**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**








**FORM
      10-KSB**








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





For
      fiscal year ended December 31, 2005





 ̈ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934








Commission
      file number: **000-30061**








**ELEPHANT
      TALK COMMUNICATIONS, INC.**


(Exact
      name of registrant as specified in its charter)





CALIFORNIA


(State
      of
      incorporation)





95-4557538


(I.R.S.
      Employer Identification No.)





438
      East Katella Avenue, Suite 217, Orange, California 92867


(Address,
      including zip code, of registrant's executive offices)





(714)
      288-1570


(Telephone
      number, including area code, of registrant’s executive offices)








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








Title
      of
      each class


None








Name
      of
      each exchange on which registered


None








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


No
      par
      value











*Table
            of Contents*




Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes x No o
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act. Yes o No x
 
 Check
        if
        disclosure of delinquent filers in response to item 405 of Regulation S-B
        is not
        contained in this form, and no disclosure will be contained, to the best
        of
        registrant's knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-KSB or any amendment
        to
        this Form 10-KSB. x
 
 Issuer's
        revenues for most recent fiscal year: $282,417
 
 State
        the
        aggregate market value of voting stock held by non-affiliates computed by
        reference to the price at which the stock was sold, or the average bid and
        asked
        prices of such stock, as of a specified date within the past 60 days: As
        of May
        16, 2006, approximately $18,275,000.
 
 State
        the
        number of shares outstanding of each of the issuer's classes of common equity,
        as of the latest practicable date: As of May 16, 2006, there were 185,250,088
        shares of common stock outstanding.





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


2005
      Form
      10-KSB Annual Report








Table
      of
      Contents








PagePART
                IItem
                1. Description of Business
            4Item
                2. Description of Property
            17Item
                3. Legal Proceedings
            18Item
                4. Submission of Matters to a Vote of Security
                Holders
            18PART
                IIItem
                5. Market for Common Equity and Related Stockholder
                Matters
            18Item
                6. Management's Discussion and Analysis or Plan of
                Operation
            21Item
                7. Consolidated Financial Statements
            26Item
                8. Changes in and Disagreements with Accountants on
                Accounting and Financial Disclosure
            26Item
                8A. Controls and Procedures
            27Item
                8B. Other Items
            28PART
                IIIItem
                9. Directors, Executive Officers, Promoters and Control
                Persons; Compliance With Section 16(a) of the Exchange
                Act
            28Item
                10. Executive Compensation
            30Item
                11. Security Ownership of Certain Beneficial Owners
                and
                Management
            31Item
                12. Certain Relationships and Related
                Transactions
            33PART
                IVItem
                13. Exhibits, and Reports on Form 8-K
            33Item
                14. Principal Accountant Fees and
                Services
            34Signatures
            35








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Explanatory
      Note:





Unless
      otherwise indicated or the context otherwise requires, all references herein
      to
      the "Company" are to Elephant Talk Communications, Inc., a California
      corporation, its wholly owned subsidiary, Elephant Talk Limited, its wholly
      owned subsidiary Guangdong Elephant Talk Network Consulting Limited, its wholly
      owned subsidiary True Precise Technology Limited, its wholly owned subsidiary
      Full Mark Limited, and its majority owned (50.56%) subsidiary Elephant Talk
      Middle East & Africa FZ-LLC. All share and per share information contained
      herein has been adjusted to reflect a one for ten reverse split of the Company's
      common stock completed and effected on January 22, 2002.





**PART
      I**





**Item1: Descriptionof Business**





Organization
      and Nature of Operations





Elephant
      Talk Communications, Inc. (herein referred to as "Elephant Talk," "ETCI," "We,"
      "Our," or "Company" formerly known as Staruni Corporation), was incorporated
      on
      February 5, 1962 under the laws of the state of California as Altius
      Corporation. The Company was involved in manufacturing of freeway signs. In
      March 1997, Altius acquired Starnet Universe Internet, Inc., a web developer
      and
      Internet Service Provider (ISP) and changed its name to Staruni
      Corporation.





Pursuant
      to an Agreement of Merger and Plan of Reorganization, effective August 27,
      2001,
      and through the subsequent transaction that closed on January 4, 2002, Staruni
      Corporation, a California corporation merged with Elephant Talk Limited, a
      limited liability company incorporated in Hong Kong. Per the terms of the merger
      agreement, Staruni continued its corporate existence under the laws of
      California and Elephant Talk Limited became its wholly-owned subsidiary. In
      conjunction with the merger, Staruni changed its name to Elephant Talk
      Communications, Inc. in order to emphasize that the new focus of ETCI will
      be
      the business of Elephant Talk Limited. Each holder of ordinary shares of
      Elephant Talk Limited common stock, par value of HK$1 (One Hong Kong Dollar)
      immediately prior to the effective time of the merger date, by virtue of the
      merger and without any action on the part of such holder, was entitled to
      receive, as of the merger date, such number of shares of common stock of ETCI,
      no par value, as the number of shares of Elephant Talk Limited common stock
      owned by such holder as of the merger date. Collectively, following the merger,
      the former holders of Elephant Talk Limited common stock held 31,164,210 shares
      of our common stock, which represented 90% of our issued and outstanding shares
      of common stock at the time. The merger caused no change in any of the shares
      of
      the ETCI's common stock outstanding on the merger date, and no other securities
      were converted as a result of the merger. At the conclusion of the merger on
      January 4, 2002, The Hartcourt Companies, Inc. ("Hartcourt") retained a majority
      ownership in ETCI.





Elephant
      Talk Limited is currently engaged in long distance telephone business and
      actively pursuing to position itself in mobile value-added service provider
      in
      China. Per the terms of the merger agreement, the Company sold its Internet
      Service Provider ("ISP") business to a related party, Vision Aerospace Inc.
      ("Vision") for 1,000,000 shares of Vision valued at $10,385. Vision is owned
      by
      the former President of the Company. The value of the shares was recorded at
      the
      book value of the assets exchanged to acquire the shares of Vision.





Pursuant
      to the terms of the share exchange agreement, control of the combined companies
      passed to the former shareholders of Elephant Talk Limited.








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Prior
      to
      the merger, Elephant Talk Limited was a 51% owned subsidiary of Hartcourt,
      a
      publicly listed company in the US and Germany. On May 16, 2001, Hartcourt and
      Elephant Talk Limited executed a Sale and Purchase Agreement whereby Hartcourt
      acquired 51% of the ownership interest in Elephant Talk Limited for a total
      consideration of $4,194,000. The terms of the agreement required Elephant Talk
      Limited to increase its authorized capital from 25,000,000 shares to 30,000,000
      shares. Hartcourt subscribed to a block of 5,000,000 new shares; issued
      1,000,000 Hartcourt shares under Rule 144 of the SEC regulations, valued at
      61.9
      cents per share; and executed a promissory note payable to Elephant Talk Limited
      in the amount of $1,250,000 due on February 16, 2002, which was further extended
      for payment to May 31, 2002. In addition, Hartcourt subscribed to another block
      of 10,300,000 Elephant Talk Limited shares from private owners for a
      consideration of $2,325,000 and issued 3,756,058 Hartcourt shares under Rule
      144
      for a combined total of 51% ownership interest in Elephant Talk
      Limited.





Pursuant
      to an execution of a Spin-Off Agreement, dated September 12, 2002, and through
      the subsequent transactions that closed on January 4, 2003, the Company
      terminated its relationship with Hartcourt. Pursuant to the terms of the
      Spin-Off Agreement, the Company received from Hartcourt 17,895,579 of its common
      shares held by Hartcourt and $349,000 in cash advances, in exchange for
      returning 4,756,000 common shares of Hartcourt held by the Company and its
      affiliates, canceling two promissory notes of Hartcourt held by the Company
      and
      its affiliate in the respective amounts of $1,250,000 and $140,595, and
      canceling the indebtedness of cash advances by issuing 5,000,000 of its
      restricted common shares to Hartcourt. In addition to executing the Spin-Off
      Agreement, the parties executed a mutual release to end their relationship
      and
      place each other in a position whereby no party is indebted to the other
      party.





On
      April
      3, 2004, the Company signed a Share Exchange Agreement with its intent to
      acquire 60% of the equity ownership interest in Urumqi General Systems
      Technology Company Ltd. (known as "General System" or "WestSMS"), a leading
      provider of mobile SMS services in the resource rich province of Xinjiang,
      China. On January 5, 2005, the Company completed the above acquisition where
      it
      formed True Precise Technology Limited ("True Precise"), a limited liability
      company registered in British Virgin Islands, as its investment holding company,
      that acquired 60% of the equity ownership interest in General System from Keen
      Solution Group Limited ("Keen Solution"), a limited liability company registered
      under the laws of British Virgin Islands. As consideration for the acquisition,
      the Company issued 23,137,500 restricted common shares valued at $1,436,875
      for
      its 60% equity interest. Upon completion of the transaction, True Precise became
      a wholly-owned subsidiary of the Company and General System became a majority
      owned subsidiary of True Precise.





On
      August
      8, 2005, Keen Solution sent notification informing the Company that it has
      unilaterally decided to terminate the Share Exchange Agreement. The Company
      placed a stop transfer restriction on all of the 23,137,500 common shares it
      issued to Keen Solution. The
      Company has treated True Precise’s transaction as discontinued operation and has
      recorded 23,137,500 common shares as cancelled shares as of December 31, 2005.
      Of those shares, 20,137,500 have been returned to the Company’s treasury, and
      the Company continues to pursue the return of the remainder. The Company has
      evaluated its legal options in connection with the termination of the Share
      Exchange Agreement and came to the conclusion that a mutual rescission of the
      agreement was in the Company’s best interest. The Company still continues to
      pursue the return of 3,000,000 common shares from Keen Solution.





On
      January 17, 2005, pursuant to the Memorandum of Understanding, the Company
      agreed to acquire all of the issued and outstanding shares of Benoit Telecom
      Holding A.G. (“Benoit”), a European telecom company with headquarters at 105
      Gartenstrasse, CH-4052 Basel, from an accredited investor and owner based in
      Europe. The Company has made earnest deposits of $6,043,080 with an escrow
      trust
      company. The Company has completed its due diligence investigation of Benoit
      and
      expects to close the transaction and execute a definitive agreement by May
      31,
      2006.








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Pursuant
        to the terms of an agency agreement in connection with its acquisition of
        Phonetone Telecom Ltd. (“Phonetone”) from Calfin Trust, the Company agreed to
        issue 40,000,000 restricted common shares, pay a cash consideration of $600,000,
        and share 15% of the yearly total profit margin generated by the Company
        or any
        of its affiliated companies from the Phonetone’s premium rate numbers in the
        years 2006, 2007 and 2008. Phonetone is a European telecom service provider
        registered in the British Virgin Islands with administrative offices in Vaduz,
        Furstentum, Liechtenstein. Phonetone is a resale agent of a unique low rate
        international telephone service based on it’s technical platform. As of May 16,
        2006, the Company has advanced $225,562 and 20,000,000 shares of common stock
        valued at $720,000 to Calfin Trust as an earnest deposit towards the proposed
        acquisition of Phonetone. The Company has performed its due diligence on
        the
        telecom service provider and plans to sign a definitive acquisition agreement
        in
        the near future.





On
      April
      20, 2005, the Company formed a joint venture Free Zone Limited Liability company
      to be incorporated in the Dubai Technology, Electronic Commerce and Media Free
      Zone, Dubai, United Arab Emirates (UAE) under the name Elephant Talk Middle
      East
& Africa FZ-LLC (“ET ME&A”). The Company, through its wholly owned
      subsidiary Elephant Talk Limited, has incorporated this joint venture company
      on
      November 6, 2005 and contributed $50,907 towards its equity share capital as
      of
      December 31, 2005. The Company owns 50.54% share of this newly formed joint
      venture company. ET ME&A is committed to spend the necessary funds to keep
      its share of equity investment and is currently seeking regulatory approvals
      for
      obtaining trade and business licenses from the UAE government to conduct its
      business. ET ME&A and has not yet begun operations and plans to operate
      various telecom related businesses in the Middle East and Africa.





Pursuant
      to the Stock Purchase Agreement, the Company agreed to sell to Rising Water
      Capital, A.G., a company registered in Zug, Switzerland (“Rising Water Capital”)
      195,947,395 shares of the Company’s common stock for an aggregate purchase price
      of $7,837,896. The Stock Purchase Agreement provided that Rising Water Capital
      would be entitled to appoint six out of eleven directors of the Company. In
      addition, Rising Water Capital agreed to retain the current management of the
      Company for a five year term. The purpose of this transaction will enable Rising
      Water Capital to infuse capital so that the Company could complete its pending
      acquisitions.





On
      June
      30, 2005, Rising Water Capital closed the purchase of a total of 100,000,000
      shares of common stock at a price of $0.04 per share, representing 49.2% of
      the
      Company’s then issued and outstanding shares of common stock of 203,107,170.
      Inasmuch as the total authorized number of shares of common stock of the Company
      was 250,000,000 shares, management could not sell and therefore, Rising Water
      Capital was unable to purchase the remaining 95,947,395 shares. In addition,
      the
      arrangements with respect to the appointment of Board of Directors have not
      been
      consummated.




On
        December 15, 2005, the Board of Directors of the Company authorized the
        execution and delivery of a Convertible Promissory Note in the principal
        amount
        of $3.5 million (the “Note”) to Rising Water Capital, in exchange for a loan in
        the same principal amount to be drawn down in stages. The Note is convertible
        during the term, in whole or in part, into common shares of the Company at
        the
        conversion price of three and one-half cents ($0.035) of principal amount
        per
        share of common stock. The agreement to issue additional shares was conditional
        subject to the Company obtaining approval for the increase in authorized
        common
        shares. Since the Company has not received the approval to increase its
        authorized common shares and that condition has not been fulfilled as of
        December 31, 2005, the Company is not obliged to issue additional shares.
        As of
        December 31, 2005, the Company received funding of $2,570,300 against the
        $3.5
        million Note. Assuming that the Note is fully converted into common stock,
        the
        Company would be obligated to issue 100,000,000 shares of common stock to
        Rising
        Water Capital, representing an additional 33.0% of the post issuance shares
        of
        common stock outstanding as of December 31, 2005. None of the principal amount
        of the Note has been converted into shares of common stock.





In
      connection with the termination of the True Precise acquisition and cancellation
      of 20,137,500 shares of common stock issued to True Precise, the Company agreed
      to reissue to Rising Water Capital all of the 23,137,500 common shares received
      or to be received, as additional compensation for this failed acquisition.
      The
      successful consummation of the True Precise acquisition had been a condition
      of
      Rising Water Capital's obligation to purchase 195,947,395 shares of common
      stock
      pursuant to a Stock Purchase Agreement, dated June 30, 2005, and, therefore,
      the
      reissuance of these shares is being offered as additional compensation to Rising
      Water Capital.








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On
      July
      11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited formed
      Full Mark Limited, a limited liability company organized under the laws of
      British Virgin Islands, to facilitate acquisitions for the Company in China.
      On
      December 13, 2005, Full Mark formed a wholly owned subsidiary Jinfuyi Technology
      (Beijing) Co. Ltd. (“Jinfuyi”), a limited liability company organized and
      existing under the laws of the Peoples’ Republic of China, with a registered
      capital of $200,000. On January 2, 2006, Jinfuyi and Beijing China Wind
      Telecommunication Information Technology Company Limited, a limited liability
      company organized under the laws of the Peoples’ Republic of China (“Beijing
      China Wind”), entered into an Exclusive Technical Consulting and Services
      Agreement (the ”Service Agreement”), pursuant to which Jinfuyi has the exclusive
      right to provide technical and consulting services in exchange for services
      fees
      of approximately $4,875,000 per year, subject to the right of Jinfuyi to adjust
      the service fee depending on the quantity of the services that it actually
      provides.





On
      January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
      liability company organized and existing under the laws of the Peoples’ Republic
      of China (“Guangdong Elephant Talk”) and an agent of the Company, and Beijing
      Zhongrun Chuangtou Technology Co., Ltd., a limited liability company organized
      and existing under the laws of the Peoples’ Republic of China (the “Vendor”),
      entered into an Equity Transfer Agreement (the ”Agreement”), pursuant to which
      Guangdong Elephant Talk agreed to acquire sixty percent (60%) of the registered
      capital of Beijing China Wind. Pursuant to the Agreement, the purchase price
      for
      60% of Beijing China Wind was agreed to $4,800,000, subject to adjustments
      based
      on Beijing China Wind’s audited net income for fiscal 2005 and 2006, and is
      payable (x) in cash of $2,800,000 in five installments the last of which is
      to
      be paid on January 31, 2007, and (y) by the issuance by the Company to the
      Vendor of 20,000,000 shares of restricted common stock valued at $0.10 per
      share, in four equal installments the last of which is to be issued on January
      31, 2007. The Vendor has the right to exercise an option within 30 days after
      July 31, 2007 to return the 20,000,000 shares of restricted common stock either
      in exchange for a 25% equity interest in Beijing China Wind or for settlement
      in
      cash within 90 days.





The
      purchase price is financed by a combination of issuing its common stock and
      making payments in cash from internal sources, mainly from the $3.5 million
      of
      proceeds advanced to date under the terms of a Convertible Promissory Note
      issued on December 15, 2005, which is discussed above. The terms of the
      Agreement impose several contractual restrictions on the operations of Beijing
      China Wind that may be favorable to the Company. In addition to other
      contractual restrictions, Guangdong Elephant Talk will have the right to appoint
      three of five Board of Directors of the Beijing China Wind.





The
      agency relationship inherent in the Agreement and ancillary documents is
      required in order to comply with the foreign investment laws of the Peoples’
Republic of China. Under such laws, the Company would not be permitted, directly
      or indirectly, to own 60% of Beijing China Wind. Therefore, the Company has
      entered into a declaration of trust agreement with Lui Por and Lin Qui Xia,
      the
      owners of the capital stock of Guangdong Elephant Talk, who are also citizens
      and residents of the Peoples’ Republic of China. The latter have agreed to hold
      their interests in Guangdong Elephant Talk for and on behalf of Elephant Talk
      Limited, wholly owned subsidiary of the Company, and to transfer the 60%
      interest in Beijing China Wind to Elephant Talk Limited or its designee when
      such transfer complies with China’s foreign investment laws. In addition to the
      legal implications of the acquisition which are discussed above, the Company
      plans to consolidate the operations of Beijing China Wind in the Company’s
      consolidated financial statements in accordance with U.S. generally accepted
      accounting principles, because of the Company’s indirect control over the
      operations of Beijing China Wind.








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Background
      of Elephant Talk Limited





Established
      in late 1994, Elephant Talk Limited is located and operated in Hong Kong. The
      Company was previously a provider of international call termination into China.
      However, due to the extreme competitive nature of this market, the Company
      is
      now repositioned as a mobile value-added services provider in China that
      provides the following services:





·
            mobile
                value-added services, viz., short messaging services (SMS) including
                SMS
                based chat and mobile games, interactive voice response services
                (IVRS),
                ring-tone/wall-paper downloads for mobile handsets and mobile
                e-commerce/payment services;


·
            eTalk,
                our pre-paid calling card for PC-to phone service targeted at HK-China
                business commuters;


·
            prepaid
                and post paid phone cards that are distributed in the
                US;


·
            international
                long distance services in wholesale market principally to
                carriers





The
      majority of the Company's revenue on an on-going basis is expected to come
      from
      mobile value-added services. Instead of building the business by itself, the
      Company is in the process of acquiring an established Short Messaging Service
      (SMS) company in China as a cornerstone in its transition to higher margin
      telecommunications industry.





Technology
      infrastructure





Elephant
      Talk Limited's mobile value-added network infrastructure principally comprises
      of Intel based servers that runs on Linux operating system. This messaging
      platform is interconnected with China Mobile's (the leading mobile carrier
      in
      China) nationwide backbone in various points in China providing seamless
      coverage and service to our customers in the major locations in
      China.





Our
      VoIP
      calling card platform has been designed as a PSTN switch with VoIP functions,
      and enables the Group to provide a robust, reliable and quick prepaid product.
      Its architecture includes a backbone switching mechanism that offers an
      integration of circuit-switched and packet-switched networks, and automatically
      detects and adopts the best routing available having regard to carrier cost
      and
      QoS. With the simultaneous use of VoIP and PSTN switching, the company is able
      to achieve lower routing costs through VoIP functionality while retaining stable
      connections and QoS offered by PSTN platform.





This
      VoIP
      system and other voice related network infrastructure is installed at the
      Company's Network Operation Centre in Kwun Tong, Hong Kong and Boston,
      Massachusetts. The Company's integrated network infrastructure comprises of
      a
      combination of voice switches (connected to telephone systems of external
      carriers) and VoIP gateways (connected to the Internet) connecting to each
      other
      through its private telephone exchange system(s) ("PBX"). The configuration
      enables the company to provide telecommunication services to its customers
      on a
      24x7 basis.





Markets
      and Customers





Our
      customers are primarily individual retail customers of mobile value-added
      services in China, with over 1 million retailers at the end of 2004. This group
      of customers can access the Company's services via the internet or from their
      mobile handsets.





Our
      eTalk
      calling card has attracted a dedicated group of HK-China business commuters
      that
      have successfully realized substantial savings from call back to HK as well
      as
      other parts of the world as they travel throughout China.





We
      continue to provide some international call termination services to China and
      other parts of Asia to other carriers around the world. However, due to the
      competitiveness of the market, revenues have all but disappeared and attention
      to this segment has slowly diminished throughout the course of 2004 and
      2005.








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Long-term
      Growth Strategy





Continuing
      to reposition the Company during 2005, management has been actively seeking
      other business opportunities to steer the Company away from the extremely
      competitive and virtually no margin market of international call termination
      to
      the more profitable, growing though still competitive, and mobile value added
      services market in China.





Market
      Opportunity and Size





According
      to the Ministry of Information Industry of China the number of mobile users
      increased by 17.5% and reached 393 million by the end of 2005. Total mobile
      call
      time increase by 33.6% over 2004 and reached 1178.8 billion minutes. 24 billion
      SMS was registered. Long distance international calls registered 9.4% increase
      to 550 million minutes for fixed lines and 11.9% increase to 330 million minutes
      for mobile phones.





Broadband
      internet users reached 37 million. VoIP long distance call within China
      destinations registered 131 billion minutes and overseas long distance calls
      registered 1.4 billion minutes. Judging from the statistics, China’s mobile
      phone usage and long distance calls have been increasing in a substantial rate
      and no signs of slowing down for the next 3 years. While the competition for
      these segments of the market is extremely stiff, the market size continues
      to
      expand and remains attractive for serious players, especially for value-added
      services.





Long-term
      Strategy





The
      Company's long term strategy is to become a major player in the mobile
      value-added services market by becoming the preferred platform for our customers
      around the world to access and/or exchange information with one another, via
      various mediums such as mobile terminals or the internet.





The
      Company intends to continue on this path of repositioning by further acquisition
      of a controlling stake in profitable companies in the coming year. The Company
      is presently involved in discussions to acquire:





·
            Benoit,
                a European based carrier that provides wholesale, free phone, Carrier
                Select and Carrier Pre-Select calls and various premium number rate
                services, such as 0900 service and VoIP services to corporations
                and
                content providers within the European Union. The Company believes
                that we
                can extract considerable synergies with them by integrating our VoIP
                platforms and extend our reach from China into Europe and vice-versa.
                Unforeseen circumstances not withstanding, we expect completion of
                this
                transaction by second quarter of
                2006.





·
            Phonetone,
                a resale agent for a unique low rate international telephone service
                based
                on Company’s agreement with various telecomm operators. It promotes its
                services through extensive media marketing
                network.





·
            Elephant
                Talk Middle East & Africa, a newly incorporated telecom and related
                services operator in the Middle East. Presently, the unit is applying
                for
                the international telecommunication service license, value added
                service
                license and internet service provider license. We intend to progressively
                build a comprehensive IP network to cover most of the Middle East
                countries. All existing voice and data business from our Middle East
                partner, Itsalat International Company Limited, will be terminated
                with
                our new IP network. In addition, the new platform enables us to operate
                international call services, calling cards, mobile value added services
                and networking business in the
                region.





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·
            Beijing
                China Wind, a SMS company in Beijing China, a highly ranked mobile
                value-added service company in China. The company has nationwide
                coverage
                of SMS and MMS. Since its inception in December 2003, Beijing China
                Wind
                has been providing its customers with wireless internet services
                which
                include short messaging services, multimedia messaging services,
                wireless
                application protocol, interactive voice response and ring-back tone
                services as well as a web portal. Short messaging services are the
                Company’s primary wireless internet data service, accounting for
                approximately 86% of the wireless internet services revenue in 2004.
                Beijing China Wind will provide our group a considerable future increase
                in revenues and net profits. Beijing China Wind’s service is mainly
                offered via China Mobile’s Monternet and China Unicom services. China
                Mobile is the dominant cellular service provider in China, with over
                250
                million users. Billing and collection is done by cellular service
                provider
                and settlement occurs monthly. Presently, the service provider splits
                15%
                of the collected revenue.





Mobile
      downloads: Ring tones, wall paper, games and canned messages are currently
      charged on a monthly subscription with unlimited download basis.





Competition:
      Competition in the SMS market in China is intense. The market is very fragmented
      with over 4000 content/service providers offering consumer related services
      that
      are similar to what Beijing China Wind is offering. Sohu, Netease, Sina.com,
      Tom
      Online are the market leaders. These four content/service providers collectively
      own about 60% of the canned message market in China. On the IVRS front, almost
      all leading SMS providers now offer IVRS. Competition is expected to be intense
      as well.





Interactive
      Voice Recognition Service (IVRS): Users access voice based information via
      their
      handsets by dialing a specific number. Then they select the desired information
      by entering the appropriate commands from their handsets. Beijing China Wind
      presently offers a wide range of information including weather, stock
      information, news, sport results and other topical item of interest. Charges
      are
      calculated on a per unit time basis.





Beijing
      China Wind ongoing strategy: Phone handset will become a totally new media
      platform crossing with TV, newspaper and website. It is Beijing China Wind’s
      focus to be the leader of this new media in China market. While its revenue
      from
      SMS and MMS has been stable for some time, it has to find ways to boost the
      portion of pay-per-piece user ratio to increase profit. New IVR services are
      being developed to strengthen the IVR revenue. On the WAP front, it has been
      focusing its development effort on embracing its WAP services around the up
      and
      coming 3G users in China.





We
      believe that our market concentration in China will be beneficial to the Company
      as the telecommunications industry in China experiences continuous growth along
      with the development and modernizations of its economy. As customers' needs
      become more sophisticated and price-sensitive, the market demand for eTalk
      is
      expected to increase significantly. The Accession to WTO makes the demand for
      international calling services even bigger. We rely on an increasingly
      transparent regulatory environment in China through her Telecommunications
      Regulations, and its gradual opening up of the domestic market to foreign
      participation which should create massive opportunities that facilitate progress
      toward an improved operating environment.





With
      the
      planned acquisition of Benoit Telecom and the formation of Middle East telecom
      company, ET will expand its world wide network into the European and Middle
      East
      countries. The reach into the European network provides ET with a better
      opportunity to lower its termination cost to some European countries and enables
      ET to assert better quality control over the network and its associated
      elements. It is our aim to leverage on our world wide network to provide the
      best voice quality at competitive price in the industry.








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PC-to-phone
      service, eTalk





In
      Asian
      Pacific markets, especially China, where deregulation is relatively limited
      compared to the U.S., we believe that our customers will look for opportunities
      to lower their long distance bills. This creates what we believe is a
      significant opportunity for us to gain market share by using the Internet to
      transmit phone calls.





In
      order
      to take advantage of this opportunity, we have decided to deliver high-quality
      voice-over-IP (VoIP) telephony services to small and medium businesses in China,
      initially, under the brand name of eTalk. Accompanying the growth of PCs and
      use
      of the Internet, we believe the market potential is huge. We have devised a
      phased approach to launching our newly developed IAX based VoIP software
      beginning in the year 2006. Our solution provides many benefits to its
      customers, including:





·
            Low
                Cost. Our services allow its customers to make telephone calls often
                at a
                fraction of the cost of traditional long distance service. Our low
                cost
                PC-to-phone service is also available all over the
                world.





·
            High
                Voice Quality. We offer carrier-grade voice quality through proprietary
                packet-switching technologies, which reduces packet loss and delay,
                route
                packets efficiently and perform quality-enhancing functions, such
                as echo
                cancellation and massive redundancy. We intend to continue to enhance
                the
                voice quality of our services as our customer base and business
                grows.





·
            Ease
                of Use and Access. Our services are designed to be convenient and
                easy to
                access. No additional telephone lines or special equipment are
                required.





·
            Reliable
                Service. Elephant Talk Limited developed its own PC client software
                and
                Gatekeeper. Our network is reliable because of its technologically
                advanced design. This flexible design allows us to expand our network
                and
                add capacity by adding switches/spans to the existing network. Our
                system
                also provides seamless service and high-quality voice transmission
                through
                its ability to reroute if problems
                arise.





·
            Scalability.
                Our services platform is a flexible solution that can be readily
                integrated at low cost and in large scale into existing systems.
                Our
                system integrates quickly and seamlessly into the platforms of various
                communications service providers such as medium to large carriers,
                ISPs,
                and enterprises.





We
      are
      able to provide our PC-to-Phone service at rates generally lower than those
      charged for traditional circuit switched calls. We are able to charge lower
      rates because its service utilizes packet-switched technology and it routes
      calls directly from the Internet onto our privately-managed IP network and
      to
      the called destination, thus avoiding access and settlement rates associated
      with traditional international and domestic long distance telecommunications
      services. Initially, the services will commence in southern part of China,
      namely, Shenzhen and Guangzhou, of which the demand for connectivity for calls
      to international destinations ranks among the highest in Mainland China. The
      services will target corporate customers, by offering call rates generally
      one-third to one-fifth of prevailing fixed-line IDD charges.





We
      believe that reliable and flexible billing, information management, monitoring
      and control are critical to our success, and support all of our services.
      Accordingly, we have invested substantial resources to develop and implement
      our
      sophisticated real-time call management information system. Key features of
      this
      system include:





·
            customer
                provisioning;


·
            customer
                access;


·
            call
                routing;


·
            call
                monitoring; and,


·
            detailed
                call records.








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RISK
      FACTORS





An
      investment in our common stock involves a great deal of risk, and should be
      considered only by those persons who are able to afford a loss of their entire
      investment. In evaluating an investment in our common stock, you should
      carefully consider the following risk factors in addition to the other
      information filed by our company.





Competition





The
      market for value-added services is highly competitive. We face competition
      from
      a variety of sources including large communications service providers with
      more
      resources, longer operating histories and more established positions in the
      telecommunications marketplace. We also compete with small companies who have
      focused primarily on Internet telephony or traditional switched services. We
      believe that we compete principally on quality of service, price and
      flexibility. It is arguable if any one company dominates the voice and data
      communications market in the same segment as we are. We also expect that the
      ability to offer enhanced service capabilities, including new services, will
      become an increasingly important competitive factor in the near future. In
      addition, we compete with and expect continued competition from
      telecommunications companies and long distance service providers, Internet
      Telephony service providers, market competition and pricing
      pressures:





Attempting
      to Develop New Revenue Stream





If
      the
      market for Internet telephony and other new services does not develop as we
      expect, or develops more slowly than expected, our business, financial condition
      and results of operations may well be adversely affected. Our customers may
      be
      reluctant to use our Internet telephony services for a number of reasons,
      including:





·
            perceptions
                that the quality of voice transmitted over the Internet is
                low;


·
            our
                inability to deliver traffic over the Internet with significant cost
                advantages; and


·
            development
                of their own capacity on routes served by
                us.





In
      addition, any perceived problems with the reliability or functionality of any
      new services that we plan to offer could discourage service providers or others
      from offering these services to their customers. In addition, the development
      of
      new capabilities or services may require substantial additional capital and
      marketing-related expenditures to be made well in advance of generating any
      revenue from such services or demonstrating any market acceptance of such
      services.





We
      cannot
      be certain that end-users will continue to purchase services from us or that
      our
      customers will maintain a demand for our services. If the market for these
      services and products does not develop or if we are unable to capture a
      significant portion of that market, either directly or through our partners,
      our
      revenues and our results of operations will be adversely affected.





Our
      future financial performance depends substantially on the revenue share between
      mobile value-added services providers, namely, Beijing China Wind and China
      Mobile. Any reduction in this revenue share will have a substantial affect
      on
      our earnings capability.





Reliance
      on Third Parties Vendors





We
      rely
      upon third-party vendors to provide us with the equipment that we use to
      transmit calls through our voice networks using principally Nuera, PCM and
      Cisco
      equipment. We cannot assure you that we will be able to continue purchasing
      such
      equipment from our vendors, in such case, we may not be able to maintain or
      expand our network to accommodate growth or provide or upgrade certain services
      when needed.








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Parties
      that Maintain Phone and Data Lines





Our
      business is dependent upon the availability of the Internet and traditional
      telephone networks to transmit voice and data, and to provide other value added
      services. Third parties maintain and, in many cases, own these networks and
      other components that comprise the Internet and certain switching facilities
      connecting to last mile. Some of these third parties are domestic telephone
      companies in the US and a few are their smaller counterparts in South East
      Asia
      such as GridTel and GreatWall Broadband. They may increase their charges for
      using these lines at any time and decrease our profitability. They may also
      fail
      to maintain their lines properly and disrupt our ability to provide service
      to
      our customers. Any failure by these third parties to maintain these lines could
      lead to a material disruption of our ability to route calls or provide other
      services. It could discourage our customers from using our network or enhanced
      services, which could have the effect of delaying or preventing our ability
      to
      become profitable.





Strategic
      Relationships





We
      depend
      in part on our strategic relationships to expand our distribution channels
      and
      develop and market our services especially in prepaid calling cards. In
      particular, we depend in large part on our dealers in the US to maintain their
      nationwide sales channels, and in the future, their counterparts in South East
      Asia. Strategic relationship partners may choose not to renew existing
      arrangements on commercially acceptable terms, if at all. If we lose these
      key
      strategic relationships, or if we fail to maintain or develop new relationships
      in the future, our ability to expand revenue stream and hence scope of our
      network would be materially adversely affected.





Fast
      Leap
      in Technology Trends





Our
      business requires that we handle a large number of international calls
      simultaneously. As we expand our operations, we expect to handle significantly
      more calls. We will need to expand and upgrade our hardware and software to
      accommodate such increased traffic. If we do not expand and upgrade quickly
      enough, we will not have sufficient capacity to handle the traffic and growth
      in
      our operating performance would suffer. Even with such expansion, we may be
      unable to manage new deployments or utilize them in a cost-effective manner.
      In
      addition to lost growth opportunities, any such failure could adversely affect
      customer confidence in the Elephant Talk Network and could result in us losing
      business outright.





As
      the
      Internet telephony industry has grown, sound quality has improved, but the
      technology requires further refinement. Because the Internet telephony market
      and markets for our enhanced services are new and evolving, predicting the
      size
      of these markets and their growth rate is difficult. Transmitting telephone
      calls over the Internet, and other uses of the Internet for our enhanced
      services, must also be accepted by customers as an alternative to traditional
      services. If our market fails to develop, then we will be unable to grow our
      customer base and our results of operations will be adversely
      affected.





Key
      Personnel





Our
      future success will depend, in large part, on the continued service of our
      key
      management and technical personnel. If any of such members of senior management
      or others at the Company are unable or unwilling to continue in their present
      positions, our business, financial condition and results of operations could
      well suffer. While many of the members of our management team have been employed
      with us, we cannot ensure their continued employment with us.





Our
      future success will depend, in large part, on our ability to attract, retain
      and
      motivate highly skilled employees, particularly operational and sales personnel.
      Competition for such employees in our industry is intense. We have from time
      to
      time in the past experienced, and we expect to continue to experience in the
      future, difficulty in hiring and retaining employees with appropriate
      qualifications. We may not be able to retain our employees or attract,
      assimilate or retain other highly qualified employees in the future. If we
      do
      not succeed in attracting and retaining skilled personnel, we may not be able
      to
      grow at a sufficient rate to attain profitable operations.








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Asian
      Economy





An
      economic crisis in Asia where a substantial portion of our client base is
      located could result in a decrease in our revenues. Several countries in Asia
      have experienced currency devaluation and/or difficulties in financing
      short-term obligations. We cannot assure you that the effect of an economic
      crisis on our customers will not impact operations, or that the effect on our
      customers in that region will not adversely affect both the demand for our
      services and the collectable of receivables.





Foreign
      Currencies





Fluctuations
      in the exchange rate of the U.S. dollar and foreign currencies could have a
      material adverse effect on our financial performance and profitability. A
      portion of our costs denominated in foreign currencies. As a result, changes
      in
      the exchange rates of these currencies or any other applicable currencies to
      the
      U.S. dollar will affect our costs of goods and services sold and operating
      margins and could result in exchange losses. We cannot fully predict the impact
      of future exchange rate fluctuations on our profitability. From time to time,
      we
      may engage in exchange rate-hedging activities in an effort to mitigate the
      impact of exchange rate fluctuations. However, we cannot assure you that any
      hedging technique we may implement will be effective. If it is not effective,
      we
      may experience reduced operating margins. We could suffer adverse tax and other
      financial consequences if U.S. or foreign taxing authorities do not agree with
      our interpretation of applicable tax laws.





Our
      corporate structure is based, in part, on assumptions about the various tax
      laws, including withholding tax, and other relevant laws of applicable non-U.S.
      jurisdictions. We cannot assure you that foreign taxing authorities will agree
      with our interpretations or that they will reach the same conclusions. Our
      interpretations are not binding on any taxing authority and, if these foreign
      jurisdictions were to change or to modify the relevant laws, we could suffer
      adverse tax and other financial consequences or have the anticipated benefits
      of
      our corporate structure materially impaired.





Terrorism





Terrorist
      attacks, such as the attacks that occurred in New York and Washington, D.C.
      on
      September 11, 2001, and other acts of violence or war may affect the markets
      on
      which our securities trade, the markets in which we and our customers operate,
      our operations and our profitability. Terrorist attacks may negatively affect
      our operations and your investment. There can be no assurance that there will
      not be further terrorist attacks against the United States or United States
      businesses. These attacks or armed conflicts may directly impact our physical
      facilities or those of our suppliers or customers. Furthermore, these attacks
      may make travel and the transportation more difficult and more expensive and
      ultimately affect the sales of our products and services in the United States
      and overseas. Also as a result of terrorism, the United States may enter into
      armed conflicts, which could have a further impact on our domestic and
      international sales, our supply chain, our production capability and our ability
      to deliver our products and services to our customers. Political and economic
      instability in some regions of the world may also result and could negatively
      impact our business. The consequences of any of these armed conflicts are
      unpredictable, and we may not be able to foresee events that could have an
      adverse effect on our business.





Risks
      Relating to the Greater China and Asian Internet Industry





The
      Greater China and Asian Internet industry is a developing market and has not
      been proven as an effective commercial medium





The
      market for Internet services in Greater China and Asia has only recently begun
      to develop. Since the Internet is an unproven medium for commercial services,
      our future operating results from eTalk services will depend substantially
      upon
      the increased use of the Internet in Greater China and Asia. Critical issues
      concerning the commercial use of the Internet in Greater China and Asia such
      as
      security, reliability, cost, ease of deployment, administration and quality
      of
      service may affect the adoption of the Internet to solve business needs. For
      example, the cost of access may prevent many potential users in Asia from using
      the Internet.








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Our
      entry
      into the Chinese Internet market depends on the establishment of an adequate
      telecommunications infrastructure in China by the Chinese
      government





Unlike
      Taiwan and Hong Kong, where the telecommunications infrastructure is comparable
      to U.S. standards and where private companies compete as ISPs, the
      telecommunications infrastructure in China is not well developed. In addition,
      access to the Internet is accomplished primarily by means of the government's
      backbone of separate national interconnecting networks that connect with the
      international gateway to the Internet, which is owned and operated by the
      Chinese government and is the only channel through which the domestic Chinese
      Internet network can connect to the international Internet network.





Although
      private sectors ISPs exist in the China, almost all access to the Internet
      is
      accomplished through ChinaNet, the Chinese primary commercial network, which
      is
      owned and operated by the Chinese government. We rely on this backbone and
      China
      Telecom to provide data communications capacity primarily through local
      telecommunications lines. As a result, we will continue to depend on the Chinese
      government to establish and maintain a reliable Internet infrastructure to
      reach
      a broader base of Internet users in China. We will have no means of getting
      access to alternative networks and services, on a timely basis or at all, in
      the
      event of any disruption or failure. There can be no assurance that the Internet
      infrastructure in Greater China will support the demands associated with
      continued growth. If the necessary infrastructure standards or protocols or
      complementary products, services or facilities are not developed by the Chinese
      government, our business could be materially and adversely
      affected.





Our
      computer network is vulnerable to hacking, viruses and other
      disruptions





Inappropriate
      use of our Internet and phone services could jeopardize the security of
      confidential information stored in our computer system, which may cause losses
      to us. Inappropriate use of the Internet includes attempting to gain
      unauthorized access to information or systems - commonly known as "cracking"
      or
      "hacking." Although we intend to implement security measures to protect our
      facilities, such measures could be circumvented. Alleviating problems caused
      by
      computer viruses or other inappropriate uses or security breaches may require
      interruptions, delays or cessation in our services.





There
      are
      political, economic and regulatory risks associated with doing business in
      China
      and Asia





China's
      economy has experienced significant growth in the past decade, but such growth
      has been uneven across geographic and economic sectors and has recently been
      slowing. There can be no assurance that such growth will not continue to
      decrease or that any slow down will not have a negative effect on our
      business.





The
      Chinese economy is also experiencing deflation which may continue in the future.
      The current economic situation may adversely affect our profitability over
      time
      as expenditures may decrease due to the results of slowing domestic demand
      and
      deflation. A significant part of our facilities and operations are currently
      located in Hong Kong. Hong Kong is a Special Administrative Region ("SAR")
      of
      China with its own government and legislature. Hong Kong enjoys a high degree
      of
      autonomy from China under the principle of "one country, two systems". We can
      give no assurance that Hong Kong will continue to enjoy autonomy from China.
      The
      Hong Kong dollar has remained relatively constant due to the U.S. dollar peg
      and
      currency board system that has been in effect in Hong Kong since 1983. Since
      1998, interest rates in Hong Kong have risen significantly, real estate and
      retail sales have declined and Hong Kong has slipped into a recession. In recent
      months, Hong Kong has suffered deflation and the currency has been subject
      to
      currency speculation and the SAR government has substantially supported the
      market for the Hong Kong dollar, both directly and indirectly through the
      large-scale purchase of securities listed on the Hong Kong Stock Exchange.
      We
      can give no assurance that the Hong Kong economy will not worsen or that the
      historical currency peg of the Hong Kong dollar to the U.S. dollar will be
      maintained. Continued recession in Hong Kong, deflation or the discontinuation
      of the historical currency peg could adversely affect our business.





Regulation
      of the information industry in China may adversely affect our
      business





China
      has
      enacted regulations governing Internet access and the distribution of news
      and
      other information. We cannot predict the effect of further developments in
      the
      Chinese legal system, particularly with regard to the Internet and mobile
      services including promulgation of the new laws, changes to the existing laws
      or
      the interpretation or enforcement thereof, or the preemption of local
      regulations by national laws.





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A
      change
      in currency exchange rates could increase our costs relative to our
      revenues





In
      future, substantial amount of our revenues, expenses and liabilities will be
      denominated in Hong Kong dollars and Chinese Renminbi. As a result, we are
      subject to the effects of exchange rate fluctuations with respect to any of
      these currencies. We have not entered into agreements or purchase financial
      instruments to hedge our exchange rate risks although we may do so in the
      future.





Restrictions
      on currency exchange may limit our ability to utilize our revenue
      effectively





Although
      Chinese governmental policies were introduced in 1996 to allow greater
      convertibility of the Renminbi, significant restrictions still remain. We
      provide no assurance that the Chinese regulatory authorities will not impose
      greater restrictions on the convertibility of the Renminbi. Because a
      significant amount of our future revenues may be in the form of Renminbi, any
      future restrictions on currency exchanges may limit our ability to utilize
      revenue generated in Renminbi to fund our business activities outside
      China.





Risks
      relating to operating licenses





Currently,
      ETL has been granted two PNETS licenses in Hong Kong, one for the provision
      of
      external telecommunications services (ETS) and the other for the provision
      of
      ISP services (ISP). Under the terms of PNETS licenses, we are subject to
      regulation of the Office of Telecommunications Authority (OFTA), the official
      regulatory body. OFTA's regulatory powers permit it to cancel, withdraw or
      suspend the company's PNETS licenses for a period as it may determine in the
      event of any contravention by the Company of the Telecommunications Ordinance
      or
      of any condition to which the company's PNETS License is granted.





PNETS
      licenses are customarily granted for 1-year terms and are renewable annually.
      On
      the basis that ETL has successfully renewed its licenses before, we have no
      reason to believe that we would fail to do so in the future. However, there
      can
      be no assurance that our PNETS licenses will be renewed upon expiration. The
      failure to obtain a renewal of its PNETS licenses would result in the company
      having to cease to offer telecommunication services through its
      network.





Doing
      business in China





Our
      operations in China involve certain risks and special considerations not
      typically associated with operations in the United States. These risks generally
      related to: (i) social, economic and political uncertainty; (ii) substantial
      governmental involvement in and control over the Chinese economy; (iii) the
      possibility that the Chinese government could elect to discontinue its support
      of the economic reform programs implemented in 1978 and return to a completely
      centrally planned economy; and (iv) possible nationalization or expropriation
      of
      assets. Accordingly, government actions in the future could have a significant
      effect on economic conditions in China. Such actions and resulting changes
      in
      the Chinese economy could significantly adversely affect, limit or eliminate
      opportunities for foreign investment, the prospects of private sector
      enterprises operating in China and the value of our investments in
      China.





Environmental
      Regulation





Our
      U.S.
      and Chinese operations are subject to various governmental laws and regulations.
      The costs and effects of compliance with environmental laws and regulations
      in
      the United States (federal, state and local) and China have not been material
      in
      the past and are not anticipated to be material in the future.





Patents,
      Trademarks and Licenses





We
      actively pursue the protection of intellectual property rights in the United
      States and relevant foreign jurisdictions. We conduct our business under the
      "Elephant Talk" brand name and logo. Currently, Elephant Talk Limited owns
      certain trademarks in China, Singapore, Hong Kong, USA and Canada, which are
      either registered in the Trademark Office or in the process of being registered.
      Elephant Talk Limited owns External Telecommunications Service License and
      ISP
      licenses to conduct telecommunications business locally in Hong
      Kong.





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Employees





We
      currently employ in the United States one full-time employee at our principal
      executive office located in Orange, California. The executive office provides
      corporate administrative and advisory services to Elephant Talk and its
      affiliates. Elephant Talk Limited employs at its two sites located in Hong
      Kong
      ten full-time employees for networking operation, customer support,
      administrative, sales support and accounting services. Its Research and
      Development centre, located in Guangzhou China, employs 8 highly skilled
      developers who are responsible for all the software and network development.
      We
      believe that our future success will depend in part on our continued ability
      to
      attract, hire, integrate, retain and motivate highly qualified personnel in
      various disciplines, and upon the continued service of our senior management
      personnel. None of our employees are represented by a labor union. We have
      never
      experienced a work stoppage and believe our relationship with our employees
      is
      good.





Research
      and Development





Elephant
      Talk Limited has spent many months doing research and development of our current
      business strategy, the cost of which has been borne through the issuance of
      securities in the acquisitions. Because of the continuing technological changes
      that characterize the Internet, Web design and telecommunications and computer
      industries, Elephant Talk’s success will depend, to a considerable extent, upon
      its ability to continue to grow its business by acquiring companies that are
      ahead of the competition in our industry and develop competitive technologies
      internally through research and development. Management does not anticipate
      incurring any significant costs for such research and development in the near
      term other than through acquisitions.





No
      assurance can be given that the agreements entered into by us will result in
      completion of actual agreements or that the terms of the agreements will not
      be
      significantly changed, or that any of the financing needs to consummate the
      agreements discussed in this Annual Report be successfully completed. Elephant
      Talk's management, which has extensive experience and expertise in relevant
      industry sectors, intends to provide Internet technology by merging with or
      acquiring companies already active in these businesses. On the financial side,
      we have raised and continue to raise the substantial funds necessary to carry
      out the plans of our venture partners by selling our own common shares to
      selected investors/partners. If we are not able to raise the necessary funds
      to
      fund our growth, the agreements will need to be modified or
      cancelled.





There
      are
      insignificant amount spent during the last two fiscal years on research and
      development, as we often use proven technologies available in the market which
      reduce the risk of bugs and unsteady performances, especially in initial
      launches of services.





There
      are
      no material costs incurred in order to comply with environment laws in a local
      or worldwide basis owing to the nature of the telecom industry.





**Item2. Descriptionof Property**





The
      Company's principal executive office is located at 438 East Katella Avenue,
      Suite 217, Orange, California 92867. The premises consist of approximately
      300
      square feet of office space with a large office and a file room. The lease
      is
      currently renewed on a month-to-month basis. The monthly rent amounts to $358
      with an escalation of monthly rent on the lease anniversary date. Elephant
      Talk
      Limited is currently leasing 5,000 square feet of office space at 8/F, 145-159
      Yeung Uk Road, Tsuen Wan, Hong Kong for a period of two years commencing May
      1,
      2004 for a monthly rent of HK$35,000 ($4,487). ET ME&A is leasing its office
      facilities located at TECOM Zone in Building No. DIC 09 on 2 nd floor
      Premises No. 222 consisting of a floor space of 699 square feet, for an annual
      rent of $21,900 (AED 80,385). The lease term is for one year commencing on
      November 2, 2005. The Company leases various co-location spaces with square
      footage of under 200 square feet in Hong Kong, Guangzhou, Los Angeles, Boston
      and Singapore where our telecommunications equipment are located.





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








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**Item3. LegalProceedings**





None.





**Item
      4. Submissionof Matters to a Vote of Security
      Holders**





The
      Company held its annual meeting on December 1, 2005. The shareholders elected
      Mr. Russelle Choi, Mr. Pius Lam, Mr. Francis Lim, Mr. Manu Ohri and Mr. James
      Wang to one-year term as directors. Additionally, the shareholders ratified
      the
      appointment of Webb & Company, P.A. as the Company's independent auditor.
      Rising Water Capital, the Company’s majority shareholder, and certain other
      affiliates of the Company voted by proxy. As a result, all of the agenda items
      for consideration by our shareholders received an affirmative vote and were
      passed.





**PART
      II**





**Item5. Marketfor Common Equity and Related Stockholder
      Matters**





The
      Company’s common stock is traded on Over the Counter Bulletin Board maintained
      by the National Association of Securities Dealers, Inc. under the symbol “ETLK”.
      Prior to the merger with Elephant Talk on January 4, 2002, the Company’s common
      stock was traded under the symbol “SRUN”. The following table sets forth the
      range of high and low bid and asked quotations for the common stock (adjusted
      for 1 for 10 reverse stock split effected on January 22, 2002) during the two
      most recent years’ calendar quarters ended December 31, 2005 and
      2004:





**High
                Bid**
            
            **Low
                Bid**
            
            **High
                Asked**
            
            **Low
                Asked**March
                31, 2004
            
            $
            0.19
            
            $
            0.20
            
            $
            0.19
            
            $
            0.20June
                30, 2004
            
            
            0.11
            
            
            0.11
            
            
            0.11
            
            
            0.11September
                30, 2004
            
            
            0.08
            
            
            0.09
            
            
            0.07
            
            
            0.07December
                31, 2004
            
            
            0.08
            
            
            0.08
            
            
            0.08
            
            
            0.08March
                31, 2005
            
            
            0.04
            
            
            0.04
            
            
            0.04
            
            
            0.04June
                30, 2005
            
            
            0.04
            
            
            0.04
            
            
            0.04
            
            
            0.04September
                30, 2005
            
            
            0.03
            
            
            0.03
            
            
            0.03
            
            
            0.03December
                31, 2005
            
            
            0.06
            
            
            0.05
            
            
            0.06
            
            
            0.05





The
      above
      prices were obtained from the National Quotation Bureau, Inc. The prices shown
      in the above table represent inter-dealer quotations without retail mark-up,
      mark-down or commission, and may not necessarily represent actual transactions.
      On December 31, 2005, there were broker-dealers publishing quotes for the common
      stock.





Holders





At
      December 31, 2005, the Company had approximately 2,980 holders of record of
      its
      common stock. In addition, there are approximately 4,700 holders in the street
      name. The holders of common shares are entitled to one vote for each share
      held
      of record on all matters submitted to a vote of stockholders. Holders of common
      shares have no preemptive rights and no right to convert their common stock
      into
      any other securities. There is no redemption of sinking fund provisions
      applicable to the common stock.





All
      of
      the Company’s issued stock has been issued pursuant to exemptions under the
      Securities Act of 1933, as amended, and nearly all of it would qualify for
      sale
      pursuant to either Rule 144 or Rule 144K under the Securities Act of 1933,
      as
      amended, provided that the conditions of the Rule are met. Approximately
      19,116,972 and 13,168,776 common shares under Rule 144 shares were held by
      officers and directors that existed at December 31, 2005 and 2004,
      respectively.








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Dividends





The
      Company has not declared any cash dividends since inception and does not
      anticipate paying any dividends in the foreseeable future. The payment of
      dividends is within the discretion of the Board of Directors and will depend
      on
      the Company’s earnings, capital requirements, financial condition, and other
      relevant factors. There are no restrictions that currently limit the Company’s
      ability to pay dividend on its Common Stock other than those generally imposed
      by applicable state law.





The
      Company has no preferred stock issued or outstanding as of December 31,
      2005.





Recent
      Sales of Unregistered Securities





On
      January 5, 2005, pursuant to a Share Exchange Agreement (“Agreement”), the
      Company completed its purchase of 60% equity ownership interest in True Precise
      Technology Limited (“True Precise”), a limited liability company, registered in
      British Virgin Island, from Keen Solution Group Limited (“Keen Solution”), a
      company registered in British Virgin Island. As consideration for the
      acquisition, the Company issued 23,137,500 restricted common shares to Keen
      Solution valued at $1,436,875. Upon completion of the acquisition on January
      5,
      2005, True Precise became a majority owned subsidiary of the Company. On August
      8, 2005, Keen Solutions sent notification informing the Company that it had
      unilaterally decided to terminate the Agreement. The True Precise acquisition
      has been cancelled, and the Company has taken protective measures to ensure
      that
      the 23,137,500 common shares are restricted and non-tradable. Of those shares,
      20,137,500 have been returned to the Company’s treasury, and the Company
      continues to pursue the return of the remainder. The 23,127,500 shares issued
      by
      the Company were offered pursuant to an exemption from registration provided
      by
      Section 4(2) under the Securities Act of 1933, as amended.





In
      this
      offering, we relied on the exemption from registration of Section 4(2) under
      the
      Securities Act, based on the following facts: (1) the issuance was an isolated
      private transaction which did not involve a public offering; (2) there were
      a
      small number of offerees, (3) the offerees have agreed to the imposition of
      a
      restrictive legend on the face of the stock certificate representing their
      shares, to the effect that they will not resell the stock unless their shares
      are registered or an exemption from registration is available; (4) the offerees
      were sophisticated investors; (5) there were no subsequent or contemporaneous
      public offerings of the stock; (6) the stock was not broken down into smaller
      denominations; and (7) the negotiations for the acquisition of True Precise
      and
      the issuance of the stock pursuant thereto took place directly between the
      offerees and our management.





The
      Company signed a Letter of Intent on March 24, 2005 to acquire 100% of equity
      interest in Phonetone Telecom Ltd. Phonetone is a marketing vehicle for a unique
      low rate international telephone service based on the Company’s technical
      platform. The Company has performed its due diligence of Phonetone and plans
      to
      sign a definitive agreement in the near future. Pursuant to the terms of the
      agreement, the Company agreed to issue 40,000,000 restricted Common Shares,
      pay
      a cash consideration of $600,000, and share 15% of the yearly total profit
      margin generated by the Company or any of its affiliated companies from the
      Phonetone’s premium rate numbers in the years 2006, 2007 and 2008, in connection
      with its acquisition of Phonetone. As of December 31, 2005, the Company had
      advanced $225,562 and issued 20,000,000 restricted Common Shares valued at
      $720,000 as earnest deposit towards the proposed acquisition of Phonetone.
      The
      20,000,000 shares issued by the Company were issued pursuant to an exemption
      from registration provided by Section 4(2) under the Securities Act of 1933,
      as
      amended.





In
      this
      offering, we relied on the exemption from registration of Section 4(2) under
      the
      Securities Act, based on the following facts: (1) the issuance was an isolated
      private transaction which did not involve a public offering; (2) there were
      a
      small number of offerees, (3) the offerees have agreed to the imposition of
      a
      restrictive legend on the face of the stock certificate representing their
      shares, to the effect that they will not resell the stock unless their shares
      are registered or an exemption from registration is available; (4) the offerees
      were sophisticated investors; (5) there were no subsequent or contemporaneous
      public offerings of the stock; (6) the stock was not broken down into smaller
      denominations; and (7) the negotiations for the acquisition of Phonetone and
      the
      issuance of the stock pursuant thereto took place directly between the offerees
      and our management.





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On
      or
      about June 30, 2005, pursuant to the Stock Purchase Agreement, the Company
      agreed to sell to Rising Water Capital 195,947,395 shares of common stock for
      an
      aggregate purchase price of $7,837,896. The purpose of this transaction will
      enable Rising Water Capital to infuse capital into the Company so that the
      Company could complete its pending acquisitions. On or about June 30, 2005,
      Rising Water Capital closed the purchase of a total of 100,000,000 shares of
      common stock at a price of $0.04 per share. Inasmuch as the total authorized
      number of shares of common stock of the Company was 250,000,000 shares,
      management could not sell and Rising Water Capital was unable to purchase the
      remaining 95,947,395 shares. The 100,000,000 shares issued by the Company were
      issued pursuant to an exemption from registration provided by Section 4(2)
      under
      the Securities Act of 1933, as amended.





In
      this
      offering, we relied on the exemption from registration of Section 4(2) under
      the
      Securities Act, based on the following facts: (1) the issuance was an isolated
      private transaction which did not involve a public offering; (2) there was
      only
      one offeree, (3) the offeree agreed to the imposition of a restrictive legend
      on
      the face of the stock certificate representing its shares, to the effect that
      it
      will not resell the stock unless its shares are registered or an exemption
      from
      registration is available; (4) the offeree was a sophisticated investor; (5)
      there were no subsequent or contemporaneous public offerings of the stock;
      (6)
      the stock was not broken down into smaller denominations; and (7) the
      negotiations for the sale of the stock and the issuance of the stock pursuant
      thereto took place directly between the offeree and our management.





On
      March
      1, 2004, the Company entered into a Stock Sale Agreement with an investor who
      purchased 2,000,000 common shares (Rule 144 one year restriction) for a
      consideration of $300,000. The restricted common shares were issued on March
      3,
      2004 and the Company received $300,000. The 2,000,000 shares issued by the
      Company were issued pursuant to an exemption from registration provided by
      Section 4(2) under the Securities Act of 1933, as amended.





In
      this
      offering, we relied on the exemption from registration of Section 4(2) under
      the
      Securities Act, based on the following facts: (1) the issuance was an isolated
      private transaction which did not involve a public offering; (2) there was
      only
      one offeree, (3) the offeree agreed to the imposition of a restrictive legend
      on
      the face of the stock certificate representing its shares, to the effect that
      it
      will not resell the stock unless its shares are registered or an exemption
      from
      registration is available; (4) the offeree was a sophisticated investor; (5)
      there were no subsequent or contemporaneous public offerings of the stock;
      (6)
      the stock was not broken down into smaller denominations; and (7) the
      negotiations for the sale of the stock and the issuance of the stock pursuant
      thereto took place directly between the offeree and our management.





On
      September 3, 2004, the Company entered into a Stock Sale Agreement with an
      investor who purchased 543,207 common shares (Rule 144 one year restriction)
      for
      a consideration of $49,970. The Company received the proceeds from sale of
      shares on September 16, 2004. The 543,207 shares issued by the Company were
      issued pursuant to an exemption from registration provided by Section 4(2)
      under
      the Securities Act of 1933, as amended.





In
      this
      offering, we relied on the exemption from registration of Section 4(2) under
      the
      Securities Act, based on the following facts: (1) the issuance was an isolated
      private transaction which did not involve a public offering; (2) there was
      only
      one offeree, (3) the offeree agreed to the imposition of a restrictive legend
      on
      the face of the stock certificate representing its shares, to the effect that
      it
      will not resell the stock unless its shares are registered or an exemption
      from
      registration is available; (4) the offeree was a sophisticated investor; (5)
      there were no subsequent or contemporaneous public offerings of the stock;
      (6)
      the stock was not broken down into smaller denominations; and (7) the
      negotiations for the sale of the stock and the issuance of the stock pursuant
      thereto took place directly between the offeree and our management.





Warrants





As
      of May
      2, 2006, there was no warrants outstanding convertible to common stock. During
      the years 2005 and 2004, no warrants were converted into shares of common
      stock.








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**Item
      6.**  **Management's
      Discussionand Analysis of Financial Condition and
      Results of Operation**





General





The
      following is a summary of certain information contained in this Report and
      is
      qualified in its entirety by the detailed information and financial statements
      that appear elsewhere herein. Except for the historical information contained
      herein, the matters set forth in this Report include forward-looking statements
      within the meaning of the “safe harbor” provisions of the Private Securities
      Litigation Reform Act of 1995. These forward-looking statements are subject
      to
      risks and uncertainties that may cause actual results to differ materially.
      These risks and uncertainties are detailed throughout the Report and will be
      further discussed from time to time in Elephant Talk’s periodic reports filed
      with the Commission. The forward-looking statements included in the Report
      speak
      only as of the date hereof.





Plan
      of
      Operation





Elephant
      Talk Communications, Inc. is currently engaged in VOIP telecommunications and
      mobile SMS and other value added telecom services provider in China. In
      addition, it also offers highly reliable and competitively priced facility-based
      international long distance services as well as a PC-phone service over IP.
      With
      its completion of acquisition of Beijing China Wind, the Company provides its
      mobile value added services to over 1 million customers in China. Our services
      include short message service, ring tone/wall-paper downloads and mobile
      e-commerce services. Our international call services are provided through an
      integrated network infrastructure comprising both the packet-switched system
      (IP
      based) and circuit switched system (conventional phone based) focusing on the
      Asia Pacific region as well the U.S.





The
      Company’s long term strategy is to become a major player in the mobile
      value-added services market by becoming the preferred platform for our customers
      around the world to access and/or exchange information with one another, via
      mediums such as mobile terminals or the internet. The Company intends to
      continue on this path of repositioning by further acquisition of controlling
      stake in profitable companies in the coming year.





Elephant
      Talk, through a combination of expertly managed internal expansion and accretive
      strategic acquisitions, is executing plans to provide a sustainable, growing,
      diversified and profitable revenue base throughout its operations. The company
      is aggressively identifying and pursuing the best business opportunities
      available. Through a continued refinement of operational efficiencies and
      increasing revenue margins, the Company is destined to provide a clear path
      to
      profitability for its current and future businesses.





Material
      Transactions to an Understanding of our MD&A Discussion





On
      April
      3, 2004, the Company signed a Share Exchange Agreement to acquire 60% of the
      equity ownership interest in Urumqi General Systems Technology Company Ltd.,
      a
      leading provider of mobile SMS services in the resource rich province of
      Xinjiang, China. On January 5, 2005, the Company completed the above acquisition
      and formed True Precise Technology Limited ("True Precise"), a limited liability
      company registered in British Virgin Islands, as its investment holding company,
      that acquired 60% of the equity ownership interest in General System from Keen
      Solution Group Limited, a limited liability company registered under the laws
      of
      British Virgin Islands.





On
      August
      8, 2005, Keen Solutions sent notification informing the Company that it had
      unilaterally decided to terminate the Share Exchange Agreement. The True Precise
      acquisition has been cancelled, and the Company has taken protective measures
      to
      ensure that the 23,137,500 common shares are restricted and nontradeable. Of
      those shares, 20,137,500 have been returned to the Company’s treasury. The
      Company has evaluated its legal options in connection with the termination
      of
      the Share Exchange Agreement and came to the conclusion that a mutual rescission
      of the agreement was in the Company’s best interest. The Company still continues
      to pursue the return of 3,000,000 common shares from Keen Solution.








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On
      January 17, 2005, the Company entered into a Memorandum of Understanding to
      acquire all of the issued and outstanding shares of Benoit Telecom Holding
      A.G.,
      a European telecom company from an accredited investor and owner based in
      Europe, and has delivered earnest deposits of $6,043,080 with an escrow trust
      company. The Company has completed its due diligence investigation of Benoit
      and
      expects to close the transaction and execute a definitive agreement by May
      31,
      2006.





Pursuant
      to the terms of an agency agreement in connection with its acquisition of
      Phonetone Telecom Ltd. from Calfin Trust, the Company agreed to issue 40,000,000
      restricted common shares, pay a cash consideration of $600,000, and share 15%
      of
      the yearly total profit margin generated by the Company or any of its affiliated
      companies from the Phonetone’s premium rate numbers in the years 2006, 2007 and
      2008. As of May 16, 2006, the Company has advanced $225,562 and 20,000,000
      shares of common stock valued at $720,000 to Calfin Trust as an earnest deposit
      towards the Phonetone proposed acquisition. The Company has performed its due
      diligence on the telecom service provider and plans to sign a definitive
      acquisition agreement in the near future.





On
      April
      20, 2005, the Company formed a joint venture Free Zone Limited Liability company
      to be incorporated in the Dubai Technology, Electronic Commerce and Media Free
      Zone, Dubai, United Arab Emirates (UAE) under the name Elephant Talk Middle
      East
& Africa FZ-LLC (“ET ME&A”). The Company through its wholly owned
      subsidiary Elephant Talk Limited incorporated the joint venture company on
      November 6, 2005 and contributed $50,907 towards its equity share capital as
      of
      December 31, 2005. The Company owns 50.54% share of this newly formed joint
      venture company. ET ME&A is committed to expend the necessary funds to keep
      its share of equity investment and is currently seeking regulatory approvals
      for
      obtaining trade and business licenses from the UAE government to conduct its
      business. ET ME&A has not yet begun the operations and plans to operate
      various telecom related business in the Middle East and Africa.





Pursuant
      to the Stock Purchase Agreement, the Company agreed to sell to Rising Water
      Capital 195,947,395 shares of the Company’s common shares for an aggregate
      purchase price of $7,837,896. This transaction will enable Rising Water Capital
      to infuse capital into the Company and also to acquire control of the Company.
      On June 30, 2005, Rising Water Capital closed the purchase of a total of
      100,000,000 shares of common stock at a price of $0.04 per share, representing
      49.2% of the Company’s then issued and outstanding shares of common
      stock.




On
        December 15, 2005, the Board of Directors of the Company authorized the
        execution and delivery of a Convertible Promissory Note in the principal
        amount
        of $3.5 million (the “Note”) to Rising Water Capital, in exchange for a loan in
        the same principal amount to be drawn down in stages. The Note is convertible
        during the term, in whole or in part, into shares of common stock at the
        conversion price of three and one-half cents ($0.035) of principal amount
        per
        share of common stock. The agreement to issue additional shares was conditional
        subject to the Company obtaining approval for the increase in authorized
        common
        shares. Since the Company has not received the approval to increase its
        authorized common shares and that condition has not been fulfilled as of
        December 31, 2005, the Company is not obliged to issue additional shares.
        As of
        December 31, 2005, the Company has received funding of $2,570,300 against
        the
        $3.5 million Note. Assuming that the Note is fully converted into common
        stock,
        the Company would be obligated to issue 100,000,000 shares of common stock
        to
        Rising Water Capital, representing an additional 33.0% of the post issuance
        shares of common stock outstanding as of December 31, 2005. None of the
        principal amount of the Note has been converted into shares of common stock
        as
        of May 16, 2006.





In
      connection with the termination of the True Precise acquisition and cancellation
      of 20,137,500 restricted common shares by the Company as of December 31, 2005,
      the Company agreed to reissue to Rising Water Capital all of the 23,137,500
      restricted common shares received or to be received as part compensation for
      this failed acquisition. The successful consummation of the True Precise
      acquisition had been a condition of Rising Water Capital's obligation to
      purchase 195,947,395 shares of common stock pursuant to a Stock Purchase
      Agreement, dated June 30, 2005, and, therefore, the reissuance of these shares
      is being offered as part of compensation to Rising Water Capital.




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On
      July
      11, 2005, the Company’s wholly owned subsidiary Elephant Talk Limited formed
      Full Mark Limited (“Full Mark”), a limited liability company organized under the
      laws of British Virgin Islands, to facilitate acquisitions of profitable
      business in China. On December 13, 2005, Full Mark formed a wholly owned
      subsidiary Jinfuyi Technology (Beijing) Co. Ltd. (“Jinfuyi”), a limited
      liability company organized and existing under the laws of the Peoples’ Republic
      of China, with a registered capital of $200,000. On January 2, 2006, Jinfuyi
      and
      Beijing China Wind entered into an Exclusive Technical Consulting and Services
      Agreement (the ”Service Agreement”), pursuant to which Jinfuyi has the exclusive
      right to provide technical and consulting services in exchange for services
      fees
      of approximately $4,875,000 per year, subject to the right of Jinfuyi to adjust
      the service fee depending on the quantity of the services that it actually
      provides.




On
      January 4, 2006, Guangdong Elephant Talk Network Consulting Limited, a limited
      liability company organized and existing under the laws of the Peoples’ Republic
      of China (“Guangdong Elephant Talk”) and an agent of the Company, and Beijing
      Zhongrun Chuangtou Technology Co., Ltd., a limited liability company organized
      and existing under the laws of the Peoples’ Republic of China (the “Vendor”),
      entered into an Equity Transfer Agreement (the ”Agreement”), pursuant to which
      Guangdong Elephant Talk agreed to acquire sixty percent (60%) of the registered
      capital of Beijing China Wind.





Pursuant
      to the Agreement, the purchase price for 60% of Beijing China Wind was agreed
      to
      be $4,800,000, subject to adjustments based on Beijing China Wind’s audited net
      income for fiscal 2005 and 2006, and is payable (x) in cash of $2,800,000 in
      five installments the last of which is to be paid on January 31, 2007, and
      (y)
      by the issuance by the Company to the Vendor of 20,000,000 shares of restricted
      common stock valued at US$0.10 per share, in four equal installments the last
      of
      which is to be issued on January 31, 2007. Finally, the Vendor has the right
      to
      exercise an option within 30 days after July 31, 2007 to return the 20,000,000
      shares of restricted common stock either in exchange for a 25% equity interest
      in Beijing China Wind or for settlement in cash within 90 days.





Comparison
      of the fiscal years ended December 31, 2005 and December 31, 2004





Our
      results of operations for 2005 primarily consisted of operations of Elephant
      Talk Communications, Inc., our wholly owned subsidiary Elephant Talk Limited,
      our wholly owned subsidiary Guangdong Elephant Talk Network Consulting Limited,
      our wholly owned subsidiary True Precise Technology Limited, our wholly owned
      subsidiary Full Mark Limited, and our majority owned subsidiary Elephant Talk
      Middle East & Africa FZ-LLC. Our results of operations for 2004 consisted of
      operations of Elephant Talk Communications, Inc. and our wholly-owned subsidiary
      Elephant Talk Limited.





Revenues
      and Cost of Revenues: The Company reported revenues of $282,417 and $636,615
      for
      the years ended December 31, 2005 and 2004, respectively. Revenues consisted
      of
      telecommunications services such as voice and data transmission like IDD,
      pre-paid calling cards, eTalk and facsimile services provided to a wide range
      of
      customers. The decline in revenues comes from price compression for long
      distance business voice services. The Company’s international business continues
      to experience significant pricing pressure on its products as we continue to
      penetrate the retail markets although the wholesale market continues to
      represent a large portion of our gross revenues. This, in addition to
      bankruptcies of some customers and industry players, resulted in reduction
      in
      circuits connected to customers related to their internal network consolidation
      and resulted in year-over-year decrease.





Cost
      of
      revenue was $252,900 and $497,234 for the years ended December 31, 2005 and
      2004, respectively. Cost of revenue included cost in providing resale
      arrangements with long distance service providers, cost of leasing transmission
      facilities, international gateway switches for voice, data transmission and
      facsimile services. Gross margin for the year ended December 31, 2005 was 10.4%
      of the revenues compared to 21.9% of the revenues for the year ended December
      31, 2004. Gross margin decreased in 2005 due to the change in the revenue mix
      for the services provided to customers as well as the direct result of increases
      in pricing in the telecom markets without adequate volume offsets. Both the
      local voice revenue and long-distance revenue decreases were impacted by
      continued weakness in the telecommunications industry and ongoing economic
      and
      competitive pressures from other telecommunications services providers in Hong
      Kong and around the world.




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Operating
        expenses: Selling, general and administrative (SG&A) expenses were $635,201
        and $598,486 for the years ended December 31, 2005 and 2004, respectively.
        SG&A expenses increased by $36,715 or 6.1% in 2005 compared to 2004
        primarily because the Company increased its legal and administrative costs
        in
        conducting due diligence of potential acquisitions, and controlling of business
        expenses through right-sizing the organization and recovering $330,934 of
        bad
        debts that were previously written-off in 2004. During 2004, the Company
        wrote-off uncollectible stock subscriptions amounting to $410,781 whereas,
        no
        stock subscriptions were written off during 2005. Stock compensation to
        officers, directors and employees were $399,250 and $560,000 for the years
        ended
        December 31, 2005 and 2004, respectively. Stock compensation expense was
        reduced
        by $160,750 or 28.7% during 2005 as compared to 2004 primarily due to reduction
        in personnel in 2005 and Company paying compensation in cash instead of issuance
        of shares. Stock compensation paid to consultants was $20,000 and $588,440
        for
        the years ended December 31, 2005 and 2004, respectively. During 2004, the
        Company incurred significant expense in fees and expenses paid to consultants
        and financial advisors for identifying potential targets for acquisitions
        in
        VoIP, broadband and Short Messaging Service business, whereas, only $20,000
        in
        such expenses were incurred during 2005. Depreciation and amortization expense
        was $56,230 for the year ended December 31, 2005 compared to $80,208 for
        the
        same period in 2004 as majority of the property and equipment had been fully
        depreciated.




Other
      Income and Expenses: Interest income was $20,467 and $21,893 for the years
      ended
      December 31, 2005 and 2004, respectively. Other income was represented by
      interest income earned on amounts due from entities related to officers,
      directors and shareholders during 2005 and 2004. Interest expense was $139,199
      in 2005 compared to $51,513 in 2004. Increase in interest expense in 2005 was
      due to Company obtaining additional loans from investor, bank and related
      parties to fund its operations. The Company recorded a gain of $32,031 in 2005
      in settlement of its payables to a director. The Company recorded a loss of
      $19,424 on its equity investment in New Times and a gain of $19,424 upon
      disposition of such investment during 2004. The Company realized and recorded
      a
      loss of $53,753 as a result of currency translations during the year ended
      December 31, 2005.





Minority
      Interest: The Company’s majority owned subsidiary Elephant Talk Middle East
& Africa FZ-LLC incurred a loss of $16,630 from operations from the date of
      inception of business on September 26 th 2005
      through December 31, 2005. The Company recorded a loss of $8,225 attributable
      to
      minority shareholders’ interest in the accompanying financial statements as of
      December 31, 2005. The Company did not have any majority owned subsidiary in
      2004.





Discontinued
      operations: The Company discontinued operations of a majority (60%) owned
      subsidiary, True Precise and recorded a loss from discontinued operations of
      $7,229 during 2005. The Company did not have any discontinued operations during
      the same period in 2004. The Company recorded a gain of $7,229 from the disposal
      of True Precise’s operations during 2005. Upon completion of selling the
      operations of True Precise, the Company acquired the remaining 40% equity in
      True Precise it did not own, making True Precise a wholly owned subsidiary
      of
      the Company as of December 31, 2005.





Comprehensive
      Loss: The Company records foreign currency translation gains and losses as
      comprehensive income or loss. The company recorded a gain of $644 for the year
      ended December 31, 2005 compared to a loss of $10,071 in 2004 due to foreign
      currency translations.





Liquidity
      and Capital Resources: The Company's principal capital requirements during
      the
      year 2006 are to fund the internal operations and complete the pending
      acquisitions of growth-oriented telecommunications and related businesses in
      Asia and Europe. The Company plans to raise necessary funds by selling its
      own
      common shares to selected investors and bringing in business partners whose
      contributions include the necessary cash. In view of low borrowing interest
      rates, the Company continues to actively pursuing additional credit facilities
      with investors and financial institutions in Hong Kong, Europe, Middle East
      and
      USA as a means to obtain new funding. The Company’s management estimates that it
      currently does not have the funds to operate for the next twelve months without
      raising additional capital.




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As
      shown
      in the accompanying financial statements, the Company incurred a net loss of
      $1,214,193 for the year ended December 31, 2005 as compared to a net loss of
      $2,128,794 for the same period in 2004. Additionally, the Company’s current
      liabilities exceeded its current assets by $3,372,917 at December 31, 2005.
      These factors and the Company’s inability to meet its debt obligations from
      current operations, and the need to raise additional funds to accomplish its
      objectives, create a substantial doubt about Elephant Talk's ability to continue
      as a going concern. Based upon above, the Company’s independent auditors have
      issued a going concern opinion as the Company does not have sufficient funds
      available to operate for the next twelve months.





Operating
      activities: Net cash used in operating activities for the year ended December
      31, 2005 was $738,018. The decrease in net cash in operating activities resulted
      primarily due to the decrease in loss of $914,601 in 2005, decrease of $54,777
      in prepaid expenses, deposits and other assets, decrease of $156,796 in accounts
      payable and customer deposits, decrease of $12,466 in deferred revenues, and
      an
      increase of $80,627 in accrued expenses and other payable.





Investing
      activities. Net cash used by investing activities for the year ended December
      31, 2005 was $8,878,818. Cash was used by the Company in making earnest deposits
      of $8,863,798 to acquire telecom and technology related companies in Europe
      and
      China. The Company purchased property and equipment of $15,020 during
      2005.




Financing
      activities. Net cash provided by financing activities for the year ended
      December 31, 2005 was $9,747,377. The Company received $7,837,896 from Rising
      Water Capital from sale of 195,947,395 restricted Common Shares of the Company.
      The Company received $55,099 in bank loans and advances of $2,570,300 against
      the convertible promissory note payable of $3.5 million from Rising Water
      Capital. The Company paid $250,000 of its note payables and made net payments
      of
      $482,433 to related parties.





As
      a
      result of the above activities, the Company had a cash and cash equivalent
      balance of $198,816 as of December 31, 2005, a net increase in cash and cash
      equivalents of $131,185 for the year ended December 31, 2005. The ability of
      the
      Company to continue as a going concern is still dependent on its success in
      obtaining additional financing from the institutional investors or by selling
      its Common Shares and fulfilling its plan of restructuring as outlined
      above.





Application
      of Critical Accounting Policies





Revenue
      Recognition, Cost of Revenue and Deferred Revenue:


The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. The Company derives revenues from the sale of minutes of
      calling time via sale of its prepaid calling cards. Cost of revenue includes
      the
      cost of capacity associated with the revenue recognized within the corresponding
      time period. Revenue is deferred upon activation of the calling cards and is
      recognized as the prepaid calling card balances are reduced based upon minute
      usage, imposition of administrative fees, or no further obligations exist with
      respect to a calling card. Deferred revenues represent amounts received from
      its
      customers for the unused minutes of the prepaid calling cards sold to its
      customers since the Company recognizes revenues only on the usage of the
      minutes.





Stock-based
      Compensation:


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





Issuance
      of Shares for Services:


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




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Impact
      of
      Accounting Pronouncements




In
        January 2003, the Financial Accounting Standards Board ("FASB") issued
        Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities
        (VIE)," (revised December 2003 by FIN No. 46R), which addresses how a
        business enterprise should evaluate whether it has a controlling financial
        interest in an entity through means other than voting rights and accordingly
        should consolidate the entity. For variable interests in VIEs created before
        January 1, 2004, the Interpretation will be applied beginning on January
        1,
        2005. For any VIEs that must be consolidated under FIN No. 46R that were
        created
        before January 1, 2004, the assets, liabilities and non-controlling interests
        of
        the VIE initially would be measured at their carrying amounts with any
        difference between the net amount added to the balance sheet and any previously
        recognized interest being recognized as the cumulative effect of an accounting
        change. If determining the carrying amounts is not practicable, fair value
        at
        the date FIN No. 46R first applies may be used to measure the assets,
        liabilities and non-controlling interest of the VIE. The
        guidelines of this statement are not applicable to the Company.
 
 In
        December 2004, the FASB issued SFAS No. 123R “Share-Based Payment”
(“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based
        Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for
        Stock Issued to Employees” and its related implementation guidance. SFAS 123R
        establishes standards for the accounting for transactions in which an entity
        exchanges its equity instruments for goods or services, including obtaining
        employee services in share-based payment transactions. SFAS 123R applies
        to all
        awards granted after the required effective date and to awards modified,
        repurchased, or cancelled after that date. Adoption of the provisions of
        SFAS
        123R is effective as of the beginning of the first interim or annual reporting
        period that begins after June 15, 2005. The guidelines of this statement
        are not
        applicable to the Company.
  In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
        of
        ARB No. 43, Chapter 4"(“SFAS 151”) This statement clarifies the criteria of
        "abnormal amounts" of freight, handling costs, and spoilage that are required
        to
        be expensed as current period charges rather than deferred in inventory.
        In
        addition, this statement requires that allocation of fixed production overheads
        to the costs of conversion be based on the normal capacity of the production
        facilities. SFAS 151 is effective for the Company July 1, 2005. The Company
        does
        not expect the adoption of this statement will have any material impact on
        its
        results or financial position.
 
 In
        December 2004, the FASB issued SFAS no. 153, *Exchanges
        of Nonmonetary Assets an amendment of APB Opinion No. 29.* This
        statement addresses the measurement of exchanges of nonmonetary assets. It
        eliminates the exception from fair value measurement for nonmonetary exchanges
        of similar productive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting
        for Nonmonetary Transactions,* and
        replaces it with an exception for exchanges that do not have commercial
        substance. This statement specifies that a nonmonetary exchange has commercial
        substance if the future cash flows of the entity are expected to change
        significantly as a result of the exchange. The Company does not expect the
        adoption of this statement will have any material impact on its results or
        financial position.
 
 In
        December 2004, the FASB issued SFAS No. 152, *Accounting
        for Real Estate Time-Sharing Transactions an amendment of FASB Statements
        No. 66
        and 67.* This
        statement amends FASB
        Statement No. 66 , *Accounting for Sales of Real Estate,* to
        reference the financial accounting and reporting guidance for real estate
        time-sharing transactions that is provided in AICPA Statement of Position
        (SOP)
        04-2, *Accounting for Real Estate Time-Sharing Transactions.* This
        statement also amends FASB
        Statement No. 67 , *Accounting for Costs and Initial Rental Operations of Real Estate
        Projects,* to state
        that the guidance for (a) incidental operations and (b) costs incurred to
        sell
        real estate projects does not apply to real estate time-sharing transactions.
        This statement is effective for financial statements for fiscal years beginning
        after June 15, 2005. The guidelines of this statement are not applicable
        to the
        Company.
 
 SFAS
        No.
        154 (“SFAS 154”), *Accounting
        Changes and Error Corrections,* was
        issued in May 2005 and replaces APB Opinion No. 20 and SFAS No. 3 (“SFAS 3”).
        SFAS No. 154 requires retrospective application for voluntary changes in
        accounting principle in most instances and is required to be applied to all
        accounting changes made in fiscal years beginning after December 15, 2005.
        At
        such, the Company is required to adopt these provisions at the beginning
        of the
        fiscal year ended December 31, 2006. The Company is currently evaluating
        the
        impact of SFAS 154 on its consolidated financial statement.
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              26
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 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.




Off
      Balance Sheet Arrangements





The
      Company has no off Balance Sheet arrangements at December 31, 2005.





The
      Board
      of Directors and its Committees





During
      the calendar year 2005, the Board held four (4) meetings. Messers Choi and
      Lam
      attended 100% of the meetings and the other present members attended some of
      the
      meetings since attaining their directorships.





The
      Company has no Compensation or Nominating Committees.





Options
      Committee





The
      Options Committee’s function is to review, make recommendations, maintain and
      implement those option grants of options promulgated by it and approved by
      the
      Board of Directors. Directors Choi and Lam comprise the membership of this
      committee.





Audit
      Committee





The
      Audit
      Committee’s function is to review with the Company’s independent public
      accountants and management, the annual financial statements and independent
      public accountants’ opinion. Its responsibilities include reviewing the scope
      and results of the examination of the Company’s financial statements by the
      independent public accountants, approving all professional services performed
      by
      the independent public accountants and all related fees paid in connection
      with
      such services and recommending the retention of the independent public
      accountants to the board, subject to ratification by the shareholders.
      Additionally, the Committee periodically reviews the Company’s accounting
      policies, internal accounting and financial controls. The members of the Audit
      Committee are Messrs. Choi and Ohri. During the calendar year 2005, the Audit
      Committee held one meeting to ratify the appointment of the Company’s
      independent accountants.





**Item
      7. Consolidated FinancialStatements**





Financial
      Statements are referred to in Item 13(a), listed in the Index to Financial
      Statements and filed and included elsewhere herein as a part of this Annual
      Report on Form 10-KSB.





**Item
      8. Changes in and Disagreementswith Accountants on Accounting
      and Financial Disclosure**





None.




**Item
      8A. Controls andProcedures**





The
      Company maintains controls and procedures designed to ensure that it is able
      to
      collect the information it is required to disclose in the reports it files
      with
      the SEC, and process, summarize, and disclose this information within the time
      periods specified in the rules of the SEC. The Company's Chief Executive Officer
      and Chief Financial Officer (“Certifying Officers”) are responsible for
      establishing and maintaining these procedures and, as required by the rules
      of
      the SEC, evaluate their effectiveness.




-
            27
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**Disclosure
      Controls and Procedures and Internal Controls**





The
      Company maintains disclosure controls and procedures designed with the objective
      of ensuring that information required to be disclosed in our reports filed
      with
      the Commission under the Exchange Act, such as this Annual report, is recorded,
      processed, summarized and reported within the time period specified in the
      Commission's rules and forms. Disclosure controls are also designed with the
      objective of ensuring that material information relating to the Company is
      made
      known to the Certifying Officers by others, particularly during the period
      in
      which the applicable report is being prepared. The Company maintains a system
      of
      internal controls designed to provide reasonable assurance that a) transactions
      are executed in accordance with management's general or specific authorization;
      b) transactions are recorded as necessary, to permit preparation of financial
      statements in conformity with generally accepted accounting principles, and
      to
      maintain accountability for assets; c) access to assets is permitted only in
      accordance with management's general or specific authorization; and d) the
      recorded accountability for assets is compared with the existing assets at
      reasonable intervals and appropriate action is taken with respect to any
      differences.





**Scope
      of the Evaluation**





The
      Certifying Officers’ evaluation of our disclosure controls and internal controls
      are done periodically so that the conclusions concerning the effectiveness
      of
      our controls can be reported in our quarterly reports on Form 10-QSB and Annual
      reports on Form 10-KSB. The overall goals of these various evaluation activities
      are to monitor our disclosure controls and our internal controls, and to make
      modifications, if and as necessary. Our external auditors also review internal
      controls in connection with their audit and review activities.





**Material
      Weakness in Disclosure Controls**





The
      Securities and Exchange Commission rules embodied in the Sarbanes-Oxley Act
      of
      2002, in particular, Section 404, require that a company's internal controls
      over financial reporting be based upon a recognized internal control framework.
      The Certifying Officers have evaluated the effectiveness of our disclosure
      controls and procedures and internal controls over financial reporting (as
      such
      terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
      Act of 1934, as amended) as of the end of the period covered by the filing
      of
      the Report, and concluded that, as of the end of such period, our disclosure
      controls and procedures were deficient and not effective. While the Company
      has
      internal controls and procedures in place, the Certifying Officers believe
      that
      during the last quarter ending December 31, 2005, the Company had a breakdown
      in
      following the Company’s established policies and procedures of recording of
      transactions in accounting records accurately, preparation of monthly
      reconciliations and management’s review of operating results on a timely basis.
      The Certifying Officers have recruited an experienced financial manager at
      the
      Company’s subsidiary in Hong Kong to ensure that the transactions are recorded
      accurately, and account reconciliations are prepared on a timely basis. The
      Company has taken the necessary corrective steps to improve and strengthen
      its
      disclosure controls and procedures, including hiring a new legal counsel, and
      implementing new policies and procedures in an effort to remediate these
      deficiencies. Management plans to monitor, on a periodic basis that corrective
      actions implemented are working effectively, and will report on progress of
      the
      corrective actions in the future filings whether such corrective actions have
      remedied the material weaknesses.




**Management’s
      action**





The
      Certifying Officers have recruited an experienced financial manager at the
      Company’s subsidiary in Hong Kong to ensure that the transactions are recorded
      accurately, and account reconciliations are prepared on a timely basis. The
      Company has taken the necessary corrective steps to improve and strengthen
      its
      disclosure controls and procedures, including hiring a new legal counsel, and
      implementing new policies and procedures in an effort to remediate these
      deficiencies. Management plans to monitor, on a periodic basis that corrective
      actions implemented are working effectively, and will report on progress of
      the
      corrective actions in the future filings whether such corrective actions have
      remedied the material weaknesses.




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Except
      as
      noted above, there have not been any changes in our disclosure controls and
      procedures and internal control over financial reporting (as such term is
      defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
      first fiscal quarter that have materially affected, or are reasonably likely
      to
      materially affect, our internal control over financial reporting.





**Item
      8B. Other Information**





None.





**PART
      II**




**Item
      9.**  **Directors,
      Executive Officers, Promoters and Control
      Persons;**  **Compliance
      with Section 16(a) of the Exchange Act**





The
      following table sets forth certain information about the directors and executive
      officers of Elephant Talk.





Director
                Name
            Age
            Position
            SinceMr.
                Russelle Choi
            51
            President
                and Chief Executive Officer
            2002Mr.
                Pius Lam
            47
            Director
            2002Mr.
                Francis Lim
            47
            Director
            2003Mr.
                Manu Ohri
            50
            Executive
                Vice-President of Finance and Chief Financial Officer
            2002Mr.
                James Wang
            48
            Director
            2003





**Russelle
      Choi, President and Chief Executive Officer:** Mr.
      Choi
      is a co-founder of the Elephant Talk Limited, a wholly owned subsidiary of
      the
      Company. Mr. Choi is responsible for the overall strategic direction of the
      Company, and is appointed as the President and Chief Executive Officer of the
      Company since January 2002. Mr. Choi serves as Chairman of ET Network Services
      Limited in Hong Kong. Mr. Choi has over 20 years experience in management and
      leadership in a wide range of industries including media, garment and
      telecommunication industries in Hong Kong, China and U.S. In 1981, Mr. Choi
      established “Happy Days Association” which earned him fame and connections in
      the media and entertainment industry in Hong Kong. Mr. Choi serves as Chairman
      of WKA Association, a leading association for Thai-style boxing for the South
      East Asia Region. In 1985, Mr. Choi opened his own garment factory in Canada
      with branches in Hong Kong and China, before jointly founding Elephant Talk
      Limited in Hong Kong 1994. Mr. Choi earned his Bachelor’s degree in Business
      Administration from the University of Toronto, Canada.




**Pius
      Lam, Vice President and Chief Operation Officer:** Mr.
      Lam
      is a co-founder of Elephant Talk Limited. Mr. Lam is responsible for the
      Company’s day-to-day management and operations. Prior to the establishment of
      Elephant Talk Limited, Mr. Lam successfully co-founded New Tech Information
      Systems Limited, an international systems integrator for the hospitality
      industry, both in US and Hong Kong. From August 1986 to August 1987, Mr. Lam
      served as a Program Analyst with Omni’s Solutions, Inc. Mr. Lam has over 16
      years experience in the computer and telecommunications industries. Mr. Lam
      earned a Master’s degree in Business Administration with emphasis in Economics
      and Finance from the State University of New York in 1986 and a Bachelor’s
      degree in Science from State University of Pennsylvania in 1984.




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**Francis
      Lim:** Mr.
      Lim
      has over ten years of experience in market entry, joint ventures formation
      and
      mergers and acquisitions in the telecommunications industry covering the full
      spectrum of services from cellular and paging to fixed line to the Internet.
      Mr.
      Lim currently serves as an independent consultant to multinational carriers
      in
      establishing and securing international traffic terminations. From April 2000
      to
      March 2003, Mr. Lim served as Regional Director of Business Development at
      Asia
      Global Crossing, responsible for establishing the partnerships and securing
      licenses for landing of East Asia Crossing and the pan-Asia fiber optics sub-sea
      cable. From April 1994 to March 2000, Mr. Lim served as Regional Managing
      Director of Business Development at AT&A Asia Pacific Ltd., responsible for
      executing market entry plans for AT&T into various countries in the Asia
      Pacific Region. Mr. Lim successfully brought AT&T into the cellular market
      in India and led all negotiations in establishing the first telecom services
      joint venture in China. Mr. Lim headed the marketing team of AT&T’s leading
      edge Global Clearinghouse Business, Asia pacific first clearinghouse for the
      settlement of VoIP minutes. Mr. Lim held variety of sales and marketing
      positions with Hutchison Telecommunications Ltd. and Xerox. Mr. Lim earned
      a
      bachelor’s degree in Chemical Engineering for University of Wisconsin in
      1980.





**Manu
      Ohri, Executive Vice President Finance & Chief Financial Officer:
      M** r.
      Ohri
      currently serves as a Director and Executive Vice President of Finance &
Chief Financial Officer for Elephant Talk Communications, Inc. since May 2002.
      From December 1999 to September 2002, Mr. Ohri served as Director and Executive
      Vice President & Chief Financial Officer for The Hartcourt Companies, Inc.
      From June 1999 to November 1999, Mr. Ohri served as the President and Chief
      Executive Officer of Pego Systems, Inc., an industrial air and gas equipment
      manufacturer’s representative organization, an affiliate of The Hartcourt
      Companies, Inc. From January 1997 to March 1999, Mr. Ohri served as Chief
      Operating Officer and Chief Financial Officer of Dynamic Cooking Systems, Inc.,
      a privately-held manufacturing company. From September 1989 to December 1996,
      Mr. Ohri served as Chief Financial Officer of Startel Corporation, a NASDAQ
      company in software development business. Mr. Ohri’s multi-faceted experience
      includes operations, finance as well as administrative functions in the
      manufacturing, distribution and software development industries. Mr. Ohri is
      a
      Certified Public Accountant with over six years experience with Deloitte &
Touche, LLP and PriceWaterhouseCoopers, LLP. Mr. Ohri earned his Masters degree
      in Business Administration from University of Detroit in 1979 and Bachelors
      degree in Accounting from University of Delhi in India in 1975.





**Mr.
      James Wang:** Mr.
      Wang
      has over twenty years of professional experience in all aspects of
      manufacturing, research & development, sales and corporate management for
      hi-tech industries including telecommunications, data communications, computer
      networking and semi-conductor manufacturing. Since June 2001, Mr. Wang has
      been
      serving as the President of Marconi Communications China in Beijing, China.
      Mr.
      Wang is responsible for all of operations of Marconi China with a target of
      tripling the revenue in three years and making Marconi a tier 1 vendor in China.
      From July 1989 to May 2001, Mr. Wang held several positions in Alcatel China,
      the last being Vice President of Sales and Commercial. Mr. Wang had the overall
      responsibility of sales and marketing of Alcatel China and undertook a major
      role in promoting company’s image and development of governmental relationships.
      Mr. Wang held leadership and staff positions at Network Access Corporation,
      BNR/Nortel and Texas Instruments in Texas. Mr. Wang earned his Doctorate degree
      in Computer Science from Southern Methodist University (SMU), Dallas, Texas
      in
      July 1995. Mr. Wang earned his dual Masters degrees in Computer Science and
      in
      Robotics in 1987 and 1983 from SMU and Oklahoma State University,
      Oklahoma.





Directors
      serve for a term of one year or until their successors are elected and
      qualified. Executive officers are appointed by and serve at the will of the
      Board of Directors. There are no family relationships between or among any
      of
      the directors or executive officers of the Company except that Mr. Pius Lam,
      Chief Operating Officer of the Company, is married to Mr. Russelle Choi’s
      sister.





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            30
            -
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            of Contents*





**Item
      10. ExecutiveCompensation**





Summary
      Compensation Table*





The
      following table sets forth the total compensation earned by or paid to the
      executive officers greater than $100,000 for the last three fiscal
      years.




ANNUAL
                  COMPENSATION
              LONG
                  TERM COMPENSATIONAwards
              PayoutsYear
              Salary
                  ($)
              Bonus
                  ($)
              Other
                  Annual Compensation ($)
              Restricted
                  Stock Awards ($)
              Securities
                  Underlying Options/SARs (#)
              LTIP
                  Payouts ($)
              All
                  Other Compensation ($)Russelle
                  Choi, President and CEO
              2005
              $127,500
              $0
              $5,000
              $0
              -0-
              $0
              $02004
              $120,000
              $0
              $20,000
              $0
              -0-
              $0
              $02003
              $120,000
              $0
              $20,000
              $0
              -0-
              $0
              $0


*
      All
      dollar amounts set forth in the Summary Compensation Table are in
      US$.





No
      options or SARs where granted to any executive officers.





Employment
      and Related Agreements





On
      January 1, 2003, the Company entered into an employment agreement with Mr.
      Russelle Choi to provide salary, bonuses, and other fringe benefits through
      December 31, 2005. Annual base salary payable to Mr. Russelle Choi under the
      agreement was $120,000 per annum in the first year, $132,000 in the second
      year
      and $150,000 in the third year. Payments are to be made in equal monthly
      installments. In the event the Company did not have sufficient cash flow to
      pay
      compensation in cash, Mr. Choi has the option to accept Elephant Talk’s
      restricted common shares for the same amount of compensation. Share price is
      to
      be calculated at 50% of the market trading bid price on the first trading day
      of
      the month for which the compensation is paid. Mr. Choi received a total
      compensation of $127,500 for the year 2005 and elected to receive 2,813,096
      restricted common shares in lieu of compensation of $67,500. During 2005, Mr.
      Choi also received 81,944 restricted common shares valued at $5,000 for
      attending Board meetings. Mr. Choi elected to receive $120,000 as compensation
      for the year ended 2004 and was issued 1,078,702 restricted common shares.
      In
      addition, Mr. Choi received 179,783 restricted common shares valued at $20,000
      as Directors fees for attending Board meetings in 2004. The Company issued
      989,009 restricted common shares valued at $120,000 to Mr. Choi towards his
      2003
      compensation and 164,835 restricted common shares valued at $20,000 as Director
      fees for attending Board meetings in 2003. The share price used in calculating
      stock compensation for the months of January 2005 to June 2005 was discounted
      by
      50% of the market trading bid price on the first trading day of the month for
      which the compensation was paid. The share price used in calculating stock
      compensation for Mr. Choi for the years 2004 and 2003 was not
      discounted.





Compensation
      of Directors





For
      attending Board meetings, the Board of Directors approved the compensation
      of
      the Company’s directors with $5,000 worth of restricted common shares valued at
      the closing market price of the common shares on first day of each fiscal
      quarter, starting January 1, 2003. The Company terminated the compensation
      policy to attend Board meetings effective April 2005, and, therefore, no
      compensation is paid to directors for attending Board meetings.





Code
      of
      Ethics





In
      April
      2006, our Board of Directors adopted a Code of Ethics, which applies to all
      officers, directors and employees. We will provide a copy of the Code of Ethics,
      without charge, to any person who sends a written request to Russelle Choi,
      President of the Company, at 438 East Katella Avenue, Suite 217, Orange,
      California 92867. A copy of the Code of Ethics has been filed as exhibit 14.1
      to
      this Annual Report. The Company intends to disclose any waivers or amendments
      to
      the Code of Ethics in a Report on Form 8-K rather than from its
      Website.





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            of Contents*





**Item
      11. Security Ownershipof Certain Beneficial Owners and
      Management**





The
      following table sets forth information as of December 31, 2005 with respect
      to
      persons known to the Company to be the beneficial owners of more than 5% of
      its
      voting securities and with respect to the beneficial ownership of such
      securities by each director of the Company and by all directors and executive
      officers of the Company as a group.





Title
                of Class
            Name
                & Address of Beneficial Owner
            Amount
                and Nature of Beneficial Ownership (A)
            PercentCommon
                stock
            Rising
                Water Capital, A.G. (B)
              Baarerstrasse
                12
              Zug,
                Switzerland 6300
            100,000,000
            54.1%Common
                stock
            Calfin
                Trust
              Postfach
                1518 Lettstrasse 10
              FL-9490
                Vaduz, Liechtenstein
            20,000,000
            10.9%Common
                stock
            Russelle
                Choi, Director (C) (E)
              8/F,
                145-159 Yeung Uk Road
              Tsuen
                Wan, Hong Kong
            9,195,132
            5.0%Common
                stock
            Lam
                Kwok Hung, Director (D) (E)
              8/F,
                145-159 Yeung Uk Road
              Tsuen
                Wan, Hong Kong
            5,317,066
            2.9%Common
                stock
            Manu
                Ohri, Director
              438
                E. Katella Avenue, Suite 217
              Orange,
                California 92867
            4,019,308
            2.2%Common
                stock
            Francis
                Lim, Director
              8/F,
                145-159 Yeung Uk Road
              Tsuen
                Wan, Hong Kong
            536,645
            0.3%Common
                stock
            James
                Wang, Director
              8/F,
                145-159 Yeung Uk Road
              Tsuen
                Wan, Hong Kong
            48,821
            0.03%All
                Officers and Directors as a group
            19,116,972
            10.4%




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A.
            Except
                as otherwise indicated, each of the parties listed has sole voting
                and
                investment power with respect to all shares of common stock indicated.
                Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
                under
                the Securities Exchange Act of 1934, as
                amended.




B.
            Rising
                Water Capital, A.G. is the record owner of 100,000,000 shares of
                common
                stock, representing 54.5% of the total outstanding shares, and the
                beneficial owner of 166,344,919 shares of common stock, representing
                66.5%
                of the total outstanding shares. The additional 66,344,919 shares
                could be
                acquired within 60 days by Rising Water Capital, A.G. upon exercise
                of its
                $3.5 million Convertible Promissory Note to the maximum extent
                permissible. Currently, there is not sufficient authorized capital
                to
                convert the Convertible Promissory Note into more shares of common
                stock.
                In addition, the Company has agreed to reissue 23,137,500 shares
                of common
                stock to Rising Water Capital as part compensation for the failed
                True
                Precise acquisition that Rising Water Capital indirectly funded.
                In the
                event that RWC converts all of its convertible securities and receives
                23,137,500 shares as aforesaid, RWC would beneficially own 189,482,419
                shares of common stock representing 70.9% of the then outstanding
                shares
                of common stock.





C.
            Russelle
                Choi is a beneficial owner of 2,286,080 shares of common stock held
                by
                Wellgear Far East Limited, and 235,116 shares of common stock held
                by
                Wiselink Technologies Limited, which shares are included in the ownership
                figure reported.





D.
            Lam
                Kwok Hung is a beneficial owner of 805,739 shares of common stock
                held by
                Wiseley International Limited, which shares are included in the ownership
                figure reported.





E.
            Lam
                Kwok Hung is married to Russelle Choi’s
                sister.





Stock
      Option Plan





None.





Employee
      Benefit Plan





The
      Company adopted an employee benefit plan called “The 2000 Employee Benefit Plan”
(the “Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or
      grant options to acquire the Company’s common stock, no par value, from time to
      time to employees of the Company or its subsidiaries. In addition, at the
      discretion of the Board of Directors, shares may be granted under this Plan
      to
      other individuals, including consultants or advisors, who contribute to the
      success of the Company or its subsidiaries, provided that bona fide services
      shall be rendered by consultants and advisors and such services must not be
      in
      conjunction with the offer or sale of securities in a capital raising
      transaction. No shares may be issued or options granted under the Plan to
      consultants, advisors or other persons who directly or indirectly promote or
      maintain a market for the Company’s securities. The Plan is intended to aid the
      Company in maintaining and developing a management team, attracting qualified
      officers and employees capable of assuring the future success of the Company,
      and rewarding those individuals who have contributed to the success of the
      Company. The Plan Administrator under the direction of the Board of Directors
      administers the Plan.





A
      total
      of four million (4,000,000) common shares and four million (4,000,000) options
      to acquire common shares may be subject to, or issued pursuant to, benefits
      granted under the Plan. At any time any stock option is granted under the terms
      of this Plan, the Company will reserve for issuance the number of shares of
      Stock subject to suck option until it is exercised or expired. The Plan
      Administrator shall determine from time to time the terms, conditions and price
      of the options granted. Options shall not be construed to be stock and cannot
      be
      exercised after the expiration of its term.





On
      January 17, 2001, the Company granted and issued 1,700,000 common shares at
      a
      price of $0.005 per share for a total consideration of $8,500. On November
      16,
      2004, the Company granted and issued 2,000,000 common shares to certain officers
      and directors at a price of $0.059 per share for a total consideration of
      $118,000. Under the Plan 300,000 shares of common stock and 4,000,000 stock
      options remain available for grant at December 31, 2005.




-
            33
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Warrants





The
      Company did not have any warrants outstanding at December 31, 2005.





Stock
      Split and Stock Issuances





As
      a
      condition precedent to the acquisition of Elephant Talk Limited and plan of
      reorganization that completed on January 4, 2002, the Company authorized a
      reverse stock split of its common shares pursuant to which for every ten (10)
      shares of the issued and outstanding common shares one (1) common share was
      exchanged. On January 22, 2002 the Company completed and effected a one (1)
      for
      ten (10) reverse stock split of its outstanding common stock. This reduced
      the
      number of shares outstanding from 34,626,899 shares to 3,464,000 shares after
      having 1,311 partial shares redeemed.





As
      part
      of the acquisition and plan of reorganization, the Company issued 31,164,210
      common shares to the former shareholders of Elephant Talk Limited. In addition,
      pursuant to a letter of understanding, on January 2, 2002, the Company sold
      the
      business operations of Vision Aerospace, Inc., owned principally by a former
      officer of the Company for 1,000,000 shares of the common stock of Vision
      Aerospace, Inc. The Company has valued the investment in Vision Aerospace,
      Inc.
      at $10,835 being the net value of assets and liabilities in exchange for
      1,000,000 shares of Vision Aerospace, Inc.





**Item
      12: Certain Relationshipsand Related
      Transactions**





a)
            Wiseley
                International Limited





The
      Company paid $49,725 and $76,923 in business consulting and management advisory
      fees to an entity owned and controlled by a director for the years ended
      December 31, 2005 and 2004, respectively.





b)
            Wellgear
                Far East Limited





The
      Company paid $58,500 and $76,923 in business consulting and management advisory
      fees to an entity owned and controlled by a director for the years ended
      December 31, 2005 and 2004, respectively.





**PART
      IV**





**Item
      13. Exhibits and Reports on Form 8-K**





The
      following list describes the exhibits filed as part of this Annual Report Form
      10-KSB and reports on Form 8-K within the last fiscal quarter.





Exhibit
                No.
            Description
                of Document14.1
            Code
                of Ethics31.1
            Certification
                of Chief Executive Officer Pursuant to
                the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14 as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200231.2
            Certification
                of Chief Financial Officer Pursuant to
                the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14 as Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Certification
                Pursuant to 18 U.S.C. Section 1350, as
                Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002




Reports
        on Form 8-K :
 
 -
        Sale of
        Unregistered Securities - filed on December 16, 2005 - Sale of $3.5 million
        Convertible Promissory Note


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**Item
      14.**  **Principal
      AccountantFees and Services**





During
      the past two fiscal years, our principal accountant have billed for their
      services as follows. In addition, fees and services related to the audit of
      the
      financial statements of the Company for the period ended December 31, 2005,
      as
      contained in the Annual Report, are not included because they were not incurred
      until after the end of the fiscal year.





Year
                ended December 31,2005
            
            
            2004Audit
                Fees
            
            $
            45,454
            
            $
            40,767Audit-Related
                Fees
            
            $
            --
            
            $
            --Tax
                Fees
            
            $
            1,200
            
            $
            1,200All
                Other Fees
            
            $
            --
            
            $
            --





(i)
      The
      Audit Committee requires that prior to the engagement of the Company’s principal
      accountant to audit the financial statements of the Company or to perform other
      Audit Related or Non-Audit Related services, the engagement be reviewed to
      consider the scope of services to be rendered and the expected fees to be
      charged by the principal accountant in connection with rendering such
      services.





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**SIGNATURES**





In
      accordance with Section 13 or 15 (d) of the Securities Exchange Act of 1934,
      the
      registrant has duly caused this registration statement to be signed on its
      behalf by the undersigned, thereunto duly authorized.





**ELEPHANT
      TALK COMMUNICATIONS, INC.**





Date:
                May 18, 2006
            By:
                /s/ Russelle ChoiRusselle
                ChoiChairman
                of the Board, President & Chief Executive Officer(Principal
                Executive Officer)Date:
                May 18, 2006
            By:
                /s/ Manu OhriManu
                OhriExecutive
                Vice President, Finance & Chief Financial Officer(Principal
                Financial Officer and Principal Accounting
                Officer)








Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.








Signature
            Title
            Date/s/
                Russelle Choi
            President,
                Chief Executive Officer and Director
            May
                18, 2006Russelle
                Choi/s/
                Pius Lam
            Chief
                Operating Officer and Director
            May
                18, 2006Pius
                Lam/s/
                Manu Ohri
            Chief
                Financial Officer, Director and Secretary
            May
                18, 2006Manu
                Ohri/s/
                Francis Lim
            Director
            May
                18, 2006Francis
                Lim







-
          36
          -





**ELEPHANT
      TALK COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**





CONSOLIDATED
      FINANCIAL STATEMENTS


AS
      OF
      DECEMBER 31, 2005





TABLE
      OF
      CONTENTS





PAGEREPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
                  FIRMS
              F-1
                  - F-2CONSOLIDATED
                  BALANCE SHEET AS OF DECEMBER 31,
                  2005
              F-3CONSOLIDATED
                  STATEMENTS OF OPERATIONS AND COMPREHENSIVE
                  LOSS
                FOR
                  THE YEARS ENDED DECEMBER 31, 2005 AND
                  2004
              F-4CONSOLIDATED
                  STATEMENTS OF CHANGES IN STOCKHOLDERS’
                  (DEFICIENCY) EQUITY
                FOR
                  THE YEARS ENDED DECEMBER 31, 2005 AND
                  2004
              F-5CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
                FOR
                  THE YEARS ENDED DECEMBER 31, 2005 AND
                  2004
              F-6NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS
              F-7
                  - F-18


i
 *Table
            of Contents*


REPORT
      OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM








To
      the
      Board of Directors of:


Elephant
      Talk Communications, Inc. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheet of Elephant Talk
      Communications, Inc. as of December 31, 2005, and the related consolidated
      statements of operations and comprehensive loss, changes in stockholders’ equity
      and cash flows for the year ended December 31, 2005. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Elephant Talk
      Communications, Inc. as of December 31, 2005 and the consolidated results
      of its operations and comprehensive loss and its cash flows for the year ended
      December 31, 2005 in conformity with accounting principles generally accepted
      in
      the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 17 to the
      consolidated financial statements, the Company had a loss of $1,214,193, a
      working capital deficit of $3,372,917, a stockholders’ equity of $1,671,202 an
      accumulated deficit of $12,132,435 and used cash in operations of $738,018.
      These factors raise substantial doubt about its ability to continue as a going
      concern. Management’s plans concerning these matters are also described in Note
      17. The accompanying consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.








/s/
      JIMMY C. H. CHEUNG & CO.


Certified
      Public Accountants





Hong
      Kong


May
      18,
      2006





F
            -
            1
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            of Contents*





REPORT
      OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING
      FIRM








To
      the
      Board of Directors of:


Elephant
      Talk Communications, Inc. and Subsidiary





We
      have
      audited the accompanying consolidated statements of operations and comprehensive
      loss, changes in stockholders’ deficiency and cash flows of Elephant Talk
      Communications, Inc. and subsidiary for the year ended December 31, 2004. These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements of Elephant Talk Communications,
      Inc. and subsidiary referred to above present fairly in all material respects
      the results of its operations and comprehensive loss and its cash
      flows for the year ended December 31, 2004 in conformity with accounting
      principles generally accepted in the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 17 to the
      consolidated financial statements, the Company had a net loss of $2,128,794,
      a
      working capital deficiency of $1,306,505, a stockholders’ deficiency of
      $1,563,096, an accumulated deficit of $10,918,242 and used cash in operations
      of
      $691,616. These factors raise substantial doubt about its ability to continue
      as
      a going concern. Management’s plans concerning this matter are also described in
      Note 17. The accompanying consolidated financial statements do not include
      any
      adjustments that might result from the outcome of this uncertainty.








WEBB
      & COMPANY, P.A.





Boynton
      Beach, Florida


March
      28,
      2005








F
            -
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            of Contents*








**ELEPHANT
                TALK COMMUNICATIONS, INC. AND
                SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****DECEMBER
                31, 2005****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            198,816Accounts
                receivable, net
            
            
            7,200Advances
                to third parties
            
            
            1,819,335Prepaid
                expenses and other current assets
            
            
            22,743Total
                current assets
            
            
            2,048,094**PROPERTY
                AND EQUIPMENT - NET**
            
            
            86,847**OTHER
                ASSETS**Due
                from related parties
            
            
            507,747****Earnest
                deposit for acquisitions
            
            
            7,061,463Total
                other assets
            
            
            7,569,210**TOTAL
                ASSETS**
            
            $
            9,704,151**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES**Overdraft
            
            $
            149,326Accounts
                payable and customer deposits
            
            
            38,922Deferred
                revenue
            
            
            107,422Accrued
                expenses and other payable
            
            
            158,027Loans
                payable
            
            
            965,716Investor
                deposit for share purchase
            
            
            3,837,896Due
                to related parties
            
            
            163,702Total
                current liabilities
            
            
            5,421,011**LONG-TERM
                LIABILITIES**Convertible
                promissory note
            
            
            2,570,300Total
                long term liabilities
            
            
            2,570,300**TOTAL
                LIABILITIES**
            
            
            7,991,311**MINORITY
                INTEREST**
            
            
            41,638**COMMITMENT
                AND CONTINGENCIES**
            
            
            --**STOCKHOLDERS'
                EQUITY**Preferred
                stock Class B, no par value, 5,000,000 shares authorized - none
                issued and outstanding
            
            
            --Common
                stock, no par value, 250,000,000 shares authorized, 177,507,588 issued
                and
                outstanding
            
            
            14,543,586Common
                stock, no par value, 20,000,000 shares issued as earnest deposit
                for
                acquisition
            
            
            (720,000
            )Common
                stock subscriptions
            
            
            (8,991
            )Accumulated
                comprehensive loss
            
            
            (10,958
            )Accumulated
                deficit
            
            
            (12,132,435
            )Total
                stockholders' equity
            
            
            1,671,202**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            9,704,151





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








F
            -
            3
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            of Contents*





**ELEPHANT
      TALKCOMMUNICATIONS, INC. AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**




**For
                  the year ended December 31,****2005**
              
              
              **2004**REVENUES
              
              $
              282,417
              
              $
              636,615COST
                  OF REVENUE
              
              
              252,900
              
              
              497,234GROSS
                  PROFIT
              
              
              29,517
              
              
              139,381OPERATING
                  EXPENSESSelling,
                  general and administrative
              
              
              635,201
              
              
              598,486Provision
                  for uncollectible stock subscriptions
              
              
              --
              
              
              410,781Stock
                  compensation to officers, directors and employees
              
              
              399,250
              
              
              560,000Stock
                  compensation to consultants
              
              
              20,000
              
              
              588,440Depreciation
                  and amortization
              
              
              56,230
              
              
              80,208Total
                  operating expenses
              
              
              1,110,681
              
              
              2,237,915LOSS
                  FROM OPERATIONS
              
              
              (1,081,164
              )
              
              (2,098,534
              )OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              20,467
              
              
              21,893Interest
                  expense
              
              
              (139,199
              )
              
              (51,513
              )Equity
                  in income (loss) of unconsolidated affiliate
              
              
              --
              
              
              (19,424
              )Gain
                  on disposition of equity investment
              
              
              --
              
              
              19,424Loss
                  on currency translation
              
              
              (53,753
              )
              
              --Gain
                  on settlement of payables
              
              
              32,031
              
              
              --Miscellaneous
                  income
              
              
              --
              
              
              160Total
                  other income (expense)
              
              
              (140,454
              )
              
              (29,460
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (1,221,618
              )
              
              (2,127,994
              )Income
                  taxes
              
              
              800
              
              
              800LOSS
                  FROM CONTINUING OPERATIONS BEFORE
                  MINORITY INTEREST
              
              $
              (1,222,418
              )
              $
              (2,128,794
              )Loss
                  in subsidiary attributable to minority interest
              
              
              8,225
              
              
              --LOSS
                  BEFORE DISCONTINUED OPERATIONS
              
              
              (1,214,193
              )
              
              (2,128,794
              )DISCONTINUED
                  OPERATIONSLoss
                  from discontinued operations
              
              
              (7,229
              )
              
              --Gain
                  from disposal of discontinued operations
              
              
              7,229
              
              
              ----
              
              
              --NET
                  LOSS
              
              
              (1,214,193
              )
              
              (2,128,794
              )OTHER
                  COMPREHENSIVE INCOME (LOSS)Foreign
                  currency translation gain (loss)
              
              
              644
              
              
              (10,071
              )644
              
              
              (10,071
              )COMPREHENSIVE
                  LOSS
              
              $
              (1,213,549
              )
              $
              (2,138,865
              )Net
                  loss per common share and equivalents - basic and dilutedLoss
                  from continuing operations
              
              $
              (0.01
              )
              $
              (0.05
              )Loss
                  from discontinued operations
              
              
              0.00
              
              
              0.00$
              (0.01
              )
              $
              (0.05
              )Weighted
                  average shares outstanding during the year - basic
                  and diluted
              
              
              109,772,900
              
              
              41,554,724
  The
        accompanying notes are an integral part of these consolidated financial
        statements.





F
            -
            4
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            of Contents*





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


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIENCY) EQUITY**





Common
                Shares
            
            
            
            
            
            
            
            Other
            
            
            
            
            
            TotalCommon
            Issued,
                not outstanding
            
            Subscriptions
            
            
            Earnest
            
            
            Comprehensive
            
            
            Accumulated
            
            
            Stockholders
              (Deficiency)Description
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Receivable
            
            
            Deposit
            
            
            Loss
            
            
            Deficit
            
            
            EquityBalance
                - December 31, 2003
            
            
            51,867,714
            
            $
            8,585,592
            
            
            (17,895,572
            )
            $
            (1,288,482
            )
            $
            (410,781
            )
            $
            --
            
            $
            (1,531
            )
            $
            (8,789,448
            )
            $
            (1,904,650
            )Shares
                issued to directors for fees
            
            
            898,915
            
            
            100,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            100,000Shares
                issued to officers for compensation
            
            
            5,074,301
            
            
            460,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            460,000Shares
                issued to directors for settlement of debt
            
            
            53,647
            
            
            12,875
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            12,875Shares
                issued to related parties for settlement of debt
            
            
            590,358
            
            
            141,686
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            141,686Shares
                issued for New Times Navigation Ltd. acquisition
            
            
            5,100,000
            
            
            683,400
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            683,400Shares
                issued as earnest deposit for True Precise acquisition
            
            
            4,000,000
            
            
            480,000
            
            
            --
            
            
            --
            
            
            --
            
            
            (480,000
            )
            
            --
            
            
            --
            
            
            --Shares
                issued to vendors for settlement of debt
            
            
            1,736,111
            
            
            416,667
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            416,667Shares
                cancelled as a result of settlement
            
            
            (17,895,572
            )
            
            (1,288,482
            )
            
            17,895,572
            
            
            1,288,482
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Sale
                of shares
            
            
            2,543,207
            
            
            349,970
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            349,970Shares
                issued to consultants for services
            
            
            3,100,000
            
            
            588,440
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            588,440Uncollectible
                stock subscriptions
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            410,781
            
            
            --
            
            
            --
            
            
            --
            
            
            410,781Comprehensive
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (10,071
            )
            
            --
            
            
            (10,071
            )Shares
                issued and not cancelled
            
            
            (5,100,000
            )
            
            (683,400
            )
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (683,400
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,128,794
            )
            
            (2,128,794
            )Balance
                - December 31, 2004
            
            
            51,968,681
            
            $
            9,846,748
            
            
            --
            
            
            --
            
            
            --
            
            
            (480,000
            )
            
            (11,602
            )
            
            (10,918,242
            )
            
            (1,563,096
            )Shares
                issued to directors for fees
            
            
            327,776
            
            
            20,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            20,000Shares
                issued to officers for compensation
            
            
            7,821,965
            
            
            379,250
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            379,250Shares
                issued to directors for settlement of debt
            
            
            989,166
            
            
            37,588
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            37,588Shares
                issued as earnest deposit for Phonetone acquisition
            
            
            20,000,000
            
            
            720,000
            
            
            --
            
            
            --
            
            
            --
            
            
            (720,000
            )
            
            --
            
            
            --
            
            
            --Shares
                issued for True Precise acquisition
            
            
            19,137,500
            
            
            956,875
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            956,875Cancellation
                of shares issued for True Precise acquisition
            
            
            (20,137,500
            )
            
            (1,076,875
            )
            
            --
            
            
            --
            
            
            --
            
            
            480,000
            
            
            --
            
            
            --
            
            
            (596,875
            )Sale
                of shares
            
            
            100,000,000
            
            
            4,000,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            4,000,000Shares
                issued to consultants for services
            
            
            400,000
            
            
            20,000
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            20,000Shares
                cancelled as a result of termination of acquisition
            
            
            (2,252,500
            )
            
            (301,835
            )
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (301,835
            )Shares
                issued and not cancelled
            
            
            (747,500
            )
            
            (58,165
            )
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (58,165
            )Uncollectible
                stock subscriptions
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (8,991
            )
            
            --
            
            
            --
            
            
            --
            
            
            (8,991
            )Comprehensive
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            644
            
            
            --
            
            
            644Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1,214,193
            )
            
            (1,214,193
            )Balance
                - December 31, 2005
            
            
            177,507,588
            
            $
            14,543,586
            
            
            --
            
            $
            --
            
            $
            (8,991
            )
            $
            (720,000
            )
            $
            (10,958
            )
            $
            (12,132,435
            )
            $
            1,671,202





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





F
            -
            5
 *Table
            of Contents*





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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For
                the year ended December 31,****2005**
            
            
            **2004****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (1,214,193
            )
            $
            (2,128,794
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            56,230
            
            
            80,208Uncollected
                stock subscriptions
            
            
            (8,991
            )
            
            --Provision
                for uncollectible stock subscriptions
            
            
            --
            
            
            410,781Issuance
                of stock for compensation and services
            
            
            402,250
            
            
            1,161,315Provision
                for uncollectible amounts
            
            
            17,293
            
            
            --Gain
                on disposal of equity investment
            
            
            (7,229
            )
            
            19,424Loss
                from discontinued operations
            
            
            7,229
            
            
            --Minority
                interest
            
            
            41,638
            
            
            --Loss
                in equity of unconsolidated subsidiary
            
            
            --
            
            
            (19,424
            )Changes
                in operating assets and liabilities:Decrease
                in accounts receivable
            
            
            1,613
            
            
            130,086Decrease
                in prepaid expenses and other current assets
            
            
            54,777
            
            
            31,392Decrease
                in accounts payable and customer deposits
            
            
            (156,796
            )
            
            (285,427
            )Decrease
                in deferred revenue
            
            
            (12,466
            )
            
            (41,651
            )Increase
                (decrease) in accrued expenses and other payable
            
            
            80,627
            
            
            (133,132
            )Net
                cash used in operating activities
            
            
            (738,018
            )
            
            (775,222
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (15,020
            )
            
            (4,500
            )Earnest
                deposit on acquisitions
            
            
            (8,863,798
            )
            
            --Proceeds
                from sale of investment
            
            
            --
            
            
            100,953Net
                cash (used in) provided by investing activities
            
            
            (8,878,818
            )
            
            96,453**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Payment
                on notes payable
            
            
            (250,000
            )
            
            --Cash
                overdraft
            
            
            16,515
            
            
            83,606Proceeds
                from bank loans
            
            
            55,099
            
            
            --Proceeds
                from note payable
            
            
            2,570,300
            
            
            255,573Proceeds
                from sale of shares
            
            
            7,837,896
            
            
            349,970Proceeds
                from (payments to) related parties
            
            
            (482,433
            )
            
            59,040Net
                cash provided by financing activities
            
            
            9,747,377
            
            
            748,189**EFFECT
                OF EXCHANGE RATES ON CASH**
            
            
            644
            
            
            (10,071
            )**NET
                INCREASE IN CASH**
            
            
            131,185
            
            
            59,349**CASH,
                BEGINNING OF THE YEAR**
            
            
            67,631
            
            
            8,282**CASH,
                END OF THE YEAR**
            
            $
            198,816
            
            $
            67,631**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid during the year for interest
            
            $
            48,308
            
            $
            50,788Cash
                paid during the year for income taxes
            
            $
            800
            
            $
            800





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





F
            -
            6
 *Table
            of Contents*








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


**NOTE
      1**   **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION**





**(A)
      Organization and Nature of Operations**





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





**(B)
      Use of Estimates**





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





**(C)
      Cash and Cash Equivalents**





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





**(D)
      Foreign Currency Translation**





The
      functional currency was the Hong Kong Dollar for the years ended December 31,
      2005 and 2004. The December 31, 2005 and 2004 financial statements of the
      Company were translated to United States dollars using year-end exchange rates
      as to assets and liabilities and average exchange rates as to revenues and
      expenses. Capital accounts were translated at their historical exchange rates
      when the capital transactions occurred. Net gains and losses resulting from
      translation of foreign currency financial statements are included in the
      statements of stockholder’s equity as other comprehensive income or (loss).
      Foreign currency transaction gains and losses are included in consolidated
      income (loss).





**(E)
      Property and Equipment**





Property
      and equipment are stated at cost, less accumulated depreciation. Depreciation
      is
      provided using the straight-line method over the estimated useful life of the
      assets from three to seven years. Expenditures for maintenance and repairs
      are
      charged to expense as incurred. Majority of the Company’s property and equipment
      is located in Hong Kong.





**(F)
      Interest Expense**





The
      Company uses a credit facility with a bank for its working capital requirements.
      Interest expense is calculated in accordance with the borrowing rate accepted
      by
      the Company pursuant to a credit arrangement with the bank when funds are drawn
      against the credit facility. Interest expense is calculated in accordance with
      the interest rate accepted by the Company on its note payable to an investor.
      Interest expense for the years ended December 31, 2005 and 2004 was $139,199
      and
      $51,513, respectively, principally incurred on borrowings under the loans
      received from the bank and note payable.








F
            -
            7
 *Table
            of Contents*





**(G)
      Carrier Deposit**





The
      Company has deposited security deposits with telecommunication carriers during
      the course of its operations. The deposits are refundable at the conclusion
      of
      the business relationship with the carriers.





**(H)
      Income Taxes**





The
      Company accounts for income taxes under the Financial Accounting Standards
      Board
      Statement of Financial Accounting Standards No. 109 "Accounting for Income
      Taxes" ('Statement 109"). Under Statement 109, deferred tax assets and
      liabilities are recognized for the future tax consequences attributable to
      differences between the financial statement carrying amounts of existing assets
      and liabilities and their respective tax bases. Deferred tax assets and
      liabilities are measured using enacted tax rates expected to apply to taxable
      income in the years in which those temporary differences are expected to be
      recovered or settled. Under Statement 109, the effect on deferred tax assets
      and
      liabilities of a change in tax rates is recognized in income in the period
      that
      includes the enactment date.





**(I)
      Revenue Recognition, Cost of Revenue and Deferred Revenue**





The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. The Company recognizes sales from telecommunications
      services as services are provided. The Company recognizes revenue from prepaid
      calling cards as the services are provided. Payments received before all of
      the
      relevant criteria for revenue recognition are satisfied are recorded as deferred
      revenue. Cost of revenue includes the cost of capacity associated with the
      revenue recognized within the corresponding time period.





Deferred
      revenue represents amounts received from the customers against future sales
      of
      services since the Company recognizes revenue on the performance of services.
      Deferred revenue was $107,422 as of December 31, 2005.





**(J)
      Basic and Diluted Net Loss Per Share**





Net
      loss
      per share is calculated in accordance with the Statement of financial accounting
      standards No. 128 (SFAS No. 128), “Earnings per share”. Basic net loss per share
      is based upon the weighted average number of common shares outstanding. Dilution
      is computed by applying the treasury stock method. Under this method, options
      and warrants are assumed to be exercised at the beginning of the period (or
      at
      the time of issuance, if later), and as if funds obtained thereby were used
      to
      purchase common stock at the average market price during the period. Weighted
      average number of shares used to compute basic and diluted loss per share is
      the
      same since the effect of dilutive securities is anti-dilutive. The Company
      had
      54,052,605 and 0 potentially diluted common shares from the conversion of
      convertible note payable as of December 31, 2005 and 2004,
      respectively.





**(K)
      Long-Lived Assets**





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
      the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
      the Results of Operations for a Disposal of a Segment of a Business." The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets' carrying amounts. In that event,
      a
      loss is recognized based on the amount by which the carrying amount exceeds
      the
      fair market value of the long-lived assets. Loss on long-lived assets to be
      disposed of is determined in a similar manner, except that fair market values
      are reduced for the cost of disposal. The Company did not impair any property
      and equipment for the years ended December 31, 2005 and 2004,
      respectively.








F
            -
            8
 *Table
            of Contents*





**(L)
      Fair Value of Financial Instruments**





Statement
      of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
      Financial Instruments” requires disclosures of information about the fair value
      of certain financial instruments for which it is practicable to estimate that
      value. For purposes of this disclosure, the fair value of a financial instrument
      is the amount at which the instrument could be exchanged in a current
      transaction between willing parties, other than in a forced sale or liquidation.
      The carrying amounts of the Company’s accounts and other receivables, accounts
      payable, accrued liabilities, factor payable, capital lease payable and notes
      and loans payable approximates fair value due to the relatively short period
      to
      maturity for these instruments.





**(M)
      Concentrations of Risk**





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk are cash and accounts receivable. The Company places its cash with
      financial institutions deemed by management to be of high credit quality. The
      amount on deposit in any one institution that exceeds federally insured limits
      is subject to credit risk. All of the Company’s revenue and majority of its
      assets are derived from operations in Hong Kong and China.





**(N)
      Reporting Segments**





Statement
      of financial accounting standards No. 131, Disclosures about segments of an
      enterprise and related information (SFAS No. 131), which superseded statement
      of
      financial accounting standards No. 14, Financial reporting for segments of
      a
      business enterprise, establishes standards for the way that public enterprises
      report information about operating segments in annual financial statements.
      The
      Company has determined it has only one segment.





**(O)
      Stock-based Compensation**





In
      October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
      Compensation”. SFAS No. 123 prescribes accounting and reporting standards for
      all stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value method
      or (ii) using the existing accounting rules prescribed by Accounting Principles
      Board Opinion No. 25, “Accounting for stock issued to employees” (APB 25) and
      related interpretations with pro forma disclosure of what net income and
      earnings per share would have been had the Company adopted the new fair value
      method. The company uses the intrinsic value method prescribed by APB25 and
      has
      opted for the disclosure provisions of SFAS No.123.





In
      December 2002, the FASB issued SFAS No. 148 "Accounting for Stock Based
      Compensation-Transition and Disclosure". SFAS No. 148 amends SFAS No. 123,
      "Accounting for Stock Based Compensation", to provide alternative methods of
      transition for a voluntary change to the fair value based method of accounting
      for stock-based employee compensation. In addition, this Statement amends the
      disclosure requirements of Statement 123 to require prominent disclosures in
      both annual and interim financial statements about the method of accounting
      for
      stock-based employee compensation and the effect of the method used, on reported
      results. The adoption of SFAS No. 148 did not have a material affect on the
      net
      loss of the Company.





**(P)
      Issuance of Shares For Services**





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








F
            -
            9
 *Table
            of Contents*





**(Q)
      Comprehensive Income**





Statement
      of financial accounting standards No. 130, Reporting comprehensive income (SFAS
      No. 130), establishes standards for reporting and display of comprehensive
      income, its components and accumulated balances. Comprehensive income is defined
      to include all changes in equity, except those resulting from investments by
      owners and distributions to owners. Among other disclosures, SFAS No. 130
      requires that all items that are required to be recognized under current
      accounting standards as components of comprehensive income be reported in
      financial statements that are displayed with the same prominence as other
      financial statements.





**(R)
      Reclassifications**





For
      comparative purposes, prior years' consolidated financial statements have been
      reclassified to conform with report classifications of the current
      year.





**(S)
      New Accounting Pronouncements**




In
        January 2003, the Financial Accounting Standards Board ("FASB") issued
        Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities
        (VIE)," (revised December 2003 by FIN No. 46R), which addresses how a
        business enterprise should evaluate whether it has a controlling financial
        interest in an entity through means other than voting rights and accordingly
        should consolidate the entity. For variable interests in VIEs created before
        January 1, 2004, the Interpretation will be applied beginning on
        January 1, 2005. For any VIEs that must be consolidated under FIN
        No. 46R that were created before January 1, 2004, the assets,
        liabilities and non-controlling interests of the VIE initially would be measured
        at their carrying amounts with any difference between the net amount added
        to
        the balance sheet and any previously recognized interest being recognized
        as the
        cumulative effect of an accounting change. If determining the carrying amounts
        is not practicable, fair value at the date FIN No. 46R first applies may be
        used to measure the assets, liabilities and non-controlling interest of the
        VIE. The
        guidelines of this statement are not applicable to the Company.
 
 In
        December 2004, the FASB issued SFAS No. 123R “Share-Based Payment”
(“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based
        Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for
        Stock Issued to Employees” and its related implementation guidance. SFAS 123R
        establishes standards for the accounting for transactions in which an entity
        exchanges its equity instruments for goods or services, including obtaining
        employee services in share-based payment transactions. SFAS 123R applies
        to all
        awards granted after the required effective date and to awards modified,
        repurchased, or cancelled after that date. Adoption of the provisions of
        SFAS
        123R is effective as of the beginning of the first interim or annual reporting
        period that begins after June 15, 2005. The guidelines of this statement
        are not
        applicable to the Company.
 
 In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs -- an amendment
        of
        ARB No. 43, Chapter 4"(“SFAS 151”) This statement clarifies the criteria of
        "abnormal amounts" of freight, handling costs, and spoilage that are required
        to
        be expensed as current period charges rather than deferred in inventory.
        In
        addition, this statement requires that allocation of fixed production overheads
        to the costs of conversion be based on the normal capacity of the production
        facilities. SFAS 151 is effective for the Company July 1, 2005. The Company
        does
        not expect the adoption of this statement will have any material impact on
        its
        results or financial position.
 
 In
        December 2004, the FASB issued SFAS no. 153, *Exchanges
        of Nonmonetary Assets an amendment of APB Opinion No. 29.* This
        statement addresses the measurement of exchanges of nonmonetary assets. It
        eliminates the exception from fair value measurement for nonmonetary exchanges
        of similar productive assets in paragraph 21(b) of APB Opinion No. 29, *Accounting
        for Nonmonetary Transactions,* and
        replaces it with an exception for exchanges that do not have commercial
        substance. This statement specifies that a nonmonetary exchange has commercial
        substance if the future cash flows of the entity are expected to change
        significantly as a result of the exchange. The Company does not expect the
        adoption of this statement will have any material impact on its results or
        financial position.
  F
              -
              10
 *Table
              of Contents*
 In
        December 2004, the FASB issued SFAS No. 152, *Accounting
        for Real Estate Time-Sharing Transactions an amendment of FASB Statements
        No. 66
        and 67.* This
        statement amends FASB
        Statement No. 66 , *Accounting for Sales of Real Estate,* to
        reference the financial accounting and reporting guidance for real estate
        time-sharing transactions that is provided in AICPA Statement of Position
        (SOP)
        04-2, *Accounting for Real Estate Time-Sharing Transactions.* This
        statement also amends FASB
        Statement No. 67 , *Accounting for Costs and Initial Rental Operations of Real Estate
        Projects,* to state
        that the guidance for (a) incidental operations and (b) costs incurred to
        sell
        real estate projects does not apply to real estate time-sharing transactions.
        This statement is effective for financial statements for fiscal years beginning
        after June 15, 2005. The guidelines of this statement are not applicable
        to the
        Company.
 
 SFAS
        No.
        154 (“SFAS 154”), *Accounting
        Changes and Error Corrections,* was
        issued in May 2005 and replaces APB Opinion No. 20 and SFAS No. 3 (“SFAS 3”).
        SFAS No. 154 requires retrospective application for voluntary changes in
        accounting principle in most instances and is required to be applied to all
        accounting changes made in fiscal years beginning after December 15, 2005.
        At
        such, the Company is required to adopt these provisions at the beginning
        of the
        fiscal year ended December 31, 2006. The Company is currently evaluating
        the
        impact of SFAS 154 on its consolidated financial statement.
 
 In
        February 2006, the FASB issued SFAS No. 155, “ *Accounting
        for Certain Hybrid Financial Instruments* ”
(SFAS
        155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and
        Hedging Activities” (“SFAS 133”) and SFAS No. 140, “ *Accounting
        for Transfers and Servicing of Financial Assets and Extinguishment of
        Liabilities* ”
(SFAS
        140”). SFAS 155 amends SFAS 133 to narrow the scope exception for interest-only
        and principal-only strips on debt instruments to include only such strips
        representing rights to receive a specified portion of the contractual interest
        or principle cash flows. SFAS 155 also amends SFAS 140 to allow qualifying
        special-purpose entities to hold a passive derivative financial instrument
        pertaining to beneficial interests that itself is a derivative instruments.
        The
        Company is currently evaluating the impact this new Standard, but believes
        that
        it will not have a material impact on the Company’s financial
        position.




**(T)
      Principles of Consolidation**





The
      accompanying consolidated financial statements for the year ended December
      31,
      2005 included the accounts of Elephant Talk Communications, Inc., its wholly
      owned subsidiary Elephant Talk Limited, its wholly owned subsidiary Guangdong
      Elephant Talk Network Consulting Limited, its wholly owned subsidiary True
      Precise Technology Limited, its wholly owned subsidiary Full Mark Limited,
      and
      its majority owned (50.54%) subsidiary Elephant Talk Middle East & Africa
      FZ-LLC. The consolidated financial statements for the year ended December 31,
      2004 consisted of operations of Elephant Talk Communications, Inc. and its
      wholly owned subsidiary Elephant Talk Limited. Minority interest principally
      represents minority shareholders’ proportionate share of equity in our
      consolidated subsidiary Elephant Talk Middle East and Africa FZ-LLC. All
      significant inter-company accounts and transactions have been eliminated in
      consolidation.





**(U)
      Supplemental Disclosure of Non-cash Investing and Financing
      Activities**





The
      consolidated cash flow statements do not include the following non-cash
      investing and financing activities. In 2005, the Company issued 8,149,741
      restricted common shares valued at $399,250 to officers and directors as
      compensation for fees for attending Board meetings; issued 989,166 restricted
      common shares valued at $37,588 to a director for settlement of payables; issued
      20,000,000 restricted common shares valued at $720,000 to a third party as
      earnest deposit for acquisition of 100% ownership interest in Phonetone Telecom
      Limited; and issued 400,000 restricted common shares to a consultant for
      business and advisory services to the Company.





In
      2004,
      the Company issued 5,973,216 restricted common shares valued at $560,000 to
      officers and directors as compensation and fees for attending Board meetings;
      issued 53,647 restricted common shares valued at $12,875 to directors for
      settlement of their debt; issued 2,326,469 restricted common shares valued
      at
      $558,353 to vendors and related parties for settlement of debt; issued 4,000,000
      common shares valued at $480,000 to a third party as earnest deposit for
      acquisition of 60% equity interest in an entity; and issued 3,100,000 common
      shares valued at $588,440 to certain consultant for advisory and
      services.




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**NOTE
      2**   **ACCOUNTS
      RECEIVABLE**





Accounts
      receivable at December 31, 2005 consisted of the following:





Accounts
                receivable
            $
            24,493Less
                allowance for doubtful accounts
            
            (17,293)$
            7,200





For
      the
      years ended December 31, 2005 and 2004, the Company wrote-off bad and doubtful
      accounts of $17,293 and $0, respectively, in its consolidated statements of
      operations.





**NOTE
      3**   **PROPERTY
      AND EQUIPMENT**





Property
      and equipment at December 31, 2005 consisted of the following:





Office
                and computer equipment
            $
            2,042,813Leasehold
                improvements
            
            6,410Furniture
                and fixtures
            
            91,6492,140,872Less
                accumulated depreciation and amortization
            
            (2,054,025)$
            86,847





Depreciation
      and amortization expense for the years ended December 31, 2005 and 2004 was
      $56,230 and $80,208, respectively.




**NOTE
      4**   **ADVANCES
      TO THIRD PARTIES**





The
      Company has advanced a) $1,703,495 to two European telecom entities for their
      working capital requirements while the Company is completing its due diligence
      of its proposed acquisitions (Note 5); and b) $115,840 to a third party for
      development of products and services in which the Company has an interest.
      All
      advances made by the Company during the year ended December 31, 2005, are deemed
      fully recoverable.





**NOTE
      5**   **EARNEST
      DEPOSITS FOR ACQUISITIONS**





On
      January 17, 2005, the Company entered into a Memorandum of Understanding with
      a
      European investor to acquire all of the issued and outstanding shares of Benoit
      Telecom Holding AG, a European telecom company. The Company has advanced earnest
      deposit of $6,043,080 with an escrow trust company as of December 31, 2005.
      The
      Company has executed a promise to repay and a security agreement with the escrow
      trust company to repay the full earnest deposit if the acquisition is not
      consummated for any reason. The Company has completed its due diligence of
      its
      proposed acquisition and fully expects to close the transaction and execute
      a
      definitive agreement by May 31, 2006.





The
      Company has advanced fully refundable earnest deposit of $225,562 and issued
      20,000,000 common shares valued at $720,000 in connection with its proposed
      acquisition of Phonetone Telecom Ltd. from Calfin Trust as of December 31,
      2005.
      Phonetone Telecom Ltd. is a European telecom service provider registered in
      British Virgin Islands. The Company has completed its due diligence of Phonetone
      Telecom Ltd. and expects to execute a definitive agreement in the near
      future.





The
      Company has advanced fully refundable earnest deposit of $792,821 in connection
      with its proposed acquisition of 60% equity interest in Beijing China Wind
      Telecommunication Information Technology Co. Limited (“Beijing China Wind”). The
      Company completed its due diligence and executed a definitive agreement on
      January 4, 2006.





The
      Company has recorded $7,061,463 as earnest deposits for its proposed
      acquisitions in the accompanying financial statements as of December 31,
      2005.




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**NOTE
      6**   **DISCONTINUED
      OPERATIONS**





On
      January 5, 2005, the Company completed its purchase of 60% equity ownership
      interest in True Precise from Keen Solution in a Share Exchange Agreement.
      The
      Company issued 23,137,500 restricted common shares valued at $1,436,875 for
      its
      purchase consideration of 60% equity interest. On August 8, 2005, Keen Solutions
      sent notification informing the Company that it has unilaterally decided to
      terminate the Agreement. The Company has received and cancelled 20,137,500
      common shares received from Keen Solution as of December 31, 2005. The remaining
      3,000,000 common shares valued at $360,000 are yet to be received and will
      be
      cancelled upon receipt. The Company has taken protective measures to ensure
      that
      the 3,000,000 common shares are restricted and non tradable. This cancellation
      of acquisition resulted in a gain of $7,229 due to disposal of discontinuing
      operations in the accompanying financial statements as of December 31, 2005.
      The
      Company has evaluated its legal options in connection with the termination
      of
      the Share Exchange Agreement and came to the conclusion that a mutual rescission
      of the agreement was in the Company’s best interest. The Company still continues
      to pursue the return of 3,000,000 common shares from Keen Solution.





Discontinued
      operations for the year ended December 31, 2005 are as follows:





Consulting
                service income
            $
            176,325Operating
                expenses
            
            183,554Loss
                from discontinued operations
            $
            (7,229)













**NOTE
      7**   **DUE
      FROM RELATED PARTIES**





The
      Company provided guarantees to third parties for funds advanced by them to
      entities that officers and/or shareholders have an ownership interest in. The
      funds were advanced to these entities prior to 2002. The balances of funds
      advanced as of December 31, 2005 are:





Due
                from ET Network Services, Ltd.
            $
            330,934Due
                from entities related to shareholders
            
            176,813$
            507,747





The
      amounts are due on demand, unsecured and carry interest at the rate of six
      percent (6%) per year. Total interest income from the related parties amounted
      to $19,716 and $21,885 for the years ended December 31, 2005 and 2004. The
      Company provided an allowance for doubtful accounts of $33,811 and $364,745
      on
      amounts due from such entities at December 31, 2005 and 2004.





**NOTE
      8**   **LOANS
      PAYABLE**





Loans
      payable at December 31, 2005 are summarized as follows:





Installment
                loan payable, bank, monthly principal and interest payments of $12,804
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2005, due December 24, 2006, secured by personal guarantees
                of two shareholders, a director, and a third party
            $
            355,156Installment
                loan payable, bank, monthly principal and interest payments of $2,924
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2005, due December 24, 2011, secured by personal guarantees
                of three shareholders and a director
            
            210,884Installment
                loan payable, bank, monthly principal and interest payments of $1,751
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2005, due June 28, 2009, secured by personal guarantees
                of
                three shareholders and a director
            
            93,542Term
                loan payable, bank, monthly payments of interest at bank's prime
                rate,
                8.0% at December 31, 2005
            
            306,134$
            965,716




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The
      Company has executed a credit facility with a bank in Hong Kong since June
      29,
      2004 under which the Company has borrowed funds from the bank under three
      installment loans and a term loan arrangements. The Company is in default of
      making loan payments on all the loans and as a result, the entire loan balance
      outstanding at December 31, 2005 is immediately due and payable to the bank.
      Furthermore, the Company is obligated to pay a default interest rate at the
      rate
      of 4.5% per annum in addition to the prescribed interest rate of the installment
      loans and term loan. The Company has recorded $61,636 and $21,070 in interest
      expense and default interest expense on loans payable as of December 31, 2005
      and $51,513 in interest expense as of December 31, 2004.




**NOTE
      9**   **CONVERTIBLE
      PROMISSORY NOTE**





On
      December 15, 2005, the Company executed on a Convertible Promissory Note (the
      “Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
      funds to be drawn in stages. The Note is convertible during the term, in whole
      or in part, into shares of common stock at the conversion price of three and
      one-half cents ($0.035) of principal amount per share of common stock. The
      conversion right of the Note is not an absolute right of RWC, nor is it an
      unconditional obligation of the Company. Rather, the Note is convertible to
      the
      extent that the Company has sufficient authorized common stock. In that regard,
      there are currently 72,492,412 shares out of the Company’s 250,000,000
      authorized common shares available for issuance upon conversion. The Note has
      a
      term of thirty (30) months during which time interest at the rate of 10% per
      annum will accrue from the date advances drawn by the Company. The Note is
      secured by shares owned or to be owned by the Company in its proposed
      acquisitions of entities for which the Company has made earnest deposits. The
      Note will be paid in full at the end of the thirty month term with a balloon
      payment of principal and accrued interest. RWC has not converted the principal
      drawn by the Company as of December 31, 2005 in exchange for the common shares
      of the Company. As of December 31, 2005, the Company has drawn a principal
      of
      $2,570,300 and recorded accrued interest of $33,134 in the accompanying
      financial statements at December 31, 2005.





**NOTE
      10**  **DUE
      TO RELATED PARTIES**





The
      Company received advances from entities that certain officers and/or
      shareholders have an ownership interest. The balances as of December 31, 2005
      are:





Due
                to entities related to certain officers, directors and
                shareholders
            $
            131,937Due
                to directors
            
            31,765$
            163,702





The
      amount due to entities related to certain officers, directors and shareholders
      is due on demand, unsecured and carry interest at the rate of six percent (6%)
      per year. Total interest expense due to related parties amounted to $9,605
      and
      $10,559 for the years ended December 31, 2005 and 2004,
      respectively.





**NOTE
      11**  **STOCKHOLDERS'
      EQUITY**





**(A)
      Common Stock**





The
      Company is presently authorized to issue 250,000,000 shares of no par value
      Common Stock. The Company currently has 177,507,588 common shares issued and
      outstanding. The holders of common stock, and of shares issuable upon exercise
      of any Warrants or Options, are entitled to equal dividends and distributions,
      per share, with respect to the common stock when, as and if declared by the
      Board of Directors from funds legally available therefore. No holder of any
      shares of common stock has a pre-emptive right to subscribe for any securities
      of the Company nor are any common shares subject to redemption or convertible
      into other securities of the Company. Upon liquidation, dissolution or winding
      up of the Company, and after payment of creditors and preferred stockholders,
      if
      any, the assets will be divided pro-rata on a share-for-share basis among the
      holders of the shares of common stock.




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




On
      May
      24, 2004, the Company issued 5,100,000 restricted common shares to four
      shareholders of New Times Navigation Limited (“New Times”) valued at $683,400
      and 37 unsecured convertible promissory notes amounting to $3,600,000 as
      consideration for purchase of its 30% equity investment interest in New Times.
      Both parties mutually rescinded the purchase transaction on December 10, 2004
      and the shareholders of New Times were required to return to the Company
      5,100,000 common shares and $3,600,000 of the unsecured convertible promissory
      notes as part of Company’s consideration towards its 30% investment interest in
      New Times. On February 22, 2005, the Company cancelled 2,252,500 common shares
      and $1,860,000 of unsecured convertible promissory notes received from New
      Times
      shareholders. The remaining 2,847,500 common shares valued at $381,565 and
      $1,740,000 of unsecured convertible promissory notes are yet to be received
      by
      the Company from New Times shareholders and will be cancelled upon receipt
      of
      such shares and notes. The Company has recorded such common shares as shares
      issued to be cancelled at December 31, 2005. The Company recorded a loss from
      operations of $19,424 of its equity investment in New Times as of December
      31,
      2004, and a gain of $19,424 on disposal of the equity investment.





On
      January 5, 2005, the Company completed its purchase of 60% equity ownership
      interest in True Precise Technology Limited from Keen Solution Group Limited
      in
      a Stock Exchange Agreement (“Agreement”) whereby, the Company issued 23,137,500
      restricted common shares valued at $1,436,875. On August 8, 2005, Keen Solutions
      sent notification informing the Company that it has unilaterally decided to
      terminate the Agreement. The Company has received and cancelled 20,137,500
      common shares received from Keen Solution. The remaining 3,000,000 restricted
      common shares valued at $360,000 are yet to be received and will be cancelled
      upon receipt. The Company has taken protective measures to ensure that the
      3,000,000 common shares are restricted and non tradable (Note 6).





On
      June
      27, 2005, the Company issued 20,000,000 common shares valued at $720,000 as
      an
      earnest deposit to Calfin Trust in connection with its proposed acquisition
      of
      100% equity interest in Phonetone Telecom Ltd. The common shares were valued
      at
      the ten day average market closing price on the date of issuance. The Company
      has not completed its proposed acquisition of Phonetone, and, therefore, the
      20,000,000 common shares issued as earnest deposit are recorded as a contra
      equity transaction at December 31, 2005.





Pursuant
      to a Stock Purchase Agreement, on June 30, 2005, the Company sold to an
      accredited investor Rising Water Capital 195,947,395 restricted common shares
      for a total cash consideration of $7,837,896. As of December 31, 2005, the
      Company has issued to RWC 100,000,000 of its restricted common shares valued
      at
      $4,000,000. The common shares were valued at $0.04 cents per share pursuant
      to
      the terms of the agreement. The remaining 95,947,395 common shares to RWC have
      not been issued to RWC as of December 31, 2005.





During
      2005, the Company issued 8,149,741 restricted common shares valued at $382,250
      as compensation to an officer and directors for salaries and fees for attending
      Board meetings. The Company issued 989,166 restricted common shares to a
      director in settlement of payables. The common shares issued to an officer
      and
      directors for compensation were valued at the closing market price of the shares
      on the first day of each month for which compensation was paid. The Company
      issued 400,000 restricted common shares valued at $20,000 to a consultant for
      providing business advisory services. The common shares issued to the consultant
      and a director in settlement of their payables was valued at the ten day average
      of the closing market price from the date of issuance.




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**(B)
      Class B Preferred Stock**





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




**(C)
      Common Shares Issued to an Officer and Directors for
      Compensation**





During
      2005 and 2004, the Company issued 8,149,741 and 5,973,216 restricted common
      shares valued at $399,250 and $560,000 as compensation to an officer and
      directors for salaries and fees for attending Board meetings. The common shares
      were valued at the closing market price of the common shares on the first day
      of
      each month. The Company recorded $582,602 and $560,000 as compensation expense
      for the years ended December 31, 2005 and 2004, respectively.





**(D)
      Stock Issued for Settlement of Payables**





The
      Company issued 989,166 restricted common shares valued at $37,588 to a director
      in settlement of payables during 2005. The Company issued 2,380,116 restricted
      common shares valued at $571,228 to directors, related parties and certain
      vendors in settlement of their debts during 2004. The shares were valued at
      the
      average market price of five days trading before and after the date of issuance.
      The Company recorded a gain of $32,031 and $0 on settlement of debt in the
      accompanying financial statements for the period ended December 31, 2005 and
      2004, respectively.





**(E)
      Common Stock Subscriptions**





The
      Company’s majority owned subsidiary Elephant Talk Middle East & Africa
      FZ-LLC (“ET ME&A”) authorized capital of $100,817 was not received in full
      when ET ME&A was incorporated on November 6, 2005. ET ME&A has since
      received $91,826 in capital contribution and $8,991 of stock subscriptions
      remain to be received from two of the three joint venture partners as of
      December 31, 2005.





**NOTE
      12**  **RELATED
      PARTY TRANSACTIONS**





**(A)
      Wiseley International Limited**





The
      Company paid $49,725 and $76,923 in business consulting and management advisory
      fees to an entity owned and controlled by a director for the years ended
      December 31, 2005 and 2004, respectively.





**(B)
      Wellgear Far East Limited**





The
      Company paid $58,500 and $76,923 in business consulting and management advisory
      fees to an entity owned and controlled by a director for the years ended
      December 31, 2005 and 2004, respectively.




F
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**NOTE
      13**  **COMMITMENTS
      AND CONTINGENCIES**





Operating
      Leases





The
      Company leases its corporate offices space with an affiliate under a
      month-to-month operating lease. Monthly rental expense under the leases is
      $3,353 per month. The Company’s majority owned subsidiary leases its office
      space from a third party. The lease term is for one year and monthly rent
      expense is $1,825 per month. Rent commitments for the year 2006 are $18,250.
      Rent expense under operating leases for the years ended December 31, 2005 and
      2004 was $40,220 and $40,935, respectively.





**NOTE
      14**  **INCOME
      TAXES**





Income
      tax expense (benefit) for the years ended December 31, 2005 and 2004, is
      summarized as follows:





2005
            
            2004Current:Federal
            $
            (412,826)
            $
            (723,800)State
            
            (72,851)
            
            (127,700)Deferred
                taxes
            
            486,477
            
            852,300Income
                tax expense (benefit)
            $
            800
            $
            800




The
      following is a reconciliation of the provision for income taxes at the U.S.
      federal income tax rate to the income taxes reflected in the Consolidated
      Statements of Operations at December 31, 2005 and 2004:





2005
            
            2004Tax
                expense (credit) at statutory rate-federal
            (34%)
            
            (34%)State
                tax expense net of federal tax
            (6%)
            
            (6%)Permanent
                differences
            --
            
            --Valuation
                allowance
            40%
            
            40%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, 2005 are as
      follows:





Deferred
                tax assets:Net
                operating loss carry forward
            $
            4,852,974Total
                gross deferred tax assets
            
            4,852,974Less
                valuation allowance
            
            (4,852,974)Net
                deferred tax assets
            $
            --





At
      December 31, 2005, the Company had accumulated deficit carry forwards of
      approximately $12,132,435 for U.S. federal income tax purposes available to
      offset future taxable income expiring on various dates through
      2025.





The
      net
      change in the valuation allowance during the year ended December 31, 2005 and
      2004 was an increase of $485,694 and $1,687,280, respectively.





**NOTE
      15**  **CONCENTRATIONS
      OF CREDIT RISK AND MAJOR CUSTOMERS**





During
      2005 and 2004, the Company received 28% and 43% of its revenue from three
      customers. The Company had accounts receivable due from these three customers
      in
      2005 and 2004 of $6,940 and $12,256, respectively.





During
      2005 and 2004, the Company purchased approximately 65% of its calling capacity
      from one supplier.




F
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            of Contents*


**NOTE
      16**  **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
      Administrators under the direction of the Board of Directors administers the
      Plan. A total of four million (4,000,000) common shares and four million
      (4,000,000) options to acquire common shares may be subject to, or issued
      pursuant to, benefits granted under the Plan. At any time any stock option
      is
      granted under the terms of this Plan, the Company will reserve for issuance
      the
      number of shares of Stock subject to suck option until it is exercised or
      expired. The Plan Administrator shall determine from time to time the terms,
      conditions and price of the options granted. Options shall not be construed
      to
      be stock and cannot be exercised after the expiration of its term.




On
      January 17, 2001, the Company granted and issued 1,700,000 common shares at
      a
      price of $0.005 per share for a total consideration of $8,500. On November
      16,
      2004, the Company granted and issued 2,000,000 common shares at a price of
      $0.059 per share for a total consideration of $118,000. Under the Plan 300,000
      shares of common stock and 4,000,000 stock options remain available for grant
      at
      December 31, 2005.





**NOTE
      17**  **GOING
      CONCERN**





The
      accompanying consolidated financial statements have been prepared in conformity
      with generally accepted **** accounting
      principles, which contemplate continuation of the company as a going concern.
      The Company has an accumulated deficit of $12,132,435 at December 31, 2005,
      which included a net loss of $1,214,193 for the year ended December 31, 2005.
      The Company’s total current liabilities exceed its total current assets by
      $3,372,917, a stockholders’ equity of $1,671,202 and the Company used cash in
      operations of $738,018. This raises a substantial doubt about our ability to
      continue as a going concern. In view of the matters described above,
      recoverability of a major portion of the recorded asset amounts shown in the
      accompanying consolidated balance sheet is dependent upon continued operations
      of the company, which in turn is dependent upon the Company’s ability to raise
      additional capital, obtain financing and succeed in its future operations.
      The
      financial statements do not include any adjustments relating to the
      recoverability and classification of recorded asset amounts or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern.





Management
      has taken the following steps to revise its operating and financial
      requirements, which it believes are sufficient to provide the Company with
      the
      ability to continue as a going concern. The Company is actively pursuing
      additional funding and potential merger or acquisition candidates and strategic
      partners, which would enhance stockholders’ investment. Management believes that
      the above actions will allow the Company to continue operations through the
      next
      fiscal year.





**NOTE
      18**  **SUBSEQUENT
      EVENTS**





On
      January 2, 2006, the Company issued 2,400,000 restricted common shares valued
      at
      $120,000 to a consultant for business advisory and management fees. The common
      shares were valued at the closing market price on the date of issuance of
      shares.





On
      January 4, 2006, the Company through its wholly owned subsidiary Guangdong
      Elephant Talk Network Consulting Limited, entered into an agreement to acquire
      sixty percent (60%) of the registered capital of Beijing China Wind. Pursuant
      to
      the Agreement, the purchase price for 60% of Beijing China Wind was agreed
      to be
      $4,800,000, subject to adjustments based on Beijing China Wind’s audited net
      income for fiscal 2005 and 2006, and is payable (a) in cash of $2,800,000 in
      five installments the last of which is to be paid on January 31, 2007, and
      (b)
      by issuance of 20,000,000 restricted common shares valued at $0.10 per share
      to
      the owners of Beijing China Wind in four equal installments the last of which
      is
      to be issued on January 31, 2007. The owners of Beijing China Wind has the
      right
      to exercise an option within 30 days after July 31, 2007 to return the
      20,000,000 restricted common shares either in exchange for a 25% equity interest
      in Beijing China Wind or for settlement in cash within 90 days. On January
      2,
      2006, the Company issued 5,000,000 restricted common shares valued at $250,000
      and has made additional cash payments of $620,000 to the owners of Beijing
      China
      Wind towards it 60% ownership equity in Beijing China Wind as of May 2, 2006.
      The common shares were valued at the closing market price on the date of
      issuance of shares.





On
      January 5, 2006, the Company issued 92,500 restricted common shares valued
      at
      $4,625 as partial compensation to two directors for salaries earned in December
      2005. The common shares were valued at the closing market price of the common
      shares on the first day of the month for which compensation was
      earned.





On
      January 26, 2006, the Company received $856,030 towards the remaining balance
      due of the $3.5 million convertible promissory note executed by Rising Water
      Capital on December 15, 2005.





On
      January 30, 2006, the Company entered into an agreement with an employee and
      issued 250,000 restricted common shares valued at $22,500. The common shares
      were valued at the closing market price on the date of issuance of
      shares.





On
      April
      5, 2006, the Company received $73,670 of the remaining balance of $3.5 million
      convertible promissory note and an advance of $926,330 against a new $2.5
      million convertible promissory note which is expected to be executed by Rising
      Water Capital no later than May 31, 2006.