**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, 2007o
              **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 0-28931
  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




Page
          1


Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No
o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. Yes x No
o





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 April 14, 2008 was approximately $3,355,142.85 based on
      the
      closing sale price of the company’s common stock on such date of U.S. $0.06 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 27, 2008, there were 238,265,927 shares of common stock
      outstanding.




Page
          2




**Elephant
      Talk Communications Inc.**


**Form
      10-K**


**For
      the fiscal year ended December 31, 2007**





**TABLE
      OF CONTENTS**


**Note
                on Forward-Looking Statements**
              **4****PART
                I**
              
              
              **5**Item
                  1.
              
              Description
                  of Business.
              5Item
                  2.
              
              Description
                  of Property.
              23Item
                  3.
              
              Legal
                  Proceedings.
              23Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders.
              24**PART
                II**
              
              
              **25**Item
                  5.
              
              Market
                  for Common Equity and Related Stockholder Matters.
              25Item
                  6.
              
              Selected
                  Financial Data.
              26Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations.
              26Item
                  8.
              
              Financial
                  Statements.
              31Item
                  9.
              
              Changes
                  In and Disagreements with Accountants on Accounting and Financial
                  Disclosure.
              55Item
                  9A(T).
              
              Controls
                  and Procedures.
              56**PART
                III**
              
              
              **57**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate Governance.
              57Item
                  11.
              
              Executive
                  Compensation.
              62Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.
              66Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              68Item
                  14.
              
              Principal
                  Accountant Fees and Services.
              69**PART
                IV**
              
              
              **70**Item
                  15.
              
              Exhibits,
                  Financial Statement Schedules.
              70







Page
          3




**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 the Company has acquired and may acquire in the
                future;




·
            the
                Company’s possible inability to raise or generate additional funds that
                will be necessary to continue and expand the Company’s
                operations;




·
            the
                Company’s potential lack of revenue
                growth;




·
            the
                Company’s potential inability to add new products and services that will
                be necessary to generate increased
                sales;




·
            the
                Company’s potential lack of cash
                flows;




·
            the
                Company’s potential loss of key
                personnel;




·
            availability
                of qualified personnel;




·
            international,
                national regional and local economic political
                changes;




·
            applicable
                foreign and domestic regulations;




·
            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.


Page
          4


**PART
      I**





**Item
      1. Description of Business.**





**Overview**





Elephant
      Talk Communications, Inc. (herein referred to as "Elephant Talk," "ETCI," "We,"
      "Our," or the "Company"), is
      an
      international telecom operator and enabler/systems integrator to the multi-media
      industry. ETCI, until recently, was engaged in the long distance telephone
      business in China and the Special Administrative Region Hong Kong. In 2006
      the
      Company adopted the strategy to re-position itself by facilitating the
      distribution of all forms of content and telecommunications services to various
      international customers. The company provides traditional telecom services,
      media streaming and distribution services primarily to the business-to-business
      community within the telecommunications market where it has a presence. Elephant
      Talk operates in over a dozen markets in Europe, Asia Pacific and the Middle
      East. Through intelligent design and organizational structure the Company
      pursues this strategy by building a worldwide network based on both clear and
      IP
      bandwidth that is managed centrally by its self-developed In House Customer
      Relations Management (IN-CRM)-Billing platform.





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





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





**Background
      of Elephant Talk Communications, Inc.**





Elephant
      Talk Communications Inc. was formed in 2001 as a result of a merger between
      the
      Staruni Corporation and Elephant Talk Limited (Hong Kong). Elephant Talk Limited
      (Hong Kong) originally started its operation in 1994 as an international long
      distance services provider, specializing in international call termination
      into
      China. Its operating hubs in Hong Kong and the USA provided a gateway to both
      the North American and Worldwide Carrier Networks. However, due to the extremely
      competitive nature of this market, the Company chose to abandon this strategy
      a
      few years ago.





Elephant
      Talk is now primarily engaged in long distance and premium rate telephone
      services and is actively seeking to position itself as a broader
      telecommunications services provider and a multimedia distribution company.
      It
      is the Company’s goal to further develop and exploit a highly flexible, fully
      standardized and integrated global telecommunications network on the basis
      of
      national licenses & interconnects which are owned or accessed through
      partnerships. Through an integrated platform around this network it is ETCI’s
      intention to offer its clients a turnkey solution for basic, commoditized
      (voice) telecommunication services, toll free, shared cost and premium rate
      services, content & payment provisioning, and mobile services. Eventually
      covering the full range of services from (IP based) telecommunications services
      to content delivery and billing and operating its own global communications
      network, ETCI hopes to be able to bring these communications services and
      content to its customers, collect payments, and allocate those payments to
      all
      parties involved in the distribution chain.




Page
          5





ETCI
      is
      creating a managed global network that, it believes, enables ETCI’s
      customers to distribute all their information in a fully managed and secured
      environment compared to the internet. Together with a fully integrated back
      office system, ET opens up this network to every Business-to-Business (B2B)
      customer and enables these customers to manage and control their business,
      as
      well as to collect payment, from their own premises and to run ETCI’s network as
      if it is their own.
      The
      feature allows ETCI’s B2B customers to see mobile, fixed, internet, WIFI,
      and local, regional or multi-country, as just one integrated network, with
      the
      advantages of one single network interface, centralized customer recognition
      and
      one set of financial controls.





As
      such
      ETCI is attempting to position itself as the preferred telecom outsourcing
      partner to all of its B2B customers. These long term business partners include
      larger marketing organizations and/or content providers who are in need of
      telecommunications services as a key (or merely a supporting but important)
      feature in their overall product/market and distribution offering. In addition
      other telecom companies could partner with ETCI to expand their geographical
      footprint or services offered. As such ETCI positions its partners as if they
      are a fully networked telecommunications company themselves by providing them
      all the tools and resources to manage their businesses, particularly the
      telecommunications part, as an integrated element of their overall
      offering.





ETCI
      believes its B2B customers will be able to create their own business
      environment, and be able, with the support of ETCI’s back office and CRM
      (Customer Relationship Management) systems, to recognize and serve their own
      clients, employees or partners wherever they are, whatever device they use
      and
      at any time. ETCI’s vision is that all access to its network will be steered by
      its worldwide central data and information base. This data base will facilitate
      ETCI’s customers to define worldwide access authorization so their clients will
      get access to the services through their own familiar interface and/or workplace
      and in the format and language of their preference.





The
      key
      to ETCI’s business plan is the fully automated capturing and recording of any
      event on its global network through standard Call Data Records. These so called
      CDR’s are globally recognized and accepted by all of ETCI’s suppliers and
      customers because of their high quality, reliability and consistency. As a
      result, on a real time/on-line basis, ETCI believes its billing engine provides
      trustworthy inter-company payment overviews.





Page
          6




The
      following chart illustrates the Company’s structure as of December 31,
      2007.










In
      2007
      the ETCI group 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 **Historical
      background “Benoit Acquisition”,** for
      an
      overview of this transaction. In addition to the Benoit Acquisition, on June
      1,
      2007 ETCI 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 this transaction and
      the Benoit Acquisition, the operations and corporate structure of ETCI
      significantly expanded.





In
      addition to the aforementioned acquisitions, in 2007 we incorporated three
      new
      companies in the ETCI group. 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. We
      incorporated Elephant Talk Business Services W.L.L. (“ET Business Services”), a
      Bahrain based company, on October 21, 2007, to act as an intra-group service
      provider outside Europe. Elephant Talk Communication Carrier Services GmbH
      performs this activity within Europe. We also formed Elephant Talk
      Communications Luxembourg S.A. (ET Luxembourg) on December 27, 2007, to
      initially focus on providing payment collection services for other group
      companies.


Page
          7


**Historical
      background “Benoit Acquisition”**





On
      January 17, 2005, the Company entered into a Memorandum of Understanding with
      Beltrust AG, a corporation organized and existing under the laws of Switzerland
      (“Beltrust”), to acquire all of the issued and outstanding shares of Benoit
      Telecom Holding AG, a corporation organized and existing under the laws of
      Switzerland (“Benoit Telecom”). Benoit Telecom is a European-based telecom
      company. On November 17, 2006, the Company executed an Agreement of Purchase
      and
      Sale (the “Agreement”), with Beltrust and Elephant Talk Europe Holding B.V. (“ET
      Europe”), a corporation organized and existing under the laws of The
      Netherlands, and a wholly owned subsidiary of the Company, providing for the
      purchase and sale of all of the issued and outstanding shares of Benoit Telecom
      by ET Europe.





Pursuant
      to the 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 the Company’s common stock. The
      parties acknowledged that $6,043,080 (equivalent to approximately Euros
      4,625,000) had been previously paid by the Company on behalf of ET Europe to
      an
      escrow agent as an earnest deposit. In addition, the parties agreed that the
      remaining balance of the consideration consisting of $600,000 of cash payment
      and 40,000,000 shares of common stock of the Company shall be transferred
      to Beltrust within 30 days of the closing. The 100,000 shares of Benoit were
      transferred to ET Europe as of the closing pursuant to the Agreement.





**Technology
      Infrastructure**





ETCI
      has
      built a worldwide footprint through intelligent network and content management
      systems, supported by its organizational structure. The company provides clear
      communication and IP bandwidth centrally managed by its proprietary
      sophisticated IN (Intelligent Network)-CRM (Customer Relationship
      Management)-Billing platform. ETCI is able to eliminate the usual limitations
      caused by national borders, networks, devices or media and therefore enables
      its
      Business-to-Business customers to operate as independent telecom and multimedia
      distribution organizations. Moreover, the Company is a system integrator and
      developer for telecom and digital media distribution activities as well as
      a
      circuit and package based telecom operator. ETCI believes it has positioned
      itself as the premier outsourcing partner for national and global multimedia
      companies. ****





To
      maintain flexibility and to allow growth, ETCI has chosen to develop its own
      proprietary software and systems including: 1) a fully integrated rating,
      mediation, provisioning, CRM and billing system for multi-country and
      multi-media use and applications; 2) an advanced Infitel IN platform; and 3)
      a
      streaming technology. ETCI’s development activities are located in Gerona,
      Spain, while the actual development and testing is carried out by ETCI’s own
      software engineering staff in Guangzhou (China). Also ETCI’s global 24/7 Network
      Operating Center is located in Guangzhou.





ETCI’s
      in-house CRM/billing system is the backbone for all of the Company’s operations.
      It ensures proper support for all of ETCI’s services and its reliable data are
      the basis for customer satisfaction. We believe the Company’s network and system
      platforms are able to handle the extremely high demands of national incumbents
      and other telecom operators on ETCI’s globally interconnected network.





By
      combining fixed line, mobile and wireless access services through contractual
      arrangements with an unrestricted number of first/last mile telecom providers,
      ETCI offers a wide range of content, media streaming and more traditional
      telecom services. All traffic is supported by ETCI’s own CRM and CDR (Call Data
      Records) systems for complete customer identification, billing and collection
      purposes. Consequently, ETCI enables its B2B customers to operate as global
      telecom & multi media distribution organizations themselves. Supporting
      business processes such as fulfillment, logistics, and live customer care agents
      can be provided through third party suppliers with which ETCI
      cooperates.





ETCI’s
      network is based on fixed-line telecommunications licenses, mobile access
      agreements and network interconnections. ETCI’s geographical cross-border
      footprint, established through existing relationships with national telecom
      incumbents, is, in the Company’s opinion, especially well-positioned for
      international traffic. ET has established its own facilities-based
      infrastructure on four continents. Currently, as a fully licensed carrier,
      ETCI
      is 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, Elephant Talk has access to interconnections in France, Germany,
      Poland, Finland, Sweden, Norway and Ireland. To complement its international
      capabilities, ETCI has facilities in Hong Kong and Los Angeles.




Page
          8





ETCI’s
      distribution of third party content such as movies, ring tones and sports is
      centrally managed and integrated through a network of content management
      platforms strategically located in data centers around the world in places
      like
      Hong Kong, Amsterdam, Hannover, Barcelona, Bahrain and Curaçao.





As
      mobile
      and wireless access increasingly play a vital role in communication success,
      ETCI continues to expand its mobile access on top of its fixed line access.
      In
      June 2007 a MVNE (Mobile Virtual Network Enabler) agreement was signed between
      T-Mobile/Orange in the Netherlands and ETCI.





**Products
      & Markets**


****


**Carrier
      (Pre) Select (CS/CPS)**





ETCI’s
      traditional fixed line network-based services include CS and CPS services to
      end-users. In addition the Company offers the service to retailers/resellers
      as
      a “white label” (third party branded) product with the use of ETCI’s fully
      integrated management tools. ETCI’s CS and CPS services route calls over its
      network at competitive rates. By dialing a specific ETCI assigned access code
      each time a long distance call is made (Carrier Select) or by having such code
      pre-installed at the subscription providing carrier (Carrier PreSelect), clients
      can route calls via the ETCI network. Clients can join ETCI easily as ETCI
      takes
      care of administrative work including number porting, the process of
      transporting their number to ETCI’s carrier service. ETCI does not charge fixed
      costs for using its CS or CPS services, clients are billed on a per usage base
      only. Our detailed invoices, sent by email or accessible on-line, provide
      complete call records and statistics. CS and CPS services are presently being
      offered in The Netherlands, Italy, France and Austria. **** To
      support its customers ETCI has a multilingual helpdesk available.





**Service
      Numbers / Premium Rate (PRS)**  **&
      Toll Free Services**





ETCI’s
      Premium Rate Service offers an easy payment solution for paid content such
      as
      data services and interactive & value added services over fixed and mobile
      networks as well as over the internet. The calling party pays a premium on
      top
      of the normal call charges. Both charges are normally collected by the
      subscription providing carrier, usually the local incumbent, through the regular
      phone bill. PRS numbers implemented with ETCI are directly delivered to ETCI’s
      switches, while the premium (after deduction of mostly regulated collecting
      charges) is being paid to ETCI. ETCI offers such PRS services on either a
      domestic or cross border basis in over 10 European countries with the added
      benefit of a centrally located management and billing system. If required,
      ETCI
      can provide PRS numbers in other countries as well. In order to meet the new
      demands as a result of the increasing integration of telecommunication and
      media
      broadcasting, ETCI is adding Video Calling solutions to its PRS platform
      capabilities.





Toll
      Free
      numbers are usually marketed by companies that want to increase the number
      of
      customers calling their sales, service and customer support centers. Based
      on
      ETCI’s interconnected global network, ETCI is positioned to cater to this
      market, especially focusing on high quality, low cost cross border toll free
      traffic.





**Two
      Stage Dialing**





ETCI’s
      Two-Stage Dialing facility offers a low rate international call service and
      is a
      white label third party branded product. Two-stage
      dialing ** means
      the
      end user has to dial twice - once to reach a second dial tone, and again to
      reach the final destination.  In other words, a call traversing from a
      public switched telephone network (PSTN) to VoIP or VoIP to PSTN must go through
      two dialing stages to reach the intended recipient. Access
      to the service can be gained by dialing a premium-rate or shared-cost number
      from as little as $0.05/min. up to a maximum of around $0.63/min. subject to
      the
      international destination. Once connected to the service a dial tone prompts
      callers to dial the number at their desired international destination subsequent
      to which ETCI routs the call through its international carrier network. The
      main
      benefits of this concept are: a) total price transparency for the end-user,
      b)
      no separate billing, callers are charged on their regular phone bill, c) no
      registration or contracts for callers, d) service can be used from any phone,
      including mobiles, at any time. The continuously decreasing termination costs
      have worked in favor of the profit margin between the revenues ETCI receives
      from the premium-rate and shared-cost numbers, and the international call
      routing costs. The service is currently used in Germany, Spain, The Netherlands,
      Austria, Switzerland, Poland and the UK. Interconnects in these countries allow
      the service to be centrally managed and ETCI’s CRM billing system enables the
      company’s customers to monitor constantly updated call statistics online. The
      Two-Stage Dialing services have predominantly been marketed through profit
      sharing Media Partners among which some of the largest media groups in Europe
      including IP Media (RTL, Switzerland), ORF Television (Austria), Metro, STER
      (Dutch national television), and various leading local TV channels and
      newspapers. Call statistics have revealed that the service is particularly
      popular among the expanding European immigrant population. Poland, for instance,
      is one of the top five most frequented destinations of all countries where
      Two-Stage dialing has been marketed. Over the years the Two-Stage dialing
      service has clearly encountered more competition from VoIP call services such
      as
      Skype but also from lower international call charges by incumbents and other
      telecommunication companies in general. However, immigrant user groups tend
      to
      have only limited access to these alternative international call facilities
      and
      often depend on a mobile device only. Consequently, Two-Stage Dialing continues
      to be essential for its niche market group users and the call volume of this
      service has been only marginally affected by competing services.




Page
          9




**Streaming,
      Media & Content Services**





*Streaming*





ETCI
      provides high quality streaming of video and audio for the internet and mobile
      phones. ETCI has developed a new technology for the digitalization of ‘running
      video’ based on a military pattern recognition technology. This compression
      technology is  applied specifically for encoding and transmitting video via
      any standard mobile telephone communication protocol, such as GSM, GPRS, EDGE,
      UMTS, HSDPA, CDMA, WCDMA with a capacity of 22 Kbps and higher: 16 Kbps for
      video, 6 Kbps for audio. In addition, ETCI also has live streaming facilities
      for analogue modems, ISDN, double ISDN, cable, xDSL, Wifi, Wimax and LAN. This
      streaming technology thus allows ETCI’s customers to not only offer services to
      broadband users, but to reach the vast market of low bandwidth end-users as
      well.




*Media
      Phone*





ETCI’s
      platform facilitates the distribution of content driven services to end-users
      via PC, laptop, fixed telephone or mobile handset using a proprietary software
      interface called Media Phone. This interface provides end-users access to
      content (music, videos and games), to use VoIP communication services, and
      for
      example also Fax and SMS services via ETCI’s network. By making use of the
      ETCI’s CRM/billing system, ETCI’s B2B customers are also able to offer revenue
      sharing business models to their own clients. Contrary to regular soft phone
      interfaces, all Media Phone traffic is channeled through ETCI’s switches (not
      peer-to-peer), thus making sure communication is of the highest quality. Users
      are automatically directed to the nearest VoIP/Media Gateway, located around
      the
      globe, to further ensure the highest quality of service. As the VoIP facility
      of
      the Media Phone can set up all regular national and international calls via
      ETCI’s own network, users can be assured of very competitive call charges. The
      platform has recently become operational, though to date it has not generated
      any traffic.





*Digital
      Content*





ETCI
      has
      recently acquired distribution rights from third parties for the widest range
      of
      content including movies, videos, music, mobile content, and games. ETCI’s
      facilities will offer access to this content base, and also enable ETCI’s B2B
      customers to distribute their content efficiently. To avoid unauthorized usage,
      security solutions have been developed using the latest techniques, including
      Microsoft DRM licenses 9, 10 and 11, that offer a highly secure environment
      in
      combination with ETCI’s CRM/billing modules.




Page
          10





**Mobile
      Services**





ETCI
      is a
      full MVNE (Mobile Virtual Network Enabler) with its own integrated platforms,
      switches and network for back-office and customer interaction solutions. The
      back-office services will range from provisioning and administration to OSS
      (Operation Service Support) and BSS (Business Service Support) running on ETCI’s
      IN/CRM/Billing platform. ETCI’s CRM system is designed to facilitate both MNO’s
      (Mobile Network Operators) to profitably target specific, often niche market
      segments and/or specific market requirements as well as MVNO’s (Mobile Virtual
      Network Operators) to run their operations effortlessly without the technical
      and financial burden of an own mobile network. We anticipate these services
      to
      be fully operational in the second quarter of 2008.





For
      companies that wish to enter the mobile telephone market, the MVNO business
      model is most attractive because it eliminates the expense of establishing
      and
      managing a mobile network of their own. The initial capital expenditure is
      therefore very low and so are the corresponding operational costs. Traditionally
      MNO-MVNO propositions required high capital and operational expenditure and
      attention to multiple technical components for both the MNO as well as the
      MVNO.
      ETCI’s business model offers a solution for MVNO’s allowing them to concentrate
      on sales and marketing, and for MNO’s to be able to cater to often smaller,
      niche market MVNO’s without burdening legacy systems and other resources,
      usually not designed to efficiently service such wholesale
      customers.





Next
      to
      more traditional voice and SMS services, ETCI’s MVNE platform is focusing on
      wireless data services, content, applications and e-commerce. Traditional voice
      service of MVNO’s will probably be marginalized over time, following similar
      price erosion patterns as in fixed telecom services, and therefore cannot
      compete on the long run without value-added services. Moreover, the emerging
      market of 3G/3.5G mobile services, including WIMAX and WIFI, create great
      opportunities to attract new subscribers.





Mobile
      devices are an effective medium to communicate commercial messages to
      subscribers, especially if supported by proper customer profiling tools in
      combination with ETCI’s CRM/billing platform. Mobile messages can be
      personalized per subscriber, segmented within the client base or just be used
      as
      a mass communication means. As a mobile device is one of the most personal
      communication tools to connect with, and stimulate customers, MVNO’s might offer
      excellent opportunities to a variety of companies with a non-telecommunication
      core business, like fast moving consumer goods companies looking to expand
      and
      broaden their markets, while at the same time creating focused marketing
      communication channels with their existing customer bases.





**Business
      Strategy for 2008 and Beyond**





**Growth
      Strategy, in general**





In
      their
      efforts to continue to reposition the Company, management has been actively
      seeking additional business opportunities to steer the Company away from the
      extremely competitive and low margin market of international call termination
      to
      the more profitable Carrier (Pre)Select, Premium Rate, Toll Free, Content
      Distribution and Mobile Services global market.





In
      this
      respect the Company concluded its acquisition of Benoit Telecom Holding (BT)
      on
      January 1, 2007, giving Europe access to the European market. In addition,
      on
      June 1, 2007, the Company concluded its acquisition of 3U’s French operation,
      mainly active in Carrier (Pre)Select.





After
      obtaining all required licenses, the Company obtained its own interconnections
      in the UK with BT and in Bahrain with Batelco operational in the third quarter
      of 2007, thereby adding an additional footprint. Management hopes to
      substantially increase ECTI’s presence over the next couple of years in Europe,
      Middle East & Africa, The Far East and in the Americas, thereby increasing
      its fixed line origination and termination capabilities.





An
      important part of ETCI’s strategy will be to grow and operate its presence both
      at a lower original investment cost as well as a structurally lower operational
      cost by managing its global infrastructure as if it is one simple national
      network, i.e. with one overhead instead of many different operational overheads.




Page
          11





All
      ETCI’s network elements, wherever located, are managed, monitored, diagnosed and
      updated remotely. As all systems are designed redundantly and build up from
      similar, uniform components, no continuous on-site support is required. On
      a
      rotating basis, proactive maintenance takes place to promote 100% uptime. As
      a
      consequence, ETCI can run all of its systems with one dedicated, relatively
      small team of high level hardware, software and telecom engineers from locations
      in Spain, China and the Netherlands. Using this single, relatively low overhead
      to run all of its global applications, gives what ETCI believes is a low cost
      structure and which is, in management’s belief, absolutely required for ETCI to
      gain a preferred market positioning.





Another
      part of ETCI’s strategy will be to build access to mobile networks on top of its
      global fixed line infrastructure. This is achieved through negotiating full
      Mobile Virtual Network Operator/Enabler (MVNO/MVNE) contracts with mobile
      network operators in countries where ETCI already is in the possession of a
      full
      fixed telecom license.





By
      building mobile access capabilities on top of its fixed network infrastructure,
      and using primarily the same overheads to run this, ETCI can add these MVNE
      capabilities at a lower investment cost than usual for these activities at
      a
      corresponding lower operational cost, thus creating a competitive advantage.
      In
      this respect ETCI concluded in 2007 its first MVNE contract in the Netherlands,
      which operation is expected to start in the second quarter of 2008. During
      the
      next couple of years management expects to be able to add 2 to 3 national MVNE
      operations each year.





The
      Company intends to continue on this path of expansion by further acquisition
      of
      a controlling stake in profitable companies in the year 2008 and beyond.





The
      Company also hopes to grow its presence in China. We believe that a business
      position in China eventually will be beneficial to the Company as the
      telecommunications industry in China experiences continuous growth along with
      the development and modernizations of its economy. The accession to World Trade
      Organization makes the demand for international calling services even bigger
      and
      will eventually open China’s telecommunications market to companies like ETCI.
      Therefore we expect an increasingly transparent regulatory environment in China
      through its regulatory system, and its gradual opening up of the domestic market
      to foreign participation which should create opportunities that facilitate
      progress toward an improved operating environment.





**Development
      Strategy**





The
      Management of the Company believes that reliable and flexible billing,
      information management, monitoring and control are critical to the Company’s
      success. Accordingly, ETCI will continue to invest substantial resources to
      further develop and implement a sophisticated real-time management information
      system. Key features of this system will include:





·
            Reliability


·
            Remote
                Management


·
            Compatibility
                to all current and future payment
                methods


·
            A
                global reach


·
            Fully
                compliant with the legal framework in each
                market


·
            Standardized
                technology


·
            Rapid
                deployment of services





We
      hope
      to execute this strategy at a lower cost and lower investment than is normally
      required through the application of a small organizational structure, the remote
      control of switches in each country in which ETCI is operational, the use of
      company-owned innovative technology, and the continuous search for optimal
      balance between quality of services and operational costs.




Page
          12





**Product
      Strategy**





ETCI
      is
      planning to ultimately offer a complete range of retail and wholesale products
      and services for telecommunications and multimedia content distribution,
      including:





·
            Smart
                POTS (Plain Old Telephony Services), creating cheaper access through
                the
                application of smart access
                technology:


o
            Carrier
                Select


o
            Carrier
                PreSelect


o
            2-stage
                dialing through third party Shared Cost/Premium Rate billing; pre
                paid
                calling cards


o
            2-stage
                dialing through direct pre/post paid billing; pre/post paid value/calling
                cards


o
            Dial
                around access plans


o
            VoIP
                through desktop/laptop client


o
            VoIP
                using normal phone set through ADSL/Cable/Wifi connected VoIP
                box





·
            Originating
                & Terminating Services


o
            Toll
                Free Originating Services


o
            Shared
                Cost Originating Services


o
            Premium
                Rate Originating Services


o
            Revenue
                Shared Terminating Services


o
            LCR
                Global Terminating Services





·
            Mobile
                Access Services


o
            Mobile
                Virtual Network Enabling Services, based on 3rd party mobile
                networks


o
            Wireless
                ET Network Services, based on ET WIFI and/or WIMAX
                networks


o
            Roaming
                services





·
            Supporting
                Services


o
            Content


o
            Streaming


o
            Codec


o
            MediaPhone


o
            Billing-CRM-Payment
                Transaction Services


o
            Inteligent
                Network Platform Services





It
      is the
      Company’s intention to offer these products either separately or as a bundled
      package starting in 2008.





The
      Company believes that adding market presence combined with a more in-depth
      products and services offering, will position ETCI to find more marketing and
      distribution partners, thereby enabling ETCI to rapidly grow the company with
      a
      lower than proportional growth in overhead cost.





**Partners**





As
      a
      result of the converging of IT and telecom solutions the amount of engagement
      between ETCI and its various partners has increased. On the supply side ET
      works
      closely together with dozens of other carriers to either originate or terminate
      ET’s traffic around the globe and with a broad range of content providers. On
      the client side, resellers have evolved from indirect channels to true partners
      bringing specialist market knowledge, customer focus and a geographical reach
      to
      its activities.





As
      a key
      element of our low-cost and fast deployment strategy, ETCI makes use of partners
      in all layers of our Multimedia distribution platform. ETCI’s partners with
      entities in the following particular areas:





*Fixed
      Network Interconnect Partners* .
      As a
      fully licensed telecommunications carrier, ETCI is 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.




Page
          13





*Network
      Exchange Partners.* ETCI’s
      Network Exchange Partners secure mutual network access and interconnection
      on a
      country by country and mutually voluntary basis. Through this cooperation,
      ETCI
      is able to leverage its own network of regulated interconnections by exchanging
      these interconnections with network access in countries were ETCI is not
      present. Thereby ETCI is capable to rapidly enlarge its network without the
      associated capital expenditures.





*Content
      Partners.* These
      partners can be a supplier as well as a marketing client at the same time.
      On
      one hand they provide a broad array of content available for distribution
      through ETCI’s network, to be marketed by a variety of ETCI’s marketing
      partners. On the other hand ETCI provides these partners with all the tools
      they
      may require to exploit and market their content and generate revenue from
      them.





*LCR
      Wholesale Origination/Termination Partners* ETCI’s
      network is connected to over a dozen Wholesale Partners that work together
      on a
      commercial basis to provide each with Least Cost Routing capabilities, to
      globally originate and terminate calls at the best possible cost/quality
      levels.





*Payment
      Partners* .
      Through
      their clearing houses and platforms ETCI is able to charge and collect monies
      due from end-customers, using any form of payment and transfer said funds
      accordingly to any of its marketing, content and carrier partners around the
      globe.





**Management
      & Personnel**





During
      2007 ETCI strengthened its organization in order to prepare itself for its
      current growth strategy by hiring a new CFO, a Corporate Controller, a General
      Manager for the Middle East & Africa, a manager for Mobile Operations,
      engineers and software developers to expand ETCI’s VoIP, Intelligent Network
      Platform, and Billing-CRM capabilities, and sales managers in Europe. In January
      2008 ETCI retained the services of a Chief Marketing Officer whose main task
      will be to streamline all of ETCI’s commercial activities and prepare the
      company for accelerated growth in revenues.





In
      addition to our corporate management staff, as of March 31, 2008 ETCI employed
      24 full time and 3 part time employees. The Company has retained on a long
      term
      basis the services of 16 independent consultants. We consider relations with
      our
      employees and consultants to be good. Each of our current employees and
      consultants has entered into confidentiality and non-competition agreements
      with
      the Company.





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





**Competition**





The
      Company experiences fierce competition in each of the market segments in which
      it operates.





**Carrier
      (Pre) Select (CS/CPS)**





By
      far
      the biggest competition still comes from each of the incumbent telecom operators
      like France Telecom, KPN, Telecom Italia and Telekom Austria. Originally they
      started with virtually 100% market shares, and although certainly market share
      has been lost, they usually still have a dominant position. Other competitors
      are either specialized Pan European telecom retail providers like for example
      Tele2. The strongest price competition usually comes from smaller, locally
      established players.





**Service
      Numbers / Premium Rate (PRS)**  **&
      Toll Free Services**





Also
      here
      traditional incumbents are strong competitors if customers solely need domestic
      oriented services, as they also here started originally out with around 100%
      market shares. In certain countries also some of the Cable Companies have
      established larger market shares, while some other markets see strong
      competition from either succesfull foreign incumbents, like British Telecom
      in
      the Netherlands, or highly specialized local services companies, like DTMS
      in
      Germany. As ETCI combines traffic originating from a dozen European markets
      into
      one single network, ETCI is in a more favourable competitive position if
      customers are for a substantial part also looking at such cross border traffic.




Page
          14





Domestic
      Toll Free traffic is again dominated by the various incumbent carriers in the
      various countries ET operates in. However also for these kind of services,
      ETCI’s single network approach for traffic from over a dozen European markets,
      creates a unique selling point for ETCI to service for example major Pan
      European call centres. In this cross border segment companies like COLT Telecom
      pose serious competition.





**Two
      Stage Dialing**





Over
      the
      years the Two-Stage dialing service has encountered more competition from VoIP
      call services such as Skype but also from lower international call charges
      by
      incumbents and other telecommunication companies in general. However, immigrant
      user groups tend to have only limited access to these alternative international
      call facilities and often depend on a mobile device only. Consequently,
      Two-Stage Dialing continuous to be essential for its niche market group users
      and the call volume of this service has only been little affected by its
      competition.




**Streaming,
      Media & Content Services**





The
      internet as such is by far the strongest competition for all kind of content
      distribution and streaming services. However more and more content distributors
      and content owners start to question the long term healthyness of the sometimes
      free for all distribution capabilities via internet. A free content model
      whereby revenue is solely driven by ad expenditures, based on unique traffic
      to
      one’s website might simply not be suitable for any content party. ET provides
      tools to deliver electronic content in a more controlled fashion and either
      receive payments for specific usage, or provide valuable customer profiling
      from
      specific customers allowed to see the content, or a combination of
      both.





**Mobile
      Services**





Even
      though ETCI as a Mobile Virtual Network Provider, will keep on creating
      excellent opportunities for MNO’s to increase the addressable market that can
      service profitably, at some moment in time such MNO’s may be considering to not
      only take on larger MVNO’s directly, but to again start servicing such smaller
      MVNO’s directly. This may especially be true if new technologies make it easier
      for these MNO’s to service such smaller non-retail customers directly. Also
      other MVNE’s may possibly create strong competition, especially if such new
      MVNE’s will be created by MNO’s as a consequence of ETCI’s success in profitably
      cooperating with various other MNO’s that already have a succesfull MVNE
      relation with ETCI.





So
      far
      there are very few truly MVNE’s, running all the required network elements to
      offer an integrated platform with a flexible, user-friendly services, currently
      operating, although this may change in the near future.







**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
      sustained substantial losses. Such losses continue due to ongoing operating
      expenses and a lack of revenues sufficient to offset operating expenses. We
      have
      raised capital to fund ongoing operations by private sales of our securities,
      some of which sales have been highly dilutive and involve considerable expense.
      In our present circumstances, there is substantial doubt about our ability
      to
      continue as a going concern absent significant sales of our products and
      telecommunication services, substantial revenues from new licensing or
      co-development contracts, or the sale of our securities.




Page
          15





We
      incurred net losses of $12,057,732 and $4,829,665 for the years ended
      December 31, 2007 and 2006, respectively. As of December 31, 2007, we had an
      accumulated deficit of $29,019,832, derivative liabilities of $18,255,065
      related to the obligations to issue 613,492,498 shares of our common stock,
      accounts payable of $4,857,229 and current portion of notes payable of
      $6,484,063.





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.





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





In
      2007,
      the Company began to shift its focus from market of international call
      termination to the Carrier (Pre) Select, Premium Rate, Toll Free, Content
      Distribution and Mobile Services global markets. We have limited experience
      in
      these areas, and there is no guarantee that we will be able to enter and compete
      in these markets, or achieve profitability.





***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 require additional capital expenditures
      or the procurement of additional products that could be expensive and time
      consuming. In addition, new products and services arising out of technological
      developments may reduce the attractiveness of our services. If we fail to adapt
      successfully to technological advances or fail to obtain access to new
      technologies, we could lose customers and be limited in our ability to attract
      new customers and/or sell new services to our existing customers. In addition,
      delivery of new services in a cost-efficient manner depends upon many factors,
      and we may not generate anticipated revenue from such services.





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




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


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


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


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




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





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





We
      strive
      to increase the volume of voice and data traffic that we carry over our existing
      global network in order to reduce transmission costs and other operating costs
      as a percentage of net revenue, improve margins, improve service quality and
      enhance our ability to introduce new products and services. We may pursue
      acquisitions in the future to further our strategic objectives. Acquisitions
      of
      businesses and customer lists, a key element of our historical growth strategy,
      involve operational risks, including the possibility that an acquisition does
      not ultimately provide the benefits originally anticipated by management.
      Moreover, there can be no assurance that we will 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 migrating the customer base 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, and there can be no assurance that successful integration will
      occur in light of these factors.




Page
          16





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





We
      have
      significant international operations in Europe, the Middle East and the Far
      East. In international markets, we are smaller than the principal or incumbent
      telecommunications carrier that operates in each of the foreign jurisdictions
      where we operate. In these markets, incumbent carriers are likely to control
      access to, and the pricing of, the local networks; enjoy better brand
      recognition and brand and customer loyalty; generally offer a wider range of
      product and services; and have significant operational economies of scale,
      including a larger backbone network and more correspondent agreements. Moreover,
      the incumbent carrier may take many months to allow competitors, including
      us,
      to interconnect to our switches within our territory, and we are dependent
      upon
      their cooperation in migrating customers onto our network. 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 significant portion of our business is conducted outside the United States,
      fluctuations in foreign currency exchange rates could adversely affect our
      results of operations.***





A
      significant portion of our net revenue is derived from sales and operations
      outside the United States. The reporting currency for our consolidated financial
      statements is the United States dollar (USD). The local currency of each country
      is the functional currency for each of our respective entities operating in
      that
      country. 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 adverse, effect on our results of operations.
      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. Due to the large percentage of our operations conducted outside
      of
      the United States, strengthening or weakening of the USD relative to one or
      more
      of the foregoing currencies could have an adverse impact on future results
      of
      operations. We historically have not engaged in hedging transactions and do
      not
      currently contemplate engaging in hedging transactions to mitigate foreign
      exchange risks. In addition, the operations of affiliates and subsidiaries
      in
      foreign countries have been funded with investments and other advances
      denominated in foreign currencies. Historically, such investments and advances
      have been long-term in nature, and we accounted for any adjustments resulting
      from currency translation as a charge or credit to accumulated other
      comprehensive loss within the stockholders’ deficit section of our consolidated
      balance sheets.





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




Page
          17


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





***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 critical
      network infrastructure to maintain or improve our service quality levels,
      purchase and utilize other transmission facilities, and train and manage our
      employee base. If we inaccurately forecast the movement of traffic onto our
      network, we could have insufficient or excessive transmission facilities and
      disproportionate fixed expenses. 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, on our support, sales and marketing and administrative resources
      and on our network infrastructure. 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
      are subject to the economic risks inherent in the Asian and European
      economies.***





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





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





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




***We
        must attract and retain skilled personnel. If we are unable to hire and retain
        technical, sales and marketing and operational employees, our business could
        be
        harmed.***
 
 Our
        ability to manage our growth will be particularly dependent on our ability
        to
        develop and retain an effective sales force and qualified technical and
        managerial personnel. We intend to hire additional employees, including software
        engineers, sales and marketing employees and operational employees. The
        competition for qualified sales, technical, and managerial personnel in the
        communications industry is intense, and we may not be able to hire and retain
        sufficient qualified personnel. In addition, we may not be able to maintain
        the
        quality of our operations, control our costs, maintain compliance with all
        applicable regulations, and expand our internal management, technical,
        information and accounting systems in order to support our desired growth,
        which
        could have an adverse impact on our operations.
  ***If
          we are not able to use and protect our intellectual property domestically
          and
          internationally, it could have a material adverse effect on our business.***
 
 Our
          ability to compete depends, in part, on our ability to use
          intellectual property in the United States and 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. There can be no assurance that
          the technology licensed by us will continue to provide competitive
          features and functionality or that licenses for technology currently used
          by us or other technology that we may seek to license in the future will be
          available to us on commercially reasonable terms or at
          all.


Page
          18





**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 revenue has been
      generally supported by and subject to regulation at the federal, state and
      local
      level. Certain 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 products may not be adequate in amount or timing
      to
      offset the declines in margin from our legacy long distance voice and dial-up
      ISP business.





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





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




Page
          19





***A
      deterioration in our relationships with facilities-based carriers could have
      a
      material adverse effect upon our business.***





We
      primarily connect our customers’ telephone calls and data/Internet needs through
      transmission lines that we lease under a variety of arrangements with other
      facilities-based long distance 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.




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





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





***If
      we are not able to operate a cost-effective network, 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 wireless services.




Page
          20




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





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





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





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





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





*Part
      of our facilities and operations are currently located in Hong Kong. Hong Kong
      is a Special* Administrative Region ("SAR") of China with its own government and legislature.
      Hong Kong enjoys a high degree of autonomy from China under the principle of
      "one country, two systems". We can give no assurance that Hong Kong will
      continue to enjoy autonomy from China. The Hong Kong dollar has remained
      relatively constant due to the U.S. dollar peg and currency board system that
      has been in effect in Hong Kong since 1983. We can give no assurance that the
      Hong Kong economy will not worsen or that the historical currency peg of the
      Hong Kong dollar to the U.S. dollar will be maintained. Continued recession
      in
      Hong Kong, deflation or the discontinuation of the historical currency peg
      could
      adversely affect our business.





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





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




Page
          21





**Risks
      related to our securities**





***Existing
      shareholders likely will experience increased dilution when we satisfy our
      obligations to issue shares of our common stock.***





We
      are
      currently obligated to issue 613,492,498 shares of common stock, though we
      currently do not have enough authorized but unissued shares of common stock
      to
      satisfy these obligations On January 15, 2008, our shareholders approved a
      25 to
      one reverse stock split. Upon our execution of the reverse split and the
      satisfaction of our obligations to issue these shares, our current stockholders
      will experience substantial dilution. Furthermore, many of the shares issuable
      are to certain affiliated parties. Therefore, the positions of these parties
      in
      our company will increase while our other shareholders will experience
      disproportionate dilution. Currently there are 238,265,927 shares of our
      common stock outstanding held by our current shareholders, comprising 95% of
      our
      authorized shares. Upon effecting the reverse split, our current shareholders
      will own about 4% of our authorized shares. In addition, upon the issuance
      of
      the total amount of shares issuable under the various obligations, our current
      shareholders will then hold 23% of our then-outstanding shares of common stock.
      As many of the shares are issuable to Rising Water Capital (“RWC”), an entity
      controlled by our chief executive officer, the positions of our other
      shareholders will be diluted while RWC's position will increase to up to 58.3%
      of our outstanding common stock. See “Shares to be Issued” under Note 14 of the
      accompanying financial statements.





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





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





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





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





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





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





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





Page
          22





**Item
      2. Description of Property.**





For
      the
      first eleven months of 2007, the Company's principal executive office was
      located at 438 East Katella Avenue, Suite 217, Orange, California 92867. We
      occupied this location on a month-to-month rental basis. The monthly rent was
      $374. In December 2007, the Company’s principal executive office was relocated
      to Schiphol Boulevard 249, 1118 BH Schiphol, The Netherlands. The new executive
      office is comprised of two offices with monthly rental of $5,082 and $3,240
      that
      carry rental leases until September 2011 and April 2013 respectively. Elephant
      Talk Communications S.L.U. is currently leasing two office spaces at Paratge
      Bujonis, despacho 1 and 20, 17220 Sant Feliu de Guixols, (Girona) Spain, on
      a
      quarter-to-quarter lease at a monthly rent of $2,168. Elephant Talk Limited
      is
      currently leasing an office space at Room 2116, 21/F, Metro Centre II, 21 Lam
      Hing Street, Kowloon, Hong Kong for a period of two years commencing Aug 15,
      2007 at a monthly rent of $3,094. The Company is currently leasing space for
      storage of its telecom switches at co-locations at a monthly rent of $28,303.
      The Company leases various co-location spaces in Guangzhou, Los Angeles,
      Amsterdam, Madrid, Barcelona, Milan, Zurich, London, Brussels and other places
      where our telecommunications equipment are located.





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





**Item
      3. Legal Proceedings.**





**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
      10,000,000 common shares of the Company valued at $0.10 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 recently received. On October
      the 18 th 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.





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





As
      previously described in the Company’s 2004 Annual Report, parties mutually
      agreed to terminate this Purchase Agreement. The Company returned the received
      shares of New Times Navigation Limited to the concerned shareholders and
      received back 2,252,500 common shares out of the 5,100,000 issued by the Company
      for the purchase. In addition the Company issued 37 unsecured convertible
      promissory notes for a total amount of US$3,600,000. On request of the Company
      21 were returned with a total value of US$2,040,000.





The
      Company is presently 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 2,847,500 common shares (valued at $381,565) and also to have them
      return the remaining 18 unsecured convertible promissory notes representing
      a
      total amount of US$1,740,000 and rescind the Purchase Agreement. The case is
      currently pending.





Page
          23





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




1.
            On
                January 15, 2008, we held the annual meeting of stockholders in New
                York,
                New York. Proxies were saliated pursuant to our Schedule 14A filed
                on
                December 28, 2007.


2.
            Our
                stockholders elected the following individuals to our board of directors:
                Steven van der Velden, Willem Ackermans, Martin Zuurbier, Johan Dejager;
                Yves van Sante, Roderick de Greef, and Bruce W.
                Barren.


3.
            Our
                stockholders also voted on the following
                proposals:


a.
            To
                approve a twenty five to one reverse split (the “Reverse Split Proposal”)
                of our issued and outstanding common
                stock.


b.
            To
                approve the adoption of an Amended and Restated Articles of Incorporation
                (the “Amendment Proposal”) to: (1) authorize 50,000,000 shares of
                Preferred Stock, which may be issued in one or more series, with
                such
                rights, preferences, privileges and restrictions as shall be fixed
                by the
                Company's Board of Directors from time to time; (2) revise the purpose
                clause of the Company in the Certificate to engage in any lawful
                act under
                the corporate laws of the State of California; (3) to change the
                number of
                directors from nine to any number between six and eleven, such number
                to
                be determined in the manner provided in the by-laws; (4) include
                indemnification provisions for directors and other agents of the
                Company;
                and (5) enact other such ancillary changes necessary to accomplish
                the
                aforesaid which appear in the amended and restated articles of
                incorporation; and


c.
            To
                adopt our 2008 Long-Term Incentive Plan (the “Plan
                Proposal”).






**Election
                of Director Proposal**
            
            **Number
                of Shares Voted For:**
            
            **%
                of Shares Cast**Steven
                van der Velden
            
            
            140,009,721
            
            
            100
            %Willem
                Ackermans
            
            
            140,009,721
            
            
            100
            %Martin
                Zuurbier
            
            
            140,009,721
            
            
            100
            %Johan
                Dejager
            
            
            140,009,721
            
            
            100
            %Yves
                van Sante
            
            
            140,009,721
            
            
            100
            %Roderick
                de Greef
            
            
            140,009,721
            
            
            100
            %Bruce
                W. Barren
            
            
            140,009,721
            
            
            100
            %




**Name**
              
              
              **Number
                  of Shares Voted For**
              
              
              **%
                  of Shares Cast**
              
              
              **Number
                  of Shares Voted Against**
              
              
              **%
                  of Shares Cast**
              
              
              **Number
                  of Shares Abstained**140,009,501
              
              
              99
              %
              
              220
              
              
              <.01
              %
              
              0140,008,051
              
              
              99
              %
              
              1,670
              
              
              <.01
              %
              
              0140,009,721
              
              
              100
              %
              
              0
              
              
              0
              %
              
              0


Page
            24




**PART** **II**




**Item
      5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and
      Purchases of Equity Securities.**




Our
      common stock is listed for quotation on the OTC BB under the symbol “ETLK”. The
      range of reported high and reported low bid prices per share for our common
      stock for each fiscal quarter during 2007, as reported by the OTC BB, is set
      forth below. The quotations merely reflect the prices at which transactions
      were
      proposed, and do not necessarily represent actual transactions.





**Quarterly
      Common Stock Price Ranges**


**Common
                  Stock****Quarter
                  Ended**
              
              **High**
              
              **Low**December
                  31, 2007
              
              $
              0.08
              
              $
              0.07September
                  30, 2007
              
              $
              0.09
              
              $
              0.09June
                  30, 2007
              
              $
              0.09
              
              $
              0.09March
                  31, 2007
              
              $
              0.09
              
              $
              0.09December
                  31, 2006
              
              $
              0.09
              
              $
              0.09September
                  30, 2006
              
              $
              0.11
              
              $
              0.11June
                  30, 2006
              
              $
              0.12
              
              $
              0.11March
                  31, 2006
              
              $
              0.19
              
              $
              0.16





At
      December 31, 2007, the Company had approximately 3,120 holders of record of
      its
      common stock. In addition, there are approximately 4,200 holders in the street
      name. The holders of common shares are entitled to one vote for each share
      held
      of record on all matters submitted to a vote of stockholders. Holders of common
      shares have no preemptive rights and no right to convert their common stock
      into
      any other securities. There is no redemption of sinking fund provisions
      applicable to the common stock.





No
      cash
      dividends have been paid on the common stock to date. We currently intend to
      retain any earnings for further business development.





*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
            
            
            7,120,833
            
            $
            0.09
            
            
            2,877,167Equity
                compensation plans not approved by security holders
            
            
            
            
            $Total
            
            
            7,120,833
            
            $
            0.09
            
            
            2,877,167




*Recent
      Sales of Unregistered Securities*





None.




Page
          25




**Dividends**





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





The
      Company has no preferred stock issued or outstanding as of December 31, 2007.




**Item
      6. Selected Financial Data**





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




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





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





**Overview**





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





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





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





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





In
      the
      third quarter of 2007 the Company finalized testing and commissioned
      additional national interconnects in the United Kingdom (British Telecom) and
      Bahrain (Batelco), further enlarging the Company’s footprint in fixed line
      infrastructure. In the Caribbean and the Middle East, the Company installed
      its
      first Wifi test sites, aimed at creating own broadband mobile access networks
      in
      emerging markets with relatively poor (or relatively expensive) infrastructures.




Page
          26





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





In
      order
      to finance this business opportunity the Company entered into stock purchase
      agreements with certain investors for the sale of its common stock. During
      the
      year ended December 31, 2007, the Company received $8,498,471 in total under
      these agreements.





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





**Comparison
      of the fiscal years ended December 31, 2007 and December 31, 2006**




**Revenues
      and Cost of Revenues:**




**Revenues** recorded
      by the Company were $47,361,028 and $158,292 for the years ended December 31,
      2007 and 2006, respectively. Revenues consisted of telecommunications services
      such as premium rate, carrier select, carrier pre-select, freephone (toll free),
      voice and data transmission like IDD and pre-paid calling cards services
      provided to a wide range of customers. The increase in revenues for 2007
      were contributed by our newly acquired European entities whose major revenues
      came from premium rates, carrier select and carrier pre-select services. The
      revenue from IDD and pre-paid calling card services continue to decline during
      the year mainly due to significant pricing pressure and reduction in demand
      on
      its products. The long-distance and calling card revenue decreases were impacted
      by continued weakness in the telecommunications industry and ongoing economic
      and competitive pressures from other telecommunications services providers
      in
      Hong Kong and around the world.




**Cost
      of revenue** was
      $47,189,533 and $144,727 for the years ended December 31, 2007 and 2006,
      respectively. Cost of revenue included depreciation and amortization directly
      attributable to revenue, network 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, data transmission services. Gross margin for the year ended
      December 31, 2007 was 0.362% of the revenues compared to 8.5% of the revenues
      for the year ended December 31, 2006. Gross margin decreased in 2007 primarily
      due to the shift of business to premium rate services, which is a low profit
      margin business in nature, plus the continuous decline in the volume of calling
      card business resulting inadequate volume offsets to the fixed network costs.
      In
      addition, $1,580,976 was due to reporting regulation to include appropriate
      depreciation expenses in the cost of revenue in 2007.


On
        June
        28, 2007, the Board approved to issue over a three years periods as of January
        1, 2007 in total 72,036,800 shares of common stock to its officers and directors
        of which 51,761,600 shares of common stock valued at $4,399,736 were recognized
        at June 28, 2007 as compensation for employment commitments for a term of
        three
        years as of January 1, 2007. The remaining 20,275,200 valued at $1,723,392
        will
        be amortized over a period of three years as of January 2007. Therefore,
        for
        compensation for services for the 12 months ended December 31, 2007 6,758,400
        shares of stock valued at $574,464 was awarded to Management in 2007. The
        shares
        were valued at the closing market price of eight and one-half cents ($0.085)
        on
        June 28, 2007, the date of grant. The Company has recorded such shares to
        be
        issued as a liability in the accompanying financial statements as of December
        31, 2007. Subsequent to the grant of such shares, the Board of Directors
        and the
        above-referenced officers and directors determined that it is unlikely that
        the
        shares of common stock will be issued in the form and within the timeframe
        originally agreed upon, if at all. The Board of Directors and management
        of the
        Company are currently in discussions regarding modifications to the original
        compensation plan and expect to finalize a revised plan in 2008.
  Payroll
        taxes for management compensation for the year ended December 31, 2007 amounted
        to $479,420.


**Operating
      expenses** :
      Selling, general and administrative (SG&A) expenses were $10,871,386 and
      $2,426,175 for the years ended December 31, 2007 and 2006, respectively.
      SG&A expenses increased by $8,445,211 or 348% in 2007 compared to 2006
      primarily due to the expansion of the company in Europe by increasing the number
      of operation units and the sign-in bonus for the senior management compensation.




**Other
      Income and Expenses:** Interest
      Income **** was
      $101,324 and $18,943 for the year ended December 31, 2007 and 2006 respectively.
      Interest income was earned on the amount due from entities related to officers,
      directors and shareholders during the year of 2006. Interest
      Expenses **** was
      $849,212 and $592,618 for the year ended December 31, 2007 and 2006
      respectively. The interest expense increase was due to continuous increase
      of
      the default payments.




**Minority
      Interest:** The
      Company’s majority owned subsidiaries Elephant Talk Communications PRS U.K.
      Limited, Elephant Talk Communications Premium Rate Services Netherlands B.V.,
      Elephant Talk Communications Luxembourg SA, Elephant Talk Middle East &
Africa (Holding) W.L.L., Elephant Talk Middle East & Africa (Holding) Jordan
      L.L.C., Elephant Talk Middle East & Africa Bahrain W.L.L., Elephant Talk
      Middle East & Africa FZ-LLC incurred losses of $43,325 attributed to
      minority shareholders’ interest in the year ended December 31, 2007. During the
      year ended December 31, 2006, the Company’s majority owned subsidiaries Elephant
      Talk Middle East & Africa (Holding) W.L.L., Elephant Talk Middle East &
Africa (Holding) Jordan L.L.C., Elephant Talk Middle East & Africa Bahrain
      W.L.L., Elephant Talk Middle East & Africa FZ-LLC incurred losses of
      $117,824 attributed to minority shareholders’ interest.




Page
          27




**Comprehensive
      Income (Loss):** The
      Company records foreign currency translation gains and losses as comprehensive
      income or loss. The Company recorded a gain of $1,426,898 and $21,133 for the
      year ended December 31, 2007 and 2006 respectively. The increase is contributed
      to the translation gain due to the sharp increase of exchange value from Euro
      to
      USD.




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




As
      shown
      in the accompanying financial statements, the Company incurred a net loss of
      $12,057,732 for the year ended December 31, 2007 as compared to a net loss
      of
      $4,829,663 for the same period in 2006. Additionally, the Company current
      liabilities exceeded its current assets by $24,429,464 as of December 31,
      2007.


Management
        has taken the following steps to revise its operating and financial
        requirements, which it believes are sufficient to provide the Company with
        the
        ability to continue as a going concern for the coming two quarters. Management
        has devoted considerable efforts during the period ended December 31, 2007
        and
        in the first few months of 2008 towards (i) obtaining additional equity
        financing (ii) controlling of salaries and general and administrative expenses
        (iii) management of accounts payable (iv) settlement of debt by issuance
        of
        common shares and (v) strategically acquire profitable companies that bring
        synergies to the Company’s products and services.
 
 Management
        believes our existing available cash, cash commitments, cash equivalents
        and
        short term investments as of December 31, 2007 in combination with continuing
        contractual commitments will be sufficient to meet our anticipated capital
        requirements until the May 2008.
  Management
        is pursuing a number of alternatives available to meet the continuing capital
        requirements of our operations, such as collaborative agreements and public
        and
        private financings. In the past the Company has demonstrated its ability
        to
        correct its operating cash deficiencies and there is currently no evidence
        to
        support that they cannot continue to do so in spite of the fact that 2007
        operations showed an operating loss. However, there can be no absolute assurance
        that any of these funding will be consummated in the time frames needed for
        continuing operations or on terms favorable to us. If adequate funds are
        not
        available, we will be required to significantly curtail our operating plans
        and/or possibly cease operations.


**Operating
      Activities:** Net
      cash
      used in operating activities for the year ended December 31, 2007 was
      $3,449,351. The increase is primarily due to the increase in loss of $7,228,067
      in 2007, decrease in accounts receivable of $991,412, increase in prepaid
      expenses of $183,556, decrease in accounts payable and customer deposits of
      $916,376, decrease in deferred revenue of $11,444 and increase in accrued
      expenses and other payable of $1,428,141.




**Investment
      Activities:** Net cash
      used in investment activities for the year ended December 31, 2007 was
      $2,037,269. Cash used to purchase plant and equipment was $2,154,559, restricted
      cash deposit for inter-connect was $23,266, cash paid for acquisition of
      subsidiary was $241,883 and cash obtained from acquisitions was
      $382,439.




**Financing
      Activities:** Net
      cash
      received by financing activities for the year ended December 31, 2007 was
      $9,085,991. The Company received $8,498,471 from the sales of shares of its
      common stocks and $561,520 from third parties.




As
      a
      result of the above activities, the Company recorded a cash and cash equivalent
      balance of $4,366,312 as of December 31, 2007, a net increase in cash and cash
      equivalent of $4,034,311 for the year ended December 31, 2007. The ability
      of
      the Company to continue as a going concern is still dependent on its success
      in
      obtaining additional financing from the institutional investors or by selling
      its common shares to accredited investors and fulfilling its plan to
      restructuring as outlined above.




**Application
      of Critical Accounting Policies and Estimates**





Revenue
      Recognition, Cost of Revenue and Deferred Revenue:


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




Page
          28





Stock-based
      Compensation:


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





Issuance
      of Shares for Services:





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





**Impact
      of Accounting Pronouncements**





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





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





a)
            A
                brief description of the provisions of this Statementb)
            The
                date that adoption is required


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





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





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




Page
          29





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





**Material
      Transactions**





**Mobile
      Virtual Network Enabler and Operator**





Elephant
      Talk Communication Premium Rate Services Netherlands BV, a company belonging
      to
      the ETCI group, received on July 3, 2007 from the OPTA, the Dutch
      telecommunications market authority, the definitive license to act as a Mobile
      Network Operator (MNO). Elephant Talk Communication Holding AG entered into
      a
      MVNE agreement in June 2007 with T/Mobile-Orange, one of the four (4) MNO’s in
      the Netherlands.





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





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





On
      August
      22, 2007, the Board approved the sale of approximately 91 million restricted
      common shares to 5 accredited investors for a total consideration of
      approximately $5.2 million.





The
      shares were valued at a 30% discount over the closing price on August 22, 2007,
      resulting in an issuance price of $0.0595, before consultancy fee of 5%. The
      company has received a cash consideration in Dollar of $5,271,658 in 2007.
      The
      Company has recorded 90,998,790 shares to be issued as a liability in the
      accompanying financial statements as of December 31, 2007.




Page
          30




**Item
      8.**  **** **Financial
      Statements**




**ELEPHANT
      TALK COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**





CONSOLIDATED
      FINANCIAL STATEMENTS


AS
      OF
      DECEMBER 31, 2007





TABLE
      OF
      CONTENTS


**PAGE**REPORT
                  OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              32CONSOLIDATED
                  BALANCE SHEETS AS OF DECEMBER 31, 2007 AND 2006
              33CONSOLIDATED
                  STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007 AND
                  2006
              34CONSOLIDATED
                  STATEMENTS OF CHANGES TO STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS
                  ENDED DECEMBER 31, 2007 AND 2006
              35CONSOLIDATED
                  STATEMENTES OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007
                  AND
                  2006
              36NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              37-55




Page
          31


REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To
      the
      Board of Directors of:


Elephant
      Talk Communications, Inc. and Subsidiaries





We
      have
      audited the accompanying consolidated balance sheets of Elephant Talk
      Communications, Inc. as of December 31, 2007 and 2006, and the related
      consolidated statements of operations, changes in stockholders’ equity (deficit)
      and cash flows for the years ended December 31, 2007 and 2006. These financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Elephant Talk
      Communications, Inc. as of December 31, 2007 and 2006 and the consolidated
      results of its operations and its cash flows for the years ended December 31,
      2007 and 2006 in conformity with accounting principles generally accepted in
      the
      United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 23 to the
      consolidated financial statements, the Company had a net loss of $12,057,732,
      a
      working capital deficit of $24,429,464 an accumulated deficit of $29,019,832
      and
      cash used in operations of $3,449,351. These factors raise substantial doubt
      about its ability to continue as a going concern. Management’s plans concerning
      these matters are also described in Note 23. The accompanying consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.




/s/
      Kabani & Company, Inc.





Los
      Angeles, California


March
      20,
      2008




Page
          32





**ELEPHANT
                TALK COMMUNICATIONS, INC AND SUBSIDIARIES**CONSOLIDATED
                BALANCE SHEETSAS
                AT DECEMBER 31, 2007 AND 2006**ASSETS**


**2007**
                  
                  **2006****CURRENT
                    ASSETS**Cash
                      and cash equivalents
                  
                  $
                  4,366,312
                  
                  $
                  332,001Restricted
                      cash
                  
                  
                  23,266
                  
                  
                  -Accounts
                      receivable, net
                  
                  
                  4,438,224
                  
                  
                  18,929Loans
                      receivable
                  
                  
                  -
                  
                  
                  3,606,983Earnest
                      Deposits
                  
                  
                  442,853
                  
                  
                  -Prepaid
                      expenses, deposits and other current assets
                  
                  
                  372,331
                  
                  
                  169,810Due
                      from related parties
                  
                  
                  18,514
                  
                  
                  -Total
                      Current Assets
                  
                  
                  9,661,500
                  
                  
                  4,127,723**PROPERTY
                      AND EQUIPMENT - NET**
                  
                  
                  3,484,224
                  
                  
                  158,234**INTANGIBLE
                      ASSETS - NET**
                  
                  
                  11,462,504
                  
                  
                  -**OTHER
                      ASSETS**
                  
                  
                  -
                  
                  
                  40,247Deposits
                  
                  
                  -
                  
                  
                  326,029Due
                      from related parties
                  
                  
                  -
                  
                  
                  9,043,080Earnest
                      Deposits for acquisitions
                  
                  
                  -
                  
                  
                  9,409,356Total
                      Other Assets**TOTAL
                      ASSETS**
                  
                  $
                  24,608,228
                  
                  $
                  13,695,313**LIABILITIES
                      AND STOCKHOLDERS' EQUITY
                      (DEFICIT****)****CURRENT
                      LIABILITIES**Bank
                      Overdraft
                  
                  $
                  197,815
                  
                  $
                  171,819Accounts
                      payable
                  
                  
                  4,857,229
                  
                  
                  51,549Deferred
                      revenue
                  
                  
                  93,661
                  
                  
                  105,105Accrued
                      expenses, interest and other payable
                  
                  
                  3,011,267
                  
                  
                  1,119,599Advances
                      from third parties
                  
                  
                  201,191Loans
                      payable
                  
                  
                  875,432
                  
                  
                  883,010Shares
                      to be issued
                  
                  
                  18,255,065
                  
                  
                  4,782,396Convertible
                      promissory note payable to related party -current
                  
                  
                  6,484,063
                  
                  
                  -Due
                      to related parties
                  
                  
                  115,241
                  
                  
                  195,834Total
                      Current Liabilities
                  
                  
                  34,090,964
                  
                  
                  7,309,312**LONG-TERM
                      LIABILITIES**Convertible
                      promissory note payable to related party
                  
                  
                  -
                  
                  
                  5,525,221**MINORITY
                      INTEREST**
                  
                  
                  231,575
                  
                  
                  127,455**COMMITMENT
                      AND CONTINGENCIES****STOCKHOLDERS'
                      EQUITY (DEFICIT)**Common
                      stock, no par value, 250,000,000 shares authorized, 238,265,927
                      issued and
                      outstanding as at December 31, 2007 & 2006
                  
                  
                  17,868,448
                  
                  
                  17,814,933Subscription
                      receivable
                  
                  
                  -
                  
                  
                  (9,683
                  )Loans
                      receivable
                  
                  
                  -
                  
                  
                  (120,000
                  )Comprehensive
                      gain
                  
                  
                  1,437,073
                  
                  
                  10,175Accumulated
                      deficit
                  
                  
                  (29,019,832
                  )
                  
                  (16,962,100
                  )Total
                      Stockholders' Equity (Deficit)
                  
                  
                  (9,714,311
                  )
                  
                  733,325TOTAL
                      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                  
                  $
                  24,608,228
                  
                  $
                  13,695,313


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




Page
          33




**ELEPHANT
                TALK COMMUNICATIONS, INC AND SUBSIDIARIES**
              CONSOLIDATED
                STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSSFOR
                THE YEARS ENDED DECEMBER 31, 2007 AND
                2006




**2007**
            
            **2006**REVENUES
            
            $
            47,361,028
            
            $
            158,292COST
                OF REVENUE (including depreciation and amortization of $1,580,976
                in 2007
                and $0 in 2006)
            
            
            47,189,533
            
            
            144,727GROSS
                PROFIT
            
            
            171,495
            
            
            13,565OPERATING
                EXPENSESSelling,
                general and administrative
            
            
            10,871,386
            
            
            2,426,175Depreciation
                and amortization
            
            
            652,478
            
            
            42,326Total
                Operating Expenses
            
            
            11,523,864
            
            
            2,468,501LOSS
                FROM OPERATIONS
            
            
            (11,352,369
            )
            
            (2,454,936
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            101,324
            
            
            18,943Interest
                expense
            
            
            (849,212
            )
            
            (592,618
            )Miscellaneous
                income
            
            
            -
            
            
            1,923Total
                Other Expense
            
            
            (747,888
            )
            
            (571,752
            )LOSS
                BEFORE INCOME TAX
            
            
            (12,100,257
            )
            
            (3,026,687
            )Provision
                for Income Tax
            
            
            800
            
            
            800LOSS
                FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST
            
            
            (12,101,057
            )
            
            (3,027,487
            )Minority
                interest
            
            
            43,325
            
            
            117,824LOSS
                FROM CONTINUING OPERATIONS
            
            
            (12,057,732
            )
            
            (2,909,663
            )DISCONTINUED
                OPERATIONSAbandonment
                of Investment
            
            
            -
            
            
            (2,152,247
            )Income
                (loss) from operations of abandoned entity
            
            
            -
            
            
            232,247LOSS
                FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            (1,920,000
            )NET
                LOSS
            
            
            (12,057,732
            )
            
            (4,829,663
            )OTHER
                COMPREHENSIVE INCOMEForeign
                currency translation gain
            
            
            1,426,498
            
            
            21,133COMPREHENSIVE
                LOSS
            
            $
            10,630,834
            
            $
            (4,808,530
            )Net
                loss per share from continuing operations
            
            $
            (0.045
            )
            $
            (0.017
            )Net
                loss per share from discontinued operations
            
            $
            -
            
            $
            (0.011
            )Net
                Loss per share - Basic & Diluted
            
            $
            (0.045
            )
            $
            (0.028
            )Weighted
                average shares outstanding during the period - basic and diluted
            
            
            238,265,927
            
            
            173,863,813




Page
          34




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




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


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006


Description
              
              Common
                  Share
              
              Amount
              
              Shares
                  issued as advances
              
              
              Subscrip-tions
                  receivable
              
              
              Earnest
                  Deposit
              
              
              Other
                  compre-hensive income (loss)
              
              
              Accum-mulated
                  Deficit
              
              
              Total
                  stock-holders Equity (Deficit)Balance
                  - December 31, 2005
              
              
              177,507,588
              
              $
              14,543,586
              
              $
              0
              
              
              $
              (8,991
              )
              
              $
              (720,000
              )
              
              $
              (10,958
              )
              
              $
              (12,132,435
              )
              
              $
              1,671,202Shares
                  issued to officers for compensation
              
              
              28,108,339
              
              
              348,847
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              348,847Shares
                  issued to consultants for services
              
              
              2,400,000
              
              
              120,000
              
              
              (120,000
              )Shares
                  issued to employee for compensation
              
              
              250,000
              
              
              22,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,500Shares
                  issued as earnest deposit - Beltrust
              
              
              40,000,000
              
              
              3,000,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,000,000Cancellation
                  of shares issued for Phone Tone acquisition
              
              
              (20,000,000
              )
              
              (720,000
              )
              
              
              
              
              
              
              
              
              
              720,000Shares
                  issued for acquisition
              
              
              10,000,000
              
              
              500,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              500,000Stock
                  subscriptions receivable
              
              
              
              
              
              
              
              
              
              
              
              
              (692
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (692
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,133
              
              
              
              
              
              
              
              21,133Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,829,665
              )
              
              
              (4,829,665
              )Balance
                  - December 31, 2006
              
              
              238,265,927
              
              
              17,814,933
              
              
              (120,000
              )
              
              
              (9,683
              )
              
              
              0
              
              
              
              10,175
              
              
              
              (16,962,100
              )
              
              
              733,325Advance
                  adjusted against the purchase consideration
              
              
              
              
              
              
              
              
              120,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              120,000Subscription
                  receivable
              
              
              
              
              
              
              
              
              
              
              
              
              9,683
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9683Amortization
                  of Stock Options expense
              
              
              
              
              
              53,515
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              53,515Comprehensive
                  Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,426,898
              
              
              
              
              
              
              
              1,426,898Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,057,732
              )
              
              
              (12,057,732
              )Balance
                  - December 31, 2007
              
              
              238,265,927
              
              $
              17,868,448
              
              $
              0
              
              
              $
              0
              
              
              $
              0
              
              
              $
              1,437,073
              
              
              $
              (29,019,832
              )
              
              
              (9,714,311
              )




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




Page
          35




**ELEPHANT
                TALK COMMUNICATIONS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE YEARS ENDED DECEMBER 31, 2007 AND
                2006**




**2007**
            
            
            **2006****CASH
              FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (12,057,732
            )
            $
            (4,829,665
            )**Adjustments
                to reconcile net loss to net cash used in operating activities:**Depreciation
                and amortization
            
            
            2,233,454
            
            
            42,326Stock
                issued for acquisition
            
            
            
            
            
            371,347Provision
                for uncollectible amounts
            
            
            135,877
            
            
            65,968Issuance
                of stock for compensation of services
            
            
            --
            
            
            --Gain
                on disposal of subsidiary
            
            
            --
            
            
            (232,247
            )Loss
                from discontinued operations
            
            
            --
            
            
            2,152,247Minority
                interest
            
            
            (43,325
            )
            
            117,824**Changes
                in operating assets and liabilities:**(Increase)
                Decrease in accounts receivable
            
            
            991,412
            
            
            (81,692
            )(Increase)
                Decrease in prepaid expenses, deposits and other assets
            
            
            (183,556
            )
            
            158,203Increase
                (decrease) in accounts payable, proceeds form related parties and
                customer
                deposits
            
            
            (916,376
            )
            
            15,420Increase
                (decrease) in deferred revenue
            
            
            (11,444
            )
            
            (2,327
            )Increase
                in Minority Interest
            
            
            --
            
            
            10,698Increase
                (decrease) in accrued expenses and other payable
            
            
            6,402,339
            
            
            881,839Net
                cash used in operating activities from continued operations
            
            
            (3,449,351
            )
            
            (1,330,059
            )Net
                cash provided by (used in) operating activities from discontinued
                operations
            
            
            --
            
            
            --**Net
                cash used in operating activities**
            
            
            (3,449,351
            )
            
            (1,330,061
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchase
                of property and equipment
            
            
            (2,154,559
            )
            
            (113,731
            )Cash
                paid for deposits
            
            
            --
            
            
            (171,804
            )Restricted
                cash
            
            
            (23,266
            )
            
            --Cash
                paid for acquisition of subsidiary
            
            
            (241,883
            )
            
            (1,420,000
            )Cash
                received from acquisition of subsidiary
            
            
            382,439
            
            
            --Net
                cash used in investing activities from continued operations
            
            
            (2,037,269
            )
            
            (1,705,535
            )Net
                cash provided by (used in) investing activities from discontinued
                operations
            
            
            --
            
            
            --**Net cash used in investing activities**
            
            
            (2,037,269
            )
            
            (1,705,535
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Payment
                on notes/loans
            
            
            --
            
            
            (941,504
            )Cash
                overdraft
            
            
            26,000
            
            
            72,486Repayment
                of bank loans
            
            
            --
            
            
            (82,577
            )Proceeds
                from note payable
            
            
            561,520
            
            
            2,954,921Proceeds
                from sale of shares
            
            
            8,498,471
            
            
            944,500Cash
                from formation of subsidiary
            
            
            --
            
            
            176,332Payments
                to related parties
            
            
            --
            
            
            --Net
                cash provided by financing activities from continued operations
            
            
            9,085,991
            
            
            3,124,159Net
                cash provided by (used in) financing activities from discontinued
                operations**Net
                cash provided by financing activities**
            
            
            9,085,991
            
            
            3,124,159**EFFECT
                OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS**
            
            
            434,940
            
            
            44,620**NET
                INCREASE IN CASH AND CASH EQUIVALENTS**
            
            
            4,034,311
            
            
            133,185**CASH
                AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**
            
            
            332,001
            
            
            198,816**CASH
                AND CASH EQUIVALENTS, END OF THE PERIOD**
            
            $
            4,366,312
            
            $
            332,001**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:**Cash
                paid during the period for interest
            
            $
            25,467
            
            $
            --Cash
                paid during the period for income taxes
            
            $
            800
            
            $
            800




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




Page
          36


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006




**Note
              1**
            **Summary
                of Significant accounting policies and
                organization**




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




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





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





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




**(B)**  **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
      from those estimates and assumptions.





**(C)**  **Foreign Currency Translation**





The
      functional currency was Euros for its wholly-owned subsidiary Elephant Talk
      Europe Holding B.V. and subsidiaries and Hong Kong Dollar for its wholly-owned
      subsidiary Elephant Talk Limited. The financial statements of the Company were
      translated to USD using year-end exchange rates as to assets and liabilities
      and
      average exchange rates as to revenues and expenses. Capital accounts were
      translated at their historical exchange rates when the capital transaction
      occurred. Net gains and losses resulting from translation of foreign currency
      financial statements are included in the statements of stockholder’s equity as
      other comprehensive income (loss). Foreign currency translation gains and losses
      are included in consolidated income (loss).





**(D)**  **Cash
      and Cash Equivalent**





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.





**(E)**  **Restricted
      Cash**





Restricted
      cash represents cash deposited as bank guarantee for interconnects.




Page
          37


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**(F)**  **Concentration
      of Credit Risk**





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





**(G)**  **Accounts
      Receivable:**





The
      Company’s customer base consists of a geographically dispersed customer base.
      The Company maintains reserves 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 reserves. Reserves are recorded primarily on
      a
      specific identification basis. As of December 31, 2007 and 2006 the reserve
      for
      doubtful debts was $146,215 and $65,968 respectively.





**(H)**  **Property
      and Equipment**





Property
      and equipment are stated at cost, less accumulated depreciation. Depreciation
      is
      provided using the straight-line method over the estimated useful life of the
      assets from three to ten years. Expenditures for maintenance and repairs are
      charged to expense as incurred.





**(I)**  **Income
      Taxes**





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





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





The
      Company's revenue recognition policies are in compliance with Staff accounting
      bulletin (SAB) 104. The
      Company derives revenues from activities as a fixed-line telecom provider with
      its own carrier 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). Cost
      of
      revenues includes the cost of capacity associated with the revenue recognized
      within the corresponding time period, payments
      made to content providers and depreciation of network infrastructure and
      equipment





The
      Company recognizes revenue from prepaid calling cards as the services are
      provided. Payments received before all of the relevant criteria for revenue
      recognition are satisfied are recorded as deferred revenue. Cost of revenue
      includes the cost of capacity associated with the revenue recognized within
      the
      corresponding time period.





Deferred
      revenue represents amounts received from the customers against future sales
      of
      services since the Company recognizes revenue upon performing the services.
      Deferred revenue was $93,661 and $105,105 as of December 31, 2007 and 2006
      respectively.





Page
          38


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**(K)**  **Long-Lived
      Assets**





Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No.144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      144"), which addresses financial accounting and reporting for the impairment
      or
      disposal of long-lived assets and supersedes SFAS No.121, "Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
      and the accounting and reporting provisions of APB Opinion No.30, "Reporting
      the
      Results of Operations for a Disposal of a Segment of a Business." The Company
      periodically evaluates the carrying value of long-lived assets to be held and
      used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
      recorded on long-lived assets used in operations when indicators of impairment
      are present and the undiscounted cash flows estimated to be generated by those
      assets are less than the assets' carrying amounts. In that event, a loss is
      recognized based on the amount by which the carrying amount exceeds the fair
      market value of the long-lived assets. Loss on long-lived assets to be disposed
      of is determined in a similar manner, except that fair market values are reduced
      for the cost of disposal. As of December 31, 2007, there was no impairment
      recorded in the accompanying financials.





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





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





**(M)**  **Reporting
      Segments**





Statement
      of financial accounting standards No. 131, Disclosures about segments of an
      enterprise and related information (SFAS No. 131), which superseded statement
      of
      financial accounting standards No. 14, Financial reporting for segments of
      a
      business enterprise, establishes standards for the way that public enterprises
      report information about operating segments in annual financial statements
      and
      requires reporting of selected information about operating segments in interim
      financial statements regarding products and services, geographic areas and
      major
      customers. SFAS No. 131 defines operating segments as components of an
      enterprise about which separate financial information is available that is
      evaluated regularly by the chief operating decision maker in deciding how to
      allocate resources and in assessing performances. The Company allocates its
      resources and assesses the performance of its sales activities based upon
      geographic locations of its subsidiaries (see
      Note
      22).





**(N)**  **Stock-based
      Compensation**





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





**(O)**  **Comprehensive
      Income**




Page
          39


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


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





**(P)**  **Advertising
      and Marketing Costs**





**Advertising
      and marketing expenses were insignificant for the Company’s operation. We
      expense costs of advertising and marketing as incurred. Advertising and
      marketing expenses for the year ended December 31, 2007 and 2006 amounted to
      $18,858 and $0 respectively.**





**(Q)**  **Reclassifications**





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





**(R)**  **Principles
      of Consolidation**




The
      accompanying consolidated financial statements for the year ended December
      31,
      2007 included the accounts of Elephant Talk Communications, Inc., its
      wholly-owned subsidiary Elephant Talk Europe Holding B.V., its wholly-owned
      subsidiary Elephant Talk Communication Holding AG, its wholly-owned subsidiary
      Elephant Talk Communications S.L.U., its wholly-owned subsidiary Cardnet
      Clearing Services B.V., its wholly-owned subsidiary Elephant Talk Communication
      Austria GmbH, its wholly-owned subsidiary Vocalis Austria GmbH, its wholly-owned
      subsidiary Elephant Talk Communications Italy S.R.L., its wholly-owned
      subsidiary ET-Stream GmbH, its wholly-owned subsidiary Elephant Talk
      Communication Carrier Services GmbH, its wholly-owned subsidiary Elephant Talk
      Communication (Europe) GmbH, its wholly-owned subsidiary Elephant Talk
      Communication Schweiz GmbH, its majority owned (51%) subsidiary Elephant Talk
      Communications Premium Rate Services Netherlands B.V., its wholly-owned
      subsidiary Elephant Talk Communications France S.A.S., its majority owned (51%)
      subsidiary Elephant Talk Communications PRS U.K. Limited, its majority owned
      (99.76275%) 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
      Elephant Talk Limited, its wholly-owned subsidiary Full Mark Technology Ltd.,
      its wholly-owned subsidiary Jinfuyi Technology Limited, its majority owned
      (51%)
      subsidiary Elephant Talk Middle East & Africa (Holding) W.L.L., its majority
      owned (51%) subsidiary Elephant Talk Middle East & Africa (Holding) Jordan
      L.L.C., its majority owned (50.49%) subsidiary Elephant Talk Middle East &
Africa Bahrain W.L.L and its majority owned (50.54%) subsidiary Elephant Talk
      Middle East & Africa FZ-LLC. The consolidated financial statements for the
      year ended December 31, 2006 included the accounts of Elephant Talk
      Communications, Inc., its wholly owned subsidiary Elephant Talk Limited, its
      wholly owned subsidiary Full Mark Limited, its wholly-owned subsidiary Elephant
      Talk Europe Holding BV, its majority owned (51%) subsidiary Elephant Talk
      Communications PRS UK Ltd., its majority owned (51%) subsidiary Elephant Talk
      Middle East & Africa (Holding) W.L.L., its majority owned (51%) subsidiary
      Elephant Talk Middle East and Africa Jordon L.L.C., and its majority owned
      (50.54%) subsidiary Elephant Talk Middle East & Africa FZ-LLC. All
      significant inter-company accounts and transactions have been eliminated in
      consolidation.




**(S)**  **New
      Accounting Pronouncements**





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




Page
          40


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


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





a.
            A
                brief description of the provisions of this Statement


b.
            The
                date that adoption is required


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





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





In
      February 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities--Including an amendment of FASB Statement
      No.
      115.” The statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. The statement is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. Management believes that this
      statement will not have a significant impact on the financial
      statements.





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





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




Page
          41


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


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





**Note
              2**
            **Acquisitions**





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





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





Cash
                & cash equivalents
            
            $
            409,174Accounts
                receivables
            
            
            4,485,259Property
                & equipment
            
            
            2,163,157Customer
                contracts & licenses
            
            
            11,504,192Other
                assets
            
            
            1,299,647Total
                Assets acquired
            
            
            19,861,430Accounts
                payable
            
            
            1,535,504Accrued
                expenses and other payables
            
            
            3,631,658Payable
                to third parties
            
            
            4,013,056Others
            
            
            125,160Liabilities
                assumed
            
            
            9,305378Net
                assets acquired
            
            
            10,556,052Consideration
                paid
            
            
            9,643,080Negative
                goodwill
            
            $
            (912,972
            )




Page
          42


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


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





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





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





The
      Company included the financial results of Benoit Telecom in its consolidated
      2007 financial results from the date of the purchase, January 1, 2007 through
      December 31, 2007.





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





The
      following un-audited pro forma consolidated financial information for the year
      ended December 31, 2007 and 2006, as presented below, reflects the results
      of
      operations of the Company as of January 1, 2007 and assuming that the
      acquisition occurred on January 1, 2006, respectively, and after giving effect
      to the purchase accounting adjustments. These pro forma results have been
      prepared for information purposes only and do not purport to be indicative
      of
      what operating results would have been had the acquisitions actually taken
      place
      on January 1, 2007 and 2006 respectively, and may not be indicative of future
      operating results.




**For
                the year ended December 31****2007**
            
            
            **2006**REVENUES,
                net
            
            $
            47,361,028
            
            $
            32,234,126LOSS
                FROM OPERATIONS
            
            $
            (11,352,369
            )
            $
            (3,956,511
            )NET
                LOSS
            
            $
            (12,057,732
            )
            $
            (6,346,401
            )Loss
                per share - basic and fully diluted
            
            $
            (0.045
            )
            $
            (0.037
            )Weighted
                average shares outstanding during the period - basic and
                diluted
            
            
            238,265,927
            
            
            173,863,813




Page
          43


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**Note
                3**
            **Earnest
                deposit**





Earnest
      deposits to various telecom carriers during the course of its operations amount
      to $442,853
      as at December 31, 2007compared with $0 for the same period of 2006. The
      deposits are refundable at the conclusion of the business relationship with
      the
      carriers.





**Note
              4**
            **Prepaid
                expenses and other current
                assets**





Prepaid
      expenses and other current assets recorded as $372,331 as at December 31, 2007.
      The amount consists primarily of VAT prepaid and receivable from various
      European authorities.





**Note
              5**
            **Property
                and equipment**





Property
      and equipment at December 31, 2007 consist of:





**2007**
            
            **2006**Leasehold
                improvements
            
            $
            36,897
            
            $
            6,410Furniture
                and fixtures
            
            
            194,322
            
            
            91,879Computer,
                communication and network equipment
            
            
            6,083,545
            
            
            2,155,996Automobiles
            
            
            137,726
            
            
            -Construction
                in progress
            
            
            687,962
            
            
            -7,140,452
            
            
            2,254,285Less:
                accumulated depreciation
            
            
            (3,656,228
            )
            
            (2,096,051
            )$
            3,484,224
            
            $
            158,234





Depreciation
      expense amounted to $652,478 and $42,326 for the year ended December 31, 2007
      and 2006 respectively.





**Note
              6**
            **Intangible
                assets - Customer contracts, licenses and
                interconnects**





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





Customer
      contracts, licenses and interconnects, at December 31, 2007 consist of the
      following:





Customer
                Contracts, Licenses & Interconnect
            
            $
            15,219,998Accumulated
                Depreciation Customer Contracts & Licenses
            
            
            (3,757,496
            )Customer
                Contracts & Licenses, net
            
            $
            11,462,504





There
      were no intangible assets as of December 31, 2006.





Amortization
      expense for the year ended December 31, 2007 amounted to $1,580,976 compared
      to
      $0 for the same period of 2006.





**Note
              7**
            **Due
                from related parties**





The
      Company advanced funds to entities that officers and/or shareholders have an
      ownership interest in. The funds were advanced to these entities prior to 2007.
      The balances of funds advanced as of December 31, 2007 amounted to $18,514.




Page
          44


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**Note
              8**
            **Overdraft**





The
      Company has executed a credit facility with a bank in Hong Kong under which
      the
      Company has borrowed funds from the bank under an overdraft account. As of
      December 31, 2007 and 2006 the overdraft balance amounted to $197,815 and
      $171,819 respectively. The accrued interest for the years ended December 31,
      2007 and 2006 was $25,465 and $22,493, respectively. 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.





**Note
              9******
            **Accrued
                Expenses**





As
      at
      December 31, 2007 and 2006, the accrued expenses comprised of the following
      :-





**2007**
            
            **2006**Accrued
                SG&A expenses
            
            $
            877,901
            
            $
            224,841Accrued
                cost of sales and network
            
            
            521,398Accrued
                taxes
            
            
            43,941Accrued
                interest payable
            
            
            1,473,811Other
            
            
            94,216Total
                accrued expenses
            
            $
            3,011,267
            
            $
            224,841




**Note
              10**
            **Payable
                To Third Parties**





As
      at
      December 31, 2007 and 2006 the Company had $201,191 and $0 respectively as
      payable to third parties in relation to advances received at various times
      for
      its working capital requirements. The advances received were non-interest
      bearing, unsecured and due on demand.





**Note
              11**
            **Loans
                Payable**





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





Installment
                loan payable due December 24, 2006, secured by personal guarantees
                of two
                shareholders, a director, and a third party
            
            $
            318,481Installment
                loan payable, bank, monthly principal and interest payments of $2,881
                including interest at bank's prime rate plus 1.5% per annum, 8.75%
                at
                December 31, 2007, due December 24, 2011, secured by personal guarantees
                of three shareholders and a director
            
            
            190,299Installment
                loan payable, bank, monthly principal and interest payments of $1,740
                including interest at bank's prime rate plus 1.5% per annum, 8.75%
                at
                December 31, 2007, due June 28, 2009, secured by personal guarantees
                of
                three shareholders and a director
            
            
            84,612Term
                loan payable, bank, monthly payments of interest at bank's prime
                rate,
                7.0% at December 31, 2007
            
            
            282,040Total
            
            $
            875,432




Page
          45


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


Loans
      payable at December 31, 2006 are summarized as follows:




Installment
                loan payable, bank, monthly principal and interest payments of $12,804
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2006, due December 24, 2006, secured by personal guarantees
                of two shareholders, a director, and a third party
            
            $
            326,037Installment
                loan payable, bank, monthly principal and interest payments of $2,924
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2006, due December 24, 2011, secured by personal guarantees
                of three shareholders and a director
            
            
            190,306Installment
                loan payable, bank, monthly principal and interest payments of $1,751
                including interest at bank's prime rate plus 1.5% per annum, 9.5%
                at
                December 31, 2006, due June 28, 2009, secured by personal guarantees
                of
                three shareholders and a director
            
            
            84,615Term
                loan payable, bank, monthly payments of interest at bank's prime
                rate,
                8.0% at December 31, 2006
            
            
            282,052Total
            
            $
            883,010




The
      Company has executed a credit facility with a bank in Hong Kong since June
      29,
      2004 under which the Company has borrowed funds from the bank under three
      installment loans and a term loan arrangement. The Company is in default of
      making loan payments on all the loans and has recorded an accrued interest
      amounting to $309,443 as of December 31, 2007. As a result of the default,
      the
      entire loan balance outstanding at December 31, 2007 is immediately due and
      payable to the bank. Furthermore, the Company is obligated to pay a default
      interest rate at the rate of 4.25% per annum in addition to the prescribed
      interest rate of the installment loans and term loan. The Company has recorded
      $12,218 and $132,262 in
      interest expense and default interest expense, respectively, on loans payable
      as
      of December 31, 2007 and $72,316 and $41,798 in interest expense as of December
      31, 2006.




**Note
              12**
            **Due
                to related parties**





The
      Company received advances from entities that certain shareholders and former
      officers have an ownership interest and has payables to individuals who are
      shareholders of the company. These amounts are due on demand, unsecured and
      non-interest bearing. As at December 31, 2007 and 2006, the due to related
      party
      were as follows:




**2007**
            
            **2006**Due
                to an entity related to a shareholder and former officer
            
            $
            14,755
            
            
            158,612Due
                to shareholders and former officers
            
            
            100,486
            
            
            37,222$
            115,241
            
            
            195,834





**Note
              13**
            **Convertible
                promissory note payable to related party**





On
      December 15, 2005, the Company executed a Convertible Promissory Note (the
      “Note”) in the principal amount of $3.5 million to Rising Water Capital (“RWC”),
      an investor and an entity controlled by the Chief Executive Officer, funds
      to be
      drawn in stages. The Note is convertible during the term, in whole or in part,
      into shares of common stock at the conversion price of three and one-half cents
      ($0.035) of principal amount per share of common stock. The Note did not have
      any beneficial conversion factor attached to it since the conversion rate was
      equal to the market price of the common stock of $0.035, on the closing of
      agreement. The Note is convertible to the extent that the Company has sufficient
      authorized common stock. In that regard, there are currently 5,586,580 shares
      out of the Company’s 250,000,000 authorized common shares available for issuance
      upon conversion. The Note has a term of thirty (30) months during which time
      interest at the rate of 10% per annum will accrue from the date advances drawn
      by the Company. The Note is secured by shares owned or to be owned by (an agent
      of) the Company in its subsidiaries. The Note would have to be paid in full
      at
      the end of the thirty month term with a balloon payment of principal and accrued
      interest or converted into common stock. RWC has not converted the principal
      drawn by the Company as of December 31, 2007 in exchange for the common shares
      of the Company. As of December 31, 2007, the entire principal of $3.5 million
      had been received. The Company recorded accrued interest expense of $350,000
      and
      $341,709 for the year ended December 31, 2007 and 2006 respectively.




Page
          46


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006




On
      May
      26, 2006, the Company executed a second Convertible Promissory Note (the
“2 nd Note”)
      in the principal sum of $3,000,000 with Rising Water Capital, an entity
      controlled by the Chief Executive Officer. The 2 nd Note has
      a term of thirty (30) months, during which time interest on the Principal Amount
      will accrue from the date of this 2 nd Note at
      an annual interest rate of 10%. The 2 nd Note
      will be paid in full at the end of the thirty month term with a balloon payment
      of principal and interest accrued. The 2 nd Note
      shall be convertible during the term, in whole or in part, into common shares
      at
      the conversion price of seven cents ($0.07) per share provided, however, that
      this 2 nd Note
      shall not be convertible during the term when the Company has insufficient
      authorized common shares to issue to the 2 nd Note
      holder when a demand for conversion is made. The Note did not have any
      beneficial conversion factor attached to it since the conversion rate was equal
      to the market price of the common stock of $0.07 on the closing of agreement.
      The 2 nd Note is
      secured by shares owned or to be owned by (an agent of) the Company in its
      subsidiaries. The Company has received the principal balance $2,984,063 and
      has
      recorded accrued interest of $280,898 in the accompanying financial statements
      as of December 31, 2007. For the same period ended December 31, 2006, the
      Company received the principal balance $1,983,160 and recorded accrued interest
      of $106,100. The note has been presented as a long term liability on the
      accompanying financials.





On
      March
      26, 2008, the Company received a letter of Rising Water Capital A.G. regarding
      the above mentioned Promissory Notes, notifying that they agreed to waive any
      and all defaults or continuing defaults for a period of time commencing on
      the
      date of the letter and continuing for 3 months hereafter.





**Note
              14**
            **Stockholders’
                equity**





**(A)
      Common Stock**





The
      Company is presently authorized to issue 250,000,000 shares of no par value
      Common Stock. The Company currently has 238,265,927 Shares of Common Stock
      issued and outstanding as of December 31, 2007. The shares issued and
      outstanding as per the stock transfer agent’s records are 244,413,420. 6,147,493
      shares were cancelled by the company prior to 2006, however, these shares were
      not returned to the stock transfer agent and never cancelled on records. These
      shares have been blocked for trading by the Stock Transfer Agent.





**Shares
      to be Issued**





Pursuant
      to a Stock Purchase Agreement dated June 30, 2005, the Company sold to an
      accredited investor Rising Water Capital (RWC) (an entity controlled by the
      Chief Executive Officer) 195,947,395 shares of restricted common stock for
      a
      total cash consideration of $7,837,896.  As of December 31, 2006, the
      Company has issued to RWC 100,000,000 of its restricted common shares valued
      at
      $4,000,000. The common shares were valued at $0.04 cents per share pursuant
      to
      the terms of the agreement. As a result, per that same date the Company still
      had to issue 95,947,395 common shares, valued at $3,837,896 to RWC. The Company
      has recorded such shares to be issued as a liability in the accompanying
      financials as of December 31, 2006.




On
      October 30, 2006, the Company agreed to issue to RWC an additional
      258,546,313 shares of common stock as price adjustment for failed acquisitions
      by the Company leading to lower market value than anticipated. The result of
      the
      price adjustment was to bring the ownership of RWC in the Company, as of October
      30, 2006, to 72.5% of total of shares of common stock (excluding the hereunder
      mentioned promissory notes).




Page
          47


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


Pursuant
      to a Stock Purchase Agreement, on December 28, 2006, the Company agreed to
      sell
      109,480,000 restricted common shares to five accredited investors for a total
      consideration of $4,105,500. The shares were valued at 50% discount over the
      last five days average market price on the date of execution of the agreement.
      On December 31, 2006 the Company had received a cash consideration of $944,500
      from one investor relating to 25,186,667 shares. In 2007 the Company received
      the remaining cash consideration from the other four investors of $3,161,000
      and
      interest for late payment amounting to $65,813. The aggregate number of shares
      to be issued to those four investors is 84,293,333 bringing the total number
      of
      shares to be issued to the five accredited investors to the agreed 109,480,000
      number of shares.




On
      June
      28, 2007, the Board approved to issue over a three years periods as of January
      1, 2007 in total 72,036,800 shares of common stock to its officers and directors
      of which 51,761,600 shares of common stock valued at $4,399,736 were recognized
      at June 28, 2007 as compensation for employment commitments for a term of three
      years as of January 1, 2007. The remaining 20,275,200 valued at $1,723,392
      will
      be amortized over a period of three years as of January 2007. Therefore, for
      compensation for services for the 12 months ended December 31, 2007 6,758,400
      shares of stock valued at $574,464 was awarded to Management in 2007. The shares
      were valued at the closing market price of eight and one-half cents ($0.085)
      on
      June 28, 2007, the date of grant. The Company has recorded such shares to be
      issued as a liability in the accompanying financial statements as of December
      31, 2007. Subsequent to the grant of such shares, the Board of Directors and
      the
      above-referenced officers and directors determined that it is unlikely that
      the
      shares of common stock will be issued in the form and within the timeframe
      originally agreed upon, if at all. The Board of Directors and management of
      the
      Company are currently in discussions regarding modifications to the original
      compensation plan and expect to finalize a revised plan in 2008.




On
      August
      22, 2007, the Board approved the sale of approximately 91 million restricted
      common shares to 5 accredited investors for a total consideration of
      approximately $5.2million.




The
      shares were valued at a 30% discount over the closing price of August 22, 2007,
      resulting in an issuance price of $0.0595, before consultancy fee of 5%. The
      company has received a cash consideration in dollars of $5,414,128 in 2007
      and
      paid fees for raising financing of $142,470. The Company has recorded 90,998,790
      shares to be issued as a liability in the accompanying financial statements
      as
      of December 31, 2007.




Per
      December 31, 2007 the total number of shares to be issued amounted to
      613,492,498 (excluding Promissory Notes) valued at $18,255,065.




**Computation
              of Full Dilution - December 31, 2007**
            
            
            **Number
                of shares to be issued**Shared
                O/S at December 31, 2007 (issued)
            
            
            238,265,927Add'l
                shares to be issued - RWC - sale of shares
            
            
            95,947,395Add'l
                shares to be issued to bring the ownership to 72.5%
            
            
            258,546,313Shares
                sold to five investors - $4,105,500 @$0.0375 per share
            
            
            109,480,000Shares
                sold to 5 accredited investors $ 5,271,658 @ $ 0.0595
            
            
            90,998,790Sign
                In Bonus Officers
            
            
            51,761,600Management
                Compensation until 31.12.2007
            
            
            6,758,400Add'l
                shares to be issued - RWC - $3.5 MM CPNote
            
            
            100,000,000RWC
                - $3 MM CPNote @ conv. price of $0.07 per share
            
            
            38,005,87131.12.2007
                Total number of shares issued and to be issued
            
            
            989,764,206




Page
          48


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006




**(B)
      Class B Preferred Stock**





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





During
      the fiscal year ended December 31, 2007, the Company did not issue any shares
      of
      Preferred Stock or warrants.





**Note
              15**
            **Basic
                and diluted net loss per share**





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





**Note
              16**
            **Employee
                benefit plan and non-qualified stock option and compensation
                plan**





**Employee
      Benefit Plan**





The
      Company adopted an employee benefit plan “The 2000 Employee Benefit Plan” (the
“Plan”) on May 30, 2000. Under the Plan, the Company may issue shares or grant
      options to acquire the Company’s common stock, no par value, from time to time
      to employees of the Company or its subsidiaries. In addition, at the discretion
      of the Board of Directors, shares may be granted under this Plan to other
      individuals, including consultants or advisors, who contribute to the success
      of
      the Company or its subsidiaries, provided that bona fide services shall be
      rendered by consultants and advisors and such services must not be in
      conjunction with the offer or sale of securities in a capital raising
      transaction. No stock may be issued or options granted under the Plan to
      consultants, advisors or other persons who directly or indirectly promote or
      maintain a market for the Company’s securities. The Plan is intended to aid the
      Company in maintaining and developing a management team, attracting qualified
      officers and employees capable of assuring the future success of the Company,
      and rewarding those individuals who have contributed to the success of the
      Company. The Plan is administrated under the direction of the Board of
      Directors. A total of 4,000,000 (four million) common shares and 4,000,000
      (four
      million) stock options to acquire common shares may be subject to, or issued
      pursuant to, benefits granted under the Plan. At any time any stock option
      is
      granted under the terms of this Plan, the Company will reserve for issuance
      the
      number of shares of Stock subject to such option until it is exercised or
      expired. The Plan Administrator shall determine from time to time the terms,
      conditions and price of the options granted. Options shall not be construed
      to
      be stock and cannot be exercised after the expiration of its term. Under the
      Plan, 300,000 shares of common stock and 4,000,000 stock options remain
      available for grant at December 31, 2007.





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




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




Page
          49


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006





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





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





Common
      stock purchase options and warrants consisted of the following as of December
      31, 2007:





#
                shares
            
            Exercise
                Price
            
            Aggregate
                Intrinsic Value**Options:**Outstanding
                as of December 31, 2006
            
            -
            
            -
            
            -Granted
            
            
            7,483,333
            
            
            0.09
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Expired
            
            
            362,500
            
            
            0.09
            
            
            -Outstanding
                as of December 31, 2007
            
            
            7,120,833
            
            
            0.09
            
            $
            -





Following
      is a summary of the status of options outstanding at December 31,
      2007:





**Range
                of Exercise Price**
            
            **Total**
              **Options
                Outstanding**
            
            **Weighted
                Average Remaining Life**
            
            **Weighted
                Average Exercise Price**
            
            **Options
                Exercisable**
            
            **Weighted
                Average Exercise Price**$0.09
            
            
            7,120,833
            
            
            4
                years
            
            $
            0.09
            
            
            -
            
            
            -




**Note
              17**
            **Income
                taxes**





Income
      tax expense (benefit) for the year ended December 31, 2007 and 2006 is
      summarized as follows:




December
                31, 2007
            
            December
                31, 2006Current:Federal
            
            $
            (4,099,629
            )
            $
            (1,642,086
            )State
            
            
            (723,464
            )
            
            (289,780
            )Deferred
                Taxes
            
            
            4,823,893
            
            
            1,932,666Income
                tax expense (benefit)
            
            $
            800
            
            $
            800




Page
          50


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006




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,
      2007:




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




The
      tax
      effects of temporary differences that gave rise to significant portions of
      deferred tax assets and liabilities at December 31, 2007 are as follows:




Deferred
                tax assets:Deferred
                Tax Asset
            
            $
            11,607,933Total
                gross deferred tax assets
            
            
            11,607,933Less:
                Valuation allowance
            
            
            (11,607,933
            )Net
                deferred tax assets
            
            $
            --





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





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





**Note
              18**
            **Minority
                interest in subsidiary**





The
      Company had minority interest in several of its subsidiaries. The balance of
      the
      minority interest as of December 31, 2007 and 2006 was as follows:




**Minority**
            
            
            **Minority
                Interest Balance at December 31,****Subsidiary**
            
            
            **Interest
                %**
            
            
            **2007**
            
            
            **2006**ETC
                PRS UK
            
            
            49
            %
            $
            10,807
            
            $
            8,327ETC
                PRS Netherlands
            
            
            49
            %
            
            144,344
            
            
            -ET
                ME&A Holding WLL
            
            
            49
            %
            
            39,254
            
            
            82,234ET
                Bahrain WLL
            
            
            1
            %
            
            1,955
            
            
            515ET
                ME&A FZ LLC
            
            
            49.46
            %
            
            35,214
            
            
            36,379Total
            
            
            
            
            $
            231,575
            
            $
            127,455





**Note
              19**
            **Discontinued
                operations**





On
      January 4, 2006, the Company, through its agent Guangdong Elephant Talk Network
      Consulting Limited (“ETGD”), entered into an agreement to acquire sixty percent
      (60%) of the registered capital of Beijing China Wind. Pursuant to the
      Agreement, the purchase price for 60% of Beijing China Wind was agreed to be
      $4,800,000, subject to adjustments based on Beijing China Wind’s audited net
      income for fiscal years 2005 and 2006, and is payable (a) in cash of $2,800,000
      in five installments, the last of which is to be paid on January 31, 2007,
      and
      (b) by issuance of 20,000,000 restricted common shares valued at $0.10 per
      share
      to the owners of Beijing China Wind in four equal installments, the last of
      which is to be issued on January 31, 2007. The owners of Beijing China Wind
      have
      the right to exercise an option within 30 days after July 31, 2007 to return
      the
      20,000,000 restricted common shares either in exchange for a 25% equity interest
      in Beijing China Wind or for settlement in cash within 90 days. The Company
      on
      behalf of its agent ETGD has issued 10,000,000 restricted common shares valued
      at $500,000 and has made cash payments of $1,420,000 to the owners of Beijing
      China Wind towards ETGD’s 60% ownership equity in Beijing China Wind as of
      September 30, 2006. The restricted common shares were valued at the closing
      market price of shares on the day of execution of the agreement. If Beijing
      China Wind is able to achieve the net profits and revenue targets for 2006
      as
      agreed pursuant to the terms of the Agreement, ETGD will have a obligation
      to
      pay $1,380,000 in cash and 10,000,000 restricted shares of common stock of
      the
      Company on or before January 31, 2007 for the agreed purchase price of
      $4,800,000 for ETGD’s 60% equity ownership in Beijing China Wind.




Page
          51


**ELEPHANT
        TALK COMMUNICATIONS, INC. AND SUBSIDIARIES**
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2007 AND 2006


**Investment
      in Beijing China Wind Telecommunication Information Technology Co.
      Limited**





Consideration
                payable for Beijing China Wind on acquisition date January 4,
                2006:Cash
                payable
            
            $
            1,600,000Common
                shares to be issued - 20,000,000 shares
            
            
            1,000,000Total
                consideration payable
            
            $
            2,600,000Fair
                value of net assets received on acquisition date January 4,
                2006:Cash
            
            $
            95,786Accounts
                receivable, net of allowances
            
            
            1,071,595Other
                receivables and prepayments
            
            
            36,256Due
                from directors
            
            
            323,657Due
                from a related company
            
            
            3,849Property
                and equipment, net
            
            
            218,471Other
                assets
            
            
            1,712,510Accounts
                payable
            
            
            (437,943
            )Other
                payables and accrued expenses
            
            
            (926,781
            )Value
                added tax payable
            
            
            (47,289
            )Notes
                payable
            
            
            (30,544
            )Due
                to stockholders
            
            
            (27,253
            )1,992,314Minority
                interest - 40%
            
            
            (796,926
            )$
            1,195,388Goodwill
            
            
            1,404,612Total
                consideration
            
            $
            2,600,000





The
      Company recorded goodwill on consolidation of its acquired entities in the
      total
      amount of $3,117,123 upon completion of acquisition of Beijing Chinawind.
      Beijing Chinawind revenues and profitability have consistently declined over
      several months due to the change in business outlook and change in telecom
      policies of network carriers in China. The Company has taken a position to
      abandon its investment in Beijing Chinawind since ETGD lost its control over
      the
      operations of Beijing Chinawind. The Company decided to discontinue its
      operations effective September 30, 2006 and recorded a loss of $2,152,247 from
      abandoning Beijing Chinawind’s operations. The Company has placed restrictions
      on the tradability of the 10,000,000 shares issued to the owners of Beijing
      Chinawind and is pursuing the return of such shares.





**Note
              20**
            **Commitments
                and contingencies**





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





December
                31, 2008
            
            $
            3,279,580December
                31, 2009
            
            
            1,649,315December
                31, 2010
            
            
            1,600,272December
                31, 2011
            
            
            1,518,634December
                31, 2012
            
            
            1,472,900**Total**
            
            $
            **6,241,121**




Page
          52


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006





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





**Note
              21**
            **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
      10,000,000 common shares of the Company valued at $0.10 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 recently received. On October
      the 18 th 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.





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





As
      previously described in the Company’s 2004 Annual Report, parties mutually
      agreed to terminate this Purchase Agreement. The Company returned the received
      shares of New Times Navigation Limited to the concerned shareholders and
      received back 2,252,500 common shares out of the 5,100,000 issued by the Company
      for the purchase. In addition the Company issued 37 unsecured convertible
      promissory notes for a total amount of US$3,600,000. On request of the Company
      21 were returned with a total value of US$2,040,000.





The
      Company is presently 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 2,847,500 common shares (valued at $381,565) and also to have them
      return the remaining 18 unsecured convertible promissory notes representing
      a
      total amount of US$1,560,000. The case is currently pending.





Page
          53


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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006




**Note
              22**
            **Segment
                information**





During
      the year ended December 31, 2006, the Company operated in a single segment.
      The
      segment information for the year ended December 31, 2007 is as
      follows:




**Twelve
        months ended December 31, 2007**





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


**Note
              23**
            **Going
                concern**





The
      accompanying financial statements have been prepared in conformity with
      generally accepted accounting principle, which contemplate continuation of
      the
      Company as a going concern. The Company has an accumulated deficit of
      $29,019,832 including a net loss of $12,057,732 for the year ended December
      31,
      2007 and default on its bank loans. This raises a substantial doubt about the
      Company’s ability to continue as a going concern. In view of the matters
      described below, recoverability of a major portion of the recorded asset amounts
      shown in the accompanying balance sheet is dependent upon continued operations
      of the Company, which in turn is dependent upon the Company’s ability to raise
      additional capital, obtain financing and to succeed in its future
      operations.


Page
          54




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


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THE
      YEARS ENDED DECEMBER 31, 2007 AND 2006





The
        financial statements do not include any adjustments relating to the
        recoverability and classification of recorded asset amounts or amounts and
        classification of liabilities that might be necessary should the Company
        be
        unable to continue as a going concern.
 
 Substantial
        additional capital resources will be required to fund continuing expenditures
        related to our research, development, manufacturing and business development
        activities.
 
 Management
        has taken the following steps to revise its operating and financial
        requirements, which it believes are sufficient to provide the Company with
        the
        ability to continue as a going concern for the coming two quarters. Management
        has devoted considerable efforts during the period ended December 31, 2007
        and
        in the first few months of 2008 towards (i) obtaining additional equity
        financing (ii) controlling of salaries and general and administrative expenses
        (iii) management of accounts payable (iv) settlement of debt by issuance
        of
        common shares and (v) strategically acquire profitable companies that bring
        synergies to the Company’s products and services.


Management
      believes our existing available cash, cash commitments, cash equivalents and
      short term investments as of December 31, 2007 in combination with continuing
      contractual commitments will be sufficient to meet our anticipated capital
      requirements until the May 2008.




Management
      is pursuing a number of alternatives available to meet the continuing capital
      requirements of our operations, such as collaborative agreements and public
      and
      private financings. In the past the Company has demonstrated its ability to
      correct its operating cash deficiencies and there is currently no evidence
      to
      support that they cannot continue to do so in spite of the fact that 2007
      operations showed an operating loss. However, there can be no absolute assurance
      that any of these funding will be consummated in the time frames needed for
      continuing operations or on terms favorable to us. If adequate funds are not
      available, we will be required to significantly curtail our operating plans
      and/or possibly cease operations.




**Note
              24**
            **Subsequent
                events**





On
      January 3, 2008, with effective date January 2, 2008 Elephant Talk Global
      Holding B.V.( ET Global) signed  a joint venture agreement with United
      Telecommunication Services NV (UTS), the incumbent telecom operator in the
      Dutch
      Antilles organized and existing under the laws of Curacao, Netherland Antilles.
      This cooperation enables  ET
      Global
      and UTS to design, install, and operate WIFI networks throughout the Dutch
      and
      French Caribbean, as well as the Islands of St. Kitts and Nevis. As a
      consequence ET Global incorporated on March 19, 2008, Elephant Talk
      Caribbean BV (ET Caribbean), organized and existing under the laws of the
      Netherlands. ET Caribbean will participate for 51% in a specially to be created
      company (Newco) in Curacao, Netherlands Antilles. The other 49% will be a
      participation of an entity of UTS. The Newco will head the joint
      venture.





On
      March
      26, 2008, the Company received a news letter of Rising Water Capital A.G.
      regarding a Promissory Note of May 26, 2006 (see note 13 of the consolidated
      financial statements) in which they agreed to waive any and all defaults or
      continuing defaults for a period of time commencing on the date of the letter
      and continuing for 3 months hereafter.





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




On
      January 23, 2007, Jimmy C. H. Cheung & Co. (“Jimmy Cheung”) was dismissed as
      the Company’s auditors. The decision to dismiss Jimmy Cheung was approved by the
      Company’s Board of Directors upon recommendation by its audit committee. Jimmy
      Cheung served as the Registrant's independent auditor for the Company’s fiscal
      year ended December 31, 2005. Jimmy Cheung’s report on the Company’s
      consolidated financial statements for the year ended December 31, 2005 (the
      “Report”) did not contain an adverse opinion or disclaimer of opinion and was
      not qualified or modified as to uncertainty, audit scope or accounting
      principles. However, the Report was modified to include an explanatory paragraph
      wherein Jimmy Cheung expressed substantial doubt about the Registrant’s ability
      to continue as a going concern.




During
      the Company’s fiscal year ended December 31, 2005, and during the period from
      January 1, 2006 until January 23, 2007, there were no disagreements with Jimmy
      Cheung on any matter of accounting principles or practices, financial statement
      disclosures, or auditing scope or procedure, which disagreements, if not
      resolved to Jimmy Cheung’s satisfaction, would have caused Jimmy Cheung to make
      reference thereto in their report on the Registrant’s financial statements for
      this fiscal year.




On
      January 24, 2007, the Company engaged Kabani & Company, Inc. (“Kabani”),
      Certified Public Accountants, as the Company's independent accountant to report
      on the Company’s consolidated balance sheet as of December 31, 2006, and the
      related consolidated statements of operations, stockholders' equity and cash
      flows for the year then ended. The decision to appoint Kabani was approved
      by
      the Company's Board of Directors upon recommendation by its audit committee.
      Prior to engaging the new accountant, the Company did not consult with Kabani
      regarding the application of accounting principles to any contemplated or
      completed transactions nor the type of audit opinion that might be rendered
      on
      the Company’s financial statements, and neither written nor oral advice was
      provided that would be an important factor considered by the Company in reaching
      a decision as to an accounting, auditing or financial reporting issue.




Page
          55




**Item
      9A(T). Controls and Procedures**




Our
      Chief
      Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), are responsible
      for establishing and maintaining adequate internal control over financial
      reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange
      Act of 1934, as amended (the “Exchange Act”)




Internal
      control over financial reporting is promulgated under the Exchange Act as a
      process designed by, or under the supervision of, our CEO and CFO and effected
      by our board of directors, management and other personnel, to provide reasonable
      assurance regarding the reliability of financial reporting and the preparation
      of financial statements for external purposes in accordance with generally
      accepted accounting principles and includes those policies and procedures that:




·
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of our
                assets;




·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and




·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition or disposition of our assets that could
                have a
                material effect on the financial
                statements.




Readers
      are cautioned that internal control over financial reporting, no matter how
      well
      designed, has inherent limitations and may not prevent or detect misstatements.
      Therefore, even effective internal control over financial reporting can only
      provide reasonable assurance with respect to the financial statement preparation
      and presentation.




Our
      management has evaluated the effectiveness of our disclosure controls and
      procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) as of the
      end of the period covered by this Report but
      has
      not evaluated thembased upon the framework in Internal
      Control—Integrated Framework issued by the Committee of Sponsoring Organizations
      of the Treadway Commission (COSO) due to the fact that the Company does not
      have
      the personnel resources nor technological infrastructure in place to perform
      this evaluation. Management has identified this lack of personnel and
      technological resources as a material weakness in the Company’s internal control
      over financial reporting. While management believes the financial reports
      included in this Annual Report fairly represent the financial condition of
      the
      Company, due to the Company’s inability to evaluate its internal controls over
      financial reporting based
      on
      the framework developed by COSO, there is no guarantee that the financial
      reports accurately represent our financial condition.




The
      Company has begun to take appropriate steps to remediate the material weakness
      described above. The Company has hired a Sarbanes-Oxley consultant and intends
      to purchase software designed to strengthen internal controls over financial
      reporting. The Company expects to initiate these remediation efforts in the
      second half of 2008. The effectiveness of our internal controls following our
      remediation efforts will not be known until we test those controls in connection
      with management’s tests of internal control over financial reporting that will
      be performed after the close of our third fiscal quarter of 2008, ending
      September 30.




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 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 in this
      Report.


Page
          56


**PART** **III**





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





Our
      directors and executive officers and their ages as of March 31, 2008 are as
      follows:


**Director****Name**
            
            **Age**
            
            **Position**
            
            **Since**Steven
                Van der Velden
            
            51
            
            Chairman
                of the Board President, Chief Executive Officer and
                Director
            
            2006Willem
                Ackermans
            
            52
            
            Chief
                Financial Officer and Director
            
            2007Martin
                Zuurbier
            
            48
            
            Chief
                Operating Officer, Chief Technical Officer and Director
            
            2007Yves
                R. Van Sante
            
            47
            
            Director
            
            2006Johan
                Dejager
            
            48
            
            Director
            
            2006Bruce
                W. Barren (1)(2)(3)
            
            66
            
            Director
            
            2008Roderick
                de Greef (1)(2)(3)
            
            47
            
            Director
            
            2008Mark
                Nije
            
            45
            
            General
                Manager, Europe
            
            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:





**Steven
      Van der Velden** has
      been
      director since October 24, 2006 and the 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.





**Willem
      Ackermans** has
      been the Chief Financial Officer and a director since January 1,
      2007 **.** Mr.
      Ackermans is also a partner in M-Ventures B.V., a Dutch based firm focusing
      on
      new business development and venture capital activities in the information
      technology, energy and healthcare industries in Europe. From April 2006 to
      December 2006, Mr. Ackermans served as an independent consultant and provided
      amongst others services focused on the development of certain payment systems
      in
      the Dutch healthcare sector and services generally in the energy sector. From
      April 2003 to April 2006, Mr. Ackermans served as Director of Corporate
      Development and Strategy, M&A, Regulatory Affairs, Sustainability and
      Environmental Affairs, Technology & Knowledge Management. From October 2001
      to March 2003, Mr. Ackermans served as Chief Financial Officer of Telemedia
      N.V., a wholly-owned subsidiary of the Dutch telecommunications company
      Koninklijke KPN NV. From 1995 to 2001, Mr. Ackermans served in several positions
      with the Dutch Telecommunications Company KPN, a.o. as Corporate Treasurer
      and
      CFO KPN International. Since 1999 Mr. Ackermans served as CFO in the Joint
      Venture between KPN and Qwest; KPNQwest. Before 1995, Mr. Ackermans acted as
      Corporate Treasurer and Financial Director of the Dutch dredging company Royal
      Boskalis Westminster N.V. In 1983, Mr. Ackermans started his career with Amro
      Bank NV as Relationship Management Natural Resources. Mr. Ackermans holds a
      Masters degree in Engineering from the Dutch Technical University at
      Delft.




Page
          57





**Martin
      Zuurbier** has
      been the 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 the
      Company on January 1, 2007. From December 1999 to December 2004, Mr. Zuurbier
      served as director and was the founder of Vocalis Telecom Group located in
      The
      Netherlands 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
      involved in the production of television commercials for the European
      market.





**Yves
      R. Van Sante** has
      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 ETCI, 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. 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
      Dejager** has
      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).


Page
          58




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




**Roderick
      de Greef**  has
      served on the Company’s Board of Directors since January, 2008. Mr. de Greef is
      the principal of Taveyanne Capital Advisers, Inc., a firm providing corporate
      finance consulting services. 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. From 1989 to 1995, Mr. de Greef was Vice President and Chief Financial
      Officer of BioAnalogics, Inc. and International BioAnalogics, Inc., both
      publicly held development stage medical technology companies located in
      Portland, Oregon. From 1986 to 1989, Mr. de Greef was Controller and then Chief
      Financial Officer of publicly held Brentwood Instruments, Inc. Mr. de Greef
      also
      serves on the board of directors of Endologix, Inc., a public medical device
      company located in Irvine, California, and BioLife Solutions, Inc., a public
      life sciences company based in Bothell, Washington.




**Executive
      Officers**





**Mark
      Nije** has been
      general manager Europe since January 1 2007, a function he held since the end
      of
      2004 within the acquired Benoit Telecom Group. Mr. Nije has experience in
      project management, business development, investment management, logistics
      and
      telecommunications. Mr. Nije started as project manager and management
      consultant for Tebodin Consulting Engineers and Reitsma & Wertheim M&A
      specialists, the Netherlands. In 1990 he co-founded Logistic Management
      International NV (LMI), an international cargo transportation and airport
      handling company at the airport of Curacao, Netherlands Antilles. During those
      years he served as a board member and vice-chairman of the Curacao Exporters
      Association. From 2000-2002 Mr. Nije was co-founder and director of
      PickYourGifts BV, an internet start-up. In 2003 he became partner of QAT
      Investments SA, the Luxemburg venture capital fund, where he has been active
      as
      investment manager and/or board member in various ICT related ventures of QAT.
      Currently he is  non-executive board member of LMI and 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.





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.





*Director
      Independence*





We
      believe that Bruce W. Barren and Roderick de Greef qualify as independent
      directors for Nasdaq Stock Market purposes.


Page
          59


**Committee
      Membership, Meetings and Attendance**





During
      the fiscal year ended December 31, 2007, there were:





o
            3
                meetings of the Board of Directors;o
            3
                meetings of the Audit Committee;o
            no
                meetings of the Compensation Committee (as it was newly formed in
                November
                2007); ando
            no
                meetings of the Nominating Committee (as it was newly formed in November
                2007).





Each
      director attended or participated in at least 2/3 rd of the
      meetings of the Board of Directors and his respective committees held during
      our
      fiscal year ended December 31, 2007 and during his term of service.





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





**Board
      Committees**





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





*Audit
      and Finance Committee*





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





The
      Audit
      Committee reviewed and discussed our audited financial statements as of and
      for
      the year ended December 31, 2007 with the Board of Directors.





The
      Board
      of Directors reviewed and discussed with representatives of Kabani &
Company, Inc., 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 Kabani & Company, Inc. required by Independence Standard No.1,
“Independence Discussions with Audit Committees,” as amended by the Independence
      Standards Board, and has discussed with Kabani & Company, Inc. their
      independence.





*Compensation
      Committee*





Our
      Compensation Committee was formed on January 15, 2008 and consists of Roderick
      de Greef and Bruce Barren. The Compensation Committee did not meet in
      fiscal 2007. 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.




Page
          60




*Nominating
      and Corporate Governance Committee*





Our
      Nominating and Corporate Governance Committee was formed on January 15, 2008
      and
      consists of Roderick de Greef and Bruce Barren. Therefore, the Nominating and
      Corporate Governance Committee did not meet in fiscal 2007. The Nominating
      and
      Corporate Governance Committee is responsible for (1) reviewing suggestions
      of
      candidates for director made by directors and others; (2) identifying
      individuals qualified to become Board members, and recommending to the Board
      the
      director nominees for the next annual meeting of stockholders; (3) recommending
      to the Board director nominees for each committee of the Board; (4) recommending
      to the Board the corporate governance principles applicable to the company;
      and
      (5) overseeing the annual evaluation of the Board and management. Pursuant
      to
      the Nominating and Corporate Governance Committee charter, there is no
      difference in the manner in which a nominee is evaluated based on whether the
      nominee is recommended by a stockholder or otherwise.





**Guidelines
      for Business Conduct and Governance Guidelines**





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





*Section
      16(a) Beneficial Ownership Reporting Compliance*





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires that our
      directors and executive officers and persons who beneficially own more than
      10%
      of our common stock (referred to herein as the “reporting persons”) file with
      the SEC various reports as to their ownership of and activities relating to
      our
      common stock. Such reporting persons are required by the SEC regulations to
      furnish us with copies of all Section 16(a) reports they file. Based solely
      upon
      a review of copies of Section 16(a) reports and representations received by
      us
      from reporting persons, and without conducting any independent investigation
      of
      our own, in 2007, all Forms 3, 4 and 5 were timely filed with the SEC by such
      reporting persons except for the following:


·
            In
                2007, Steven van der Velden, our Chief Executive Officer, Director,
                and
                beneficial owner of an excess of five percent of our outstanding
                common
                stock, failed to report 3 transactions for which the filing of a
                Form 4
                was required, and did not timely file the Form 5 for the 2007 fiscal
                year.


·
            In
                2007, Johan Dejager, our Director and beneficial owner of an excess
                of
                five percent of our outstanding common stock, failed to timely file
                the
                Form 5 for the 2007 fiscal year.


·
            In
                2007, Alex Vermeulen, our Secretary and General Counsel, failed to
                report
                2 transactions for which the filing of a Form 4 was required and
                failed to
                timely file the Form 5 for the 2007 fiscal
                year.


·
            Willem
                Ackermans, our Chief Financial Officer and Director, failed to report
                2
                transactions for which the filing of a Form 4 was required and failed
                to
                timely file the Form 5 for the 2007 fiscal
                year.


·
            Martin
                Zuurbier; our Chief Operating Officer, Chief Technical Officer, Director
                and beneficial owner of an excess of five percent of our outstanding
                common stock, failed to report 2 transactions for which the filing
                of a
                Form 4 was required and failed to timely file the Form 5 for the
                2007
                fiscal year.


·
            Yves
                van Sante, our Director, failed to timely file the Form 5 for the
                2007
                fiscal year.


·
            Rising
                Water Capital, A.G., beneficial owner of an excess of five percent
                of our
                outstanding common stock, failed to report 1 transaction for which
                the
                filing of a Form 4 was required.


·
            We
                did not receive written confirmations from any other holders of five
                percent or more of our outstanding common stock that they were not
                required to file a Form 5 for the fiscal year ended December 31,
                2007.


Page
          61


**Item
      11. Executive Compensation.**




The
      following table sets forth all annualized compensation paid to our named
      executive officers at the end of the fiscal years ended December 31, 2007 and
      2006. Individuals we refer to as our "named executive officers" include our
      Chief Executive Officer and our most highly compensated executive officers
      whose
      salary and bonus for services rendered in all capacities exceeded $100,000
      during the fiscal year ended December 31, 2007.


**Name
                  and principal position**
              
              **Year**
              
              **Salary
                  ($)**
              
              **Bonus
                  ($)**
              
              
              **Stock
                  Awards ($)**
              
              
              **Total
                  ($)**Steven
                  van der Velden, CEO
              
              
              2007
              
              $
              0
              
              $
              1,636,760.00
              (1)
              
              $
              287,240.50
              (2)
              
              $
              1,924,000.502006
              
              $
              0
              
              $
              0
              
              
              $
              0
              
              
              $
              0Willem
                  Ackermans, CFO
              
              
              2007
              
              $
              246,371.13
              
              $
              837,896.00
              (3)
              
              $
              17,952.00
              (4)
              
              $
              1,099,219.132006
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -Martin
                  Zuurbier, COO,CTO
              
              
              2007
              
              $
              164,247.42
              
              $
              748,136.00
              (5)
              
              $
              107,712.00
              (6)
              
              $
              1,020,095.422006
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -Mark
                  Nije, General Manager, Europe
              
              
              2007
              
              $
              164,247.42
              
              $
              845,376.00
              (7)
              
              $
              107,712.00
              (8)
              
              $
              1,117,335.422006
              
              
              -
              
              
              -
              
              
              
              -
              
              
              
              -




(1)
            Based
                on 19,256,000 restricted shares of our common stock granted on January
                1,
                2007 as an entrance bonus.


(2)
            Based
                on 3,379,300 restricted shares of our common stock issued as
                salary.


(3)
            Based
                on 9,857,600 restricted shares of our common stock granted on January
                1,
                2007 as an entrance bonus.


(4)
            Based
                on 211,200 restricted shares of our common stock issued as
                salary.


(5)
            Based
                on 8,801,600 restricted shares of our common stock granted on January
                1,
                2007 as an entrance bonus.


(6)
            Based
                on 1,267,200 restricted shares of our common stock issued as
                salary.


(7)
            Based
                on 9,945,600 restricted shares of our common stock granted on January
                1,
                2007 as an entrance bonus.


(8)
            Based
                on 1,267,200 restricted shares of our common stock issued as
                salary.





Page
          62




**Narrative
      Disclosure to Summary Compensation Table.**




*Employment
      Agreements*




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




*Steven
      Van der Velden, Chief Executive Officer -* the
      Company intends to enter into an employment agreement with Mr. Van der Velden
      which will provide for his continued employment in his present capacity as
      Chief
      Executive Officer through December 31, 2009. In the interim, the Company has
      agreed to issue Mr. van der Velden 19,256,000 shares of restricted common stock,
      effective January 1, 2007, as an entrance bonus, and to compensate him with
      an
      annual award of 10,137,600 shares of restricted common stock. All restricted
      shares of common stock are subject to a lockup period until the earlier of
      (i)
      December 31, 2009, and a change in control of the Company. In the event Mr.
      van
      der Velden becomes disabled for a consecutive period greater than 12 months,
      his
      compensation shall be terminated. The Company has recorded such shares to be
      issued as a liability in the accompanying financial statements as of December
      31, 2007. Subsequent to the grant of such shares, the Board of Directors
      and the above-referenced officers and directors determined that it is
      unlikely that the shares of common stock will be issued in the form and within
      the timeframe originally agreed upon, if at all.  The Board of
      Directors and management of the Company are currently in discussions
      regarding modifications to the original compensation plan and expect to finalize
      a revised plan in 2008. In the event of his death, his compensation terminates
      immediately; provided, however, his estate will be entitled six months of
      compensation. In the case the Company terminates his employment, any
      compensation payable through the end of the calendar year shall become due
      any
      payable immediately. In the case Mr. van der Velden terminates his employment
      with the Company, compensation shall cease immediately. Mr. van der Velden
      is
      also entitled to twenty-five vacation days per year, reimbursement of reasonable
      travel costs and other expenses, and the use of a laptop computer and telephone.




*Willem
      Ackermans, Chief Financial Officer*  *-* the
      Company intends to enter into an employment agreement with Mr. Ackermans which
      will provide for his continued employment in his present capacity as Chief
      Financial Officer through December 31, 2009. In the interim, the Company has
      agreed to issue Mr. Ackermans 9,875,600 shares of restricted common stock,
      effective January 1, 2007, as an entrance bonus, and to compensate him with
      an
      annual award of 211,200 shares of restricted common stock and an annual cash
      salary of $237,600. All restricted shares of common stock are subject to a
      lockup period until the earlier of (i) December 31, 2009, and a change in
      control of the Company. The Company has recorded such shares to be issued as
      a
      liability in the accompanying financial statements as of December 31, 2007.
      Subsequent to the grant of such shares, the Board of Directors and the
      above-referenced officers and directors determined that it is unlikely that
      the
      shares of common stock will be issued in the form and within the timeframe
      originally agreed upon, if at all.  The Board of Directors
      and management of the Company are currently in discussions regarding
      modifications to the original compensation plan and expect to finalize a revised
      plan in 2008. In the event Mr. Ackermans becomes disabled for a consecutive
      period greater than 12 months, his compensation shall be terminated. In the
      event of his death, his compensation terminates immediately; provided, however,
      his estate will be entitled six months of compensation. In the case the Company
      terminates his employment, any compensation payable through the end of the
      calendar year shall become due any payable immediately. In the case Mr.
      Ackermans terminates his employment with the Company, compensation shall cease
      immediately. Mr. Ackermans is also entitled to twenty-five vacation days per
      year, reimbursement of reasonable travel costs and other expenses, and the
      use
      of a laptop computer and telephone.




*Martin
      Zuurbier, Chief Operating Officer, Chief Technical Officer*  *-* the
      Company intends to enter into an employment agreement with Mr. Zuurbier which
      will provide for his continued employment in his present capacity as Chief
      Operating Officer and Chief Technical Officer through December 31, 2009. In
      the
      interim, the Company has agreed to issue Mr. Zuurbier 8,801,600 shares of
      restricted common stock, effective January 1, 2007, as an entrance bonus, and
      to
      compensate him with an annual award of 1,267,200 shares of restricted common
      stock and an annual cash salary of $158,400. All restricted shares of common
      stock are subject to a lockup period until the earlier of (i) December 31,
      2009,
      and a change in control of the Company. The Company has recorded such shares
      to
      be issued as a liability in the accompanying financial statements as of December
      31, 2007. Subsequent to the grant of such shares, the Board of Directors
      and the above-referenced officers and directors determined that it is
      unlikely that the shares of common stock will be issued in the form and within
      the timeframe originally agreed upon, if at all.  The Board of
      Directors and management of the Company are currently in discussions
      regarding modifications to the original compensation plan and expect to finalize
      a revised plan in 2008. In the event Mr. Zuurbier becomes disabled for a
      consecutive period greater than 12 months, his compensation shall be terminated.
      In the event of his death, his compensation terminates immediately; provided,
      however, his estate will be entitled six months of compensation. In the case
      the
      Company terminates his employment, any compensation payable through the end
      of
      the calendar year shall become due any payable immediately. In the case Mr.
      Zuurbier terminates his employment with the Company, compensation shall cease
      immediately. Mr. Zuurbier is also entitled to twenty-five vacation days per
      year, reimbursement of reasonable travel costs and other expenses, and the
      use
      of a laptop computer and telephone.




Page
          63




*Mark
      Nije, Europe General Manager -* the
      Company intends to enter into an employment agreement with Mr. Nije which will
      provide for his continued employment in his present capacity as the Europe
      General Manager through December 31, 2009. In the interim, the Company has
      agreed to issue Mr. Nije 9,945,600 shares of restricted common stock, effective
      January 1, 2007, as an entrance bonus, and to compensate him with an annual
      award of 1,267,200 shares of restricted common stock and an annual cash salary
      of $158,400. All restricted shares of common stock are subject to a lockup
      period until the earlier of (i) December 31, 2009, and a change in control
      of
      the Company. The Company has recorded such shares to be issued as a liability
      in
      the accompanying financial statements as of December 31, 2007. Subsequent to
      the
      grant of such shares, the Board of Directors and the above-referenced
      officers and directors determined that it is unlikely that the shares of common
      stock will be issued in the form and within the timeframe originally agreed
      upon, if at all.  The Board of Directors and management of
      the Company are currently in discussions regarding modifications to the original
      compensation plan and expect to finalize a revised plan in 2008.In the event
      Mr.
      Nije becomes disabled for a consecutive period greater than 12 months, his
      compensation shall be terminated. In the event of his death, his compensation
      terminates immediately; provided, however, his estate will be entitled six
      months of compensation. In the case the Company terminates his employment,
      any
      compensation payable through the end of the calendar year shall become due
      any
      payable immediately. In the case Mr. Nije terminates his employment with the
      Company, compensation shall cease immediately. Mr. Nije is also entitled to
      twenty-five vacation days per year, reimbursement of reasonable travel costs
      and
      other expenses, and the use of a laptop computer and telephone.




Page
          64




*Outstanding
      Equity Awards*




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**


Name
              
              Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable
              
              Number
                  of Securities Underlying Unexercised Options Exercisable
              
              Equity
                  Incentive Plan Awards: Number of Securities Underlying Unexercised
                  Unearned Options (#)
              
              Option
                  Exercise Price ($)
              
              Option
                  Expiration Date
              
              Market
                  Value of Shares or Units of Stock That Have Not Vested ($)
              
              Equity
                  Incentive Plan Awards: Number of Unearned Shares, Units or Other
                  Rights
                  That Have Not Vested (#)
              
              Equity
                  Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                  Units or
                  Other Rights That Have Not Vested (#)Steven
                  van der Velden, CEO
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Willem
                  Ackermans, CFO
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Martin
                  Zuurbier, COO,CTO
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Mark
                  Nije, General Manager, Europe
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --




**Narrative
      Disclosure to Outstanding Equity Awards**





There
      were no outstanding equity awards at the end of fiscal 2007.





*Compensation
      of Directors Summary Table*





The
      following table represents compensation paid in 2007 to our directors who are
      not “named executive officers.”





**DIRECTOR
      COMPENSATION**


Name
              
              Fees
                  Earned or
                Paid
                  in Cash
                ($)
              
              Stock
                  Awards ($)
              
              Option
                  Awards
                ($)
              
              Non-Equity
                  Incentive Plan Compensation
                ($)
              
              Non-Qualified
                  Deferred Compensation Earnings ($)
              
              All
                  Other Compensation
              
              Total
                ($)Russelle
                  Choi
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              $
              40,000-
              
              $
              40,000Johan
                  de Jager
              
              
              -
              
              
              
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              0Yves
                  van Sante
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,498.73Eric
                  Dejonghe




Page
          65


***Narrative
      to Director Compensation***




Directors
      were not compensated in 2007 for their service as directors of the Company.
      However, payments for consulting services rendered by Mr. Choi were recorded
      in
      the amount of $60,000 for the fiscal year ended December 31, 2007. Of the
      $60,000, $40,000 had been paid as of December 31. Mr. van Sante received
      $4,498.73 for consulting services rendered in fiscal 2007.




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





**Beneficial
      Ownership of Principal Stockholders, Officers and
      Directors**




The
      following table sets forth, as of March
      31, 2008 ,
      certain
      information as to the stock ownership of each person known by the Company to
      own
      beneficially five (5%) percent or more of the outstanding Common Stock, of
      each
      of the Company’s 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
      or
      warrants that are not currently exercisable or exercisable within 60 days and
      are therefore not deemed to be outstanding and beneficially owned by the person
      holding the options or warrants for the purpose of computing the number of
      shares beneficially owned and the percentage ownership of that person. Unless
      otherwise indicated, the address for each person listed below is c/o Elephant
      Talk Communications, Inc., Schiphol Blvd 249, 1118 BH Schiphol, The Netherlands.


Title
                  of Class
              
              Name
                  & Address of Beneficial Owner
              
              Amount
                  and Nature of Beneficial Ownership (A)
              
              Percent*Common
                  stock
              
              Rising
                  Water Capital, A.G. (B)(L)
                Baarerstrasse
                  12
                Zug,
                  Switzerland 6300
              
              592,499,579
              
              81.1%Common
                  stock
              
              Calfin
                  Trust (I)
                Postfach
                  1518 Lettstrasse 10
                FL-9490
                  Vaduz, Liechtenstein
              
              40,000,000
              
              16.8%Common
                  stock
              
              Steven
                  van der Velden (C)
                President,
                  CEO and Director
              
              629,942,550
              
              82%Common
                  stock
              
              Russelle
                  Choi (F) (G)
                Director
                8/F,
                  145-159 Yeung Uk Road
                Tsuen
                  Wan, Hong Kong
              
              18,289,953
              
              7.7%Common
                  stock
              
              Lam
                  Kwok Hung, (G)
                8/F,
                  145-159 Yeung Uk Road
                Tsuen
                  Wan, Hong Kong
              
              12,032,710
              
              5.1%Common
                  stock
              
              Yves
                  R. Van Sante, Director (D)
                Avenue
                  Louise 109
                Brussels,
                  Belgium 1050
              
              0
              
              0%Common
                  stock
              
              Johan
                  Dejager (E)
              
              25,186,667
              
              9.6%Common
                  Stock
              
              Martin
                  Zuurbier, Director (J)
              
              8,402,132
              
              3.4%Common
                  Stock
              
              Anarjay
                  Concepts, Inc. (H)
                438
                  E. Katella Ave., Suite 217
                Orange,
                  CA 92867
              
              12,024,221
              
              5.17%Common
                  Stock
              
              Willem
                  Ackermans
                Chief
                  Financial Officer, Director (K)
              
              10,280,000
              
              4.1%Common
                  Stock
              
              Roderick
                  de Greef, Director
              
              0
              
              0%Common
                  Stock
              
              Bruce
                  W. Barren, Director
              
              0
              
              0%All
                  Officers and Directors as a Group
              
              673,811,349
              
              83.0%




Page
          66





(A)
            Except
                as otherwise indicated, each of the parties listed has sole voting
                and
                investment power with respect to all shares of common stock indicated.
                Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
                under
                the Securities Exchange Act of 1934, as amended.(B)
            Rising
                Water Capital, A.G. (“RWC”) is the record owner of 100,000,000 shares of
                common stock, representing 42%
                of the total outstanding shares as of March 31, 2008. RWC has the
                right to
                acquire within 60 days of the date hereof an additional 492,499,579
                shares
                of the Company’s common stock based on the following: Pursuant to a stock
                purchase agreement dated June 30, 2005, the Company agreed to sell
                to RWC
                an aggregate of 195,947,395. Of these shares, only the aforementioned
                100,000,000 have been issued. The Company is obligated to issue RWC
                an
                additional 95,947,395 shares based on this agreement. On October
                30, 2006,
                the Company agreed to issue RWC an additional 258,546,313 shares
                of common
                stock, none of which have been issued, as part of a settlement agreement.
                RWC could also acquire an aggregate of 138,005,871 shares of common
                stock
                upon the conversion of two outstanding promissory notes (excluding
                shares
                issuable upon the conversion of outstanding interest, if any), with
                principal amounts of $3,500,000 and $2,660,441. The Company currently
                does
                not have enough authorized but unissued shares of common stock to
                satisfy
                its obligations to issue to RWC the remaining 492,499,579 shares.
                Steven
                van der Velden, as a result of his ownership of QAT Investments SA,
                as
                described in footnote (C) hereof, and as a result of his position
                on the
                board of directors of QAT Investments as well as on the board of
                directors
                of RWC, exercises investment and voting control over the shares
                beneficially owned by RWC. Mr. Van der Velden disclaims beneficial
                ownership of such shares.(C)
            Steven
                van der Velden may be deemed to be the beneficial owner of an aggregate
                of
                629,942,550 shares of the common stock consisting in part of the
                following: 19,256,000 shares of common stock payable on June 28,
                2007 as
                an entrance bonus; 3,379,200 shares of common stock payable for salary
                on
                January 1, 2007, 3,379,200 shares of common stock payable for salary
                on
                January 1, 2008. In addition, Mr. van der Velden may be deemed to
                be the
                beneficial owner of the shares of common stock owned and issuable
                to RWC
                by virtue of his status as a holder of 31.5% of the outstanding capital
                stock of QAT Investments SA, which owns 51% of the outstanding capital
                stock of RWC, and by his status as the owner of 50% of the outstanding
                capital stock of Interfield, which owns 34% of the outstanding capital
                stock of RWC. Mr. van der Velden also sits of the board of directors
                of
                QAT and RWC, and exercises investment and voting control of the securities
                held by RWC. In addition, Mr. van der Velden owns 27.25% of the
                outstanding capital stock of CMV Invest, a Belgian entity, which
                beneficially owns 11,428,571 shares of the Company’s common stock.(D)
            Yves
                R. Van Sante is the beneficial owner of approximately 6.21% of the
                issued
                and outstanding shares of QAT Investments SA, which is the majority
                (51.3%) shareholder of RWC. Mr. Van Sante also owns one third of
                the
                outstanding capital stock of Amelia & Associates S.A. This entity
                purchased 8,733,333 shares of the Company’s common stock in December 2006.
                Mr. Van Sante does not control the voting or investment power of
                the
                shares of the Company’s common stock held by Amelia & Associates.
                These shares of common stock have yet to be issued due to our lack
                of
                authorized shares of common stock.(E)
            Johan
                DeJager is the beneficial owner of approximately 7.28% of the issued
                and
                outstanding shares of QAT Investments SA, which is the majority (51.3%)
                shareholder of RWC. On December 28, 2006, Mr. Dejager individually
                purchased 25,186,667 shares of the common stock valued at $944,500.
                Such
                shares have not yet been issued due to the Company’s lack of authorized
                shares.(F)
            Russelle
                Choi is a beneficial owner of 2,286,080 shares of common stock held
                by
                Wellgear Far East Limited, and 235,116 shares of common stock held
                by
                Wiselink Technologies Limited, which shares are included in the ownership
                figure reported.(G)
            Lam
                Kwok Hung is a beneficial owner of 805,739 shares of common stock
                held by
                Wiseley International Limited, which shares are included in the ownership
                figure reported. Lam Kwok Hung is married to Russelle Choi’s
                sister.(H)
            Manu
                Ohri is the beneficial owner of Anarjay Concepts,
                Inc.(I)
            Mr.
                Thomas Nigg exercises investment and voting control over beneficially
                owned by Calfin Trust.(J)
            Includes
                1,267,200 shares payable on June 28 2007, and additional 8,801,600
                shares
                payable on June 28, 2008, and an additional 1,267,200 shares payable
                1,
                2008. At the moment, the company does not have sufficient authorized
                shares to issue these shares. Mr. Zuurbier also owns 17% of the
                outstanding capital stock of RWC; however, he does not exercise investment
                and voting control over the shares beneficially owned by RWC.(K)
            Includes
                9,857,600 shares payable on June 28, 2007, an additional 211,200
                shares
                payable on June 28, 2007, and an additional 211,200 shares payable
                on
                January 1, 2008.  At the moment, the Company does not have
                sufficient authorized shares to issue these shares.*
            Calculated
                in accordance with Rule 13d-(3)(d)(1) under the Securities Exchange
                Act of
                1934.




Page
          67




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





Steven
      Van der Velden, our president, chief executive officer and chairman, owns 31.5%
      of QAT Investments, SA, (“QAT”) which owns 51.3% of the issued and outstanding
      capital stock of Rising Water Capital, A.G. (“RWC”), the owner of 42% of our
      outstanding common stock. In addition, Mr. Van der Velden owns 17% of the
      outstanding capital stock of RWC directly. Yves R. Van Sante, a director of
      the
      Company, is the beneficial owner of 6.21% of the issued and outstanding capital
      stock of QAT. Johan DeJager, a director of the Company, owns 7.28% of the issued
      and outstanding capital stock of QAT. Martin Zuurbier, a director of the
      Company, owns 17% of the issued and outstanding capital stock of
      RWC.  The preceding respective interests of our officers and directors
      shall be incorporated to the following, as applicable.





On
      December 15, 2005, the Company entered into a $3.5 million convertible
      promissory note with RWC. The Note is payable on demand, and is convertible
      at a
      price of $0.035 per share. The promissory bears interest at a rate of 10% per
      annum. As of the date hereof, no payment of principal or interest has been
      made
      upon this promissory note, which is currently outstanding.





On
      May
      26, 2006, the Company entered into a $3.0 million convertible promissory note
      with RWC. The largest principal amount outstanding under the Note since its
      creation was $2,660,441, which amount is currently outstanding as of the date
      hereof. The Note is payable on demand, and is convertible at a price of $0.07
      per share. The promissory bears interest at a rate of 10% per annum. As of
      the
      date hereof, no payment of principal or interest has been made upon this
      promissory note which is currently outstanding.





On
      August
      22, 2007, the Board approved the sale of approximately 104 million restricted
      common shares to 5 accredited investors for a total consideration of €4,530,000
      and $50,000. CMV Invest, a Belgian entity, agreed to purchase 11,428,571 shares
      of our common stock in this transaction. Steven van der Velden, our President,
      Chief Executive Officer and Director, beneficially owns 27.25% of the
      outstanding capital stock of CMV Invest





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





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 $60,000, 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**





The
      Board
      of Directors has determined that Roderick de Greef and Bruce Barren are
      independent for NASDAQ Stock Market purposes. Roderick de Greef and Bruce
      Barren, elected in the shareholders meeting of January 15, 2008, are per the
      same date the members of the standing committees of the Board of Directors.
      These committees are: the Audit Committee, **t** he
      Compensation Committee and the Nominating and Corporate Governance
      Committee.





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




Page
          68


.


**Item
      14.**  **Principal Accountant Fees and Services**





**Audit
      Fees.** The
      aggregate fees billed by Kabani and Company for professional services rendered
      for the audit of our annual financial statements for the years ended
      December 31, 2007 and 2006 and the review of the financial statements
      included in our Forms 10-QSB totaled $185,000 and $75,000 respectively. The
      above amounts include interim procedures as audit fees as well as attendance
      at
      audit committee meetings.




**Audit-Related
      Fees.** The
      aggregate fees billed by Kabani and Company for audit-related fees for the
      years
      ended December 31, 2007 and 2006 were $12,000 and $13,000, respectively.





**Tax
      Fees.** The
      aggregate fees billed by Kabani and Company for professional services rendered
      for tax compliance, for the years ended December 31, 2007 and 2006 were
      $14,000 and $1,200, respectively.





**All
      Other Fees.** The
      aggregate fees billed by Kabani and Company for products and services, other
      than the services described in the paragraphs captions “Audit Fees”, and “Tax
      Fees” above for the years ended December 31, 2007 and 2006 totaled $0 for
      both years.





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


Page
          69


**Part
      IV**




**Item
      15.**  **Exhibits,
      Financial Statement Schedules**




The
      following exhibits are filed with this Report.


**Number**
              
              **Description**3.1
              
              Amended
                  and Restated Articles of Incorporation (1)3.2
              
              Amended
                  and Restated By-Laws (2)10.1
              
              Stock
                  Purchase Agreement dated June 30, 2005, by and among the Company
                  and
                  Rising Water Capital, A.G. (3)10.2
              
              Convertible
                  Promissory Note dated December 15, 2005, by the Company, in favor
                  of
                  Rising Water Capital, A.G. (4)10.3
              
              Equity
                  Transfer Agreement, dated January 4, 2006, by and among Zhongrun
                  Chuangtou
                  Technology Co. Ltd. and Guangdong Guangxiang Network Information
                  Co., Ltd
                  (5)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. (5)10.5
              
              Convertible
                  Promissory Note dated May 26, 2006, by the Company, in favor of
                  Rising
                  Water Capital, A.G. (6)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. (7)10.7
              
              Form
                  of Common Stock Purchase Agreement, dated August 31, 2007, by and
                  among
                  the Company and certain investors. (8)14.1
              
              Code
                  of Ethics (1)21.1
              
              Subsidiaries
                  of the Registrant *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 July 7,
                2005.


(4)
            Filed
                as an Exhibit to our Current Report on Form 8-K on December 16,
                2005.


(5)
            Filed
                as an Exhibit to our Current Report on Form 8-K on January 13,
                2006.


(6)
            Filed
                as an Exhibit to our Current Report on Form 8-K on June 5,
                2006.


(7)
            Filed
                as an Exhibit to our Current Report on Form 8-K on December 1,
                2006.


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




Page
          70




**SIGNATURES**





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





**ELEPHANT
                TALK COMMUNICATIONS, INC.**Date:
                April 15, 2008
            
            
            
            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
              
              April
                  15, 2008Steven
                  van der Velden
              
              (Principal
                Executive Officer)/s/
                  Willem Ackermans
              
              Chief
                  Financial Officer and Director
              
              April
                  15, 2008Willem
                  Ackermans
              
              (Principal
                Accounting Officer)/s/
                  Martin Zuurbier
              
              Chief Operating
                  Officer,
              
              April
                  15, 2008Martin
                  Zuurbier
              
              Chief
                Technical Officer, Director./s/
                  Yves R. van Sante
              
              Director
              
              April
                  15, 2008Yves
                  R. van Sante/s/
                  Johan Dejager
              
              Director
              
              April
                  15, 2008Johan
                  Dejager/s/
                  Bruce W. Barren
              
              Director
              
              April
                  15, 2008Bruce
                  W. Barren/s/
                  Roderick de Greef
              
              Director
              
              April
                  15, 2008Roderick
                  de Greef




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          71