UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





Form
10-K





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





For the
fiscal year ended December 31, 2009





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







For the
transition period from ____________________ to ____________________





Commission
file number 000-30061





Elephant
Talk Communications, Inc.


(Exact
name of registrant as specified in its charter)





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





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





Issuer’s
telephone number:  31
0 20 653 5916





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





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





Common
Stock, no par value


(Title of
class)





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





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





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes oNo x





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x





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




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes o No x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2009 was approximately $12,786,514 based on
the closing sale price of the Company’s common stock on such date of U.S. $0.95
per share, as reported by the OTC BB.





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of March 30, 2010 there were 64,260,437
shares of common stock outstanding.








Elephant Talk Communications Inc.




Form
10-K


For
the fiscal year ended December 31, 2009





TABLE
OF CONTENTS




Note
      on Forward-Looking Statement
              1PART
      IItem
      1.
              Description
      of Business.
              2Item
      2.
              Description
      of Property.
              26Item
      3.
              Legal
      Proceedings.
              27PART
      IIItem
      4.
              Reserved
              28Item
      5.
              Market
      for Common Equity and Related Stockholder Matters.
              28Item
      6.
              Selected
      Financial Data.
              31Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
              32Item
      8.
              Financial
      Statements.
              39Item
      9.
              Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure.
              67Item
      9A(T).
              Controls
      and Procedures.
              67PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance.
              69Item
      11.
              Executive
      Compensation.
              74Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters.
              74Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence.
              76Item
      14.
              Principal
      Accountant Fees and Services.
              78PART
      IVItem
      15.
              Exhibits,
      Financial Statement Schedules.
              79









NOTE
ON FORWARD LOOKING STATEMENTS





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




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




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




·
            our
      potential lack of revenue growth;




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




·
            our
      potential lack of cash flows;




·
            our
      potential loss of key personnel;




·
            the
      availability of qualified
personnel;




·
            international,
      national regional and local economic political
  changes;




·
            general
      economic and market conditions;




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




·
            the
      possibility of telecommunications rate changes and technological
      changes;




·
            the
      potential for increased competition;
and




·
            other
      unanticipated factors.




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




1





ITEM
1.  DESCRIPTION OF BUSINESS





We
provide Internet, telephony, and data communications software services to both
mobile phone companies and businesses





Elephant
Talk Communications, Inc. also referred to as “we”, “us”, “Elephant Talk” and
“the Company” is an international provider of business software and services to
the telecommunications and financial services industry. Elephant Talk installs
its operating software at the network operating centers of mobile carrier and
receives a fee per month per cell phone subscriber on the network. Currently the
subscribers are wholesale customers of Vizzavi (a subsidiary of the Vodafone
group) in Spain and T-Mobile in the Netherlands.  Elephant Talk
typically signs a five- year exclusive with one carrier per
country.  Negotiations with mobile carriers are currently under way in
a number of other countries. We also operate landline telephony services in nine
European countries and Bahrain. Our network components, hardware, software
systems, telecom switches and interconnections with other telecom operators are
located in secured data-centers in eight countries.





Our
ET Boss software enables mobile carriers to outsource their entire back office
to Elephant Talk. By outsourcing operations the mobile carriers can reduce the
number of vendor software, employees, and consultants.  ET Boss
reduces the number of software modules / vendors form over twenty to
one.  Additionally, ET Boss enables mobile virtual network operators
(MVNO’s) to control their pricing and product offerings with the touch of a
keypad from a windows interface.  This compares with the current
situation often experienced by virtual operators whereby it can take up to six
month to effect a change in their product offerings.









Due to
the large capital outlays required for the construction of new towers, switches,
and infrastructure, mobile network operations such as Sprint (outsourced to
Ericson) have been outsourcing elements of their networks in an effort to reduce
costs.  Our software platform offers operators the potential to
realize significant savings; we are currently providing these services to
Vodafone’s subsidiary in Spain and T-Mobile in the Netherlands. We simply take
three pipes from the mobile network operator (MNO) – voice, data, and signaling
(see above) – and plug them into our ET Boss platform (see below).





2







We are
developing and acquiring application software to enable our virtual clients to
offer various dynamic products that include remote health care monitoring on a
watch or pendant credit card fraud prevention, mobile internet ID security,
multi-country discounted phone services, loyalty management services, and a
whole range of other emerging customized mobile services. In line with our
strategy to develop and market customized mobile solutions, we acquired
ValidSoft, Ltd. (“ValidSoft”) on March 17, 2010. ValidSoft provides strong
authentication and transaction verification capabilities that allow
organizations to quickly implement solutions that protect against certain of the
latest forms of credit and debit card fraud, and on-line transaction and
identity theft. By correlating the relative location of a person’s credit card
with the location of their mobile phone, this service can tell a bank in less
than half a second if the transaction is likely genuine or fraudulent (see
diagram below). We anticipate generating revenues on a per transaction
verification fee from banks.  This acquisition combines ValidSoft’s
best in class proprietary software with our superior telecommunication platform
to create what we believe is the best electronic fraud prevention total solution
available.









We
currently generate in excess of $40 million in revenues in 2009, employ 89
employees and have retained 27 independent contractors on a long-term basis. Our
principal offices are located in The Netherlands, Spain and China. Mobile
services are currently provided in Spain and The Netherlands, whereas landline
telephony services are provided in nine European countries and Bahrain. Our
network components, hardware, software systems, telecom switches and
interconnections with other telecom operators are located in secured
data-centers in eight countries.





3


Background of Elephant Talk
Communications, Inc.





Elephant
Talk Communications Inc. was formed in 2001 as a result of a merger between
Staruni Corporation (USA, 1962) and Elephant Talk Limited (Hong Kong, 1994).
Staruni Corporation - named Altius Corporation, Inc., until 1997 - was a web
developer and Internet Service Provider since 1997 following its acquisition of
Starnet Universe Internet Inc.  Elephant Talk Limited (Hong Kong)
began operating in 1994 as an international long distance services provider,
specializing in international call termination into China. In 2006 Elephant Talk
Communications, Inc., decided to abandon its strategy of focusing on
international calls into China.





In 2000
Staruni Corporation became a reporting company on the OTC Bulletin Board under
the symbol “SRUN”, replaced by “ETLK” following the merger with Elephant Talk
Limited (Hong Kong), and in turn changed to “ETAK” pursuant to a 2008
stock-split.





In
January 2007, through our acquisition of Benoit Telecom (Switzerland), we
established a foothold in the European Telecommunications Market, particularly
within the market for Service Numbers (Premium Rate Services and Toll Free
Services) and to a smaller extent Carrier (Pre) Select
Services.  Furthermore, through the human capital, IT resources and
software acquired, we obtained the experience and expertise of individuals and
software deeply connected to telecom and multi-media systems, telecom
regulations and European markets.





In March
2010, we acquired ValidSoft.  We believe this acquisition is in line
with our strategy to develop and market customized mobile
solutions.  ValidSoft provides strong authentication and transaction
verification capabilities that allow organizations to quickly implement
solutions which protect against the latest forms of credit and debit card fraud,
on-line transaction and identity theft. This acquisition combines ValidSoft’s
best in class proprietary software with our superior telecommunication platform
to create the best electronic fraud prevention total solution available on the
market today.


Further
details on the above acquisitions, other (smaller) acquisitions and
incorporations can be found under “legal structure of the company”.





Product
– Service Strategy





Our
corporate strategy results in the following three main types of value
propositions offered to the market,each building upon our
converged network and access capabilities in combination with “ET Boss”, our
proprietary telecommunications Operating Support System (OSS) and Business
Support System (BSS):





·
            Customized mobile
      services, such as our ValidSoft credit card fraud
      solution




·
            Mobile Enabling Platform (ET
      BOSS), including our MVNE/MVNO
services




·
            Landline network outsourcing
      services




Industry
Developments




A number
of relevant factors in the converging telecommunications industry, combined with
consumers and businesses increasing adoption of mobile and wireless based
applications, drive our investments and services, are as follow:




4


The
mobile phone will become the channel of choice for consumers




We
believe that the mobile phone will ultimately be the (handheld) device chosen by
consumers and businesses to best bring personalized, contextual and time-wise
relevant services such as:




·
            mobile
      banking


·
            telemedicine


·
            location
      based services


·
            use
      of near field communications for cashless payments, couponing, cashless
      tickets, vending machine payments, grocery store
  payments


·
            credit
      card applications


·
            communities;
      social, entertainment and loyalty


·
            customer
      profiling and data mining to support one-on-one
  marketing


·
            security
      and trust sensitive applications; the mobile phone as
      authenticator.





Mobile
operators need to reduce total cost of ownership (TCO) and increase utilization
of their assets





Mobile
Network Operators typically have twenty or more vendors for their software to
handle Network Management, Customer Relationship Management (CRM), billing,
fulfillment, distribution and customer care. This has resulted in legacy systems
that are expensive to maintain and difficult to adapt to changing market
conditions. In addition, MNO’s are looking for new ways to attract traffic over
their networks, since the traditional mass marketing of voice and messaging
focused on end-users (“retail”) shows little or no growth. MNO’s are required to
shift their organization from a mass marketing oriented retail focus to a
wholesale focus; thereby allowing other organizations such as MVNO’s to serve
smaller and specifically targeted end-user groups with specialized and converged
solutions in order to increase traffic (e.g. voice, text, data or media) over
the operators networks.




Trust
and security aspects are increasingly important in a networked and digitalized
environment




The open
nature of the Internet as well as exponential digitalization and globalization
of society has resulted in increased (international) fraud, attention for
privacy intrusions and national security concerns.




Summary
Services and Solutions




ValidSoft
Ltd: customized mobile solution for credit card fraud prevention




In line
with our strategy to develop and market customized mobile solutions, we recently
acquired ValidSoft Ltd.  Validsoft provides strong authentication and
transaction verification capabilities, which allow organizations to quickly
implement solutions that protect against the latest forms of credit and debit
card fraud, on-line transaction and identity theft.  This acquisition
combines Validsoft’s advanced proprietary software with what we believe is a
superior telecommunication platform to create a leading electronic fraud
prevention total solution.




We
believe the ValidSoft solution can save  US banks significant time,
energy and “zero-liability” funds in connection with credit and debit card
fraud. ValidSoft has successfully completed trials with two major banks and is
in advanced discussions with leading global payment processors, international
banks and credit card providers. Validsoft was recently awarded the European
Privacy Seal from EuroPrise, underscoring the prudent set-up of its systems as
to privacy matters. Revenues generated from the ValidSoft business are expected
to become our highest margin contributor.




MVNE/MVNO




Since
2006, significant investments have been made in mobile enabling services and
platforms. We invest and operate as a full Mobile Virtual Network Enabler
(MVNE), offering MNO’s various parts of the back office network including core
network, messaging platforms, data platforms and billing
solutions.  As a result, we are positioning ourselves as the MVNE
partner of choice for the larger, global MNO’s, and a one-stop convergent
solutions provider for specialized MVNO customers.




5


The first
revenues from these mobile services began during the fourth quarter of 2008 with
T-Mobile in the Netherlands and with Vizzavi (a subsidiary of Vodafone group) in
Spain during 2009. Currently we have 6 MVNO’s running on our platforms in The
Netherlands and Spain, and are rapidly expanding our geographic service
areas.




Currently
we are negotiating agreements with various MNO’s and MVNO’s in numerous
countries in order to realize our strong growth objectives, both in revenues and
margin improvement.




Landline
Outsourced solutions




At the
base of our advanced mobile services, and currently still the largest revenue
contributor, is our landline services, which we offer in nine European countries
and Bahrain. These services are provided by operating a switch-based telecom
network with national licenses and direct land line interconnects with the
Incumbents/National Telecom Operators. Together with our centrally operated and
managed IN-CRM platform, we offer geographical, premium rate, toll free,
personal, nomadic and Voice over Internet Protocol (“VoIP”) services to our
primarily business customers.  We position our customers as if they
are a fully networked telecommunications company themselves by providing them
with the tools and resources necessary to manage their businesses, particularly
the telecommunications segment, as an integrated component of their overall
offering.




Network




Landline
and Mobile Network




Our
network is based on landline and MVNO telecommunications licenses, mobile access
agreements and network interconnections. Our geographical cross-border
footprint, established through existing relationships with national telecom
incumbents, is well positioned for international traffic because we have
established our own facilities-based infrastructure on two continents.
Currently, as a fully licensed carrier, we are interconnected with incumbents in
the Netherlands (KPN), Spain (Telefonica), Austria (Telekom Austria), Belgium
(Belgacom), Switzerland (Swisscom), Italy (Telecom Italia), the United Kingdom
(BT) and Bahrain (Batelco). Through partners, we have access to interconnections
in France, Germany, Poland, Finland, Sweden, Norway and Ireland.  For
our premium rate services we added to our national interconnect with KPN a
direct connection in the Netherlands with the mobile operators Vodafone and
T-Mobile.




For our
mobile services we need, in addition to the landline interconnections and switch
facilities, mobile access coverage. In 2008 we entered into our first MVNE
agreement with T-Mobile/Orange in the Netherlands where in 2010 we were
servicing six of our own MVNO’s. In 2009 we were awarded an MVNE agreement with
Vizzavi (a subsidiary of the Vodafone group) of Spain, and provide managed
services for their MVNO portfolio, to be followed by the hosting of our own
MVNO’s.




In order to reduce the investments
required for our MVNO’s, as well as increase our flexibility and depth of mobile
service offeringsto MVNO’s and MNO’s, we
operate as a full MVNE; meaning that we procure, integrate and operate the
relevant mobile components, including core network, application platform,
subscriber management and MVNO billing and CRM.




Network
Operations Center (NOC)




Our
global 24/7 Network Operations Center is located in Guangzhou, China and
monitors all landline, data and mobile traffic throughout our global clear
bandwidth and IP network.




Proprietary
Software Technology




ET’s
Business Operating Support System (“ET BOSS”)




§
            To
      maintain flexibility and allow for growth, we have chosen to develop our
      own proprietary software and systems including: 1) a fully integrated
      rating, mediation, and provisioning CRM and billing system for
      multi-country and multimedia use, and applications, and 2) an advanced
      Infitel IN platform.




6




§
            Our
      internally developed customer provisioning, rating and billing system,
      also known as “ET BOSS”, ensures proper support for all of our
      services.  Further, the reliable data provided by the ET BOSS
      system is the basis for customer satisfaction(?). We believe our network
      and system platforms are able to handle the high demands of national
      incumbents and other telecom operators on our globally interconnected
      network. The key component of our business strategy is the fully automated
      capturing and recording of any event on our global network through a
      standard Call Data Record, or CDR.  CDR’s are globally
      recognized and accepted by all of our suppliers and customers because of
      their high quality, reliability and consistency. As a result, on a real
      time/on-line basis, we believe our billing engine provides reliable
      inter-company payment overviews, and will continue to do so as we develop
      and implement our global network.




§
            The
      core
      modules have been designed to address all of our major business
      processes, and those of our  partners in such a manner that the
      state of the art flexibility, level of integration and dynamic feature set
      ensures rapid and low-cost deployments. The core modules and their
      sub-modules include amongst others:




§
            Billing;
      (dynamic) rating management, bill mediation, invoicing and automatic
      payment script generation


§
            Payment;
      credit card, direct debit, Paypal etc. enabled
    functionalities


§
            Provisioning;
      switches, HLR, porting


§
            Self
      Care; mobile, carrier(pre)select, premium rate & toll free
      services


§
            CRM
      ; trouble ticketing, customer management, provisioning


§
            Sales
      & Marketing; prospect management, sales management, analysis
      tools


§
            Revenue
      Collection Assurance; end-user credit management, credit control, fraud
      management, routing analysis


§
            Control;
      dashboard overview, reporting, quality analysis, quality
      control




The
sub-modules are unique and tailored to local situations.




Infitel
Suite - IN Platform




In order
to achieve real time session control, rating and charging, telecom value added
applications as well as improved enrichment of data generated in and passing
through our networks, we have acquired the carrier grade next generation IN
(Intelligent Network) platform “Infitel”, including the source code and
trademark. We own and develop this platform, thereby ensuring the flexibility
and integration we strive for in and between all our software and network
components.




Inficore is the core of the IN
platform, defines the framework, administrative modules and SLP (Service Logic
Processor) that runs the scripts (call flows) created with
Infiscript.




Infiscript is the SCE (Service
Creation Environment) this is a graphical suite with which the call flows and
business logic can be developed and compiled to be distributed to running
Inficore environments.




Infitel Suite comprises the
applications and call-flows that are running on top of Inficore and that have
been created with Infiscript, customized SIBs (C++ core code) and stored
procedures.




The
Infitel Suitecomprises amongst others
the following value added services:




§
            Intelligent
      Call Routing, Service Numbers




7






§
            Universal
      Prepaid (Residential, Phoneshop, Reseller)


§
            Flexible
      Number Portability


§
            EasyVote
      (Televoting)


§
            VPN/CUG


§
            Advanced
      Call Completion


§
            NJoy-Dial


§
            Personal
      Call Manager


§
            Advanced
      Business Communication


§
            Zonal
      Call Manager





ValidSoft  -
Fraud Prevention and Security Software Solutions




In 2009,
we  began investing and developing the integration of our systems into
those of (at that time still) joint venture partner ValidSoft, in order to be
able to offer a full fledged security solution over mobile networks. These
investments in development were part of our overall strategy to becoming a
leading player in the area of “Customized Mobile Solutions”.




ValidSoft,
as a software engineering company, has made significant investments in
intellectual property in processes and software pertaining to Intelligent
Identity & Transaction Verification, and is considered to have developed
thought leadership in countering electronic fraud. The essence of the ValidSoft
product suite is in providing Card-(not) Present fraud prevention, on-line
Banking fraud prevention, Strong Mutual Authentication (multi-channel),
Transaction Verification (Out of Band – OOB), Identity Verification and
Non-Repudiation.




The main
components of the VALid® product suite are:




§ VALid-IVR


§ VALid-SMS


§           VALid-SVP stands for Speaker
Verification Platform and is the biometric voice verification capability of the
VALid® platform. The VALid-SVP solution is based on a completely modular,
plug-in based architecture that allows organizations to integrate their existing
or preferred biometric engines into the VALid® framework. VALid-SVP supports
text-dependent, text-independent and conversational voice verification models,
all deliverable over multiple electronic channels. ValidSoft’s own biometric
voice verification engine is based on Alize, a state-of-the-art speaker
verification platform developed in the European Union.




§           VALid-TDS is the Transaction
Data Signing capability of VALid®, crucial in the provision of Non-Repudiation
for Internet based financial transactions. VALid-TDS cryptographically ties the
One Time Passcode (OTP) to the underlying transaction, as distinct to a randomly
generated OTP. This enables the underlying transaction detail to be determined
through the code, critical in proving or disproving transaction
repudiation.  VALid-TDS also interoperates with external tamper
evident stores, storing the encrypted transaction data, authentication details
and real-time call recording for further use in Non-Repudiation.




8


§ VALid-POS®


§ VALid-ARM


§ VALid-TTS


§           VALid-VPN - The Virtual
Private Network client that allows users to gain secure remote access to an
organization’s protected network. Remote network access is becoming a greater
issue for many organizations through the growth of home working, remote workers,
extended enterprise and disaster recovery and business disruption planning.
VALid-VPN supports most of the major remote access solution providers, including
Citrix, Juniper, Checkpoint and Cisco.  The VALid-VPN solution has
been designing as a generic solution enabling simple, low-cost integration into
additional remote access technologies and providers, should this be
necessary.


§           VALid-ISA- VALid’s ISA
integration provides secure access to applications accessed through ISA, e.g.
Microsoft OWA. Currently many companies disallow remote access to ISA hosted
applications (e.g. OWA) due to security concerns. VALid-ISA solves this problem
and, through its zero client-footprint model, enables instant wide scale
distribution.  VALid-ISA also enables one secure point of access to
any number of web based application sitting behind ISA.




§           VALid-FOB (Disconnected Model)
– The mobile phone or PDA based VALid® client option for customers who may not
have regular access to a telecommunications signal, either mobile or landline,
but who do have access to the Internet. VALid-FOB is a J2ME (Java) based
application that can be downloaded to the mobile phone or PDA and be used to
provide Authentication, Mutual Authentication and Transaction Data Signing
functions in contingency situations.





Products
and Markets





Full
MVNE




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




9


These
in-depth MVNE (Mobile Virtual Network Enabler) platform services are now fully
operational in The Netherlands as of the end of the third quarter of 2008 and
operational in Spain since June 2009.




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




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




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




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




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




10


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




Customized
Mobile Solutions – ValidSoft Fraud prevention and security
solutions




The
essence of the ValidSoft product suite is in providing:




■            Card-Present fraud prevention and
resolution – Card Skimming is one of the fastest growing fraud threats.
In the UK, this type of fraud in 2007 accounted for over half a billion pounds,
and in the US, a leading research company is predicting that the cost of plastic
card fraud will rise from 25 basis points to over 150 basis points over the next
12 to 18 months. VALid-POS combines the functionality of VALid’s real-time
Out-of-Band transaction verification capability with proximity based
mathematical models that assists Issuing Banks in determining whether the
genuine customer is conducting the card-based transaction.  Where in
doubt, VALid® can contact the customer and resolve the potential threat in
real-time.




§           Card-not-Present fraud prevention and
resolution – Card-not-Present fraud, i.e. fraud associated with online
retailing, is a significant problem worldwide. The vast majority of this type of
fraud involves the use of card details that have been fraudulently obtained
through methods such as skimming, data hacking or through unsolicited emails or
telephone calls. The card details are then used to make fraudulent
card-not-present transactions, most commonly via the Internet. As the number of
Internet retailers has grown, fraudsters have increasingly targeted the online
shopping environment. The global cost of this type of fraud is estimated at over
$5 billion globally. VALid-POS combines the functionality of VALid’s real-time
Out-of-Band transaction verification capability with proximity based
mathematical models that assists retail providers in determining whether the
genuine customer is conducting the online transaction. Where in doubt, VALid®
can contact the customer and resolve the potential threat in
real-time.




§           Online Banking fraud
prevention – Online banking fraud is a significant threat to the take-up
of online banking worldwide. Fears concerning the safety of this type of banking
transactions prevent banks from realizing the massive cost savings provided by
self-service online banking. Globally less than 50% of internet users bank
online and security fears remain the primary inhibitor of
take-up.  VALid’s real-time Out-of-Band strong mutual authentication
and real-time transaction verification enables the bank to apply a real-time
dynamic rules engine to identify anomalies and to contact the customer and
verify the transaction in real-time.




§           Strong Mutual Authentication
(multi-channel) – the need for the customer to know that the bank is
genuine is just as important as the need for the bank to know that it is
transacting with the genuine customer - this is essential in terms of fostering
consumer confidence, the lack of which is the single most significant deterrent
in terms of the adoption of online commerce. This is termed “Mutual
Authentication” and VALid® has one of the most intuitive and strongest forms of
Mutual Authentication available;




■           Transaction Verification (Out-of-Band
– OOB) – even if both parties to a transaction are genuine there is no
guarantee that the transaction will not be corrupted. A “Man-in-the-Middle” or
“Man-in-the-Browser” attack will succeed no matter how strong the authentication
process. Therefore banks need Transaction Verification. Most banks monitor
transactions to identify anomalies. When an exception is detected, banks for the
most part rely on a manual process of contacting the customer by phone to verify
the legitimacy of the transaction – this is expensive and also prone to security
risk itself as the customer is forced to reveal security credentials to unknown
third parties. VALid® addresses this issue since it has the ability to verify
the integrity of transactions in real-time and in a totally automated manner
over a separate telecommunications channel. Real-time OOB Transaction
Verification is regarded by Gartner as the only effective way to protect the
integrity of a transaction carried out on the Internet.




§           Identity Verification – In
mass market and extranet situations, service providers are struggling to find a
solution that does not require the distribution of hardware devices yet provides
strong authentication and transaction verification in a cost effective and
convenient manner. It is likely that going forward service providers will be
expected to comply with increasing regulation in this area. ValidSoft, through
its telephony based architecture enables service providers to implement the
strongest form of mutual authentication and transaction verification available.
Designed specifically for mass markets and extranet situations, VALid® combines
ease-of-use, cost effectiveness and strong security, from challenge response up
to and including conversational voice biometrics, to ensure that service
providers can verify to non-repudiation level if required, the verification of
identity of both internal employees, external contractors and customers who may
have access to sensitive material and also conduct transactions
electronically.




11


■          Non-Repudiation – PKI(Digital
Certificates), long regarded as a form of Non-Repudiation is now vulnerable to
Man-in-the-Browser attacks. This means that PKI can no longer guarantee the
integrity of transactions and therefore can be challenged in a Court of Law
where PKI is presented as a case for Non-Repudiation. VALid® has been designed
to address the issue of Non-Repudiation through its multi-layered approach,
which includes elements such as: Transaction Verification; Transaction Data
Signing (cryptographically linking a One Time Passcode to the underlying
transaction); Voice Biometrics (or OOB challenge/response); Customer
Authorization (Voice Recording) and Geometric Transaction Analysis, to achieve
the highest level of non-repudiation capability, presented to the customer in an
intuitive and easy-to-use manner.




■          Business Enabling – financial
institutions cannot leverage the full power and cost effectiveness of the
Internet as a Business Enabling/Self-Service medium because of security
concerns. Certain transactions requiring branch or telephone banking, or the
completion of paper-based forms with signatures (e.g. Address change), are
considered too high risk for Internet deployment, and as a consequence these
transactions continue to be processed manually resulting in high cost,
inefficiencies, poor quality data and customer inconvenience. VALid®, through
the combination of OOB Strong Mutual Authentication and Transaction
Verification, provides the capability to securely automate today’s manual
processes resulting in: dramatic cost savings; customer empowerment; increasing
the consistency, accuracy, timeliness and security of transactions; and creating
competitive advantage through market differentiation.




Landline
network outsourcing services




Even
though the majority of our investments in the past years have been in (mobile)
software development,  mobile related acquisitions and implementing
MNO’s and MVNO’s, our largest revenue stream is currently still generated by our
traditional telecom services like Carrier Select and Carrier Pre-Select
Services, and Toll Free and Premium Rate Services. These services formed the
basis and gave us decade-long experience as an outsourcing partner in the field
of telecommunications services managed by our propriety Intelligent
Network/Customer Provisioning Management/Billing platform. This platform has
always been designed to put our customers, who purposely chose to outsource
their telecommunication requirements to a specialized company like us, in
control: our customers can work with our technology and our delivery platforms
as if these are their own. We empower and likewise facilitate our
customers  to harness, to manage and to fully apply the power of some
of the most powerful mobile/landline delivery systems in the world through a
web-based self care user friendly interface, without the need to initiate,
install, fund, operate and support those global systems on a 24/7
basis.




Business
and Growth Strategy for 2010 and Beyond




Elephant
Talk is actively seeking additional MNO partners that understand the symbioses
between a mobile network operator and an applications-focused enabler that
brings the right services in the right format through a secure delivery platform
within reach of all business customers that may require such services as part of
their overall market and product strategy. We believe that over the next couple
of years MNO’s will proactively seek partners like our company, as it will be
the preferred way to successfully expand from retail focused markets to
wholesale markets, thereby more effectively using the capacity of their core
antenna networks and spectrum capabilities.




Especially
in markets where direct retail customer penetration reaches 80% plus levels,
MVNO’s can enhance bring market penetration and network usage levels. However,
only if these MVNO’s are capable of bringing significantly differentiated
service bundles into the market place - reflecting the specific requirements of
individualized communities - will they be less vulnerable to what has been
undermining the MNO’s basic business models: churn. Most important to an
operator’s success is to understand that a uniquely serviced community far
outweighs the pricing alone of any basic underlying service.




12


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




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




Most
of these new business models, driven by customized mobile services, will be
created and operated by independent third party application providers that may
be directly or indirectly connected to mobile service delivery platforms like
our MVNE platform. In areas we see attractive opportunities to create, operate
and market such services ourselves, we may actively invest in such developments
or may acquire other companies that already have developed such applications. A
good example of such a service is the fraud prevention application that
ValidSoft offers, the company recently acquired by us.




Growth
in Partnerships




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




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




Landline
Network Interconnect Partners




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




Mobile
Network Partners




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




Content
& Customized Mobile Services Partners




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




13


Roaming
& LCR Wholesale Origination/Termination Partners




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




Management
and Personnel




During
2009 we further strengthened our organization in order to prepare ourselves for
our current operational and revenue growth strategy, especially in the area of
mobile services, by strongly increasing the number of engineers and software
developers to expand our VoIP, Intelligent Network Platform, and Billing-CRM
capabilities. In addition some increases were made in the support and project
management departments.




In
addition to our corporate management staff, as of December 31, 2009, we employed
85 employees. We have retained, on a long term basis, the services of 27
independent contractors. We consider relations with our employees and
contractors to be good. Each of our current employees and contractors has
entered into confidentiality and non-competition agreements with
us.




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




Competition




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




Traditional
Telecom Services




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




Mobile
Services




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




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




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




14


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




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




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




Fraud
Prediction & Prevention Services




Our
current (ValidSoft) Fraud Prediction & Prevention Services face competition
from Authentify, Strikeforce, Finsphere, Tricipher for Out-of-Band (OBB), RSA,
VASCO and others for Tokens, and Verisign and others for Digital
Certificates.





ValidSoft’s products combined with the
Elephant Talk’s advanced telecommunications platform we believe combine the
complementary strengths which results in a state of the art and currently one of
a kind total solution in payment card (debit and credit) fraud
prevention.





More in
particular for the ValidSoft part, VALid® combines strong authentication and
transaction verification to counter not only the more traditional attacks, but
also the latest in session hijacking (Man-in-the-Middle, Man-in-the-Browser)
through its Transaction Integrity Verification (TIV) model. Alternative two
factor authentication solutions such as hardware tokens are vulnerable to these
types of threats. These vulnerabilities exist due to a number of issues and
weaknesses.  VALid® provides flexibility in allowing banks to
authenticate at both the session and transaction level, with the device,
protocol and even authentication behavior completely configurable. Use of the
customers’ existing telephony devices, ensures complete interoperability between
multiple banks, while providing the necessary branding through the use of the
individual bank’s voice scripts. As VALid® supports remote access in a number of
ways it operates in exactly the same manner for internal enterprise access.
Managing conventional Two Factor authentication systems that use physical tokens
carry significant overheads, such as the end user token distribution process
(including retrieval and replacement), synchronization issues and time
sequencing problems. Managing these tokens is also cumbersome as in some cases a
master token must be used before an administrator can de-activate a token.
VALid® does not have these issues and provides banks with the added benefit of a
significant lower Total Cost of Ownership whilst dramatically improving security
levels. A user can be added to the system using an intuitive web based system
resulting in near real time for activation or deactivation.





15


Legal
structure of the company





The
following chart illustrates our company’s corporate structure as of December 31,
2009.









In 2007,
our company grew as a result of the acquisition, effective January 1, 2007, of
Elephant Talk Communication Holding AG (formerly known as “Benoit Telecom
Holding AG”) by Elephant Talk Europe Holding B.V.(the “Benoit Acquisition”).
Please see “Benoit Acquisition” below, for an overview of this transaction. In
addition to the Benoit Acquisition, on June 1, 2007, we acquired a French
entity: 3U Telecom SrL, from 3U Telecom AG, a German company. The name of this
entity was subsequently changed to Elephant Talk Communications France S.A.S.
(“ET France”). As a result of the preceding acquisitions, our corporate
structure and breadth of operations significantly expanded.




In
addition to the aforementioned acquisitions, we incorporated three new companies
in 2007. On May 24, 2007 we established Elephant Talk Global Holding B.V (“ET
Global”), a 100% Dutch subsidiary of ETCI. We created ET Global to act as the
holding company for several of our worldwide subsidiaries. On October 21, 2007
we incorporated Elephant Talk Business Services W.L.L. (“ET Business Services”),
a Bahrain based company, to act as an intra-group service provider outside
Europe (Elephant Talk Communication Carrier Services GmbH performs this activity
within Europe). On December 27, 2007 we formed Elephant Talk Communications
Luxembourg S.A. (“ET Luxembourg”) to initially focus on providing payment
collection services for other group companies. On March 20, 2008 Elephant Talk
Caribbean BV was incorporated in the Netherlands as a 100% subsidiary of
Elephant Talk Global Holding B.V. The purpose of this subsidiary is to act as
the joint venture partner of United Telecommunication Services N.V. in the
entity ET-UTS NV. ET-UTS NV was incorporated in Curacao, the Netherland
Antilles, on April 9, 2008 as a 51% subsidiary of Elephant Talk Caribbean B.V.
with the remaining 49% owned by our joint venture partner United
Telecommunication Services N.V. The total issued capital amounts to one hundred
thousand dollars ($100,000.00). The purpose of ET-UTS NV is to design, install,
maintain and exploit WIFI and WIMAX networks in the Caribbean area and
Surinam.




16


On August
14, 2008 we changed the name of Cardnet Clearing Services BV, a wholly-owned
affiliate of Elephant Talk Europe Holding BV, to Elephant Talk Mobile Services
BV. This company’s primary objective is to act as our vehicle to contract Mobile
Virtual Network Operators in the Netherlands. On August 20, 2008 Elephant Talk
Europe Holding BV signed an agreement for the acquisition of 100% of Moba
Consulting Services BV.  The effective date of the transaction was
September 1, 2008 at an acquisition price of €1.00 plus 50,000 of our stock
options. We acquired Moba Consulting Services BV to obtain expertise and
manpower for certain aspects of the implementation of the Mobile Virtual Network
Operators on our platform.




Benoit
Acquisition




On
January 17, 2005, we entered into a Memorandum of Understanding with Beltrust
AG, a corporation organized and existing under the laws of Switzerland
(“Beltrust”), to acquire all of the issued and outstanding shares of Benoit
Telecom Holding AG, a corporation organized and existing under the laws of
Switzerland (“Benoit Telecom”). Benoit Telecom is a European-based telecom
company. On November 17, 2006, we executed an Agreement of Purchase and Sale
(the “Beltrust Agreement”), with Beltrust and Elephant Talk Europe Holding B.V.
(“ET Europe”), a corporation organized and existing under the laws of The
Netherlands, and our wholly owned subsidiary, providing for the purchase and
sale of all of the issued and outstanding shares of Benoit Telecom by ET Europe.
Pursuant to the Beltrust Agreement, ET Europe agreed to purchase from Beltrust
all of the 100,000 issued and outstanding shares of Benoit Telecom, in exchange
for a) cash payment of $6,643,080 and b) 40,000,000 shares of our common
stock.





ITEM
1A.  RISK FACTORS





Risks
Related to Our Company





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





We have
incurred net losses of $17,299,884 and $16,015,359 for the years ended December
31, 2009 and 2008, respectively. As of December 31, 2009, we had an accumulated
deficit of $62,335,076 which has resulted in our need to raise capital via a
private placement offering in 2009 and subsequent bridge loans in 2010. In 2009,
through this offering $12.3 million gross was raised, with $6.08 million from
related parties.





Such
losses will continue during 2010 due to ongoing operating expenses in new Mobile
services and a lack of revenues sufficient to offset operating expenses plus the
need to fund the future development to satisfy our potential customers’ needs.
We have raised and continue to raise capital to fund ongoing operations by
private sales of our securities, some of which sales have been highly dilutive
and involve considerable expense, and will continue to do so provided market
conditions allow us.





In our
present circumstances there is substantial doubt about our ability to continue
as a going concern absent significant sales of our products and
telecommunication services, or the sale of our securities.





We expect
to continue to spend significant amounts to acquire businesses and to expand our
current technology. As a result, we will need to raise additional capital until
we generate significant additional revenue to achieve profitability. There is no
guarantee that such capital will be available, or that it will be available on
favorable terms.





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





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





17


We
currently derive a large part of our revenue from the premium rate services
business activity.





Although
our revenue mix is changing and our new Mobile services are improving operating
margins, the premium rate services still remain the key driver of revenue for
the company. If significant changes occur in market conditions pertaining to
this type of service it could have an adverse impact on our business, results of
operations and financial condition.





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





In 2006
we began to expand our focus from the market of landline telecommunication
services to mobile telecommunication and system services, including substantial
increases of investment in software engineering, systems integration and mobile
components. We have limited experience in these areas, therefore we may not be
able to enter and compete in these markets, or achieve
profitability.





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





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





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





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





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





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





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





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





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





18


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





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





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





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





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





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





We have
significant international operations in Europe and to a lesser extent in the
Middle East and the Far East. There can be no assurance that we will be able to
obtain the permits and operating licenses required for us to operate, obtain
access to local transmission facilities on economically acceptable terms, or
market services in international markets. In addition, operating in
international markets generally involves additional risks, including unexpected
changes in regulatory requirements, taxes, tariffs, customs, duties and other
trade barriers, difficulties in staffing and managing foreign operations,
problems in collecting accounts receivable, political risks, fluctuations in
currency exchange rates, restrictions associated with the repatriation of funds,
technology export and import restrictions, and seasonal reductions in business
activity. Our ability to operate and grow our international operations
successfully could be adversely impacted by these risks.





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





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





19


We
historically have not engaged in hedging transactions since we primarily operate
in same currency countries, currently being the EUR. However, the operations of
affiliates and subsidiaries in non-US countries have been funded with
investments and other advances denominated in foreign currencies and more
recently in USD. Historically, such investments and advances have been long-term
in nature, and we accounted for any adjustments resulting from currency
translation as a charge or credit to accumulated other comprehensive loss within
the shareholders’ deficit section of our consolidated balance sheets. Although
we have not engaged in hedging so far we continue to assess on a regular basis
the possible need for hedging.





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





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





Our
services related to communications information systems, outsourced solutions and
value added (communication) services are highly competitive and fragmented, and
we expect competition to continue to increase. We compete with telecom solution
providers, independent software and service providers and the in-house IT and
network departments of communications companies as well as firms that provide IT
services (including consulting, systems integration and managed services),
software vendors that sell products for particular aspects of a total
information system, software vendors that specialize in systems for particular
communications services (such as Internet, land-line and mobile services, cable,
satellite and service bureaus) and companies that offer software systems in
combination with the sale of network equipment. Also, in this more fragmented
market, larger players exist with associated advantages described earlier which
we need to compete against.





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





Our
positioning in the marketplace may place a significant strain on our management,
operational and financial resources, and increase demand on our systems and
controls. To manage this position effectively, we must continue to implement and
improve our operational and financial systems and controls, invest in
development & engineering, critical systems and network infrastructure to
maintain or improve our service quality levels, purchase and utilize other
system and solutions, and train and manage our employee base. As we proceed with
our development operational difficulties could arise from additional demand
placed on customer provisioning and support, billing and management information
systems, product delivery and fulfillment, sales and marketing and
administrative resources.





20


For
instance, we may encounter delays or cost-overruns or suffer other adverse
consequences in implementing new systems when required. In addition, our
operating and financial control systems and infrastructure could be inadequate
to ensure timely and accurate financial reporting.





We
could suffer adverse tax and other financial consequences if U.S. or foreign
taxing authorities do not agree with our interpretation of applicable tax
laws.





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





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





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





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





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





Our
revenue, earnings and profitability are affected by the length of our sales
cycle, and a longer sales cycle could adversely affect our results of operations
and financial condition.





Our
business is directly affected by the length of our sales cycle. Both our
telecommunications traffic services as well as our communications information
systems, outsourced solutions and value added (communication) services are
relatively complex and their purchase generally involves a significant
commitment of capital, with attendant delays frequently associated with large
capital expenditures and procurement procedures within an organization. The
purchase of these types of products typically also requires coordination and
agreement across many departments within a potential customer’s organization.
Delays associated with such timing factors could have a material adverse effect
on our results of operations and financial condition. In periods of economic
slowdown in the communications industry, which may recur in the current economic
climate, our typical sales cycle lengthens, which means that the average time
between our initial contact with a prospective customer and the signing of a
sales contract increases. The lengthening of our sales cycle could reduce growth
in our revenue in the future. In addition, the lengthening of our sales cycle
contributes to an increased cost of sales, thereby reducing our
profitability.





We
are dependent on a significant customer for our Premium Rate Services business
and the loss of this customer could have an adverse effect on our business,
results of operations and financial condition.





21


In 2009
the Company had a customer in the Netherlands, which accounted for Premium Rate
Services revenue of $21,905,840 or (50% of the total revenue). For the same
period in 2008, this same Dutch customer accounted for $25,195,711 (57% of the
total revenue). If this significant customer discontinues its relationship with
us for any reason, or reduces or postpones current or expected revenues, it
could have an adverse impact on our business, results of operations and
financial condition.





Risks
Related to Our Industry





Changes
in the regulation of the telecommunications industry could adversely affect our
business, revenue or cash flow.





We
operate in a heavily regulated industry. The majority of our telecommunications
traffic revenue has been generally supported by and subject to regulation at the
European community, federal, state and local level. Certain European, foreign,
federal, and state regulations and local franchise requirements have been, are
currently, and may in the future be, the subject of judicial proceedings,
legislative hearings and administrative proposals. Such proceedings may relate
to, among other things, the rates we may charge for our local, network access
and other services, the manner in which we offer and bundle our services, the
terms and conditions of interconnection, unbundled network elements and resale
rates, and could change the manner in which telecommunications companies
operate. We cannot predict the outcome of these proceedings or the impact they
will have on our business, revenue and cash flow.





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





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





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





Both the
land-line and mobile traffic business are intensely competitive with relatively
limited barriers to entry in the more deregulated countries in which we operate
and with numerous entities competing for the same customers. Recent and pending
deregulation in various countries may encourage new entrants to compete,
including ISPs, Mobile Network Operators, cable television companies, who would
offer voice, broadband, Internet access and television, and electric power
utilities who would offer voice and broadband Internet access. As competition
intensifies as a result of deregulatory, market or technological developments,
our results of operations and financial condition could be adversely affected,
since the traffic business still constitutes a sizeable portion of our total
business.





Deterioration
in our relationships with facilities-based carriers could have a material
adverse effect upon our telecommunications traffic business.





In our
telecommunication traffic business, we primarily connect our customers’
telephone calls and data/Internet needs through access agreements with
facilities-based Mobile Network Operators and land-line carriers. Many of these
carriers are, or may become, our competitors. Our ability to maintain and expand
our business depends on our ability to maintain favorable relationships with the
facilities-based carriers from which we lease transmission lines. If our
relationship with one or more of these carriers were to deteriorate or
terminate, it could have a material adverse effect upon our cost structure,
service quality, network diversity, results of operations and financial
condition. If we experience difficulties with our third-party providers, we may
not achieve desired economies of scale or otherwise be successful in growing our
business.





22


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





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





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





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





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





Our
operations are subject to constantly changing regulation. There can be no
assurance that future regulatory changes will not have a material adverse effect
on us, or that regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable regulations, any of
which could have a material adverse effect upon us. As a multinational
telecommunications company or provider of services to carriers and operators, we
are directly and indirectly subject to varying degrees of regulation in each of
the jurisdictions in which we provide our services. Local laws and regulations,
and the interpretation of such laws and regulations, differ significantly among
the jurisdictions in which we operate. Enforcement and interpretations of these
laws and regulations can be unpredictable and are often subject to the informal
views of government officials. Potential future regulatory, judicial,
legislative, and government policy changes in jurisdictions where we operate
could have a material adverse effect on us. Domestic or international regulators
or third parties may raise material issues with regard to our compliance or
noncompliance with applicable regulations, and therefore may have a material
adverse impact on our competitive position, growth and financial
performance.





Risks
Related to Our Capital Stock





We
could issue additional common stock, which might dilute the book value of our
capital stock.





Our board
of directors has authority, without action or vote of our shareholders, to issue
all or a part of our authorized but unissued shares of common
stock.  Any such stock issuance could be made at a price that reflects
a discount or a premium to the then-current trading price of our common stock.
In addition, in order to raise future capital, we may need to issue securities
that are convertible into or exchangeable for a significant amount of our common
stock. These issuances, if any, would dilute your percentage ownership interest
in the company, thereby having the effect of reducing your influence on matters
on which shareholders vote. You may incur additional dilution if holders of
stock options, whether currently outstanding or subsequently granted, exercise
their options, or if warrant holders exercise their warrants to purchase shares
of our common stock. As a result, any such issuances or exercises would dilute
your interest in the company and the per share book value of the common stock
that you owned, either of which could negatively affect the trading price of our
common stock and the value of your investment.





23


Our
board of directors has the power to designate a series of preferred stock
without shareholder approval that could contain conversion or voting rights that
adversely affect our common shareholders.





Our
Articles of Incorporation authorize the issuance of capital stock including
50,000,000 undesignated preferred shares, and empowers our board of directors to
prescribe by resolution and without shareholder approval a class or series of
such preferred shares, including the number of shares in the class or series and
the voting powers, designations, rights, preferences, restrictions and the
relative rights in each such class or series thereof.  The creation
and issuance of any such preferred shares could dilute your voting and ownership
interest in the company, the value of your investment, the trading price of our
stock and any cash (or other form of consideration) that you would otherwise
receive upon the liquidation of the company.





We
may need to request our shareholders to authorize additional shares of common
stock in connection with subsequent financings.





We are
authorized to issue 300,000,000 shares of capital stock, including 250,000,000
shares of common stock and 50,000,000 shares of preferred stock, of
which 64,260,437 were issued and outstanding as of March 31, 2010. We have
reserved 42,810,106 shares for issuance upon exercise of
stock options and warrants outstanding.   Furthermore, should we
decide to finance the company through the issuance of additional common stock or
preferred stock, this may have a dilutive effect on your voting rights, the
value of your investment and the trading price of the common
stock.  If we issue more than 20% of our outstanding common stock in
any equity-based financing, we may be required to call a special meeting of our
shareholders to authorize the issuance of such additional shares before
undertaking the issuance. As a result, we cannot assure you that our
shareholders would authorize such issuance and the company could be required to
seek necessary capital in an alternative manner, which may not be available on
commercially reasonable terms, if at all.  If the company is unable to
adequately fund itself, through its operations or equity/debt financing, this
would have a material adverse affect on the company as a going
concern.





As
a “thinly-traded” stock, large sales can place downward pressure on our stock
price.





Our stock
experiences periods when it could be considered “thinly traded.” Financing
transactions resulting in a large number of newly issued shares that become
readily tradable, or other events that cause current shareholders to sell
shares, could place further downward pressure on the trading price of our
stock.  In addition, the lack of a robust resale market may require a
shareholder who desires to sell a large number of shares to sell the shares in
increments over time to mitigate any adverse impact of the sales on the market
price of our stock.





Shares
eligible for future sale may adversely affect the market for our common
stock.





We
presently have 4,094,342 options and 38,715,764 warrants to purchase
shares of our common stock outstanding.  If and when these securities
are exercised into shares of our common stock, the number of our shares of
common stock outstanding will increase.
Such increase in our outstanding share, and any sales of such shares, could have
a material adverse effect on the market for our common stock and the market
price of our common stock.





In
addition, from time to time, certain of our shareholders may be eligible to sell
all or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act of 1933, which we refer to in this prospectus as the Securities
Act, subject to certain limitations. In general, pursuant to Rule 144, after
satisfying a six month holding period: (i) affiliated shareholders (or
shareholders whose shares are aggregated) may, under certain circumstances, sell
within any three month period a number of securities which does not exceed the
greater of 1% of the then outstanding shares of common stock or the average
weekly trading volume of the class during the four calendar weeks prior to such
sale and (ii) non-affiliated shareholders may sell without such limitations,
provided we are current in our public reporting obligations. Rule 144 also
permits the sale of securities by non-affiliates that have satisfied a one year
holding period without any limitation or restriction. Any substantial sale of
our common stock pursuant to Rule 144 or pursuant to any resale prospectus may
have a material adverse effect on the market price of our
securities.





24


Conversions
of the Notes issued in the Offering or exercise of the Warrants will dilute your
interest in the Company.





The Notes
are convertible at the option of the holder into common stock, of the
Company  at a price equal to eighty five percent (85%) of the price at
which shares are sold in a future public offering by the Company (if
consummated). If no public offering is consummated before March 31, 2010, the
conversion price will be equal to eighty five percent (85%) of the twenty (20)
day average closing price of the Common Stock for the twenty (20) trading days
prior to March 31, 2010.  Additionally, if at any time following the
earlier of the closing of a public offering or March 31, 2010, the twenty (20)
day average closing price of the Common Stock for any twenty (20) consecutive
trading days exceeds two hundred percent (200%) of such public offering closing
price or of the twenty (20) day average closing price of the common stock for
the twenty (20) trading days prior to March 31, 2010, as applicable, then any
Notes which remain unconverted shall automatically convert into shares of the
Company at the respective price.





As a
result, the voluntary (or mandatory) conversion of the Notes or the exercise of
the Warrants issued in connection with the Offering will significantly dilute
your interest in the Company and could have a material adverse effect on the
trading price of our common stock and the value of your investment.





QAT
II Investments has the option of converting outstanding loans into future
offerings of the Company.





QAT II
Investments, an entity affiliated with certain of our officers and directors,
has made a number of bridge loans to the Company.  In connection with
the loans dated February 3, 2010, February 24, 2010 and March 26, 2010, the
Company granted QAT II the ability to convert the principal and accrued interest
outstanding, as of the date of an equity or debt financing of at least
$5,000,000 (a “Placement”), into the same type of equity or debt securities
issued by us and on the same terms and conditions offered to other investors in
the Placement.  As a result, should QAT II convert the loans into
equity or equity-linked securities of the Company, this could dilute your
interest in the Company as well as the value of your investment. If QAT II
counted such loans into debt securities at the Company, any such
conversion  may effect the maximum amount we could raise or the terms
and conditions of such debt, being an affect on our financial position and
result of operations.




Certain
conditions in the Notes may make it more difficult for us to incur
indebtedness.





We are
bound by certain terms in the Notes which restrict our ability to borrow funds
outside the ordinary course of business.  We can provide no assurances
that we will be able to secure waivers from the holders of our Notes or that the
Selling Agents will waive any such defaults or potential defaults under the
Notes.  Should we be in default under the Notes for a period exceeding
thirty (30) days, (i) all amounts then unpaid under this Note, including accrued
but unpaid interest, will bear interest at the default rate of fifteen percent
(15%) and (ii) all obligations under the Note will be immediately due and
payable.  As a result, any prolonged default under the Notes could
have a material adverse effect on the financial condition of the Company as well
as our ability to continue as a going concern.





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





As of
March 15, 2010, Steven van der Velden, Martin Zuurbier, Johan Dejager, Yves van
Sante, Mark Nije and Roderick de Greef, our executive officers and directors,
beneficially owned or controlled approximately 81.47% of our outstanding common
stock.  In particular, as of March 15, 2010, Rising Water Capital AG,
an entity affiliated with the certain of the aforementioned individuals,
beneficially owned  51.49% of our common stock and QAT Investments,
SA, another entity affiliated with certain of our officers and directors and the
owner of 51% of Rising Water Capital, beneficially owned 61.97% of our common
stock.  If those shareholders act together, they will have the ability
to control matters submitted to our shareholders for approval, including the
election and removal of directors and the approval of any merger, consolidation
or sale of all or substantially all of our assets. As a result, our other
shareholders may have little or no influence over matters submitted for
shareholder approval. In addition, the ownership of such shareholders could
preclude any unsolicited acquisition of us, and consequently, materially
adversely affect the price of our common stock. These shareholders may make
decisions that are adverse to your interests.





25


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





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





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





Securities
in the OTC market are generally more difficult to trade than those on the New
York Stock Exchange, NASDAQ Markets, or the major world exchanges (e.g. London
Stock Exchange, Toronto Stock Exchange, etc.). In addition, accurate price
quotations are also more difficult to obtain. The trading market for our common
stock is subject to special regulations governing the sale of penny
stock.





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





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





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





ITEM
2.  DESCRIPTION OF PROPERTY





Our
principal executive office is located at Schiphol Boulevard 249, 1118 BH
Schiphol, The Netherlands. The office monthly rental is $9,088 that carry rental
leases until June 2015. In September 2008 the Company entered into a lease for
office space at Wattstraat 52, 1171 TR, Sassenheim, The Netherlands. We lease
this office space for a monthly rental of $1,931.





Elephant Talk Communications S.L.U. is
currently leasing office space at Paratge Bujonis, 17220 Sant Feliu de Guixols,
(Girona) Spain, on a quarter-to-quarter lease, at a monthly rent of $3,824. In
Guangzhou, China, we lease office space for a monthly rental of
$6,348.





We also lease space for our telecom
switches, servers and IT platforms at data centers (“co-locations”) at an
aggregate monthly rent of $35,892. The various co-location spaces include:
Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Paris, Vienna, Bahrain and
other locations where our telecommunications equipment are located.





26


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





ITEM 3.   LEGAL
PROCEEDINGS





(a) Beijing Chinawind





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




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





On
February 4, 2009, our board of directors decided to no longer pursue our
interests in the concerned company.





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





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





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





(c) Russelle Choi Litigation





On
September 12, 2008, an action was commenced against the Company by Russelle Choi
(“Choi”), our former CEO and director, in the California Superior Court, Orange
County, in a matter entitled Choi v. Elephant Talk
Communications, Inc., Case No. 30-2008-00111874.  Choi alleges
that the Company breached a termination agreement and a consulting agreement
entered into between the Company and Choi.  By August 19, 2009 the
Company had settled both the dispute on the termination agreement as well as the
dispute regarding the alleged breach of the consulting agreement. The entire
action was dismissed by Choi with prejudice on June 8, 2009.





27


(d)
Manu Ohri Litigation





On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court, Orange County,
in a matter entitled Manu Ohri
v. Elephant Talk Communications, Inc., Case No.
30-20009-00120609.  Ohri alleges  breach of a written
contract, breach of an oral contract, and a common count for services
rendered.   Ohri claims, among other things, $427,816 in unpaid
severance payments, $56,951 owed under an oral consulting agreement, and stock
options payable under the oral consulting agreement with a net value of
$622,000.  The Company denies all material allegations of Ohri’s
complaint and asserts various affirmative defenses.  The Company also
filed and served a cross-complaint against Ohri, who then filed and served an
answer, denying the material allegations of our cross-complaint.




The
parties are continuing with pretrial discovery, and a jury trial is scheduled to
start June 11, 2010.





(e)
Bruce Barren Litigation





On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled Bruce Barren v. Elephant Talk
Communications, Inc., Case No. BC429032.  Barren alleges causes
of action for breach of a restricted stock agreement, breach of the implied
covenant of good faith and fair dealing, breach of an oral employment agreement,
and common counts for services rendered—despite entering into a settlement
agreement and full release of any claims against the Company shortly after his
resignation in May 2009.





The
Company believes that all of Mr. Barren’s such claims are without merit and has
answered his complaint, denying all material allegations and asserting various
affirmative defenses. We intend to continue to vigorously defend ourselves
against these claims.





(f)
Chong Hing Bank Litigation





On
December 15, 2009, an action was commenced against the Company by Chong Hing
Bank Limited, fka Liu Chong Hing Bank Limited, a publicly listed Hong Kong
company (the “Hong Kong Bank”), in the California Superior Court, Orange County,
in a mater entitled Chong Hing
Bank Limited v. Elephant Talk Communications, Inc., Case No.
30-2009-00328467.  The Bank alleges that it entered into various
installment loan agreements and an overdraft account with Elephant Talk Limited
(“ETL”), a Hong Kong subsidiary of the Company.  The Bank alleges that
ETL is in default on the loans and overdraft account, and that $1,536,792 plus
interest is currently due.  The Bank alleges that the Company is
liable to repay the loans and overdraft account.  The Bank is suing
the Company for breach of contract and common counts.





At this
time the Company intends to vigorously challenge the Bank’s claims.





PART
II




ITEM
4.  RESERVED




ITEM
5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS, AND PURCHASES OF EQUITY SECURITIES




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





Common
      StockQuarter
      Ended
            
            High
            
            
            LowDecember
      31, 2009
            
            $
            2.00
            
            
            $
            1.14September
      30, 2009
            
            $
            1.48
            
            
            $
            0.80June
      30, 2009
            
            $
            1.00
            
            
            $
            0.70March
      31, 2009
            
            $
            1.16
            
            
            $
            0.50December
      31, 2008
            
            $
            0.90
            
            
            $
            0.50September
      30, 2008
            
            $
            1.75
            
            
            $
            0.90June
      30, 2008
            
            $
            2.00
            
            
            $
            1.42March
      31, 2008
            
            $
            1.75
            
            
            $
            1.25





28


At
December 31, 2009, we had approximately 3,477 record holders of our common
stock.





Securities
Authorized for Issuance under Equity Compensation Plans





Plan
      category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options and rights
            
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            
            Number of securities
              remaining available
              for future issuance(a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders
            
            
            1,320,342
            
            
            $
            1.24
            
            
            
            4,239,658Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            $
            —
            
            
            
            —Total
            
            
            1,320,342
            
            
            $
            1.24
            
            
            
            4,239,658




Recent Sales of Unregistered
Securities





Shares
issued in 2010





On
January 12, 2010 we entered into an agreement with Alliance Advisors, LLC as
consideration for investor relations and consulting services to be provided
through June 30, 2010. We agreed to pay Alliance Advisors, LLC 12,500 restricted
shares of our common stock. These shares have already been issued in 2010. The
contract includes the issue of another 12,500 restricted shares of our common
stock to be issued end of June 2010.





On
February 17, 2010 we received a request from one of our investors of the 2009
Private Placement Offering of Convertible Promissory Notes to exercise the full
number of warrants (94,000) which were issued to such investor as part of the
offering. These warrants have been exercised as requested by the
warrants-holder in accordance with the “Cashless” exercise terms of the warrant
and resulted in the issuance of 25,868 shares of common stock in March 2010.





On March
17, 2010 we issued 10,235,739 shares as purchase price consideration following
the completion of the acquisition of Validsoft Ltd.





Warrants
issued in 2010





On January 31, 2008 we entered into an
agreement with Insomnia BV. This agreement included the issuance of warrants to
purchase shares of our common stock based on the revenue-margin contributed by
the acquisition of customers during 2008 and 2009. The final calculation has
been made which resulted in the issuance of warrants to purchase 3,256 shares of
our common stock at an exercise price of $2.25





29


Options
issued in 2010





In December 2009 the Compensation
Committee and board of directors approved the issuance of certain employee stock
option to purchase up to 2,276,000 of our common shares with an average exercise
price of $1.35.





Shares
issued in 2009





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





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





On June
30, 2009, we issued 124,800 shares of our common stock to QAT as consideration
for the services provided by Steven van der Velden, our Chairman, President and
Chief Executive Officer.  The shares of common stock were issued
directly to QAT pursuant to an agreement between QAT and Mr. van der
Velden.




On June
30, 2009, we issued an aggregate number of 500,000 shares of our common stock to
our management team (4 persons) for successfully meeting targets set by the
company.




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





Warrants
issued in 2009





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





On July 31, 2009, we
consummated the initial closing (the “Closing”) of a private placement offering
(the “Offering”) of Units comprised of 12% secured convertible promissory notes
(the “Notes”) and warrants to purchase shares of common stock (the “Warrants”,
and together with the Notes, the “Securities”) to accredited investors
(“Investors”).  The Securities were offered and sold pursuant to an
exemption from registration under Section 4(2) of the Securities
Act.  At the Initial Closing, we sold an aggregate of $5,111,000
principal amount of Notes and delivered Warrants to purchase an aggregate of
5,111,000 shares of our common stock at a purchase price of $1.00 per
share.





The Notes
are convertible at the option of the holder into Common Stock, of the
Company  at a conversion price (the “Conversion Price”) equal to eighty
five percent (85%) of the price at which shares are sold in a future public
offering (the “Public Offering”) currently contemplated by the Company if
consummated; provided, however, that if the Public Offering is not consummated
on or before March 31, 2010, the Conversion Price shall be equal to eighty five
percent (85%) of the twenty (20) day average closing price of the Common Stock
for the twenty (20) trading days prior to March 31, 2010 (the “March 31, 2010
Conversion Price”); provided further, however, that if at any time following the
earlier of the closing of the Public Offering or March 31, 2010, the twenty (20)
day average closing price of the Common Stock for any twenty (20) consecutive
trading days exceeds two hundred percent (200%) of the Public Offering closing
price or of the twenty (20) day average closing price of the Common Stock for
the twenty (20) trading days prior to March 31, 2010, as applicable, that any
Notes which remain unconverted shall automatically convert into shares of the
Common Stock at the Conversion Price or the March 31, 2010 Conversion Price, as
applicable.





30


Certain
Investors that invested through their individual retirement accounts received
Class B Notes. All other Investors received Class A Notes. The Class B Notes are
identical to the Class A Notes in all respects except that the Class A Notes are
secured by a first priority security interest in all of the assets of the
Company and certain subsidiaries whereas the Class B Notes are secured by all
the current assets of the Company and its consolidated subsidiaries including
cash, cash equivalents and accounts receivable. In addition, the Class B Notes
provide for simple interest as opposed to the Class A Notes, which provide for
compounded interest.





The
Warrants entitle the holders to purchase shares of Common Stock reserved for
issuance there under (the “Warrant Shares”) for a period of five years from the
date of issuance and contain certain anti-dilution rights and a cashless
exercise feature on terms specified in the Warrants. In the event the trading
price of the Common Stock exceeds $2.00 for twenty (20) consecutive trading
days, the Company has the option to require that the Investors exercise the
Warrants. In the event the Investor chooses not to exercise the Warrants in this
case, the Investor will receive such number of Warrant Shares as the Investor
would be entitled to receive pursuant to a cashless exercise.





On August 18, 2009, we
consummated the second closing of the Offering.  At the second
closing, we sold an aggregate of $1,185,000 principal amount of Notes and
delivered Warrants to purchase an aggregate of 1,185,000 shares of our common
stock at a purchase price of $1.00 per share.





On September 3, 2009, we
consummated the third closing of the Offering. At the third closing, we sold an
aggregate of $1,269,843 principal amount of Notes and delivered Warrants to
purchase an aggregate of 1,269,843 shares of our common stock at a purchase
price of $1.00 per share.





On September 30, 2009, we
consummated the fourth closing of the Offering. At the fourth closing, we sold
an aggregate of $650,000 principal amount of Notes and delivered Warrants to
purchase an aggregate of 650,000 shares of the Company’s common stock at a
purchase price of $1.00 per share.





On October 30, 2009, we
consummated the fifth closing of the Offering. At the fifth closing, we sold an
aggregate of $4,116,383 principal amount of Notes and delivered Warrants to
purchase an aggregate of 4,116,383 shares of the Company’s common stock, at a
purchase price of $1.00 per share.





Dividends





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





ITEM
6.  SELECTED FINANCIAL DATA





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




31





ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





Forward-Looking
Statements




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





Overview





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





Strategic
shift in service offerings and investments since 2006





Nature
of use of funding received by the Company (2006 – 2009); mobile investment
estimate.





Since new
management was hired in late 2006, approximately $30 million of investments have
been made into the Company through the end of 2008 with and from related
parties. The following is a general description of the use of such proceeds
during this period. Management believes that our traditional landline business
(“old business”) could be operated by approximately 15 people, which is a much
smaller number of people compared to the total employees and long term
contractors we currently employ.





However,
in order to expand our capabilities to create our mobile platform and the
underlying footprint (“new business”), including all related capabilities in the
areas of customer relationship management (“CRM”), Billing, intelligent network
(“IN”), and the integration of all mobile network components, we have on average
required approximately 45 employees and consultants.  During the
period of 2006 to 2008, we spent approximately $ 2.9 million in network costs
and $13.9 million in selling general & administration expenses (excluding
$1.4 million in capitalized development compensation cost). When allocating
roughly 25% of the network costs and 75% of the selling general &
administration costs (based upon the average amount of people working for
the old and new business; in 2007 we had a headcount of 53, as opposed to 75 in
2008), we estimate that a total of $11.2 million was spent on developing these
new capabilities.  In addition, we invested approximately $9.3 million
in the acquisition of the Benoit Telecom Group in addition to other smaller
acquisitions in order to build our footprint in Europe.  In addition,
we spent approximately $4.5 million plus $1.43 million (in capitalized
development compensation costs), or a total of $5.9 million in capital
expenditures over the last two years.  In total we have invested
approximately $26.4 million up till 2008 in building our mobile platform
capabilities.  When costs of raising capital are included, in
addition to certain deposits made, a total of $30 million has been expended
in positioning us in our new business.





For 2009
we spent approximately $1.7 million in network costs and $7.9 million in selling
general & administration expenses (excluding $1.6 million in capitalized
development compensation cost). When allocating roughly 35% of the network costs
and 80% of the selling general & administration costs, we arrive at $6.9
million mobile related  network cost and SG&A. We invested
virtually all of our capital expenditures in mobile capabilities, of which $2.2
million in equipment and third party software and $1.5 million in capitalized
compensation expenses for internally developed mobile software. In customized
mobile solutions we invested (by means of loans provided to Validsoft Ltd)
$1.7 million. Lastly, in order to attract the relevant funding for these mobile
investments we spent $1.5 million in fundraising fees and consultancy, bringing
the total investment in mobile capabilities and markets during 2009 to $13.9
million, which was financed by $3.7 million in operating margins and $10.2
million in net proceeds from funding and working capital.





32


Consequently,
the Company’s estimate of the investments made in mobile capabilities and
markets over the period 2006 – 2009 amounts to a total of $44
million.





Results of
Operations





Our
results of operations for the year ended December 31, 2009, consisted of the
operations of Elephant Talk Communications, Inc., its wholly-owned subsidiaries
Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and
its subsidiaries, Elephant Talk Global Holding BV and its
subsidiaries.





Although
the vast majority of our business activities are carried out in Euro’s, we
report our financial statements in US dollars (“USD”),  The conversion
of Euros and USD leads to period-to-period fluctuations in our reported USD
results arising from changes in the exchange rate between the USD and the
Euro.  Generally, when the USD strengthens relative to the Euro, it
has an unfavorable impact on our reported revenue and income and a favorable
impact on our reported expenses.  Conversely, when the USD weakens
relative to the Euro, it produces a favorable impact on our reported revenue and
income, and an unfavorable impact on our reported expenses.  The
above fluctuations in the USD/Euro exchange rate therefore result in currency
translation effects (not to be confused with real currency exchange effects),
which impact our reported USD results and may make it difficult to determine
actual increases and decreases in our revenue and expenses which are
attributable to our actual operating activities.  In addition to
reporting changes in our financial statements in USD’s as per the requirements
of United States generally accepted accounting principles (“US GAAP”), we also
highlight the impact of any material currency translation effect by providing a
comparison between periods on a constant currency basis, where the most recent
USD/Euro exchange rate is applied to previous periods.  Management
believes that this allows for greater insight into the trends and changes in our
business for the reported periods. Also, since we carry out our business
activities primarily in Euro’s we do not currently engage in hedging
activities.





Revenue


Revenue
for the year ended December 31, 2009 was $43,650,957, a decrease of $708,050 or
(1.6%), compared to $44,359,007 for the year ending December 31, 2008. The
decrease was the result of an unfavorable impact of a $2,189,518 currency
translation effect arising from a lower USD/Euro exchange rate, offset primarily
by an increase in our Mobile revenue.





Revenue
- Constant currency




The
increase in 2009 revenue of $1,481,468 over 2008, in constant currency, was
attributable to an increase in our Mobile revenue of $5,480,185 and Middle East
pre-paid calling cards revenue of $911,040 compared to 2008, partly offset by a
decline in our premium rate services (“PRS”) of $4,248,879 and other landline
services $660,878 compared to the same period in 2008.




Revenue
              
              2009
              
              
              2008
                constant
      currency
              
              
              variance
                2009
      v 2008
                constant
      currencyPremium
      Rate Services
              
              $
              35,791,740
              
              
              $
              40,040,619
              
              
              $
              -4,248,879Mobile
      Services
              
              
              5,842,379
              
              
              
              362,194
              
              
              
              5,480,185Middle
      East Calling Cards
              
              
              1,207,298
              
              
              
              296,259
              
              
              
              911,040Other
      revenue
              
              
              809,539
              
              
              
              1,470,418
              
              
              
              -660,878Total
      Revenue
              
              $
              43,650,957
              
              
              $
              42,169,489
              
              
              $
              1,481,468




Cost
of service




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





Cost of
service for the year ended December 31, 2009 was $41,452,639, a decrease of
$1,883,472 or 4.3%, compared to $43,336,111 for the year ended December 31,
2008. The decrease was primarily the result of the favorable impact of a
$2,135,052 currency translation effect arising from a lower USD/Euro exchange
rate.





Cost
of service – constant currency




In
constant currency the cost of service increased by $251,580 or 0.6% compared to
the same period in 2008, primarily as a result of higher levels of revenue on a
constant currency





Cost of
service, as a percent of revenue, expressed in constant dollar terms was 95.0%
and 97.7% for the twelve-month periods ended December 31, 2009 and 2008,
respectively. Management expects cost of service will continue to decline as a
percent of revenue as a greater proportion of future revenue is comprised of our
Mobile services, which have a substantially lower cost of service than our
traditional PRS business.





Selling,
general and administrative




Selling,
general and administrative (“SG&A”) expense for the years ended December 31,
2009 and 2008, were $7,958,933 and $7,569,583, respectively. SG&A expenses
increased by $389,350, or 5.1%, in 2009 compared to 2008.





Selling,
general and administrative – constant currency




In
constant currency, SG&A increased by $635,537, or 8.7%, compared to the same
period in 2008.




The
increase in expenses was mainly attributable to an increase in indirect
fundraising costs related to the 12% note offering, tax provision, provision for
doubtful accounts and higher staffing levels.





Non-cash
compensation to officers, directors, consultants and employees




Non-cash
compensation for the years ended December 31, 2009 and 2008, was $1,727,870 and
$1,266,155, respectively. The increase in both periods is primarily attributable
to higher staffing levels, and awards made under the 2008 Incentive Plan.
Non-cash compensation is comprised of:





·
            the
      expense related to shares of restricted common stock that were issued to
      management in connection with a compensation plan originated in the first
      quarter of 2007;





·
            the
      2006 Non-Qualified Stock and Option Compensation Plan and  the
      2008 Long-Term Incentive Plan; and





·
            the
      expense related to shares issued to consultants for
    services.





Since
non-cash compensation comprises United States Dollars denominated shares,
options and warrants, a constant currency analysis  is not
applicable.





Depreciation
and amortization




Depreciation
and amortization for the years ended December 31, 2009 and 2008, was
$3,051,461and $2,903,244 respectively. Depreciation and amortization expenses
increased by $148,217 or 5.1% in 2009 compared to 2008.





Depreciation
and amortization – constant currency




In
constant currency the depreciation and amortization expenses increased by
$287,450 or 9.4% compared to the same period in 2008.





Intangible
assets impairment charge




The
December 31, 2009 consolidated balance sheet includes: $3.9 million of
intangible assets, net, and $7.8 million of fixed assets, net. Management
updated its analysis of intangible assets and long-lived assets as of December
31, 2009 and we determined that for 2009 no asset impairment charges are
necessary.





33


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





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





Other
Income and Expenses




Interest
income was $160,535 and $42,258 for the years ended December 31, 2009 and 2008
respectively. Interest income was interest received on bank
balances.





Interest
expense was $938,627 and $499,015 for the years ended December 31, 2009 and 2008
respectively. The increase in interest expenses of $439,612 compared to 2008 was
related to higher levels of debt financing and less favorable interest
rates.




Other
expenses was $480,000 and $0 for the years ended December 31, 2009 and 2008
respectively. We accrued a FIN48 reserve of $480,000 for uncertain tax position,
including interest and penalties.




In 2009
fair value expenses and amortizations related to the Convertible Notes,
associated Warrants and deferred financing costs were $ 5,499,275 compared to $
0 in 2008.





For the
year ended December 31, 2008 a Note beneficial conversion feature was expensed
for $ 1,200,000.





Non-controlling
Interest


Our
majority owned subsidiaries Elephant Talk Communications PRS U.K. Limited,
Elephant Talk Communications Premium Rate Services Netherlands B.V., Elephant
Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
W.L.L., Elephant Talk Middle East & Africa FZ-LLC
and   ET-UTS NV.





We
incurred a non-controlling interest charge attributable to minority
shareholders’ interest for the year ended December 31, 2009 of $1,771. For the
year ended December 31, 2008 we incurred a positive charge of
$88,808.





Comprehensive
Income (Loss)


We record
foreign currency translation gains and losses as comprehensive income or loss.
Comprehensive Income (Loss) for the years ended December 31, 2009 and 2008 was
$190,062 and ($490,239) respectively. This change is primarily attributable to
the translation effect resulting from the substantial fluctuations in the
USD/Euro exchange rates.





Liquidity
and Capital Resources


We have
an accumulated deficit of ($62,335,076) as of December 31,
2009.  Historically, we have relied on a combination of debt and
equity financings to fund our ongoing cash requirements.  In 2009 we
received a total of $12.3 million in gross proceeds from the private placement
offering during five closings in the period July until October
2009.





In 2009,
QAT II continued to invest in our Company whereby QAT and associated partners
subscribed to the private placement for $6.1 million out of the total gross
proceeds of $12.3 million. In addition we received in February and March 2010
bridge loan funding from QAT for the amount of $1,639,165.





Although
QAT II and other related parties have invested, or have arranged for the
investment of, a total of $35.4 million between 2005 and December 31, 2008 and
an additional $7.7 million from 2009 through March 2010 to fund our short-term
capital requirements as well as non-related accredited investors who invested
$6.2, there can be no assurance we will be able to secure additional funding
from the parties. Although we have previously been able to raise capital as
needed, such capital may not continue to be available at all, or if available,
that the terms of such financing may be dilutive to existing shareholders or
otherwise on terms not favorable to us or our existing shareholders. Further,
the current global financial situation may offer additional challenges to
raising the required capital.  If we are unable to secure additional
capital, we may not be able to continue operations.





34


Sources
of capital and capital requirements.




The
company currently has cash needs to cover operational losses of approximately
$800,000 (EUR/USD exchange rate used is 1.35) per month excluding capital
expenditures, overdue creditor debts of approximately $1.7 million, but
including interest expenses and the operational losses of the recently acquired
company ValidSoft Ltd.


Following
the delivery of our mobile platform and network and consequent commercialization
plus the planned revenues from the integrated Elephant Talk / ValidSoft fraud
solution management expects substantial revenue increases and margin
improvements in 2010.





In
addition to driving margin improvement, management is actively attempting to
attract new financing for the Company, the level of which depends on the speed
and roll-out of commercial activities (including associated capital
expenditures), acquisition activities and financial market
conditions.





Our
primary sources of capital resources are from related parties and other selected
investors. In the second part of 2010 the Company intends to raise capital
through a registered direct or other financing offering of between $20 and $35
million to meet its liquidity and capital resource requirements to continue as a
going concern for the foreseeable future; however, we provide no assurances we
will consummate any such transactions or raise any funds. Until this planned
registered or other financial offering is completed the Company intends to cover
the liquidity needs by means of bridge loans and/or equity instruments; however,
we provide no assurances such bridge loans/equity instruments or other financing
arrangement will be available to us.




Capital
expenditures.




Our
capital expenditures have typically been related to equipment and system
additions required for our Mobile business. Capital expenditures for the year
ended December 31, 2009 were $3.8 million compared to $2.2 million for
2008.




We expect
to make approximately $7 to $9 million of capital expenditures in fiscal 2010,
primarily for expansion and upgrades to our MVNE and MVNO businesses following
the anticipated growth of contracts and revenues.




As of
December 31, 2009, these conditions raise substantial doubt about our ability to
continue as a going concern.  The financial statements filed as part
of this Report on Form 10-K does not include any adjustments that might result
from the outcome of this uncertainty.





Operating
activities


Net cash
used in operating activities for the year ended December 31, 2009 was $5,329,837
compared to $6,278,741 in 2008, a decrease of $948,904. This decrease is mainly
attributable to increased accrued expenses and other payables as well as a
decrease in pre-paid expenses, deposit and other assets.





Investment
activities


Net cash
used in investment activities for the year ended December 31, 2009 was
$5,605,998, an increase of $3,258,865 or 139% compared to $2,347,133 in 2008.
The increase was primarily attributable to the loans to ValidSoft and the
increase in property plant & equipment required to develop and support the
expansion of our Mobile business.





Financing
activities


Net cash
received by financing activities for the year ended December 31, 2009 was
$10,799,201 compared to $6,192,132 for the year ended December 31,
2008.





As a
result of the above activities, the Company had a cash and cash equivalents
balance of $1,457,900 as of December 31, 2009, a net decrease in cash and cash
equivalents of $198,646, over the year ended December 31, 2008.





35





Application
of Critical Accounting Policies and Estimates





Revenue Recognition and
Deferred Revenue





The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”), (formerly, Staff Accounting Bulletin (SAB) 104).
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured.  The Company
derives revenue from activities as a fixed-line and mobile services provider
with its network and its own switching technology. Revenue represents amounts
earned for telecommunication services provided to customers (net of value added
tax and inter-company revenue).  The Company recognizes revenue from
prepaid calling cards as the services are provided.  Payments received
before all of the relevant criteria for revenue recognition are satisfied are
recorded as deferred revenue. Deferred revenue represents amounts received from
the customers against future sales of services since the Company recognizes
revenue upon performing the services.





Stock-based
Compensation





Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation”,” (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective
approach. As a result, we recognize stock-based compensation expense for only
those awards that are granted subsequent to December 31, 2005 and any previously
existing awards that are subject to variable accounting, including certain stock
options that were exercised with notes in 2003, until the awards are exercised,
forfeited, or contractually expire in accordance with the prospective
method and the transition rules of ASC 718. Under ASC 718, stock-based awards
granted after December 31, 2005, are recorded at fair value as of the grant date
and recognized as expense over the employee’s requisite service period
(the vesting period, generally three years), which we have elected to
amortize on a straight-line basis.





Intangible Assets and
Impairment of long Lived Assets





In
accordance with ASC 350 (formerly SFAS No. 142), intangible assets are carried
at cost less accumulated amortization and impairment charges. Intangible assets
are amortized on a straight-line basis over the expected useful lives of the
assets, between three and ten years. Other intangible assets are reviewed for
impairment in accordance with ASC 360, “Property, Plant, and Equipment”
(formerly SFAS No. 144), annually, or whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is based
on the amount of the carrying value that exceeds the fair value of the
asset.





Impact of new Accounting
Pronouncements





In April
2009, the FASB issued guidance, which is now part of ASC 825, “Interim
Disclosures about Fair Value of Financial Instruments” (“ASC 825”), (formerly
Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1). ASC 825 amends FASB Statement No. 107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
ASC 825 did not have an impact on the Company’s consolidated financial
statements.





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





36


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





Material
Transactions





Definitive
agreement signed with Vodafone España S.A.U.





On May
20, 2009, Elephant Talk Communication Holding, AG, a wholly-owned subsidiary of
the Company, entered into a definitive agreement with Vizzavi España, S.L. for
the supply of operational and technical services through a comprehensive
technological platform.  The Company, through Elephant Talk
Communication Holding, AG, will offer exclusive operational and technical
support services to Vizzavi, a Vodafone Group company.





Collaboration
agreement ValidSoft Ltd., Ireland





On June
17, 2009, the Company and ValidSoft entered into a Collaboration
Agreement.  Pursuant to this Agreement, the Company and ValidSoft will
bundle and sell products offered by both companies. The companies have granted
each other worldwide licenses for their intellectual property in connection with
the distribution, marketing and sale of products to be offered.





Private
Placement Offering





On
October 30, 2009, the Company consummated the fifth and final closing of its
2009 offering.  In the Offering, we sold an aggregate of $12,333,020
principal amount of Notes and delivered Warrants to purchase an aggregate of
12,333,020 shares of the Company’s common stock at a purchase price of $1.00 per
share.  Of the total offering amount, $6,077,383 was raised from
parties affiliated with the Company. As a result of the closing of the offering,
the United States-based selling agent received 890,880 Warrants, commission and
non-accountable expenses and fees of $596,800, and an expense reimbursement of
$66,344 QMG, the European placement agent related to several of our officers and
directors, will receive 1,082,404 Warrants and commissions and non-accountable
expenses and fees of $676,501.





Heads
of Terms Agreement with ValidSoft Ltd., Ireland





On
November 2, 2009, we entered into a Heads of Terms Agreement (the “HOT
Agreement”) to acquire all of the outstanding shares in ValidSoft Ltd. ValidSoft
provides telecommunications based credit card fraud identification and detection
solutions combined with fully automated customer service resolution capability,
which is ideally suited for mass consumer deployment via banks. The HOT
Agreement replaces a previous agreement between the Company and ValidSoft,
with respect to this transaction.





On March
17, 2010, we completed the acquisition with ValidSoft. The acquisition will be
effective as of April 1, 2010.





As part
of the ValidSoft acquisition the Company entered into two Sale and Purchase
Agreements (each an “SPA” and, collectively, the “SPAs”) with the shareholders
of ValidSoft Limited (“ValidSoft”), a company organized under the laws of the
Republic of Ireland. The entry into the SPAs follows the parties’ execution of a
Heads of Terms on November 2, 2009. Two SPAs were entered into because one SPA,
entered into with shareholder Enterprise Ireland, an Irish agency, is to be
governed by Irish law. The remaining shareholders entered into the other SPA,
governed by New York law.\





37


Pursuant
to the SPAs, the Registrant acquired the securities of ValidSoft for
consideration consisting of 20% of the issued and outstanding common stock of
Registrant as of February 1, 2009 and warrants to purchase common stock of
Registrant equal to (i) 20% of the issued and outstanding warrants of Registrant
as of February 1, 2009; and (ii) 20% of the issued and outstanding options of
Registrant as of February 1, 2009. Twenty-five percent of the foregoing
consideration was placed into escrow and, in the event certain revenue
milestones (as set forth the in the SPAs) have not been achieved, is subject to
forfeiture and cancellation.





In
connection with the SPAs, the shareholders of ValidSoft entered into lock-up
agreements restricting the sale, transfer and disposition of the unregistered
common stock owned by such shareholders (i) for a period of 2 years from
Completion (as defined in the SPAs) with respect to the shareholders who
participate in the management of the Registrant and (ii) for a period of 1 year
from Completion or 6 months from the completion of a rights offering by
ValidSoft, whichever is earlier, with respect to the non-management
shareholders.




38


ITEM
8.  FINANCIAL STATEMENTS




ELEPHANT
TALK COMMUNICATIONS, INC.


AND
SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS


AS OF
DECEMBER 31, 2009 and 2008





TABLE OF
CONTENTS




PAGEREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, BDO SEIDMAN,
      LLP
            
            40CONSOLIDATED
      BALANCE SHEETS AS OF DECEMBER 31, 2009 AND 2008
            
            41CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
      2008
            
            42CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
      ENDED DECEMBER 31, 2009 AND 2008
            
            43CONSOLIDATED
      STATEMENTES OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
      2008
            
            44NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
            
            45-76





39




REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors


Elephant
Talk Communications, Inc.




We have
audited the accompanying consolidated balance sheet of Elephant Talk
Communications, Inc. as of December 31, 2009 and 2008, the related consolidated
statement of operations and comprehensive loss, shareholders’ equity (deficit),
and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on this financial statement based on our audit.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Elephant Talk
Communications, Inc. at December 31, 2009 and 2008, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.





As more
fully described in Note 3 to the consolidated financial statements, effective
January 1, 2009, the Company adopted the Amendments to the provisions of
Accounting Standards Codification 810-10, Consolidation.




The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company incurred a net loss of $17.4 million, used cash in
operations of $5.4 million and had an accumulated deficit of $62.3 million which
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.




/s/ BDO
Seidman, LLP




March 31,
2010





40




ELEPHANT
      TALK COMMUNICATIONS, INC AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS
              AS
      AT DECEMBER 31, 2009 AND 2008




2009
              
              
              2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              1,457,900
              
              
              $
              1,656,546Restricted
      cash
              
              
              192,116
              
              
              
              191,209Accounts
      receivable, net of an allowance for doubtful accounts of $764,302 and
      $503,102 at December 31, 2009 and December 31, 2008
      respectively
              
              
              5,071,293
              
              
              
              4,574,013Prepaid
      expenses and other current assets
              
              
              2,657,019
              
              
              
              1,916,967Total
      Current Assets
              
              
              9,378,328
              
              
              
              8,338,735LONG
      TERM DEPOSITS
              
              
              330,946
              
              
              
              310,356DEFERRED
      FINANCING COSTS
              
              
              3,033,277
              
              
              
              —PROPERTY
      AND EQUIPMENT, NET
              
              
              7,773,862
              
              
              
              6,345,113INTANGIBLEASSETS,
      NET
              
              
              3,910,363
              
              
              
              4,461,869TOTAL
      ASSETS
              
              $
              24,426,776
              
              
              $
              19,456,073LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)CURRENT
      LIABILITIESOverdraft
              
              $
              351,589
              
              
              $
              322,903Accounts
      payable and customer deposits
              
              
              6,475,074
              
              
              
              5,809,211Deferred
      revenue
              
              
              132,205
              
              
              
              220,058Accrued
      expenses and other payables
              
              
              2,738,998
              
              
              
              1,890,004Shares
      to be issued
              
              
              —
              
              
              
              619,057Advances
      from related parties
              
              
              13,287
              
              
              
              274,762Loans
      payable
              
              
              880,536
              
              
              
              881,035Total
      Current Liabilities
              
              
              10,591,689
              
              
              
              10,017,030LONG
      TERM LIABILITIESLoan
      from related party
              
              
              437,161
              
              
              
              402,425Warrant
      liabilities
              
              
              16,626,126
              
              
              
              —Conversion
      feature
              
              
              2,899,801
              
              
              
              —Total
      Long term Liabilities
              
              
              19,963,088
              
              
              
              402,425Total
      Liabilities
              
              
              30,554,777
              
              
              
              10,419,455STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, no par value, 250,000,000 shares authorized, 53,695,984 issued and
      outstanding as of December 31, 2009 compared to 50,433,260 shares issued
      and outstanding as of December 31, 2008
              
              
              54,880,778
              
              
              
              52,933,209Accumulated
      other comprehensive income
              
              
              1,136,897
              
              
              
              946,834Accumulated
      deficit
              
              
              (62,335,076
              )
              
              
              (45,035,192
              )Elephant
      Talk Comunications, Inc. Stockholders' Equity
              
              
              (6,317,401
              )
              
              
              8,844,851NON-CONTROLLING
      INTEREST
              
              
              189,400
              
              
              
              191,767Total
      Stockholders' Equity
              
              
              (6,128,001
              )
              
              
              9,036,618TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              24,426,776
              
              
              $
              19,456,073




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




41




ELEPHANT
      TALK COMMUNICATIONS, INC AND SUBSIDIARIES
              CONSOLIDATED
      STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSSFOR
      THE YEARS ENDED DECEMBER 31, 2009 AND
2008




2009
              
              
              2008REVENUES
              
              $
              43,650,957
              
              
              $
              44,359,007COST
      AND OPERATING EXPENSESCost
      of service
              
              
              41,452,639
              
              
              
              43,336,111Selling,
      general and administrative expenses
              
              
              7,958,933
              
              
              
              7,569,583Non
      cash compensation to officers, directors and employees
              
              
              1,727,870
              
              
              
              1,266,155Depreciation
      and amortization of intangibles assets
              
              
              3,051,461
              
              
              
              2,903,244Intangible
      assets impairment charge
              
              
              —
              
              
              
              3,730,524Total
      cost and operating expenses
              
              
              54,190,903
              
              
              
              58,805,617LOSS
      FROM OPERATIONS
              
              
              (10,539,946
              )
              
              
              (14,446,610
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              160,535
              
              
              
              42,258Interest
      expense
              
              
              (938,627
              )
              
              
              (499,015
              )Other
      expenses
              
              
              (480,000
              )
              
              
              —Interest
      expense related to amortization of debt discount on promissory
      notes
              
              
              (4,369,183
              )
              
              
              —Change
      in fair value of warrant liabilities
              
              
              (538,382
              )
              
              
              —Amoritization
      of deferred financing costs
              
              
              (591,710
              )
              
              
              —Note
      beneficial conversion feature
              
              
              —
              
              
              
              (1,200,000
              )Total
      other income (expense)
              
              
              (6,757,367
              )
              
              
              (1,656,757
              )LOSS
      BEFORE PROVISION FOR INCOME TAXES
              
              
              (17,297,313
              )
              
              
              (16,103,367
              )Provision
      for income taxes
              
              
              (800
              )
              
              
              (800
              )NET
      LOSS BEFORE NONCONTROLLING INTEREST
              
              
              (17,298,113
              )
              
              
              (16,104,167
              )Net
      (loss) income attributable to noncontrolling interest
              
              
              (1,771
              )
              
              
              88,808NET
      LOSS
              
              
              (17,299,884
              )
              
              
              (16,015,359
              )OTHER
      COMPREHENSIVE (LOSS) INCOMEForeign
      currency translation gain (loss)
              
              
              190,063
              
              
              
              (490,239
              )190,063
              
              
              
              (490,239
              )COMPREHENSIVE
      LOSS
              
              $
              (17,109,821
              )
              
              $
              (16,505,598
              )Net
      loss per common share and equivalents - basic and diluted
              
              $
              (0.32
              )
              
              $
              (0.53
              )Weighted
      average shares outstanding during the period - basic and
      diluted
              
              
              53,553,354
              
              
              
              30,263,376




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




42




ELEPHANT
TALK COMMUNICATIONS, INC. AND SUBSIDIARIES


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


FOR THE
YEARS ENDED DECEMBER 31, 2009 AND 2008





Description
                
                Common
                  Shares
                
                
                Common
                  Amount
                
                
                Other
                  comprehensive
                  income
      (loss)
                
                
                Accummulated
      Deficit
                
                
                Total
                  stockholders
      Equity
                  (Deficit)Balance
      - December 31, 2007
                
                
                9,536,107
                
                
                $
                17,868,448
                
                
                $
                1,437,073
                
                
                $
                (29,019,832
                )
                
                $
                (9,714,311
                )Shares
      issued sold before 2008
                
                
                22,198,905
                
                
                $
                13,423,636
                
                
                $
                —
                
                
                $
                —
                
                
                $
                13,423,636Conversion
      of RWC Promissory note 1
                
                
                5,017,007
                
                
                
                4,389,881
                
                
                
                —
                
                
                
                —
                
                
                
                4,389,881Conversion
      of RWC Promissory note 2
                
                
                3,380,276
                
                
                
                3,549,289
                
                
                
                —
                
                
                
                —
                
                
                
                3,549,289Shares
      issued and sold in 2008
                
                
                7,047,106
                
                
                
                7,400,127
                
                
                
                —
                
                
                
                —
                
                
                
                7,400,127Shares
      issued for management compensation
                
                
                2,882,192
                
                
                
                6,123,128
                
                
                
                —
                
                
                
                —
                
                
                
                6,123,128Shares
      issued for consultants
                
                
                355,000
                
                
                
                532,500
                
                
                
                —
                
                
                
                —
                
                
                
                532,500Shares
      issued for placement fee agent
                
                
                16,667
                
                
                
                25,000
                
                
                
                —
                
                
                
                —
                
                
                
                25,000Placement
      fees
                
                
                —
                
                
                
                (1,737,915
                )
                
                
                —
                
                
                
                —
                
                
                
                (1,737,915
                )Beneficial
      Conversion Feature
                
                
                —
                
                
                
                1,200,000
                
                
                
                —
                
                
                
                —
                
                
                
                1,200,000Amortization
      of Stock Options expense
                
                
                —
                
                
                
                159,113
                
                
                
                —
                
                
                
                —
                
                
                
                159,113Other
      comprehensive loss due to foreign exchange rate
translation
                
                
                —
                
                
                
                —
                
                
                
                (490,239
                )
                
                
                —
                
                
                
                (490,239
                )Net
      Loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (16,015,360
                )
                
                
                (16,015,360
                )Balance
      - December 31, 2008
                
                
                50,433,260
                
                
                $
                52,933,208
                
                
                $
                946,834
                
                
                $
                (45,035,192
                )
                
                $
                8,844,850Shares
      issued, sold in 2008
                
                
                468
                
                
                
                500
                
                
                
                —
                
                
                
                —
                
                
                
                500Shares
      issued for financing
                
                
                866,316
                
                
                
                571,074
                
                
                
                —
                
                
                
                —
                
                
                
                571,074Shares
      issued for directors compensation
                
                
                2,420,833
                
                
                
                532,583
                
                
                
                —
                
                
                
                —
                
                
                
                532,583Shares
      issued to consultants
                
                
                307,300
                
                
                
                205,389
                
                
                
                —
                
                
                
                —
                
                
                
                205,389Shares
      returned by former CFO and Director
                
                
                (956,993
                )
                
                
                (192,694
                )
                
                
                —
                
                
                
                —
                
                
                
                (192,694
                )Shares
      issued for management compensation
                
                
                624,800
                
                
                
                469,880
                
                
                
                —
                
                
                
                —
                
                
                
                469,880Placement
      fees
                
                
                —
                
                
                
                (100,000
                )
                
                
                —
                
                
                
                —
                
                
                
                (100,000
                )Amortization
      of Stock Options expense
                
                
                —
                
                
                
                460,838
                
                
                
                —
                
                
                
                —
                
                
                
                460,838Other
      comprehensive loss due to foreign exchange rate
translation
                
                
                —
                
                
                
                —
                
                
                
                190,063
                
                
                
                —
                
                
                
                190,063Net
      Loss
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (17,299,884
                )
                
                
                (17,299,884
                )Balance
      - December 31, 2009
                
                
                53,695,984
                
                
                $
                54,880,778
                
                
                $
                1,136,897
                
                
                $
                (62,335,076
                )
                
                $
                (6,317,401
                )




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




43




ELEPHANT
      TALK COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2009 AND
2008




2009
              
              
              2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (17,299,884
              )
              
              $
              (16,015,359
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              3,051,461
              
              
              
              2,903,244Provision
      for doubtful accounts
              
              
              220,156
              
              
              
              381,783Stock
      based compensation
              
              
              1,561,378
              
              
              
              1,266,154Noncontrolling
      interest
              
              
              1,771
              
              
              
              (88,808
              )Amortization
      of Shares issued for Consultancy
              
              
              162,501
              
              
              
              135,417Change
      in fair value of warrant liabilities
              
              
              538,382
              
              
              
              —Interest
      expense relating to debt discount and conversion feature
              
              
              4,960,893
              
              
              
              —Note
      beneficial conversion feature
              
              
              —
              
              
              
              1,200,000Intangible
      assets impairment charge
              
              
              —
              
              
              
              3,730,524Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivable
              
              
              (628,082
              )
              
              
              (717,991
              )Decrease
      (Increase) in prepaid expenses, deposits and other assets
              
              
              846,491
              
              
              
              542,528Increase
      (decrease) in accounts payable, proceeds from related parties and customer
      deposits
              
              
              602,179
              
              
              
              1,157,354Increase
      (decrease) in deferred revenue
              
              
              (87,853
              )
              
              
              126,171Increase
      (decrease) in accrued expenses and other payables
              
              
              740,769
              
              
              
              (899,758
              )Net
      cash used in operating activities
              
              
              (5,329,837
              )
              
              
              (6,278,741
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (3,869,149
              )
              
              
              (2,178,478
              )Restricted
      cash
              
              
              (93
              )
              
              
              (168,654
              )Cash
      paid for acquisition of subsidiary
              
              
              —
              
              
              
              (1
              )Loan
      to third party
              
              
              (1,736,756
              )
              
              
              —Net
      cash used in investing activities
              
              
              (5,605,998
              )
              
              
              (2,347,133
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Bank
      overdraft
              
              
              27,125
              
              
              
              127,495Issuance
      of Common Stock
              
              
              —
              
              
              
              7,400,127Placement
      fees
              
              
              (100,000
              )
              
              
              (1,737,915
              )Proceeds
      from Convertible 12% secured note
              
              
              5,568,000
              
              
              
              —Proceeds
      from Convertible 12% secured note - related parties
              
              
              6,765,015
              
              
              
              —Deferred
      financing costs
              
              
              (1,495,674
              )
              
              
              —Loan
      from related party
              
              
              34,736
              
              
              
              402,425Net
      cash provided by financing activities
              
              
              10,799,201
              
              
              
              6,192,132EFFECT
      OF EXCHANGERATES ON CASH AND CASH EQUIVALENTS
              
              
              (62,012
              )
              
              
              (276,023
              )NET
      DECREASEIN CASH AND CASH EQUIVALENTS
              
              
              (198,646
              )
              
              
              (2,709,766
              )CASH
      AND CASH EQUIVALENTS, BEGINNING OF THEPERIOD
              
              
              1,656,546
              
              
              
              4,366,312CASH
      AND CASH EQUIVALENTS, END OF THEPERIOD
              
              $
              1,457,900
              
              
              $
              1,656,546SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
              
              $
              21,965
              
              
              $
              7,5272009
              
              
              2008SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING &FINANCING
      ACTIVITIES:Shares
      issued to convert the notes payable to related parties and accrued
      interest
              
              $
              532,583
              
              
              $
              7,939,171Cash
      paid during the period for income taxes
              
              
              800
              
              
              
              800Deemed
      Dividend as a result of loss on conversion of the above Note to related
      party
              
              
              —
              
              
              
              1,200,000Warrants
      and derivative liabilities for issuance of 12% Promissory Notes are
      considered as discount of the Promissory Notes
              
              
              12,333,020
              
              
              
              —Warrants
      issued to placement agents for services, treated as deferred financing
      costs
              
              
              2,129,313
              
              
              
              
              —




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




44





Note 1.
Organization





The
Company is a niche player in the converged telecommunications market, providing
traffic and network services as a licensed operator, and specializing in carrier
grade mobile enabling platforms to provide outsourced solutions to the various
players in the telecommunications’ value chain, including Mobile Network
Operators (MNO’s), Mobile Virtual Network Operators (MVNO’s) and non-operator
companies in need of both mobile as well as specialized land-line
telecommunication services. In this chain we position ourselves as a Full Mobile
Virtual Network Enabler (Full MVNE).





Note 2. Financial Condition
and Going Concern





The
Company has an accumulated deficit of ($62,335,076) as of December 31,
2009.  Historically, the Company has relied on a combination of debt
and equity financings to fund our ongoing cash requirements.  In 2009,
the Company received a total of $12.3 million in gross proceeds from Offering
during five closings in the period July until October 2009.





In 2009,
QAT II continued to invest in the Company whereby QAT and associated partners
subscribed to the private placement for $5.3 million out of the total gross
proceeds of $12.3 million. In addition, the Company received in February and
March 2010 bridge loan funding from QAT for the amount of $1,639,165 received in
March 2010 from certain accredited investors.





Although
QAT II and other related parties have invested, or have arranged for the
investment of, a total of $35.4 million between 2005 and December 31, 2008 and
an additional $7.7 million from 2009 through March 2010 to fund our short-term
capital requirements as well as non-related accredited investors who invested
$6.2, there can be no assurances the Company will be able to secure additional
funding from the parties.





Although
the Company has previously been able to raise capital as needed, such capital
may not continue to be available at all, or if available, that the terms of such
financing may be dilutive to existing shareholders or otherwise on terms not
favorable to existing shareholders. Further, the current global financial
situation may offer additional challenges to raising the required
capital.  If the Company is unable to secure additional capital, as
circumstances require, it may not be able to continue operations.





As of
December 31, 2009, these conditions raise substantial doubt about the Company’s
ability to continue as a going concern.  The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.





Note 3. Significant
Accounting Policies





Principles of
Consolidation





The
accompanying consolidated financial statements for December 31, 2009 and 2008
include the accounts of Elephant Talk Communications, Inc., its wholly-owned
subsidiary Elephant Talk Europe Holding B.V., its wholly-owned subsidiary
Elephant Talk Communication Holding AG, its wholly-owned subsidiaries Elephant
Talk Communications S.L.U., Elephant Talk Mobile Services B.V. (formerly known
as Cardnet Clearing Services B.V), Elephant Talk Communication Austria GmbH,
Vocalis Austria GmbH, Elephant Talk Communications Italy S.R.L., ET-Stream GmbH,
Elephant Talk Communication Carrier Services GmbH, Elephant Talk Communication
(Europe) GmbH, Elephant Talk Communication Schweiz GmbH, Moba Consulting
Partners B.V., Elephant Talk Communications France S.A.S.,its majority owned
(51%) subsidiary Elephant Talk Communications Premium Rate Services Netherlands
B.V., , its majority owned (51%) subsidiary Elephant Talk Communications PRS
U.K. Limited, its wholly-owned subsidiary Elephant Talk Communications
Luxembourg SA, its wholly-owned subsidiary Elephant Talk Global Holding B.V.,
its wholly-owned subsidiary Elephant Talk Business Services W.L.L., its
wholly-owned subsidiary Guangzhou Elephant Talk Information Technology Limited.,
its wholly-owned Elephant Talk Caribbean B.V., its majority owned (51%)
subsidiary ET-UTS N.V., its wholly-owned subsidiary Elephant Talk Limited, its
majority owned (51%) subsidiary Elephant Talk Middle East & Africa (Holding)
W.L.L., its majority owned (51%) subsidiary Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., its majority owned (99%) subsidiary Elephant
Talk Middle East & Africa Bahrain W.L.L and its majority owned (50.54%)
subsidiary Elephant Talk Middle East & Africa FZ-LLC.





45


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





Foreign Currency
Translation





The
functional currency was Euros for the Company’s wholly-owned subsidiary Elephant
Talk Europe Holding B.V. and subsidiaries, and Euros for its wholly-owned
subsidiary Elephant Talk Global Holding B.V., and the Hong Kong Dollar for its
wholly-owned subsidiary Elephant Talk Limited. The financial statements of the
Company were translated to USD using period-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses, and capital
accounts were translated at their historical exchange rates when the capital
transaction occurred. In accordance with Accounting Standard Codification
(“ASC”) 830, Foreign Currency Matters, (formerly known as Statement of Financial
Accounting Standards (“SFAS”) No. 52), net gains and losses resulting from
translation of foreign currency financial statements are included in the
statements of shareholder’s equity as other comprehensive income (loss). Foreign
currency transaction gains and losses are included in consolidated income
(loss). The accumulated other comprehensive income as of December 31, 2009 and
2008 was $1,136,896 and $946,834, respectively. The foreign currency translation
gain/(loss) for the years ended December 31, 2009 and 2008 was $190,062 and
($490,239), respectively.





Use of
Estimates





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





Cash and Cash
Equivalents





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





Restricted
Cash





Restricted
cash represents cash deposited as bank guarantee for interconnects.





Accounts Receivables,
net





The
Company’s customer base consists of a geographically dispersed customer base.
The Company maintains an allowance for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these allowances. Allowances are recorded primarily on
a specific identification basis.  As of December 31, 2009 and 2008,
the allowance for doubtful accounts was $764,302 and $503,102,
respectively.





Revenue Recognition and
Deferred Revenue





The
Company’s revenue recognition policies are in compliance with ASC 605, Revenue
Recognition (“ASC 605”), (formerly, Staff Accounting Bulletin (“SAB104”).
Revenue is recognized only when the price is fixed or determinable, persuasive
evidence of arrangement exists, the service is performed and the collectability
of the resulting receivable is reasonably assured.  The Company
derives revenue from activities as a landline and mobile services provider with
its network and its own switching technology. Revenue represents amounts earned
for telecommunication services provided to customers (net of value added tax and
inter-company revenue).  The Company recognizes revenue from prepaid
calling cards as the services are provided.  Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as deferred revenue. Deferred revenue represents amounts received from the
customers against future sales of services since the Company recognizes revenue
upon performing the services. Deferred revenue was $132,205 and $220,058 as of
December 31, 2009 and December 31, 2008, respectively.





46


Cost of Service





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





Reporting
Segments





ASC 820,
Segment Reporting, (Formerly SFAS No.131), defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performances.  The
Company allocates its resources and assesses the performance of its sales
activities based upon geographic locations of its subsidiaries.





Stock-based
Compensation





Effective
January 1, 2006, we adopted the provisions of ASC 718 “Compensation-Stock
Compensation”, (“ASC 718”) (formerly SFAS No. 123(R)), using the prospective
approach. As a result, we recognize stock-based compensation expense for only
those awards that are granted subsequent to December 31, 2005 and any previously
existing awards that are subject to variable accounting, including certain stock
options that were exercised with notes in 2003, until the awards are exercised,
forfeited, or contractually expire in accordance with the prospective method and
the transition rules of ASC 718. Under ASC 718, stock-based awards granted
after December 31, 2005, are recorded at fair value as of the grant date and
recognized as expense over the employee’s requisite service period (the vesting
period, generally three years), which we have elected to amortize on a
straight-line basis.





Income
Taxes





The
Company accounts for income taxes under ASC 740, “Accounting for Income Taxes”
(“ASC 740”) (formerly SFAS No. 109). This statement requires the recognition of
deferred tax assets and liabilities for the future consequences of events that
have been recognized in the Company’s financial statements or tax returns. The
measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and the tax
bases of the Company’s assets and liabilities result in a deferred tax asset,
ASC 740 requires an evaluation of the probability of being able to realize the
future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or the entire deferred tax asset will not be realized. As part of the process of
preparing our consolidated financial statements, we are required to estimate our
income tax expense in each of the jurisdictions in which we operate. In the
ordinary course of a global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Some of these
uncertainties arise as a consequence of revenue sharing and reimbursement
arrangements among related entities, the process of identifying items of revenue
and expenses that qualify for preferential tax treatment and segregation of
foreign and domestic income and expense to avoid double taxation. We also assess
temporary differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting differences. These differences result
in deferred tax assets and liabilities, which are included within our
consolidated balance sheet. We may record a valuation allowance to reduce our
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. Although we believe that our estimates are reasonable and
that we have considered future taxable income and ongoing prudent and feasible
tax strategies in estimating our tax outcome and in assessing the need for the
valuation allowance, there is no assurance that the final tax outcome and the
valuation allowance will not be different than those that are reflected in our
historical income tax provisions and accruals.





47


ASC 740
prescribes a recognition threshold and measurement methodology to recognize and
measure an income tax position taken, or expected to be taken, in a tax return.
The evaluation of a tax position is based on a two-step approach. The first step
requires an entity to evaluate whether the tax position would “more likely than
not” be sustained upon examination by the appropriate taxing authority. The
second step requires the tax position be measured at the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. In addition, previously recognized benefits from tax positions that
no longer meet the new criteria would be derecognized.





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




Comprehensive
Income/(Loss)





Comprehensive
income (loss) includes all changes in equity during a period from non-owner
sources. Other comprehensive income refers to gains and losses that under
accounting principles generally accepted in the United States are recorded as an
element of shareholders’ equity but are excluded from net income. For the 2009
and 2008 the Company’s comprehensive income/(loss) consisted of its net loss and
foreign currency translation adjustments.





Intangible
Assets





In
accordance with ASC 350 (formerly SFAS No. 142), intangible assets are carried
at cost less accumulated amortization and impairment charges. Intangible assets
are amortized on a straight-line basis over the expected useful lives of the
assets, between three and ten years. Other intangible assets are reviewed for
impairment in accordance with ASC 360, Property, Plant, and Equipment,”
(formerly SFAS No. 144), annually, or whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is
based on the amount of the carrying value that exceeds the fair value of the
asset.





Property and Equipment,
Internally Developed and Third Party Software





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





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





Fair Value
Measurements





Fair
value is defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment
associated with the inputs used to measure their fair value. The fair value
hierarchy distinguishes between (1) market participant assumptions
developed based on market data obtained from independent sources (observable
inputs) and (2) an entity’s own assumptions about market participant
assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three
broad levels, which gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value
hierarchy are described below:




Level Input:
            
            Input Definition:Level
      I
            
            Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement date.Level
      II
            
            Inputs,
      other than quoted prices included in Level I, that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.Level
      III
            
            Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.





48




The
following table summarizes fair value measurements by level at December 31, 2009
for financial assets and liabilities measured at fair value on a recurring
basis:




Level
      I
            
            
            Level
      II
            
            
            Level
      III
            
            
            TotalWarrant
      liabilities
            
            $
            -
            
            
            $
            16,626,126
            
            
            $
            -
            
            
            $
            16,626,126Conversion
      feature
            
            
            2,899,801
            
            
            
            -
            
            
            
            -
            
            
            
            2,899,801Total
      liabilities
            
            $
            2,899,801
            
            
            $
            16,626,126
            
            
            $
            -
            
            
            $
            19,525,927





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





Recently
Issued Accounting Pronouncements





In December 2007, the FASB issued guidance which is now part of
ASC 810-10, Noncontrolling Interests in Consolidated Financial Statements, an
Amendment of Accounting Research Bulletin No. 51 “ (formerly Statement of
Financial Accounting Standards (SFAS) 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51 ). This guidance
establishes accounting and reporting standards for ownership interests in
subsidiaries held by parties other than the parent, changes in a parent’s
ownership of a noncontrolling interest, calculation and disclosure of the
consolidated net income attributable to the parent and the noncontrolling
interest, changes in a parent’s ownership interest while the parent retains its
controlling financial interest and fair value measurement of any retained
noncontrolling equity investment. The new guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. The
Company adopted this guidance on January 1, 2009, the beginning of its 2009
fiscal year, which resulted in certain reclassifications related to the
noncontrolling interest in the consolidated financial
statements.




In April
2008, the FASB issued revised guidance on determining the useful life of
intangible assets. The revised guidance, which is now part of ASC 350-30 General
Intangibles Other than Goodwill (previously Staff Position No. FAS 142-3,
Determination of the Useful Life of Intangible Assets), amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The Position is
effective for fiscal years beginning after December 15, 2008 and applies
prospectively to intangible assets acquired after the effective date. Early
adoption is not permitted. The adoption of SFAS No. ASC 350-30 did not have a
material impact on the Company’s consolidated financial statements.




49


In April
2009, the FASB issued guidance, which is now part of ASC 825, “Interim
Disclosures about Fair Value of Financial Instruments” (“ASC 825”), (formerly
Financial Staff Position SFAS 107-1 and Accounting Principles Board (APB)
Opinion No. 28-1). ASC 825 amends FASB Statement No. 107, Disclosures about
Fair Value of Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. ASC 825 is effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
ASC 825 did not have an impact on the Company’s consolidated financial
statements.




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





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





Note 4. Long-term
Earnest Deposit





Long-term
earnest deposits to various telecom carriers during the course of its operations
amount to $330,946 as at December 31, 2009 compared with $310,356 as of December
31, 2008.  The deposits are refundable at the termination of the
business relationship with the carriers.





Note 5. Prepaid
Expenses and Other Current Assets





Prepaid
expenses and other current assets recorded at $2,657,019 as of December 31,
2009, compared with $1,916,967 as of December 31, 2008.  The 2009
amount consists primarily of prepaid Value Added Tax (“VAT”), unvested stock
related compensation for management and consultants and advances to ValidSoft
Limited (“ValidSoft”) made pursuant to the Bridging Loan Agreement (also see
Note 28).





Note 6. Deferred Financing
Costs





Deferred
financing costs consist of commissions, warrants issued to placement agents,
associated expenses and legal fees for the convertible 12% secured notes. At
December 31, 2009 and 2008 deferred financing costs were $3,033,277 and $0
respectively, and are amortized over the term of the convertible 12% secured
notes.





50





Note 7. Property &
Equipment





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





·
            Intelligent
      Network (IN) platform (Infitel Suite, Inficore,
  Infiscript)


·
            CRM
      provisioning software


·
            Mediation,
      Rating & Pricing engine


·
            Operations
      and Business Support software


·
            Network
      management tools





Property
and equipment at December 31, 2009 and 2008 consists of:




Average
                Estimated
      Useful
                Lives
              
              
              December
      31,
                2009
              
              
              December
      31,
                2008Leasehold
      improvements
              
              
              3
              
              
              $
              --
              
              
              $
              10,433Furniture
      and fixtures
              
              
              5
              
              
              
              219,469
              
              
              
              78,278Computer,
      communication and network equipment
              
              
              3
      - 10
              
              
              
              8,071,138
              
              
              
              6,395,032Software
              
              
              5
              
              
              
              4,410,714
              
              
              
              4,632,430Automobiles
              
              
              5
              
              
              
              135,455
              
              
              
              133,202Construction
      in progress
              
              
              
              
              
              
              1,009,969
              
              
              
              1,047,24813,846,745
              
              
              
              12,296,623Less:
      accumulated depreciation
              
              
              
              
              
              
              (6,072,883
              )
              
              
              (5,951,510
              )$
              7,773,862
              
              
              $
              6,345,113




Total
depreciation expense for the year ended December 31, 2009 totaled $ 2,246,669
compared to $1,645,137 for the same period of 2008.





Note 8. Intangible
Assets - Customer Contracts, Licenses and Interconnects





Intangible
assets include customer contracts, telecommunication licenses and integrated,
multi-country, centrally managed switch-based interconnects.





Intangible
assets as of December 31, 2009 and 2008 consisted of the following:




Average
                Estimated
      Useful
                Lives
              
              
              December
      31,
                2009
              
              
              December
      31,
                2008Customer
      Contracts, Licenses & Interconnect
              
              
              5
      - 10
              
              
              $
              12,282,126
              
              
              $
              12,104,634Less:
      Accumulated Amortization and impairment charges
              
              
              
              
              
              
              (8,371,763
              )
              
              
              (3,912,241
              )Impairment
      of intangible assets
              
              
              
              
              
              
              --
              
              
              
              (3,730,524
              )$
              3,910,363
              
              
              $
              4,461,869
  51





Estimated
amortization for:




Years
      Ending December 31,2010
              
              $
              764,3022011
              
              
              764,3022012
              
              
              762,0782013
              
              
              724,0822014
              
              
              652,882Thereafter
              
              
              242,717$
              3,910,363




Intangible
asset amortization expense for the year ended December 31, 2009 totaled $804,792
compared to $1,258,107 for the same period of 2008.





Intangible
Assets Impairment charge





The
Company assessed the carrying value of its intangible assets as of December 31,
2009.  As a result of this assessment, the Company determined that the
value of certain specific intangible assets was not higher than the estimated
recoverable value and therefore no impairment charge was recorded during 2009.
In 2008 the company recorded an impairment charge of $3,730,524. In the
evaluation of its Intangible Assets, the Company estimated the discounted future
cash flows directly associated with the asset and compared these to the asset’s
carrying amount.





Note
9. Overdraft





In 2004,
Elephant Talk Ltd. executed a credit facility with a bank in Hong Kong pursuant
to which Elephant Talk Ltd. borrowed funds. As of December 31, 2009, the
overdraft balance, including accrued interest totaled, $250,022 compared to
$223,663 as of December 31, 2008.  The interest rate and default
payment interest rate were charged at 2% and 6% per annum above the Lender’s
Hong Kong Dollar Prime Rate quoted by the Lender from time to time.





The
Company has not guaranteed the credit facility or is otherwise obligated to pay
funds drawn upon it on behalf of Elephant Talk Ltd.  As of December
31, 2009, Moba Consulting Partners B.V., a subsidiary of the Company, had an
overdraft of $101,567 compared to $99,240 as of December 31, 2008 on one of the
company’s bank accounts.





Note
10. Accrued Expenses




December
      31,
                2009
              
              
              December
      31,
                2008Accrued
      Selling, General & Administrative expenses
              
              $
              589,630
              
              
              $
              513,722Placement
      fees
              
              
              -
              
              
              
              491,100Accrued
      cost of sales and network
              
              
              307,172
              
              
              
              14,140Accrued
      taxes
              
              
              855,370
              
              
              
              227,896Accrued
      interest payable
              
              
              552,393
              
              
              
              439,290Other
              
              
              434,432
              
              
              
              203,856Total
      accrued expenses
              
              $
              2,738,998
              
              
              $
              1,890,004




Note 11. Advances from
Related Parties





As at
December 31, 2009 and 2008 the Company had $13,287 and $274,762, respectively as
payable to related parties.





52





Note
12.Loans
Payable





Loans
payable at December 31, 2009 and 2008 are summarized as follows:




December
      31, 2009
            
            
            December 31, 2008Installment loan payable
      due December 24, 2006, secured by personal guarantees of two shareholders,
      a former director, and a third party
            
            $
            320,339
            
            
            $
            320,520Installment
      loan payable, bank, monthly principal and interest payments of $2,798
      including interest at bank’s prime rate plus 1.5% per annum, 8.25% at
      November 30, 2008, due December 24, 2011, secured by personal guarantees
      of three shareholders and a former director
            
            
            191,407
            
            
            
            191,516Installment
      loan payable, bank, monthly principal and interest payments of $1,729
      including interest at bank’s prime rate plus 1.5% per annum, 8.25% at
      November 24, 2008, due June 28, 2009, secured by personal guarantees of
      three shareholders and a former director
            
            
            85,106
            
            
            
            85,154Term
      loan payable, bank, monthly payments of interest at bank’s prime rate,
      7.0% at December 31, 2007
            
            
            283,684
            
            
            
            283,845Total
            
            $
            880,536
            
            
            $
            881,035




Elephant
Talk Ltd has executed a credit facility with a bank in Hong Kong since June 29,
2004, under which Elephant Talk Ltd has borrowed funds from the bank under three
installment loans and a term loan arrangement. Elephant Talk Ltd is in default
of making loan payments on all the loans and has recorded an accrued interest
amounting to $552,393 as of December 31, 2009. As a result of the default, the
entire loan balance outstanding at December 31, 2009, totaling $880,536, is due
and payable to the bank. Furthermore, Elephant Talk Ltd is obligated to pay a
default interest rate at the rate of 4.25% per annum in addition to the
prescribed interest rate of the installment loans and term loan. Elephant Talk
Ltd has recorded $ 5,408 and $111,361 in interest expense and default interest
expense, respectively, on loans payable as of December 31, 2009 and $9,062 and
$103,560 in interest expense as of December 31, 2008. The Company has not
guaranteed the credit facility or is otherwise obligated to pay funds drawn upon
it on behalf of Elephant Talk Ltd.





Note 13. Loan from
related parties





The
Company’s 51% owned subsidiary ET-UTS N.V. has received $437,161 in interest
bearing (8% per annum) unsecured loans from United Telecommunication Services
N.V., the 49% shareholder in the subsidiary. No maturity date has been
fixed.





Note 14. 12% Secured
Convertible Notes





On July
31, August 18, September 3, September 30 and October 30, 2009, the Company
consummated closings of its private placement offerings of Units comprised of
12% secured convertible promissory notes (the ‘Notes”) and warrants to purchase
shares of no par value common stock to accredited investors. The Securities were
offered and sold pursuant to an exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended. The Company sold an aggregate of
$12,333,020 principal amount of Notes and delivered Warrants to purchase an
aggregate of 12,333,020 shares of the Company’s no par value common stock at a
purchase price of $1.00 per share. The Company intends to use the net proceeds
from the Offering primarily for working capital.





The Notes
are convertible at the option of the holder into no par value common stock, of
the Company at a conversion price equal to eighty five percent (85%) of the
price at which shares are sold in a future public offering currently
contemplated by the Company if consummated; provided, however, that if the
public offering is not consummated on or before March 31, 2010, the conversion
price shall be equal to eighty five percent (85%) of the twenty (20) day average
closing price of the Common Stock for the twenty (20) trading days prior to
March 31, 2010 (the “March 31, 2010 Conversion Price”); provided further,
however, that if at any time following the earlier of the closing of the Public
Offering or March 31,2010, the twenty (20) day average closing price of the
Common Stock for any twenty (20) consecutive trading days exceeds two hundred
percent (200%) of the Public Offering closing price or of the twenty (20) day
average closing price of the Common Stock for the twenty (20) trading days prior
to March 31, 2010, as applicable, that any Notes which remain unconverted shall
automatically convert into shares of the Common Stock at the Conversion Price or
the March 31, 2010 Conversion Price, as applicable. For further details see also
Note 27.





53


Note 15. Warrant
liabilities





We have
issued warrants in connection with the private placements of our common stock
during the second half-year of 2009. The warrants include conversion provisions
that require us to record them at fair value as a liability in accordance with
ASC 815 (formerly EITF 00-19), with subsequent changes in fair value recorded as
a non-operating gain or loss in our statement of operations. The fair value of
the warrants is determined using a Black-Scholes option pricing model, and is
affected by changes in inputs to that model including our stock price, expected
stock price volatility, interest rates and expected term. The fair value of the
warrants issued to investors and placement agents in connection with the 2009
private placement offerings were $16,087,741 upon issuance and are valued
at $16,626,126 as of December 31, 2009. Part of the fair value consisted of the
warrants issued to placement agents in connection with the 2009 private
placement offerings were valued at $2,297,498 as of December 31,
2009.  The warrants issued to placement agents were capitalized as
deferred financing costs (see note 6) and were valued using the black scholes
model and the inputs in accordance with ASC 505.





Note 16. Conversion
feature





A
conversion feature (promissory note-holders will receive a discount of 15% when
converting the principal into shares instead of cash repayment) was recognized
at fair value on the respective issuance dates of the Notes as a discount and
will be amortized using the effective interest rate method from issuance to the
maturity date of the respective Notes. The conversion feature will be marked to
market each reporting date with subsequent changes in fair value recorded as a
non-operating gain or loss in our statement of operations. The fair value of the
conversion feature issued in the quarter ending December 31, 2009 totaled
$985,172 which exceeded the remaining face value of the Notes issued after
deducting the warrant liability by $985,172 which was expensed in the current
quarter as finance/interest expense. The fair value of the aggregate conversion
feature was $2,899,801 as of December 31, 2009.




Note 17.  Related
Party Transactions




On
January 27, 2009, QAT II Investments SA (“QAT II), a closed-end sister fund of
QAT Investments SA, entered into a loan agreement with the Company whereby QAT
II agreed to provide the Company with $1,409,700. According to the terms, the
loan will bear interest at a rate of twelve percent (12%) per annum and shall be
repaid either: (1) if QAT II and the Company sign an investment agreement, the
amount due under the loan will be reduced by the investment amount pursuant to
the investment agreement, or (2) if no investment agreement is executed, the
principal amount of the loan plus interest is due and payable by June 30,
2009.  On February 15, February 23, and March 31, 2009 QAT II entered
into three loan agreements with the Company whereby QAT II agreed to provide the
Company with $643,650, $637,250 and $660,400 respectively.  The
outstanding principal of $3,351,000 and interest at a rate of twelve percent
(12%) per annum shall become immediately due and payable in the event the
Company fails to make required payments of principal and interest, or otherwise
breaches the agreements and fails to cure such breach upon twenty (20) days
notice, or if it disposes of its properties or assets without QAT II’ prior
consent, or if it files a petition for bankruptcy or otherwise resolves to wind
up its affairs.  All agreements and amounts were entered in Euro’s.
Accordingly, deviations may occur with prior 8-K filings due to different
exchange rate usage.





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





54


Payments
made in connection with the 2008 Financing





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





Due
Diligence Agreement.





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





In
connection with the potential acquisition of ValidSoft, on March 16, 2009, the
Company entered into an agreement with QMG under which QMG will conduct due
diligence of ValidSoft in exchange for an amount equal to 3% of the
consideration paid by the Company under the First Acquisition Agreement. The
ValidSoft acquisition was subsequently consummated on March 17, 2010, see
“Subsequent Events” footnote (Note 30).





Stock
issuance





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





Partial
conversion of loans





On July
1, 2009 and July 8, 2009 QAT II, a closed-end fund of QAT Investments, entered
into a loan agreement with the Company whereby QAT II provided the Company with
$ 213,795 and $ 142,530.  According to the terms, the loans will bear
interest at a rate of twelve percent (12%) per annum and shall be repaid either:
(1) if QAT II and the Company sign an investment agreement, the amount due under
the loan will be reduced by the investment amount pursuant to the investment
agreement, or (2) if no investment agreement is executed, the principal amount
of the loan plus interest is due and payable by August 31, 2009. The agreement
and amount were entered in Euro’s, which means that currency differences may
occur in filings made and this Report.





On July
31, 2009, QAT II converted $4,100,000 provided under the loan agreements into
$4,100,000 in Notes and Warrants as part of the First Closing with respect to
the Offering (see note 14). On October 30, 2009, QAT II converted $1,332,383
into Notes and Warrants as part of the Fifth Closing with respect to the
Offering.





Compensation
of QMG





Quercus
Management Group N.V. (“QMG”), an entity affiliated with certain officers and
directors of the Company served as European placement agent for the
Offering.  In the aggregate, QMG raised $4,837,632, entitling it to
774,022 Warrants (equal to 8% of the aggregate amount of Notes and Warrants sold
in the Offering, including those Notes and Warrants sold to affiliates of the
Company), an 8% selling concession equal to $387,010.56 and 2% non-accountable
expenses and fees equal to $96,752.64.  Of the $4,837,632 raised by
QMG, $4,399,995.10 (or 91% of the total) was raised from parties affiliated with
the Company (including the $4,100,000 conversion by QAT II).





55


.


Note 18.
Shareholders’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 53,695,984 common shares issued and
outstanding as of December 31, 2009. The shares issued and outstanding as per
the stock transfer agent’s records are 53,941,884, and include 245,900 shares
which were cancelled by the Company prior to 2006.  However, these
shares were not returned to the stock transfer agent and never cancelled on the
Company’s records. These shares have been blocked for trading by the Stock
Transfer Agent.




Shares
awarded
in2008, issued in 2009
 
 On May 8, 2008 the Company entered into a placement
agent agreement with Quercus Management Group N.V. (“QMG”) and Amelia pursuant
to which QMG and Amelia were each issued 16,667 shares of common stock of the
Company in connection with their participation in the financing (the “2008
Financing”).The fair value of the
33,334 shares on issuance was $50,001and was
recognized as an expense and credited to “Shares issued for
financing”
  On March 31, 2008, in lieu of cash compensation owed to
QMG and Amelia for their services in connection with the 2008 financing, we
issued 34,000 shares of common stock to QAT (at the request of QMG) and 33,000
shares of common stock to Amelia.The fair value of the 67,000
shares on issuance was $40,000and was
recognized as an expense and credited to “Shares issued for
financing”.
  In the
fourth quarter of 2008, pursuant to four restricted stock agreements, we issued
an aggregate of 2,420,833 to our non-executive directors in
consideration for services rendered in connection with their positions on our
board of directors.
  On
January 2, 2009, in lieu of a cash payment regarding a previous private
placement, RWC accepted 742,000 shares of our common stock, based on a share
price of $0.60 per share. The fair value of the 742,000 shares on issuance was
$445,100 and was recognized as an expense and credited to “Shares issued for
financing”.
 
 On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment. The fair value of the 23,982 shares on issuance was
$35,973 and was recognized as an expense and credited to “Shares issued for
financing”
  Shares
issued in 2009
  On
January 20, 2009, we entered into an agreement with Alliance Advisors LLC. As
consideration for investor relations, consulting services to be provided
through
January 20, 2010 we agreed to pay Alliance $20,000 to $ 25,000 per quarter plus
200,000 restricted shares already issued in 2009.The fair
value of the 200,000 restricted shares on issuance was $130,000 and was
recognized as an expense and credited to“Shares issued to
consultants”.
 
 On March
31, 2009, we entered into an agreement with OTC Global Partners, LLC (“OTC
Global”).  As consideration for financial consulting services to be
provided through September 30, 2009, we agreed to pay OTC Global $10,000 per
month, budget expenses of up to $50,000 subject to our prior approval, and
100,000 restricted shares of our common stock.The fair value of the
100,000 restricted shares on
issuance was $70,000 and was recognized as an expense and credited to
“Shares
issued to consultants”.
  On
September 16, 2009, the company issued 7,300 shares to a consultant with a value
of $5,389.
  On June
30, 2009, we issued 124,800 shares of our common stock to QAT as consideration
for the services provided by Steven van der Velden, our Chairman, President and
Chief Executive Officer.  The shares of common stock were issued
directly to QAT pursuant to an agreement between QAT and Mr. van der
Velden.The fair
value of the124,800shares on
issuance was $74,880 and was recognized as an expense and credited to
“Shares
issued for management compensation”
  On June
30, 2009, we issued an aggregate number of 500,000 shares of our
commonstock to our
management team (fourpersons) for
successfully meeting of targets set by the company.The fair
value of the 500,000 shares on issuance was $395,000 and was recognized as an
expense and credited to “Shares issued for
management compensation”
  The
aforementioned
securities were issued in reliance upon the exemptions from registration
provided by Section 4(2) of promulgated under the Securities
Act.
  On June 2, 2009 a
former chief financial officer returned 420,368 shares with a fair value of
$192,694.
  OnSeptember14, 2009 a former
director returned536,625shares with a
fair value of $0to the Company.
The former director has filed a lawsuit against the Company, see note 24 for
further details.


56


The
following table summarizes the shares issued for the year ended December 31,
2009:





Computation
      of Full Dilution - December 31, 2009
              
              Number
      of shares
                issuedDecember
      31, 2008 Total number of shares issued
              
              
              50,433,260Shares
      issued, sold in 2008
              
              
              468Shares
      issued for financing
              
              
              866,316Shares
      issued for directors compensation
              
              
              2,420,833Shares
      issued for consultants
              
              
              307,300Shares
      returned by former CFO
              
              
              (420,368
              )Shares
      issued for management compensation
              
              
              624,800Shares
      returned by former director
              
              
              (536,625
              )December
      31, 2009 Total number of shares issued
              
              
              53,695,984


Note
to Warrants





Warrants
issued in 2009





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





On July 31, 2009, the Company
consummated the first closing of its private placement offering (the “Offering”)
of Units comprised of 12% secured convertible promissory notes (the “Notes”) and
warrants to purchase shares of common stock (the “Warrants”, and together with
the Notes, the “Securities”) to accredited investors
(“Investors”).  The Securities were offered and sold pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended (the “Securities Act”).  The Company sold an aggregate of
$5,111,000 principal amount of Notes and delivered Warrants to purchase an
aggregate of 5,111,000 shares of the Company’s common stock at a purchase price
of $1.00 per share





On August 18, 2009, the
Company consummated the second closing of its Offering.  At the second
closing, the Company sold an aggregate of $1,185,000 principal amount of Notes
and delivered Warrants to purchase an aggregate of 1,185,000 shares of the
Company’s common stock at a purchase price of $1.00 per share.





On September 3, 2009, the
Company consummated the third closing of its Offering.  At the third
closing, the Company sold an aggregate of $1,270,837 principal amount of Notes
and delivered Warrants to purchase an aggregate of 1,270,837 shares of the
Company’s common stock at a purchase price of $1.00 per share.





57


On September 30, 2009, the
Company consummated the fourth closing of its Offering.  At the fourth
closing, the Company sold an aggregate of $650,000 principal amount of Notes and
delivered Warrants to purchase an aggregate of 650,000 shares of the Company’s
common stock at a purchase price of $1.00 per share.





On October 30, 2009, the
Company consummated the fifth of its.  At the fifth closing, the
Company sold an aggregate of $4,116,383 principal amount of Notes and delivered
Warrants to purchase an aggregate of 4,116,383 shares of the Company’s common
stock, no par value (“Common Stock”) at a purchase price of $1.00 per
share.





(B)
Class B Preferred Stock





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





During
2009 or 2008 the Company did not issue any shares of Preferred
Stock.





Note 19. Basic and diluted
net loss per share





Net loss
per share is calculated in accordance with ASC 260, Earnings per Share,
(formerly SFAS No.128). Basic net loss per share is based upon the weighted
average number of common shares outstanding. Dilution is computed by applying
the treasury stock method. Under this method, options and warrants are assumed
to be exercised at the beginning of the period (or at the time of issuance, if
later), and as if funds obtained thereby were used to purchase common stock at
the average market price during the period. Weighted average number of shares
used to compute basic and diluted loss per share is the same since the effect of
dilutive securities is anti-dilutive.





Note 20. Employee
Benefit Plan and Non-Qualified Stock Option and Compensation
Plan





2000
Employee Benefit Plan





The
Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
options to acquire the Company’s common stock, no par value, from time to time
to employees of the Company or its subsidiaries. In addition, at the discretion
of the Board of Directors, shares may be granted under this Plan to other
individuals, including consultants or advisors, who contribute to the success of
the Company or its subsidiaries, provided that bona fide services shall be
rendered by consultants and advisors and such services must not be in
conjunction with the offer or sale of securities in a capital raising
transaction. No stock may be issued or options granted under the Plan to
consultants, advisors or other persons who directly or indirectly promote or
maintain a market for the Company’s securities. The Plan is intended to aid the
Company in maintaining and developing a management team, attracting qualified
officers and employees capable of assuring the future success of the Company,
and rewarding those individuals who have contributed to the success of the
Company. The Plan is administrated under the direction of the Board of
Directors. A total of 160,000 common shares and 160,000 stock options to acquire
common shares may be subject to, or issued pursuant to, benefits granted under
the Plan. At any time any stock option is granted under the terms of this Plan,
the Company will reserve for issuance the number of shares of Stock subject to
such option until it is exercised or expired. The Plan Administrator shall
determine from time to time the terms, conditions and price of the options
granted. Options shall not be construed to be stock and cannot be exercised
after the expiration of its term. Under the Plan, 12,000 shares of common stock
and 160,000 stock options remain available for grant at December 31,
2009.





58





2006
Non-Qualified Stock and Option Compensation Plan





Under
this plan there are, as of December 31, 2009, 344,342 stock options outstanding.
There are remaining 600,000 shares and 55,658 stock options available for
grant.





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




Common
stock purchase options and warrants consisted of the following as of December
31, 2009:




Number
      of
                shares
              
              
              Exercise
                Price
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2008
              
              
              366,009
              
              
              $
              2.25
              
              
              $
              453,917Granted
      in 2009
              
              
              --
              
              
              
              --
              
              
              
              --Exercised
              
              
              --
              
              
              
              --
              
              
              
              --Cancelled/Forfeited
              
              
              21,667
              
              
              
              2.25
              
              
              
              26,871Outstanding
      as of December 31, 2009
              
              
              344,342
              
              
              $
              2.25
              
              
              $
              427,046




The
options were granted with an exercise price of $2.25, the share closing price as
of September 26, 2007. The options will generally vest on December 31, 2009, or
if there is a change of control in the Company.




The
options will expire on December 31, 2011 or later depending on granting
date.




The
cancelled/forfeited options during 2009 were granted in 2007 (9,667) and 2008
(12,000).





Following
is a summary of the status of options outstanding at December 31,
2009:




Options outstanding
            
            
            Options exercisableRange of Exercise Prices
            
            Total
              Options
              Outstanding
            
            Weighted
              Average
              Remaining
              Life
              (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            
            Options
              Exercisable
            
            
            Weighted
              Average
              Exercise
              Price$
            2.25
            
            
            344,342
            
            2.61
      years
            
            $
            2.25
            
            
            
            262,142
            
            
            $
            2.25





At
December 31, 2009, the total compensation cost related to unvested stock-based
awards granted to employees under the provisions of ASC 718 and the Company’s
2006 stock award plan, but not yet recognized was approximately
$38,915.





2008
Long-Term Incentive Plan





The 2008
plan was adopted on January 15, 2008, and approved by our shareholders on the
same date at our annual meeting. This incentive plan authorizes awards of up to
5,000,000 shares of common stock, in the form of incentive and non-qualified
stock options, stock appreciation rights, performance units, restricted stock
awards and performance bonuses. The amount of common stock underlying the awards
to be granted remained the same after the 25 to one reverse stock-split that was
effectuated on June 11, 2008. As of December 31, 2009, a total of 976,00 stock
options and 507,300 shares had been granted under this plan. Options granted
generally begin vesting over a three (3) year period after grant date although
already Options have been granted with a shorter period than three (3) years.
Options generally expire two (2) years from the date of vesting.





59


Common
stock purchase options and warrants consisted of the following as of December
31, 2009:




Number
      of
                shares
              
              
              Average
      Exercise
                Price
              
              
              Initial
      Fair
                Market
      ValueOptions:Outstanding
      as of December 31, 2008
              
              
              366,009
              
              
              $
              0.60
              
              
              $
              159,696Granted
      in 2009
              
              
              631,658
              
              
              $
              1.04
              
              
              $
              496,481Exercised
              
              
              --
              
              
              
              --
              
              
              
              --Cancelled/Forfeited
              
              
              21,667
              
              
              $
              0.60
              
              
              $
              9,454Outstanding
      as of December 31, 2009
              
              
              976,000
              
              
              $
              0.89
              
              
              $
              646,723




The
options granted in 2009 were granted with an average exercise price of $0.886.
The initial fair market value of the options granted using the Black-Sholes
options model for these options has been valued at $496,481 at their initial
grant-date.





Following
is a summary of the status of options outstanding at December 31,
2009:





Options outstanding
            
            
            Options exercisableRange of Exercise Price
            
            Total
              Options
              Outstanding
            
            Weighted
              Average
              Remaining
              Life
              (Years)
            
            Weighted
              Average
              Exercise
              Price
            
            
            Options
              Exercisable
            
            
            Weighted
              Average
              Exercise
              Price$
            0.60-1.20
            
            
            976,000
            
            4.9 years
            
            $
            0.89
            
            
            
            62,500
            
            
            
            $1.09





The
weighted average assumptions used so far for the options granted in 2009 using
the Black-Scholes options model are: volatility of 154%, term of 5.79 years
and a Risk Free Interest Rate assumption of 1.546%. The expected dividend yield
is zero.





At
December 31, 2009 the total compensation cost related to unvested stock-based
awards granted to employees under the provisions of ASC 718 and the
Company’s 2008 stock award plan, but not yet recognized in the profit and loss
was approximately $434,219.





Stock-Based
Compensation Expense





Under the
provisions of ASC 718, the Company recorded for the three months ended December
31, 2009, $405,531in stock-based compensation expense for management shares,
Non-Qualified Stock and Option Compensation Plan and shares issued for
consultancy and employee compensation. For the comparable period in 2008 the
expensing was $159,113. The Company utilized the Black-Scholes valuation model
for estimating the fair value of the stock-based compensation granted after the
adoption of SFAS 123(R).





Note 21.  Income
taxes





Income
tax expense (benefit) for the year ended December 31, 2009 and 2008 is
summarized as follows:





December
      31, 2009
            
            
            December
      31, 2008Current:Federal
            
            $
            (5,881,961
            )
            
            $
            (5,444,950
            )State
            
            
            (1,037,993
            )
            
            
            (960,874
            )Deferred
      Taxes
            
            
            6,920,754
            
            
            
            6,406,624Income
      tax expense
            
            $
            800
            
            
            $
            800





60




The
following is a reconciliation of the provision for income taxes at the United
States federal statutory rate to the foreign income tax rate at December 31,
2009:





2009
            
            
            2008Tax
      expense (credit) at statutory rate-federal
            
            
            (34%)
            
            
            
            (34%)State
      tax expense net of federal tax
            
            
            (6%)
            
            
            
            (6%)Foreign
      income tax rate difference
            
            
            8,1%
            
            
            
            6,5%Change
      in valuation allowance
            
            
            31,9%
            
            
            
            33,5%Tax
      expense at actual rate
            
            
            —
            
            
            
            —





The tax effects of temporary differences that gave
rise to significant portions of deferred tax assets and liabilities at December
31, 2009 are as follows:





Deferred
      tax assets:
            
            2009
            
            
            2008Deferred
      Tax Asset
            
            $
            24,934,030
            
            
            $
            18,013,756Total
      gross deferred tax assets
            
            
            24,934,030
            
            
            
            18,013,756Less:  Valuation
      allowance
            
            
            (24,934,030
            )
            
            
            (18,013,756
            )Net
      deferred tax assets
            
            $
            —
            
            
            $
            —





At December 31, 2009, the Company had accumulated
deficit carry forwards of approximately $ 62,335,076. Pursuant to Dutch income
tax laws, losses may be carried forward indefinitely. However, loss carry-back
is permitted for three years. Utilization of the net operating losses may be
prohibited after a change of 30% or more of the ultimate control in a
company.





The net
change in the valuation allowance during the twelve months period ended December
31, 2009 was $ 6,920,274.





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




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




A
valuation allowance of $ 24,934,030 and $ 18,013,756 at December 31, 2009 and
2008, respectively, has been recorded against deferred tax assets as the Company
was unable to conclude that it is more likely than not that such deferred tax
assets will be realized.




As of
December 31, 2009, we had net federal operating loss carry forwards and state
operating loss carry forwards of approximately $ 22.9 million. The net federal
operating loss carry forwards begin to expire in 2018 and the net state
operating loss carry forwards begin to expire in 2012. The net operating loss
carry forwards for foreign countries amounts to approximately $ 38.4 million. In
all foreign countries various periods of expiration dates are
applicable.




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




In
June 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes. FIN 48 requires that companies recognize in the
consolidated financial statements the impact of a tax position, if that position
is more likely than not of being sustained on audit, based on the technical
merits of the position. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure. The provisions of FIN 48 are effective for years beginning after
December 15, 2006. We adopted FIN 48 on January 1, 2007 with no impact to our
consolidated financial statements. We file income tax returns in the U.S.
federal jurisdiction and various state and foreign jurisdictions. Due to the net
operating loss, all the tax years are open for tax examination. As of
December 31, 2009 and 2008, we accrued FIN48 reserve of $480,000 and $0,
respectively for uncertain tax benefit, including interest and
penalties.




61


Note
22.  Non-controlling Interest





The
Company had non-controlling interests in several of its subsidiaries. The
balance of the non-controlling interests as of December 31, 2009 and December
31, 2008 were as follows




Noncontrolling
      interest Balance atSubsidiary
              
              Noncontrolling
                Interest
      %
              
              
              December
      31,
                2009
              
              
              December
      31,
                2008ETC
      PRS UK
              
              
              49
              %
              
              $
              10,516
              
              
              $
              10,807ETC
      PRS Netherlands
              
              
              49
              %
              
              
              140,462
              
              
              
              144,344ET
      ME&A Holding WLL
              
              
              49
              %
              
              
              --
              
              
              
              --ET
      Bahrain WLL
              
              
              1
              %
              
              
              3,180
              
              
              
              1,388ET
      ME&A FZ LLC
              
              
              49.46
              %
              
              
              35,242
              
              
              
              35,227ET
      UTS Curacao
              
              
              49
              %
              
              
              --
              
              
              
              --Total
              
              
              
              
              
              $
              189,400
              
              
              $
              191,767




Note
23.  Commitments





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





Years
      ending December 31,2010
              
              
              2,448,7432011
              
              
              2,267,6672012
              
              
              2,451,1942013
              
              
              1,713,1502014
              
              
              88,260Total
              
              $
              8,969,015





As of December 31, 2009 the commitments of the
Company relating to purchase orders are valued at cost of $
607,416.





Note
24.  Litigation





(a)
Beijing Chinawind





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




62




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





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





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





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





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





(c)
Russelle Choi Litigation





On
September 12, 2008, an action was commenced against the Company by Russelle Choi
(“Choi”), our former CEO and director, in the California Superior Court, Orange
County, in a matter entitled Choi v. Elephant Talk
Communications, Inc., Case No. 30-2008-00111874.  Choi alleges
that the Company breached a termination agreement and a consulting agreement
entered into between the Company and Choi.  By August 19, 2009 the
Company had settled both the dispute on the termination agreement as well as the
dispute regarding the alleged breach of the consulting agreement. The entire
action was dismissed by Choi with prejudice on June 8, 2009.





(d)
Manu Ohri Litigation





On March
26, 2009, an action was commenced against the Company by Manu Ohri (“Ohri”), our
former Chief Financial Officer, in the California Superior Court, Orange County,
in a matter entitled Manu Ohri
v. Elephant Talk Communications, Inc., Case No.
30-20009-00120609.  Ohri alleges  breach of a written
contract, breach of an oral contract, and a common count for services
rendered.  Ohri claims, among other things, $427,816 in unpaid
severance payments, $56,951 owed under an oral consulting agreement, and stock
options payable under the oral consulting agreement with a net value of
$622,000.  The Company denies all material allegations of Ohri’s
complaint and asserts various affirmative defenses.  The Company also
filed and served a cross-complaint against Ohri, who then filed and served an
answer, denying the material allegations of our cross-complaint.




The
parties are continuing with pretrial discovery, and a jury trial is scheduled to
start June 11, 2010.





(e)
Bruce Barren Litigation





On
December 30, 2009, an action was commenced against the Company by Bruce Barren
(“Barren”), a former director of the Company from January 2008 to May 2009, in
the California Superior Court, Los Angeles County, in a matter entitled Bruce Barren v. Elephant Talk
Communications, Inc., Case No. BC429032.  Barren alleges causes
of action for breach of a restricted stock agreement, breach of the implied
covenant of good faith and fair dealing, breach of an oral employment agreement,
and common counts for services rendered—despite entering into a settlement
agreement and full release of any claims against the Company shortly after his
resignation in May 2009.




63




The
Company believes that all of Mr. Barren’s such claims are without merit and has
answered his complaint, denying all material allegations and asserting various
affirmative defenses. We intend to continue to vigorously defend ourselves
against these claims.





(f)
Chong Hing Bank Litigation





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





At this
time the Company intends to vigorously challenge the Bank’s
claims.





Note 25.
Segment information


Year
      ended December 31, 2009EUROPENetherlands
                  
                  
                  Spain
                  
                  
                  Switzerland
                  
                  
                  Others
                  
                  
                  Total
                  
                  
                  Hong
      Kong /
                  
                  
                  Middle
      East
                  
                  
                  The
      Americas
                  
                  
                  TOTALRevenues
      from unaffiliatedcustomers:
                  
                  $
                  33,610,555
                  
                  
                  $
                  2,277,766
                  
                  
                  $
                  6,117,537
                  
                  
                  $
                  431,548
                  
                  
                  $
                  42,437,406
                  
                  
                  $
                  753
                  
                  
                  $
                  1,207,298
                  
                  
                  $
                  5,500
                  
                  
                  $
                  43,650,957Operating
      income (loss)
                  
                  $
                  (2,242,451
                  )
                  
                  $
                  306,505
                  
                  
                  $
                  (3,111,328
                  )
                  
                  $
                  (753,604
                  )
                  
                  $
                  (5,800,877
                  )
                  
                  $
                  (254,678
                  )
                  
                  $
                  (97,699
                  )
                  
                  $
                  (4,386,693
                  )
                  
                  $
                  (10,539,946
                  )Net
      income (loss):
                  
                  $
                  (2,216,043
                  )
                  
                  $
                  306,499
                  
                  
                  $
                  (3,110,907
                  )
                  
                  $
                  (752,157
                  )
                  
                  $
                  (5,772,607
                  )
                  
                  $
                  (1,204,025
                  )
                  
                  $
                  (98,887
                  )
                  
                  $
                  (10,224,365
                  )
                  
                  $
                  (17,299,884
                  )Identifiable
      assets
                  
                  $
                  5,156,354
                  
                  
                  $
                  1,459,767
                  
                  
                  $
                  11,066,207
                  
                  
                  $
                  559,357
                  
                  
                  $
                  18,241,686
                  
                  
                  $
                  602,574
                  
                  
                  $
                  518,745
                  
                  
                  $
                  5,063,772
                  
                  
                  $
                  24,426,776Depreciation
      and amortization
                  
                  $
                  (110,968
                  )
                  
                  $
                  (211,707
                  )
                  
                  $
                  (1,892,639
                  )
                  
                  $
                  (97,106
                  )
                  
                  $
                  (2,312,420
                  )
                  
                  $
                  (51,397
                  )
                  
                  $
                  (41,507
                  )
                  
                  $
                  (646,137
                  )
                  
                  $
                  (3,051,461
                  )Capital
      expenditure
                  
                  $
                  103,893
                  
                  
                  $
                  30,105
                  
                  
                  $
                  3,080,942
                  
                  
                  $
                  -
                  
                  
                  $
                  3,214,940
                  
                  
                  $
                  438,989
                  
                  
                  $
                  -
                  
                  
                  $
                  215,220
                  
                  
                  $
                  3,869,149
  Year
      ended December 31, 2008EUROPEFar
      East
                  
                  
                  
                  
                  
                  TheNetherlands
                  
                  
                  Spain
                  
                  
                  Switzerland
                  
                  
                  Others
                  
                  
                  Total
                  
                  
                  Hong
      Kong /
                  
                  
                  Middle
      East
                  
                  
                  Americas
                  
                  
                  TOTALRevenues
      from unaffiliatedcustomers:
                  
                  $
                  32,745,079
                  
                  
                  $
                  2,772,295
                  
                  
                  $
                  7,350,985
                  
                  
                  $
                  1,183,707
                  
                  
                  $
                  44,052,067
                  
                  
                  $
                  10,832
                  
                  
                  $
                  296,108
                  
                  
                  $
                  5,500
                  
                  
                  $
                  44,364,507Operating
      income (loss)
                  
                  $
                  (2,551,663
                  )
                  
                  $
                  234,895
                  
                  
                  $
                  (6,276,743
                  )
                  
                  $
                  602,475
                  
                  
                  $
                  (7,991,036
                  )
                  
                  $
                  (975,766
                  )
                  
                  $
                  (255,682
                  )
                  
                  $
                  (5,224,126
                  )
                  
                  $
                  (14,446,610
                  )Net
      income (loss):
                  
                  $
                  (2,526,822
                  )
                  
                  $
                  234,889
                  
                  
                  $
                  (6,276,716
                  )
                  
                  $
                  610,213
                  
                  
                  $
                  (7,958,435
                  )
                  
                  $
                  (1,817,334
                  )
                  
                  $
                  (215,861
                  )
                  
                  $
                  (6,023,728
                  )
                  
                  $
                  (16,015,358
                  )Identifiable
      assets
                  
                  $
                  3,713,315
                  
                  
                  $
                  1,626,346
                  
                  
                  $
                  8,835,496
                  
                  
                  $
                  629,304
                  
                  
                  $
                  14,804,462
                  
                  
                  $
                  219,608
                  
                  
                  $
                  801,527
                  
                  
                  $
                  3,630,475
                  
                  
                  $
                  19,456,073Depreciation
      and amortization
                  
                  $
                  (195,105
                  )
                  
                  $
                  (229,930
                  )
                  
                  $
                  (3,446,152
                  )
                  
                  $
                  (82,823
                  )
                  
                  $
                  (3,954,011
                  )
                  
                  $
                  (48,250
                  )
                  
                  $
                  (8,774
                  )
                  
                  $
                  (2,622,733
                  )
                  
                  $
                  (6,633,768
                  )Capital
      expenditure
                  
                  $
                  45,297
                  
                  
                  $
                  1,242
                  
                  
                  $
                  1,998,496
                  
                  
                  $
                  -
                  
                  
                  $
                  2,045,035
                  
                  
                  $
                  58,490
                  
                  
                  $
                  34,664
                  
                  
                  $
                  40,289
                  
                  
                  $
                  2,178,478




64




Note 26 .
Concentrations





Customers
in excess of 10% of total revenues were as follows:





For the
year ended December 31, 2009, the Company had a customer in the Netherlands,
which accounted for revenue of $21,905,840. For the same periods in 2008, this
same customer accounted for $25,195,711




Note 27. Loans and
Convertible Notes (Private Placement)





On July
1, 2009 and July 8, 2009 QAT II, a closed-end fund of QAT Investments, entered
into a loan agreement with the Company whereby QAT II provided the Company with
$ 213,795 and $ 142,530.  According to the terms, the loans will bear
interest at a rate of twelve percent (12%) per annum and shall be repaid either:
(1) if QAT II and the Company sign an investment agreement, the amount due under
the loan will be reduced by the investment amount pursuant to the investment
agreement, or (2) if no investment agreement is executed, the principal amount
of the loan plus interest is due and payable by August 31, 2009. The agreement
and amount were entered in Euro’s, which means that currency differences may
occur in filings made and this Report.  An investment agreement was
made October 31st 2009, converting these loans into the convertible 12% secured
notes. See note 15.





Separately,
on July 31, 2009, the Company consummated the first of its private placement
offering (the “Offering”) of Units comprised of 12% secured convertible
promissory notes (the “Notes”) and warrants to purchase shares of common stock,
no par value (the “Common Stock”) (the “Warrants”, and together with the Notes,
the “Securities” to accredited investors (“Investors”). The Securities were
offered and sold pursuant to an exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended (the “Securities Act”). In the First
Closing the Company sold an aggregate of $5,111,000 principal amount of Notes
and delivered Warrants to purchase an aggregate of 5,111,000 shares of the
Company’s common stock at a purchase price of $1.00 per share. After taking into
consideration the conversion of $4.1 million of existing QAT II loans into the
First Closing, the Company received cash proceeds of $1.0 million.





The Notes
are convertible at the option of the holder at the Conversion Price; provided,
however, that if the Public Offering is not consummated on or before March 31,
2010, the Conversion Price shall be equal to the March 31, 2010 Conversion
Price; provided further, however, that if at any time following the earlier of
the closing of the Public Offering or March 31, 2010, the twenty (20) day
average closing price of the Common Stock for any twenty (20) consecutive
trading days exceeds two hundred percent (200%) of the Public Offering closing
price or of the twenty (20) day average closing price of the Common Stock for
the twenty (20) trading days prior to March 31, 2010, as applicable, any Notes
which remain unconverted shall automatically convert into shares of the Common
Stock at the Conversion Price or the March 31, 2010 Conversion Price, as
applicable.





Certain
Investors that invested through their individual retirement accounts received
Class B Notes. All other Investors received Class A Notes. The Class B Notes are
identical to the Class A Notes in all respects except that the Class A Notes are
secured by a first priority security interest in all of the assets of the
Company and certain subsidiaries whereas the Class B Notes are secured by all
the current assets of the Company and its consolidated subsidiaries including
cash, cash equivalents and accounts receivable. In addition, the Class B Notes
provide for simple interest as opposed to the Class A Notes, which provide for
compounded interest.





The
Warrants entitle the holders to purchase warrant shares for a period of five
years from the date of issuance and contain certain anti-dilution rights and a
cashless exercise feature on terms specified in the Warrants. In the event the
trading price of the Common Stock exceeds $2.00 for twenty (20) consecutive
trading days, the Company has the option to require that the Investors exercise
the Warrants. In the event the Investor chooses not to exercise the Warrants in
this case, the Investor will receive such number of Warrant Shares as the
Investor would be entitled to receive pursuant to a cashless
exercise.





On August
18, 2009, the Company consummated the second closing (the “Second Closing”) of
the Offering.  In the Second Closing the Company sold an aggregate of
$1,185,000 principal amount of Notes and delivered Warrants to purchase an
aggregate of 1,185,000 shares of the Company’s common stock at a purchase price
of $1.00 per share.




65




On
September 3, 2009, the Company consummated the third closing (the “Third
Closing”) of the Offering.  In the Third Closing the Company sold an
aggregate of $1,269,843 principal amount of Notes and delivered Warrants to
purchase an aggregate of 1,269,843 shares of the Company’s Common Stock at a
purchase price of $1.00 per share.





On
September 30, 2009, the Company consummated the fourth closing (the “Fourth
Closing”) of the Offering.  In the Fourth Closing the Company sold an
aggregate of $650,000 principal amount of Notes and delivered Warrants to
purchase an aggregate of 650,000 shares of the Company’s common stock at a
purchase price of $1.00 per share.





On
October 30, 2009, the Company consummated the fifth closing (the “Fifth
Closing”) of the Offering.  In the Fifth Closing the Company sold an
aggregate of $4,116,383 principal amount of Notes and delivered Warrants to
purchase an aggregate of 4,116,383 shares of the Company’s common stock at a
purchase price of $1.00 per share





The
Company intends to use the net proceeds from the Offering for working capital
purposes. The Company is obligated to register the shares of Common Stock
underlying the Notes and Warrants pursuant to unlimited piggy-back registration
rights granted to the Investors.




Note 28. Related Party
Transactions





On July
1, 2009 and July 8, 2009 QAT II, a closed-end fund of QAT Investments, entered
into a loan agreement with the Company whereby QAT II provided the Company with
$ 213,795 and $ 142,530.  According to the terms, the loans will bear
interest at a rate of twelve percent (12%) per annum and shall be repaid either:
(1) if QAT II and the Company sign an investment agreement, the amount due under
the loan will be reduced by the investment amount pursuant to the investment
agreement, or (2) if no investment agreement is executed, the principal amount
of the loan plus interest is due and payable by August 31, 2009. The agreement
and amount were entered in Euro’s, which means that currency differences may
occur in filings made and this Report.





On July
31, 2009, QAT II converted $4,100,000 provided under the loan agreements
into  $4,100,000 in Notes and  Warrants as part of the First
Closing with respect to the Offering. On October 30, 2009, QAT II converted
$1,332,383 into Notes and Warrants as part of the Fifth Closing with respect to
the Offering.





Quercus
Management Group N.V. (“QMG”), an entity affiliated with certain officers and
directors of the Company served as European placement agent for the
Offering.  In the aggregate, QMG raised $4,837,632, entitling it to
774,022 Warrants (equal to 8% of the aggregate amount of Notes and Warrants sold
in the Offering, including those Notes and Warrants sold to affiliates of the
Company), an 8% selling concession equal to $387,011 and 2% non-accountable
expenses and fees equal to $96,753.  Of the $4,837,632 raised by QMG,
$4,399,995 (or 91% of the total) was raised from parties affiliated with the
Company (including the $4,100,000 conversion by QAT II).




Note 29. ValidSoft, Limited
Transactions





On June
17, 2009, the Company and ValidSoft Limited a company organized under the laws
of the Republic of Ireland entered into a Collaboration Agreement (the
“Collaboration Agreement”). Pursuant to the Collaboration Agreement, the Company
and ValidSoft will bundle and sell products offered by the Companies. The
Companies have granted each other worldwide licenses for their intellectual
property in connection with the distribution, marketing and sale of products to
be offered. The Companies have agreed to terms regarding the allocation of
revenue generated by the sale of the bundled products, and to indemnify the
other party in the event of losses arising from a breach of the Collaboration
Agreement by either the Company or ValidSoft. The Agreement has a term of ten
years.





On June
30, 2009, we issued 124,800 shares of our common stock to QAT as consideration
for the services provided by Steven van der Velden, our Chairman, President and
Chief Executive Officer.  The shares of common stock were issued
directly to QAT pursuant to an agreement between QAT and Mr. van der
Velden.




66





On
November 2, 2009, the Company entered into a generally non-binding heads of
terms agreement (the “HOT Agreement”) with ValidSoft Limited (“ValidSoft”), a
company organized under the laws of the Republic of Ireland, and the
shareholders of ValidSoft.  The HOT Agreement replaces a previous
agreement entered into on February 23, 2009, between Registrant and
ValidSoft.





Under the
HOT Agreement, the Company expects to enter into a definitive agreement to
acquire 100% of the issued and outstanding securities of ValidSoft for
consideration consisting of 20% of the issued and outstanding common shares of
the Company as of February 1, 2009 and warrants to purchase common shares of
Company equal to (i) 20% of the issued and outstanding warrants of the Company
as of February 1, 2009; and (ii) 20% of the issued and outstanding options of
the Company as of February 1, 2009.  Twenty-five percent of the
foregoing consideration shall be placed into escrow and, in the event certain
revenue milestones (as set forth the in the HOT Agreement) have not been
achieved, is subject to forfeiture and cancellation.





The HOT
Agreement includes the payment of a binding break-up fee of € 2,000,000 by a
party if (i) such party breaches the exclusivity and conduct of business
provisions described in the HOT Agreement; (ii) such party terminates
negotiations before December 31, 2009 without good cause (as defined in the HOT
Agreement); or (iii) such party is unable to complete the proposed transactions
substantially upon the terms set forth in the HOT Agreement by December 31,
2009.





Pursuant
to the earlier HOT Agreement of February 23, 2009, a Bridging Loan Agreement,
and subsequent amendments, on December 31 2009, the Company had advanced a total
of $1,736,756 excluding accrued interest, to ValidSoft.





Note 30. Subsequent
Events





On
February 3, 2010, February 24, 2010 and March 26, 2010 we entered into loan
agreements with QAT II, an investment firm related to our officers and
directors, having an approximate aggregate value of $2,320,000 (based on
exchange rates published in the Wall Street Journal).  These loan
agreement provides that we will pay interest at a rate of fourteen percent (14%)
per annum on the outstanding balance and provides the principal and interest
shall be due and payable on the earlier of: (i) 180 days from the date of the
loan or (ii) in the event we consummate an equity or debt financing of at least
$5,000,000 (a “Placement”); provided, however, QAT II has
the ability to convert the principal and accrued interest outstanding as of the
date of the Placement into the same type of equity or debt securities issued by
us and on the same terms and conditions offered to other investors in the
Placement.  The outstanding principal and interest shall become
immediately due and payable in the event we fail to make required payments of
principal and interest, or otherwise breaches the loan agreement and fail to
cure such breach upon twenty (20) days notice, or if it disposes of its
properties or assets without QAT II’s prior consent, or if we files a petition
for bankruptcy or otherwise resolves to wind up our affairs.




On March
17, 2010 the Company completed the acquisition of ValidSoft. The acquisition
will be effective from April 1, 2010. The advances by the Company to ValidSoft
totaling $1,736,756 as of December 31, 2009 will reclassified as intracompany
loans and subsequently eliminated upon consolidation.





On March
30, 2010 the Company appointed Mr. Phil Hickman to the Board of
Directors.





The
Company’s management evaluated subsequent events through March 31, 2010, the
date the financial statements were issued and filed with the Securities and
Exchange Commission.




ITEM 9. CHANGESIN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.




None.





ITEM
9A (T).  CONTROLS AND PROCEDURES




67




Evaluation
of Disclosure Controls and Procedures




Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we carried out an evaluation
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer have concluded that,
at December 31, 2009, such disclosure controls and procedures were not
effective.




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




Limitations
on the Effectiveness of Controls




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




Management’s
Report on Internal Control Over Financial Reporting




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




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




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




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




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements in our consolidated financial statements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree or compliance with the policies or procedures may
deteriorate. Management assessed the effectiveness of our internal control over
financial reporting at December 31, 2009. In making these assessments,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework.Based on an initial assessment as of December 31, 2009 as
defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, Our management
determined that a material weakness within its internal control over financial
reporting exists.




68




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




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




Changes
in Internal Control over Financial Reporting





In order
to remediate the material weakness described above we have started a
Sarbanes-Oxley (“SOX”) program strengthening internal controls over financial
reporting in 2008. Key risks and key controls have been identified and assessed
and many improvements were implemented, but remediation of all material
weaknesses was not complete at year end. We aim to complete the remediation in
2010.




Auditor
attestation on Internal Control over Financial Reporting




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





PART
III





ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF
      THE EXCHANGE ACT.




Our
directors and executive officers and their ages as of March 31, 2010 are as
follows:




DirectorName
            
            Age
            
            Position
            
            SinceSteven
      van der Velden
            
            53
            
            Chairman
      of the Board President, Chief Executive Officer and
    Director
            
            2006Martin
      Zuurbier
            
            50
            
            Chief
      Operating Officer, Chief Technical Officer and Director
            
            2007Yves
      R. Van Sante
            
            49
            
            Director
            
            2006Johan
      Dejager
            
            50
            
            Director
            
            2006Roderick
      de Greef (1)(2)(3)
            
            48
            
            Director
            
            2008Phil
      Hickman
            
            59
            
            Director
            
            2010Mark
      Nije
            
            47
            
            Chief
      Financial Officer
            
            n/a







(1)
            Member
      of Audit and Finance Committee.




(2)
            Member
      of Nominating and Corporate Governance
  Committee.




(3)
            Member
      of Compensation Committee





Background





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




69




Steven van der Veldenhas been
a director since October 24, 2006 and our Chairman, President and Chief
Executive Officer since October 30, 2006. Mr. van der Velden has experience in
consultancy, logistics, real estate development, and telecommunications,
e-commerce and investment management. He founded his first consultancy firm in
1983 and since then Mr. van der Velden has started over a dozen companies. Mr.
van der Velden is involved in various Information Communication Technology
ventures throughout Europe, North America and the Far East, and currently serves
as Chairman of the Board of QAT Investments SA in Luxembourg. In 2000, he
co-founded E-commerce Park NV, which has developed a 50,000 sq.ft. data centre
and Internet hosting facility, located on top of the various fiber optic landing
points in Curacao. In 1994, Mr. van der Velden co-founded the ITA International
Telemedia Association, known today as the Network for Online Commerce, and
served as its first Chairman. In the same year, he co-founded InTouch Telecom
SA/NV to offer a wide range of business and consumer telecom applications to the
Belgian Market, and served as its CEO until the company was sold to Global
TeleSystems, Inc. in 1999.  From 1988 until 1992 he served as the
first Managing Director of Antillephone NV. Currently he is a Director of Unicom
NV. Between 1986 and 1988, Mr. van der Velden co-headed a team of 16
consultants, which advised on and implemented a wide range of measures to
balance budgets and to restructure the internal organizations of the Governments
of both the Dutch Antilles and the island of Curacao. Mr. van der Velden earned
his Master’s Degree in Business Administration from Rotterdam School of
Management, the Netherlands, and a Master’s Degree in Law from Leiden
University, the Netherlands. He splits his time between Curacao, Dutch Antilles
and Brussels, Belgium.





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





Yves R. van Santehas been a
director since October 24, 2006.  Mr. van Sante founded QAT
Investments S.A. in 2002, where he currently serves as the Chief Executive
Officer. Concurrently, Mr. van Sante has held various Management and Board
functions in companies supported by Quercus Aimer Trust Investments (“QAT”), the
majority shareholder of our company, such as being a member of the Business Club
‘De Warande’ since 1998. In 2000, Mr. van Sante became the Managing Director of
E-port NV in Ostend, Belgium, a call centre owned by the Port of Ostend. When
E-port was sold after six months to the Dutch call-centre Call-IT, Mr. van Sante
was asked to become Advisor to the Management Board of Call-IT. In 1999, Mr. van
Sante became Vice-President Business Services with GTS, a Pan European Telecom
operator. In this position, Mr. van Sante consolidated acquisitions and turned a
voice Telco operator around into an IP operator. In 1994, Mr. van Sante
co-founded and became partner of InTouch Telecom, a privately owned Belgium
Telco company. As its Managing Director, Mr. van Sante was responsible for
Business Development, Sales and Marketing. From 1987 until 1993, Mr. van Sante
served as Sales and Marketing Manager for Central Europe at 3C Communications
(currently named Tele-2) in Luxemburg, where he launched Credit Card Telephony
across Europe. Prior to this position, Mr. van Sante became a Business Unit
Manager of Public Telephony at Belgacom, a former Belgian owned telecom
operator, where he managed a department of over 650 employees. Mr. van Sante
started his career as an Advisor at United Brokers in 1982. Mr. Van Sante
studied Marketing, Communication and Commercial Management at the High School
for Business Economics and Commercial Management in Ghent, Belgium in
1980.





Johan Dejagerhas been a
director since October 24, 2006. Mr. Dejager is managing director and owner of
Osta Carpets, a specialized niche producer of area rugs with production plants
in Belgium and a distribution center in Barcelona, and Gaverdal, a finishing
plant for the carpet industry. He is also Managing Director of Ligne Pure, a
company specialised in the design and manufacturing of handmade carpets for the
decorator market. Mr. Dejager serves as a member of the Board of Directors of
QAT Investments SA. In addition, he is a shareholder and director of Keyware, a
provider of identity-related solutions and services, and of SPARNEX, an
engineering company developing and industrializing DSL products for the telecom
industry. Mr. Dejager is a member of the Board of Directors of FEBELTEX (the
Federation of the Belgian Textile Companies). As Vice-President of the company,
Mr. Dejager is in charge of the subdivision of interior textiles. Mr. Dejager
holds a Bachelors degree (1981) and a Masters degree in Commercial Engineering
from the University of Leuven, Belgium (1981) and an MBA from Insead
Fontainebleau, France (1982).




70




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




Phil Hickman was appointed as
director on 29 March 2010. Mr. Hickman manages his own consultancy and advisory
business in the fields of corporate strategy and organization, offshore banking,
business process outsourcing (BPO), payment & cash management solutions,
internet and telephony security, sales and marketing. Mr. Hickman is Chairman of
ValidSoft, a member of the Elephant Talk Communications Group, and he is also a
Director of Alfa Bank Holdings, the largest privately-owned bank in Russia and
part of the Alfa Group.  He also acts as an advisor with the Bank in
Russia, Ukraine, Belarus and Kazakhstan. Mr. Hickman spent 32 years in HSBC Bank
plc and has been responsible for developing and implementing many areas of
change and innovation both in the UK and around the world. Before leaving HSBC,
Mr. Hickman was Head of Strategy & Planning HSBC Commercial
Bank.





Executive
Officers





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





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





We have
agreed with Rising Water Capital, A.G., a large shareholder, and on entity in
which QAT holds a 51% ownership interest, to use our best efforts to retain our
current management, including Mr. van der Velden, pursuant to a settlement
agreement dated May 13, 2008.





Committee
Membership, Meetings and Attendance





During
the fiscal year ended December 31, 2009, there were:




·
              meetings of the Board of
      Directors;
  71
  ·
              meetings of the Audit
      Committee;
 
 ·
              meetings of the Compensation
      Committee; and
 
 ·
              meeting of the Nominating
      Committee.





Each
director attended or participated in at least 3/4 of the meetings of the Board
of Directors and his respective committees held during our fiscal year ended
December 31, 2009 and during his term of service.





Board
Committees





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





Audit
and Finance Committee





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





The Audit
Committee reviewed and discussed our audited financial statements as of and for
the year ended December 31, 2009 with the Board of Directors.





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





Compensation
Committee





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





In 2009
this Committee reviewed the Board and Management compensation, including bonus
awards upon the realization of defined targets. Stock options were granted to
staff and consultants. A company wide bonus stock plan is under study of the
Committee.





Nominating
and Corporate Governance Committee





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





72





Corporate
 Governance Guidelines




Our board
of directors has adopted Corporate Governance Guidelines to which adherence is
full commitment. The Corporate Governance Guidelines may be found on our website
at www.elephanttalk.com. 
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of these Guidelines by
posting such information on our website, at the address specified
above.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that our
directors and executive officers and persons who beneficially own more than 10%
of our common stock (referred to herein as the “reporting persons”) file with
the SEC various reports as to their ownership of and activities relating to our
common stock. Such reporting persons are required by the SEC regulations to
furnish us with copies of all Section 16(a) reports they file. Based solely upon
a review of copies of Section 16(a) reports and representations received by us
from reporting persons, and without conducting any independent investigation of
our own, in 2009, all Forms 3, 4 and 5 were timely filed with the SEC by such
reporting persons except for the following:





1.
            Mr.
      Steven van der Velden did not file timely Form 4s, but did ultimately
      file, on Form 5, a report pertaining to the acquisition of convertible
      notes and warrants by QAT Investments and the issuance of warrants to QMG
      in connection with the Offering..


.


2.
            Mr.
      Johan Dejager did not file timely Form 4s, but did ultimately file, on
      Form 5, a report pertaining to the acquisition of convertible notes and
      warrants by QAT Investments and the issuance of warrants to QMG in
      connection with the Offering.




3.
            Mr.
      Yves van Sante did not file timely Form 4s, but did ultimately file, on
      Form 5, a report pertaining to the acquisition of convertible notes and
      warrants by QAT Investments and the issuance of warrants to QMG in
      connection with the Offering.




4.
            QAT
      Investments did not file timely, and has not filed, on Form 4 or Form 5, a
      report pertaining to the acquisition of convertible notes and warrants by
      QAT Investments and the issuance of warrants to QMG in connection with the
      Offering.





73




ITEM
11.  EXECUTIVE
COMPENSATION




Information
concerning this item is contained in the Company’s Definitive Proxy
Statement, filed pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934 for the 2010 Annual Meeting of Stockholders and
is incorporated herein by reference.





ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      SHAREHOLDER MATTERS.





Beneficial Ownership of Principal
Shareholders, Officers and Directors




The
following table sets forth, based on 53,954,385 shares of common stock
outstanding and as of March 15, 2009, certain information as to the stock
ownership of each person known by us to own beneficially five (5%) percent or
more of the outstanding common stock, of each of the our named officers and
directors who owns any shares and of all officers and directors as a group. In
computing the outstanding shares of common stock, the Company has excluded all
shares of Common Stock subject to options, warrants or other securities that are
not currently exercisable or exercisable within 60 days and are therefore not
deemed to be outstanding and beneficially owned by the person holding the
options, warrants or other securities for the purpose of computing the number of
shares beneficially owned and the percentage ownership of that person. Unless
otherwise indicated, the address for each person listed below is c/o Elephant
Talk Communications, Inc., Schiphol Blvd 249, 1118 BH Schiphol, The
Netherlands.




Name
      of Beneficial Holder (18)
            
            Number
      of Shares of Common Stock Owned*
            
            
            Percent
      of Class as of 15 March 2010Rising
      Water Capital AG (1)
            
            
            28,188,087
            (2)
            
            
            51.44
            %(2)CMV
      Invest II CVA (3)
            
            
            8,689,660
            (4)
            
            
            14.69
            %
      (4)Amelia
      & Associates SA(5)
            
            
            1,267,969
            (6)
            
            
            2.31
            %
      (6)CMV
      Invest CVA
            
            
            1,728,697
            
            
            
            3.20
            %Q.A.T.
      Investments SA (1)
            
            
            40,593,793
            (2)
      (7) (8) (9) (10)
            
            
            61.97
            %
      (2) (7)(8)(9) (10)Interfield
      Consultancy Ltd. (1)
            
            
            975,744
            (11)
            
            
            1.81
            %Interact
      WLL(12)
            
            
            654,148
            
            
            
            1.21
            %Steven
      van der Velden
            
            
            54,972,536
            (13)
            
            
            75.99
            %(13)Johan
      Dejager
            
            
            43,839,403
            (14)
            
            
            65.31
            %(14)Yves
      van Sante
            
            
            43,480,857
            (15)
            
            
            56.33
            %(15)Martin
      Zuurbier
            
            
            28,842,235
            (16)
            
            
            52.64
            %(16)Mark
      Nije
            
            
            434,912
            (17)
            
            
            0.81
            %17)Roderick
      de Greef
            
            
            408,333
            
            
            
            0.76
            %All
      Officers and Directors as a Group
            
            
            59,646,477
            
            
            
            81.47
            %







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





(1)
            Q.A.T. Investments, S.A.
      (“QAT”) holds a 51.3% interest in Rising Water Capital, A.G.
      (“RWC”).  Mr. van der Velden holds a 30.79 ownership interest in
      QAT, and also indirectly holds a 17% interest in RWC through his 100%
      ownership interest in Interfield Consultancy Ltd. (“Interfield”). Martin
      Zuurbier indirectly holds approximately a 17% ownership interest in RWC,
      and Dejager and van Sante hold a direct 3.73% and an indirect 3.11%
      interest in QAT, respectively.  Accordingly, Messrs. van der
      Velden, Zuurbier, Dejager and van Sante hold shared voting power and
      dispositive power over the shares held by RWC.  To our
      knowledge, RWC’s address of record is Baarerstrasse 135, 6301
      Zug,Switzerland.




74




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





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





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





(5)
            Mr.
      van Sante holds a 33% ownership interest in Amelia & Associates SA
      (“Amelia”) and therefore holds shared voting and dispositive power over
      the securities held by this entity.  While Amelia holds an 18.4%
      ownership interest in QAT, it disclaims beneficial ownership over the
      securities held by QAT.  To our knowledge, Amelia’s address of
      record is Rue du Fort Rheinshein 7, 2419
  Luxembourg.





(6)
            Includes
      warrants to purchase 347,587 shares of our common stock at $1.05 per
      share, warrants to purchase 347,587 shares of our common stock at $1.26
      per share, and warrants to purchase 173,794 shares of our common stock at
      $1.47 per share.





(7)
            Includes
      warrants to purchase 357,172 shares of our common stock at $1.05 per
      share, warrants to purchase 357,172 shares of our common stock at $1.26
      per share, and warrants to purchase 178,586 shares of our common stock at
      $1.47 per share.





(8)
            Includes
      shares beneficially owned by RWC as described in part in footnote (20)
      hereof.





(9)
            Includes
      5,332,383 shares of common stock issuable upon conversion of two notes,
      one in the amount of $4 million and the other in the amount of $1.33
      million, each issued to QAT Investments in the Offering and 5,332,383
      shares of common stock issuable upon the exercise of two warrants issued
      to QAT Investments in connection with the
  Offering.





(10)
            Includes
      774,022 warrants issued to Quercus Management Group N.V., a wholly-owned
      subsidiary of QAT Investments, for its role as placement agent in our
      Offering to European-area
investors.





(11)
            Does
      not include shares of common stock held by
RWC.





(12)
            Mr.
      Zuurbier owns 100% of Interact W.L.L. and therefore has voting and
      dispositive power of the shares of common stock held by this
      entity.





(13)
            Includes
      shares of common stock held by RWC, QAT, CMV, CMVII, and Interfield and
      the warrants and other securities described in notes (2) (4) (7) (9) and
      (10).





(14)
            Includes
      shares of common stock held by QAT, RWC and the warrants to purchase
      619,048 shares of our common stock at $1.26 per share, and warrants to
      purchase 309,524 shares of our common stock at $1.47 per share as well as
      the warrants and other securities described in notes (2) (7) (9) and
      (10)





(15)
            Includes
      shares of common stock held by QAT, RWC, and Amelia and the warrants and
      other securities described in notes (2) (6) (7) (9) and
    (10).





(16)
            Includes
      shares held by Interact and RWC and the warrants described in note
      (2).




75




(17)
            Mr.
      Nije holds .32% and .16% of QAT and RWC, respectively, and is a partner of
      QAT, but does not control the voting and dispositive power of the
      securities held by these entities.





(18)
            This
      does not reflect any issuances as a result of the Company’s acquisition of
      Validsoft on March 17, 2010, pursuant to which 10,235,739 shares of
      restricted common stock were issued or
      the issuance to Mr. Hickman of 151,011 shares on March 17,
      2010.





ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE.





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





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





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





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





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





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





76




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




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




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





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




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




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




On
February 3, 2009, 23,982 shares of common stock were issued to RWC as part of
the Incentive Payment.  As a result of our private placement of securities
in excess of $1.0 million, RWC is additionally entitled, as an Incentive
Payment, approximately $451,915 in cash and was issued warrants to purchase
338,029 shares of our common stock at $1.05 per share, warrants to purchase
338,029 shares of our common stock at $1.26 per share and warrants to purchase
169,015 shares of our common stock at $1.47 per share.  In lieu of the
cash payment to RWC was entitled it accepted 742,000 shares of our common stock,
based on a conversion price of $0.60 per shareIn connection with the loan
agreements described above, on March 30, 2009 we entered into a security
agreement (the “Security Agreement”) with QAT II.  The Security
Agreement granted QAT II a security interest in the revenues received by us
under a Spanish MVNE Agreement which management expects to be entered into by
the parties (the “MVNE Agreement”).   The Security Agreement will
terminate when all amounts due under the loan agreements have been paid in full
by Registrant.




77




On June
30, 2009, we issued 124,800 shares of our common stock to QAT as consideration
for the services provided by Steven van der Velden, our Chairman, President and
Chief Executive Officer.  The shares of common stock were issued
directly to QAT pursuant to an agreement between QAT and Mr. van der
Velden.




On July
1, 2009 and July 8, 2009 QAT II, a closed-end fund of QAT Investments, entered
into a loan agreement with the Company whereby QAT II provided the Company with
$ 213,795 and $ 142,530.  According to the terms, the loans will bear
interest at a rate of twelve percent (12%) per annum and shall be repaid either:
(1) if QAT II and the Company sign an investment agreement, the amount due under
the loan will be reduced by the investment amount pursuant to the investment
agreement, or (2) if no investment agreement is executed, the principal amount
of the loan plus interest is due and payable by August 31, 2009. The agreement
and amount were entered in Euro’s, which means that currency differences may
occur in filings made and this Report.




On July
31, 2009, QAT II converted $4,100,000 provided under the loan agreements
into  $4,100,000 in Notes and  Warrants as part of the First
Closing with respect to the Offering. On October 30, 2009, QAT II converted
$1,332,383 into Notes and Warrants as part of the Fifth Closing with respect to
the Offering.





Quercus
Management Group N.V. (“QMG”), an entity affiliated with certain officers and
directors of the Company served as European placement agent for the
Offering.  In the aggregate, QMG raised $4,837,632, entitling it to
774,022 Warrants (equal to 8% of the aggregate amount of Notes and Warrants sold
in the Offering, including those Notes and Warrants sold to affiliates of the
Company), an 8% selling concession equal to $387,010.56 and 2% non-accountable
expenses and fees equal to $96,752.64.  Of the $4,837,632 raised by
QMG, $4,399,995.10 (or 91% of the total) was raised from parties affiliated with
the Company (including the $4,100,000 conversion by QAT II).





On February 3, 2010, we entered into a
loan agreement with QAT II  pursuant to which QAT II agreed to lend to
the Company the sum of €350,000 (or $488,775 based on the February 3, 2010
exchange rate published in the Wall Street Journal on February 3, 2010), on
February 24, 2010, QAT II agreed to lend to us the sum of €850,000 (or
$1,150,390 based on the February 24, 2010 exchange rate published in the Wall
Street Journal on February 25, 2010) and on March 26 we entered into a loan
agreement with QAT II  pursuant to which QAT II agreed to lend to the
Company the sum of €500,000 (or $680,850 based on the March 26, 2010 exchange
rate published in the Wall Street Journal on March 29, 2010).  These
loan agreement provides that we will pay interest at a rate of fourteen percent
(14%) per annum on the outstanding balance and provides the principal and
interest shall be due and payable on the earlier of: (i) 180 days from the date
of the loan or (ii) in the event we consummate an equity or debt financing of at
least $5,000,000 (a “Placement”); provided, however, QAT II has
the ability to convert the principal and accrued interest outstanding as of the
date of the Placement into the same type of equity or debt securities issued by
us and on the same terms and conditions offered to other investors in the
Placement.  The outstanding principal and interest shall become
immediately due and payable in the event we fail to make required payments of
principal and interest, or otherwise breaches the loan agreement and fail to
cure such breach upon twenty (20) days notice, or if it disposes of its
properties or assets without QAT II’s prior consent, or if we files a petition
for bankruptcy or otherwise resolves to wind up our affairs.




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




To the
best of our knowledge, other than as set forth above, there were no material
transactions, or series of similar transactions, or any currently proposed
transactions, or series of similar transactions, to which we were or are to be a
party, in which the amount involved exceeds $120,000, and in which any director
or executive officer, or any security holder who is known by us to own of record
or beneficially more than 5% of any class of our common stock, or any member of
the immediate family of any of the foregoing persons, has an
interest.





Director
Independence





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





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


.


ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES.





The
aggregate fees billed by BDO Siedman (“BDO”) for professional services rendered
for the audit of our annual financial statements for the years ended
December 31, 2009 and 2008 and the review of the financial statements
included in our Current Reports on Form 10-Q during the 2009 and 2008 fiscal
years totaled $250,000 and $195,000 The above amounts include interim procedures
as audit fees as well as attendance at audit committee meetings.





Tax Fees.The aggregate fees
billed by Kabani for professional services rendered for tax compliance, for the
years ended December 31, 2009 and 2008 were $0 and $0
respectively.





The
aggregate fees billed by BDO for professional services rendered for tax
compliance, for the year ended December 31, 2009 and 2008 were $0 and $0
respectively





All Other Fees.The aggregate
fees billed by BDO for products and services, other than the services described
in the paragraphs captions “Audit Fees”, and “Tax Fees” above for the year ended
December 31, 2009 and 2008  totaled $0 and $2,030.





The Audit
Committee of our Board of Directors has established its pre-approval policies
and procedures, pursuant to which the Audit Committee approved the foregoing
audit, tax and non-audit services provided by BDO in 2009 and 2008 consistent
with the Audit Committee’s responsibility for engaging our independent auditors,
all audit and permitted non-audit services require pre-approval by the Audit
Committee. The full Audit Committee approves proposed services and fee estimates
for these services. The Audit Committee chairperson has been designated by the
Audit Committee to approve any audit-related services arising during the year
that were not pre-approved by the Audit Committee. Any non-audit service must be
approved by the full Audit Committee. Services approved by the Audit Committee
chairperson are communicated to the full Audit Committee at its next regular
meeting and the Audit Committee reviews services and fees for the fiscal year at
each such meeting. Pursuant to these procedures, the Audit Committee approved
the foregoing audit services provided by BDO.




78





Part IV




ITEM
15. Exhibits, Financial Statement Schedules




The
following exhibits are filed with this Report.




Number
            
            Description3.1
            
            Amended
      and Restated Articles of Incorporation (1)3.2
            
            Amended
      and Restated By-Laws (2)3.3
            
            Amended
      and Restated Articles of Incorporation, filed with the State of California
      on June 10, 2008. (3)10.1
            
            Stock
      Purchase Agreement dated June 30, 2005, by and among the Company and
      Rising Water Capital, A.G. (4)10.2
            
            Convertible
      Promissory Note dated December 15, 2005, by the Company, in favor of
      Rising Water Capital, A.G. (5)10.3
            
            Equity
      Transfer Agreement, dated January 4, 2006, by and among Zhongrun Chuangtou
      Technology Co.  Ltd. and Guangdong Guangxiang Network
      Information Co., Ltd (6)10.4
            
            Exclusive
      Technical Consulting  and Services Agreement, dated January 2,
      2006, by and among Jinfuyi Technology (Beijing) Co., Ltd. and Beijing
      Chinawind Communication Information Technology Co., Ltd.
    (6)10.5
            
            Convertible
      Promissory Note dated May 26, 2006, by the Company, in favor of Rising
      Water Capital, A.G. (7)10.6
            
            Agreement
      of Purchase and Sale, dated November 16, 2006, by and among the Company,
      Elephant Talk Europe Holding B.V. and Beltrust A.G. (8)10.7
            
            Form
      of Common Stock Purchase Agreement, dated August 31, 2007, by and among
      the Company and certain investors. (9)10.8
            
            Settlement
      Agreement, entered by and between the Company and Rising Water Capital
      AG.(10)10.9
            
            Loan
      Agreement by and between the Company and QAT II Investments dated January
      27, 2009(11)10.10
            
            Loan
      Agreement by and between the Company and QAT II Investments dated February
      15, 2009(12)10.11
            
            Loan
      Agreement by and between the Company and QAT II Investments dated February
      23, 2009(12)10.12
            
            Loan
      Agreement by and between the Company and QAT II Investments dated March
      31, 2009(12)10.13
            
            Security
      Agreement, entered into by and between the Company and QAT II Investments
      (12)10.14
            
            Loan
      Agreement by and between the Company and QAT II Investments dated May 27,
      2009(13)10.15
            
            Contract
      for the Supply of Operation and Technical Services through a Comprehensive
      Technological Platform between Vizzavi Espana S.L. and the
      Company(14)10.16
            
            Collaboration
      Agreement by and between Validsoft Limited and the
    Company(15)10.17
            
            Loan
      Agreement by and between the Company and QAT II Investments dated July 1,
      2009(16)10.18
            
            Amendments
      to Loan Agreements dated January 27, 2009, February 15, 2009, March 4,
      2009, March 31, 2009, May 4, 2009, and May 27, 2009 by and between QAT II
      Investments and the Company(16)10.19
            
            Side
      Agreement by and between Validsoft Limited and the
    Company(17)10.20
            
            Extension
      Agreement by and between Validsoft Limited and the
    Company(17)10.21
            
            Amendment
      to Loan Agreements dated January 27, 2009, February 15, 2009, March 4,
      2009, March 31, 2009, May 4, 2009, May 27, 2009, July 1, 2009 and July 8,
      2009 by and between QAT II Investments and the
  Company(18)10.22
            
            Letter
      Agreement by and between Validsoft Limited and the
    Company(19)10.23
            
            Heads
      of Terms Agreement by and between Validsoft Limited and the
      Company(20)10.24
            
            Loan
      Agreement by and between the Company and QAT II Investments dated February
      3, 2010(21)10.25
            
            Loan
      Agreement by and between the Company and QAT II Investments dated February
      24, 2009(22)




79




10.26
            
            Sale
      and Purchase Agreement, dated March 17, 2010, by and among the Company.
      and the shareholders of Validsoft Limited other than Enterprise Ireland
      (23)10.27
            
            Sale
      and Purchase Agreement, dated March 17, 2010, by and the Company and
      Enterprise Ireland (23)14.1
            
            Code
      of Ethics (1)21.1
            
            Subsidiaries
      of the Registrant (*)23.1
            
            Consent
      public accounting firm BDO Seidman, LLP
      (*)31.1
            
            Certification
      of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (*)(**)31.2
            
            Certification
      of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
      (*)(**)32.1
            
            Certification
      of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (*)(**)32.2
            
            Certification
      of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
      (*)(**)







*
            Filed
      Herewith


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


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


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


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


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


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


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


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


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


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


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


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


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


(13)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 1,
      2009.


(14)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 4, 2009 and
      amended by a Current Report on Form 8-K filed September 17,
      2009.


(15)
            Filed
      as an Exhibit to our Current Report on Form 8-K on June 24,
      2009.


(16)
            Filed
      as an Exhibit to our Current Report on Form 8-K on July 2,
      2009.


(17)
            Filed
      as an Exhibit to our Current Report on Form 8-K on July 8,
      2009.


(18)
            Filed
      as an Exhibit to our Current Report on Form 8-K on July 21,
      2009.


(19)
            Filed
      as an Exhibit to our Current Report on Form 8-K on August 6,
      2009.


(20)
            Filed
      as an Exhibit to our Current Report on Form 8-K on November 6,
      2009.


(21)
            Filed
      as an Exhibit to our Current Report on Form 8-K on February 18,
      2010.


(22)
            Filed
      as an Exhibit to our Current Report on Form 8-K on February 26,
      2010.


(23)
            Filed
      as an Exhibit to our Current Report on Form 8-K on March 23,
      2010.




80




SIGNATURES





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




ELEPHANT
      TALK COMMUNICATIONS, INC.Date:
      March 31, 2010
              By:
              /s/
      Steven van der VeldenName:
              Steven
      van der VeldenTitle:
              President
      and Chief Executive Officer




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




Person
            
            
            
            Capacity
            
            
            
            Date/s/
      Steven van der Velden
            
            
            
            Chairman
      of the Board and Director
              (Principal
      Executive Officer)
            
            
            
            March
      31, 2010Steven
      van der Velden/s/
      Mark Nije
            
            
            
            Chief Financial
      Officer
            
            
            
            March
      31, 2010Mark
      Nije/s/
      Martin Zuurbier
            
            
            
            Chief Operating
      Officer, Chief Technical Officer, Director.
            
            
            
            March
      31, 2010Martin
      Zuurbier/s/
      Yves R. van Sante
            
            
            
            Director
            
            
            
            March
      31, 2010Yves
      R. van Sante/s/
      Johan Dejager
            
            
            
            Director
            
            
            
            March
      31, 2010Johan
      Dejager/s/
      Roderick de Greef
            
            
            
            Director
            
            
            
            March
      31, 2010Roderick
      de Greef/s/
      Phil Hickman
            
            
            
            Director
            
            
            
            March
      31, 2010Phil
      Hickman