownership interests in QAT and
their seats on its board of directors, Messrs. van der Velden, Dejager and van
Sante therefore hold shared voting and dispositive power over the securities
held by this entity.  Q.A.T. Investments, S.A. (“QAT”) holds a 51.3%
interest in Rising Water Capital, A.G. (“RWC”).





(6)
Includes warrants to purchase 357,172 shares of our common stock at $1.05 per
share, warrants to purchase 357,172 shares of our common stock at $1.26 per
share, warrants to purchase 178,586 shares of our common stock at $1.47 per
share owned directly by QAT.  Also includes shares beneficially owned
by RWC, including those described in footnote (2) hereof.





(7) Mr.
van der Velden holds a 30.79 ownership interest in QAT, and also indirectly
holds a 17% interest in RWC through his 100% ownership interest in Interfield
Consultancy Ltd. (“Interfield”).  Includes shares of common stock held
by RWC, QAT, and CMVII.  In addition, this amount includes 1,728,697
shares held by CMV Invest CVA and 975,744 shares held by
Interfield.





(8)
Includes warrants to purchase 619,048 shares of our common stock at $1.26 per
share, and warrants to purchase 309,524 shares of our common stock at $1.47 per
share, as well as the shares of common stock held by QAT and RWC.





(9)
Includes shares of common stock held by QAT and RWC, as well as 366,001 shares,
warrants to purchase 347,587 shares of our common stock at $1.05 per share,
warrants to purchase 347,587 shares of our common stock at $1.26 per share, and
warrants to purchase 173,794 shares of our common stock at $1.47 per share, each
held by Amelia and Associates SA. Mr. van Sante holds a 33% ownership interest
in Amelia & Associates SA (“Amelia”) and therefore holds shared voting and
dispositive power over the securities held by this entity.





72




(10)
Includes shares held by Interact and RWC, as well as 504,148 shares of our
common stock held by Interact WLL.  Mr. Zuurbier indirectly holds
approximately 17% of the outstanding capital stock of RWC, which stock is held
on a fiduciary basis by Interfield.





(11) Mr.
Nije holds .32% and .16% of QAT and RWC, respectively, and is a partner of QAT,
but does not control the voting and dispositive power of the securities held by
these entities.  While 167,616 shares of our common stock payable to
Mr. Nije under his compensation arrangement with us were issued directly to QAT,
Mr. Nije disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest there.




Item
13.  Certain Relationships and Related Transactions and Director
Independence.





On December 15, 2005, we executed a
Convertible Promissory Note (the “Note”) in the principal amount of $3.5 million
to Rising Water Capital (“RWC”), an investor and an entity controlled by our
Chief Executive Officer, with funds to be drawn in stages. The Note was
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) (pre-split) of
principal amount per share of common stock. The Note did not have any beneficial
conversion feature attached to it since the conversion rate was equal to the
market price of the common stock of $0.035 (pre-split), on the closing of
agreement. The Note was convertible to the extent that we had sufficient
authorized common stock. The Note had a term of thirty (30) months during which
time interest at the rate of 10% per annum accrued from the date advances were
drawn by us. The Note was secured by shares owned by our agent in our
subsidiaries. The Note provided for a balloon payment of principal and accrued
interest at maturity or conversion into common stock.





As of December 31, 2007, the entire
principal of $3,500,000 had been received. We recorded accrued interest of
$889,881and $735,298 as of December 31, 2008 and December 31, 2007,
respectively.





On June 9, 2008, we and RWC entered
into a settlement agreement, effective May 13, 2008 (the “Settlement
Agreement”), whereby RWC agreed to convert the Note held by it in the amount of
$3,500,000 and accumulated interest of $889,881 into our common stock. As a
result, total number of shares post reverse stock split issued as a result of
the conversion was 5,017,007, based on a post reverse stock split conversion
price of $0.875.





On May 26, 2006, we executed a second
Convertible Promissory Note (the “2nd Note”)
in the principal sum of $3,000,000 with RWC. The 2nd Note
had a term of thirty (30) months, during which time interest on the principal
amount would accrue from the date of this 2nd Note at
an annual interest rate of 10%. The 2nd Note
provided for a balloon payment of principal and interest accrued at maturity.
The 2nd Note
was secured by shares owned or to be owned by our agent in our subsidiaries. The
2nd
Note was also convertible during the term, in whole or in part, into common
shares at a conversion price of seven cents ($0.07) (pre-split) per share. The
2nd
Note did not have any beneficial conversion feature attached to it since the
conversion rate was equal to the market price of the common stock of $0.07
(pre-split), on the closing of agreement.  We recorded accrued
interest of $549,289 and $417,321 as of December 31, 2008 and December 31, 2007
respectively.





On June 9, 2008, we and RWC entered
into the Settlement Agreement whereby RWC agreed to convert the 2nd note
principal amount of $3,000,000 and interest of $549,289 into our common stock.
RWC also agreed to fund the remaining balance under the $3,000,000 note. In
order to induce RWC to convert the promissory note, we agreed to reduce the
conversion price of the $3,000,000 note to the price at which we offer our
common stock in a subsequent financing with a minimum of $1,000,000 in gross
proceeds. The conversion price was adjusted to reflect the reverse stock split.
As a result, the total number of shares (pre Reverse Split 1:25) amounted to
84,506,891.  The number of post Reverse Stock Split shares issued as a
result of the conversion was 3,380,276 (post reverse stock split price of
$1.05).





In connection with the conversion of
the second RWC Note we originally recorded $1,200,000 as deemed dividend as a
result of reduction in the conversion price from the original conversion price.
However, in the third quarter we determined that in accordance with EITF 96-19
"Debtors Accounting for a Modification or Exchange of Debt Instruments" the
$1,200,000 Beneficial Conversion feature should be expensed in the P&L, and
this adjustment was recorded.




73




RWC is
the beneficial holder of 28,188,087shares of our common stock.  Quercus
Aimer Trust Investments SA (“QAT Investments”) holds a 51.3% ownership interest
in RWC.  Additionally, Mr. van der Velden, the our President and Chief
Executive Officer, is the Chairman of QAT Investments, on the management board
of QAT Investments and holds a 30.79% ownership interest in QAT
Investments.  Mr. Nije, our Chief Financial Officer, is a principal at
QAT Investments and holds a 0.32% ownership interest in QAT
Investments.  Mr. van Sante, one of our directors, is the Chief
Executive Officer of QAT Investments, on the management committee of QAT
Investments and also holds a 33% ownership interest in Amelia & Associates
SA (“Amelia”) which holds an 18.4% ownership interest in QAT
Investments.  Mr. Dejager, one of our directors, is on the management
board of QAT Investments and holds a 7.28% ownership interest in QAT
Investments.  Interfield Consultancy SI Ltd. (“IFC”), a company
wholly-owned by Mr. van der Velden, holds a 34% interest in RWC, of which
approximately 17% is held in a fiduciary capacity for the benefit of Mr.
Zuurbier, our Chief Operating Officer, Chief Technical Officer, and Director.




On August
22, 2007, the Board approved the sale of approximately 4,160,000 shares of
restricted common stock to accredited investors.  As part of this
transaction, CMV Invest CVA (“CMV”) agreed to purchase 1,728,697 shares of
restricted common stock in the Company.  Mr. van der Velden holds a 27.25%
ownership interest in CMV.




On May 8,
2008 we entered into a placement agent agreement with Quercus Management Group
N.V. (“QMG”), the wholly owned subsidiary of QAT, and Amelia pursuant to which
QAT (on behalf of QMG) and Amelia were each issued 16,667 shares of our common
stock in connection with their participation in the financing (the “2008
Financing”).  In addition, pursuant to the terms of the placement
agent agreement, and as part of their compensation for acting as placement agent
in a private offering of securities, QAT (on behalf of QMG) was paid a
commission of $469,764 and issued warrants to purchase 357,172 shares of our
common stock at $1.05 per share, warrants to purchase 357,172 shares of our
common stock at $1.26 per share and warrants to purchase 178,586 shares of our
common stock at $1.47 per share. Amelia was paid a commission of $458,231 and
issued warrants to purchase 347,587 shares of our common stock at $1.05 per
share, warrants to purchase 347,587 shares of our common stock at $1.26 per
share and warrants to purchase 173,794 shares of our common stock at $1.47 per
share.





Pursuant
to the terms of the Settlement Agreement, upon conversion of the 2nd Note,
we agreed to make an incentive payment to RWC, commensurate with any fees paid
in connection with a financing, pro rata, based upon the aggregate amount raised
in such financing, whether equity or debt, of at least $1.0 million (the
“Incentive Payment”).




On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment.  As a result of our private placement of securities
in excess of $1.0 million, RWC is additionally entitled, as an Incentive
Payment, approximately $451,915 in cash and was issued warrants to purchase
338,029 shares of our common stock at $1.05 per share, warrants to purchase
338,029 shares of our common stock at $1.26 per share and warrants to purchase
169,015 shares of our common stock at $1.47 per share.  In lieu of the
cash payment to RWC was entitled, on January 2, 2009, RWC accepted 742,000
shares of our common stock, based on a conversion price of $0.60 per
share.




In the
2008 Financing, CMV Invest II CVA (“CMV II”) purchased approximately 2,400,000
shares of our common stock for approximately $2.5 million.  Additionally,
CMV II holds warrants to purchase 3,475,864 shares of our common stock at $1.26
per share and warrants to purchase 1,737,932 shares of our common stock at $1.47
per share.  Mr. van der Velden holds a 40.75% ownership interest in CMV
II.




74




On May 8,
2008 and in connection with the 2008 financing, we entered into a placement
agent agreement with Quercus Management Group N.V. (“QMG”), the wholly owned
subsidiary of QAT, and Amelia pursuant to which QAT (on behalf of QMG) and
Amelia were each issued 16,667 shares of our common stock in connection with
their participation in the financing (the “2008 Financing”).  In
addition, pursuant to the terms of the placement agent agreement, and as part of
their compensation for acting as placement agent in a private offering of
securities, QAT (on behalf of QMG) was paid a commission of $469,764 and issued
warrants to purchase 357,172 shares of our common stock at $1.05 per share,
warrants to purchase 357,172 shares of our common stock at $1.26 per share and
warrants to purchase 178,586 shares of our common stock at $1.47 per share.
Amelia was paid a commission of $458,231 and issued warrants to purchase 347,587
shares of our common stock at $1.05 per share, warrants to purchase 347,587
shares of our common stock at $1.26 per share and warrants to purchase 173,794
shares of our common stock at $1.47 per share.   On March 31,
2008, in lieu of additional cash compensation owed to QMG and Amelia for their
services in connection with the 2008 Financing, we issued 34,000 shares of
common stock  to QAT (at the request of QMG) and 33,000 shares of
common stock to Amelia.




On
January 27, 2009, QAT II Investments SA, a closed-end fund of QAT Investments,
entered into a preliminary loan agreement with us whereby QAT II Investments
will provide us with $ 1,300,000.  According to the terms, the loan will
bear interest at a rate of twelve percent (12%) per annum and shall be repaid
either: (1) if QAT II Investments and we sign an investment agreement, the
amount due under the loan will be reduced by the investment amount pursuant to
the investment agreement, or (2) if no investment agreement is executed, the
principal amount of the loan plus interest is due and payable by June 30, 2009.
 On February 15, 2009, February 23, 2009, and March 29, 2009, QAT II
Investments entered into three additional loan agreements with us whereby QAT II
Investments agreed to provide us with $600,000, $600,000 and $600,000,
respectively.  The outstanding principal and interest shall become
immediately due and payable in the event we fail to make required payments of
principal and interest, or otherwise breaches the agreements and fails to cure
such breach upon twenty (20) days notice, or if it disposes of its properties or
assets without QAT II Investments’ prior consent, or if we file a petition for
bankruptcy or otherwise resolves to wind up its affairs.  All
agreements and amounts contemplated euros with a conversion rate of 1.30 EUR/USD
used for the purposes of this Report.  Deviations may occur with our
prior 8-K filings due to the use of a different exchange rate.




All
future transactions between us and our officers, directors or five percent
stockholders, and respective affiliates will be on terms no less favorable than
could be obtained from unaffiliated third parties and will be approved by a
majority of our independent directors who do not have an interest in the
transactions and who had access, at our expense, to our legal counsel or
independent legal counsel.





Director
Independence





Our board
of directors has determined that Roderick de Greef and Bruce Barren are
independent for NASDAQ Stock Market purposes. Roderick de Greef and Bruce
Barren, elected in our shareholders’ meeting on January 15, 2008, were appointed
as members of the standing committees of the Board of Directors. These
committees are: the Audit Committee, the Compensation Committee and
the Nominating and Corporate Governance Committee.





In
addition, the members of our Audit Committee each qualify as “independent” under
special standards established by the U.S. Securities and Exchange Commission
(“SEC”) for members of audit committees. The Audit Committee also includes at
least one independent member who is determined by the board of directors to meet
the qualifications of an “audit committee financial expert” in accordance with
SEC rules, including that the person meets the relevant definition of an
“independent director.” Roderick de Greef is the independent director who has
been determined to be an audit committee financial expert. Stockholders should
understand that this designation is a disclosure requirement of the SEC related
to Mr. de Greef’s experience and understanding with respect to certain
accounting and auditing matters. The designation does not impose upon Mr. de
Greef any duties, obligations or liability that are greater than are generally
imposed on him as a member of the Audit Committee and the board of directors,
and his designation as an audit committee financial expert pursuant to this SEC
requirement does not affect the duties, obligations or liability of any other
member of the Audit Committee or the board of directors. Our board of directors
also determined that each Audit Committee member has sufficient knowledge in
reading and understanding financial statements to serve on the Audit
Committee.




75




Item 14. Principal Accountant Fees and
Services.




Audit Fees.The aggregate fees
billed by Kabani & Company (“Kabani”) for professional services rendered for
the review of our quarterly financial statements and the audit of our annual
financial statements for the year ended December 31, 2007 and the review of
the financial statements included in our Current Reports on Form 10-Q during the
2008 fiscal years totaled $185,000 and $50,000 respectively. The above amounts
include interim procedures as audit fees as well as attendance at audit
committee meetings.





The
aggregate fees billed by BDO Siedman (“BDO”) for professional services rendered
for the audit of our annual financial statements for the year ended
December 31, 2008 and the review of the financial statements included in
our Current Reports on Form 10-Q during the 2008 fiscal year totaled $95,000 The
above amounts include interim procedures as audit fees as well as attendance at
audit committee meetings.





Audit-Related Fees.The
aggregate fees billed by Kabani for audit-related fees for the years ended
December 31, 2008 and 2007 were $0 and $0, respectively.





The
aggregate fees billed by BDO for audit-related fees for the year ended
December 31, 2008 were $95,000.





Tax Fees.The aggregate fees
billed by Kabani for professional services rendered for tax compliance, for the
years ended December 31, 2008 and 2007 were $0 and $6,000
respectively.





The
aggregate fees billed by BDO for professional services rendered for tax
compliance, for the year ended December 31, 2008 were $0.





All Other Fees.The aggregate
fees billed by Kabani for products and services, other than the services
described in the paragraphs captions “Audit Fees”, and “Tax Fees” above for the
years ended December 31, 2008 and 2007 totaled $0 for both
years.





The
aggregate fees billed by BDO for products and services, other than the services
described in the paragraphs captions “Audit Fees”, and “Tax Fees” above for the
year ended December 31, 2008 totaled $2,030.





The Audit
Committee of our Board of Directors has established its pre-approval policies
and procedures, pursuant to which the Audit Committee approved the foregoing
audit, tax and non-audit services provided by Kabani in 2007 and BDO in 2008.
consistent with the Audit Committee’s responsibility for engaging our
independent auditors, all audit and permitted non-audit services require
pre-approval by the Audit Committee. The full Audit Committee approves proposed
services and fee estimates for these services. The Audit Committee chairperson
has been designated by the Audit Committee to approve any audit-related services
arising during the year that were not pre-approved by the Audit Committee. Any
non-audit service must be approved by the full Audit Committee. Services
approved by the Audit Committee chairperson are communicated to the full Audit
Committee at its next regular meeting and the Audit Committee reviews services
and fees for the fiscal year at each such meeting. Pursuant to these procedures,
the Audit Committee approved the foregoing audit services provided by Kabani and
BDO.





76




Part IV




Item
15. Exhibits, Financial Statement Schedules




The
following exhibits are filed with this Report.




Number
            
            Description3.1
            
            Amended
      and Restated Articles of Incorporation (1)3.2
            
            Amended
      and Restated By-Laws (2)3.3
            
            Amended
      and Restated Articles of Incorporation, filed with the State of California
      on June 10, 2008. (3)10.1
            
            Stock
      Purchase Agreement dated June 30, 2005, by and among the Company and
      Rising Water Capital, A.G. (4)10.2
            
            Convertible
      Promissory Note dated December 15, 2005, by the Company, in favor of
      Rising Water Capital, A.G. (5)10.3
            
            Equity
      Transfer Agreement, dated January 4, 2006, by and among Zhongrun Chuangtou
      Technology Co.  Ltd. and Guangdong Guangxiang Network
      Information Co., Ltd (6)10.4
            
            Exclusive
      Technical Consulting  and Services Agreement, dated January 2,
      2006, by and among Jinfuyi Technology (Beijing) Co., Ltd. and Beijing
      Chinawind Communication Information Technology Co., Ltd.
    (6)10.5
            
            Convertible
      Promissory Note dated May 26, 2006, by the Company, in favor of Rising
      Water Capital, A.G. (7)10.6
            
            Agreement
      of Purchase and Sale, dated November 16, 2006, by and among the Company,
      Elephant Talk Europe Holding B.V. and Beltrust A.G. (8)10.7
            
            Form
      of Common Stock Purchase Agreement, dated August 31, 2007, by and among
      the Company and certain investors. (9)10.8
            
            Settlement
      Agreement, entered by and between the Company and Rising Water Capital
      AG.(10)10.9
            
            Loan
      Agreement dated January 27, 2009, by and between the Registrant and QAT.
      (11)Loan
      Agreement dated February 15, 2009, by and between the Registrant and QAT
      II Investments. (12)10.10
            
            Loan
      Agreement dated February 23, 2009, by and between the Registrant and QAT
      II Investments.(12)10.11
            
            Loan
      Agreement dated March 31, 2009, by and between the Registrant and QAT II
      Investments.(12)10.12
            
            Security
      Agreement dated March 30, 2009 by and between the Registrant and QAT II
      Investments. (12)14.1
            
            Code
      of Ethics (1)16.1
            
            Letter
      of Kabani & Company, Inc., dated September 3, 2008, regarding change
      in independent registered public accounting firm.(13)21.1
            
            Subsidiaries
      of the Registrant (*)23.1
            
            Consent
      public accounting firm BDO Seidman, LLP23.2
            
            Consent
      public accounting firm Kabani & Company31.1
            
            Certification
      of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (*)(**)31.2
            
            Certification
      of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (*)(**)32.1
            
            Certification
      of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (*)(**)32.2
            
            Certification
      of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (*)(**)




*
            Filed
      Herewith


**
            A
      signed original of this written statement has been provided to the Company
      and will be retained by the Company and furnished to the Securities and
      Exchange Commission or its staff upon request.


(1)
            Filed
      as part of our Definitive Proxy Statement on Schedule 14A on December 28,
      2007.


(2)
            Filed
      as an Exhibit to our Current Report on Form 8-K on January 22,
      2008.


(3)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 12,
      2008.


(4)
            Filed
      as an Exhibit to our Current Report on Form 8-K on July 7,
      2005.




77






(5)
            Filed
      as an Exhibit to our Current Report on Form 8-K on December 16,
      2005.


(6)
            Filed
      as an Exhibit to our Current Report on Form 8-K on January 13,
      2006.


(7)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 5,
      2006.


(8)
            Filed
      as an Exhibit to our Current Report on Form 8-K on December 1,
      2006.


(9)
            Filed
      as an Exhibit to our Current Report on Form 8-K on November 19,
      2007.


(10)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 12,
      2008.


(11)
            Filed
      as an Exhibit to our Current Report on Form 8-K on February 2,
      2009.


(12)
            Filed
      as an Exhibit to our Current Report on Form 8-K on April 9,
      2009.


(13)
            Filed
      as an Exhibit to our Current Report on Form 8-K on September 5,
      2008.




78




SIGNATURES





In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.




ELEPHANT
      TALK COMMUNICATIONS, INC.Date:
      April 15, 2009
              By:
              /s/
      Steven van der VeldenName:
      Steven
      van der VeldenTitle:
      President
      and Chief Executive Officer




In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.




Person
              
              Capacity
              
              Date/s/
      Steven van der Velden
              
              Chairman
      of the Board and Director (Principal Executive
    Officer)
              
              April
      15, 2009Steven
      van der Velden/s/
      Mark Nije
              
              Chief Financial
      Officer
              
              April
      15, 2009Mark
      Nije/s/
      Martin Zuurbier
              
              Chief Operating
      Officer, Chief Technical Officer, Director.
              
              April
      15, 2009Martin
      Zuurbier




/s/
      Yves R. van Sante
              
              Director
              
              April
      15, 2009Yves
      R. van Sante/s/
      Johan Dejager
              
              Director
              
              April
      15, 2009Johan
      Dejager/s/
      Bruce W. Barren
              
              Director
              
              April
      15, 2009Bruce
      W. Barren




/s/
      Roderick de Greef
                
                Director
                
                April
      15, 2009Roderick
      de Greef


79