SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
   [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2004

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

                        Commission file number 000-30061

                       ELEPHANT TALK COMMUNICATIONS, INC.
             (Exact name of registrant as specified in its charter)

                                   CALIFORNIA
                            (State of incorporation)

                                   95-4557538
                      (I.R.S. Employer Identification No.)

  438 East Katella Avenue, Suite 217, Orange, California  92867, (714) 288-1570
    (Address, including zip code, and telephone number, including area code,
                       of registrant's executive offices)

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

                               Title of each class
                                      None

                    Name of each exchange on which registered
                                      None

   Securities registered pursuant to Section 12(g) of the Act:
Common Stock:  No par value

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

         Check if  disclosure  of  delinquent  filers in response to item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

         Issuer's revenues for most recent fiscal year: $636,615

         State the aggregate market value of voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days: As of March 22, 2005, $3,865,641.

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 22,  2005, there  were
59,017,706 shares of common stock outstanding.

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                ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARY

                         2004 Form 10-KSB Annual Report
                                Table of Contents
                                                                            Page
                                     PART I

  Item 1.    Description of Business.......................................... 3

  Item 2.    Description of Property..........................................21

  Item 3.    Legal Proceedings................................................21

  Item 4.    Submission of Matters to a Vote of Security Holders..............21

                                     PART II

  Item 5.    Market for Common Equity and Related Stockholder Matters.........22

  Item 6.    Management's Discussion and Analysis or Plan of Operation........23

  Item 7.    Consolidated Financial Statements................................28

  Item 8.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure.........................................28

  Item 8A    Controls and Procedures..........................................29

  Item 8B    Other Items......................................................29

                                    PART III

  Item 9.    Directors, Executive Officers, Promoters and Control Persons;
             Compliance With Section 16(a) of the Exchange Act................29

  Item 10.   Executive Compensation...........................................31

  Item 11.   Security Ownership of Certain Beneficial Owners and Management...32

  Item 12.   Certain Relationships and Related Transactions...................35

                                     PART IV

  Item 13.   Exhibits, and Reports on Form 8-K................................36

  Item 14.   Principal Accountant Fees and Services...........................36

             Signatures.......................................................37







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Explanatory Note:

Unless otherwise  indicated or the context  otherwise  requires,  all references
herein to the "Company" are to Elephant Talk Communications,  Inc., a California
corporation and its wholly owned  subsidiary,  Elephant Talk Limited.  All share
and per share  information  contained  herein has been adjusted to reflect a one
for ten reverse  split of the Company's  common stock  completed and effected on
January 22, 2002.


                                     PART I

Item 1:  Description of Business.

Organization and Nature of Operations
-------------------------------------

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

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

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


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<PAGE>

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

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

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

The Company's  business  purpose of the acquisition of Elephant Talk Limited via
the merger was to gain market share in the  telecommunication  industry in Asia.
Following the merger,  the Company adopted Elephant Talk Limited business as its
own.  Elephant  Talk is a value  added  services  provider in the large and ever
growing value added services market in China. Our services include:

   o  Voice over Internet Protocol (VoIP) service targeted to PC-Phone users
   o  Mobile value added  services,  including  Short  Messaging  Service (SMS),
      Interactive  Voice  Response (IVR)  service,  electronic  payment/commerce
      services.

Background of Elephant Talk Limited

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

   o  mobile  value-added   services,   viz.,  short  messaging  services  (SMS)
      including  SMS based chat and mobile  games,  interactive  voice  response



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      services  (IVRS),  ring-tone/wall-paper  downloads for mobile handsets and
      mobile e-commerce/payment services;
   o  eTalk,  our  pre-paid  calling  card for PC-to phone  service  targeted at
      HK-China business commuters;
   o  prepaid and post paid phone cards that are distributed in the US;
   o  International  long distance  services in wholesale market  principally to
      carriers

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

Technology infrastructure

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

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

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

Markets and Customers

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

The list of  corporate  customers  however is growing as we now start to place a
greater focus on corporate mobile value-added applications. Amongst them include
a prominent Shanghai based Chine Eastern  Airlines that uses our SMS platform to
alert their  passengers of flight  schedules and permits  their  frequent  flyer
customers to check on their air miles balance at anytime via their handsets. The
China National Football Lottery  Commission is another valued corporate customer
of our SMS service platform.  Via our platform,  the purchase of lottery tickets


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<PAGE>

and the  distribution  of  winning  numbers  has been  made  efficient.  Lottery
participants  in Xinjiang enter several simple codes into their handsets and the
purchase  is   automatically   effected  and  results   sent   directly  to  the
participants' handsets.

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

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

Long-term Growth Strategy

During the course of 2004, management as been actively repositioning the Company
from the extremely  competitive and virtually no margin market of  international
call  termination to the huge  profitable,  growing,  though still  competitive,
mobile value added services market in China.

Market Opportunity and Size

As of August 2004,  figures from the Ministry of  Information  Industry of China
show  that the  number of mobile  handset  users  exceeded  300  million  with a
projected compound annual growth rate (CAGR) of 25% until 2007. China's wireless
penetration  rate  (i.e.,  the number of  subscribers  divided by the  estimated
population  of China)  remained  relatively  low in  comparison  to other  Asian
wireless  markets  such  as  Japan,  South  Korea  and  Hong  Kong,  which  have
penetration rates of 61.8%, 68.3% and 91.1%, respectively.  As evidence, Pyramid
Research,  an independent  research agency,  estimates that the number of mobile
subscribers in China will reach  approximately 395 million by December 31, 2005,
representing a penetration rate of only 30.0% as of December 31, 2005.

Norson Telecom Consulting,  an independent research agency, estimates that total
wireless  value-added services revenue in China grew from RMB1.0 billion ($120.8
million) in 2001 to RMB15.0  billion ($1.8 billion) in 2003 and will continue to
grow to RMB26.0  billion  ($3.1  billion) in 2004.  Despite such growth,  Norson
Telecom Consulting estimates that total revenue gained from wireless value-added
services  accounted  only for 3.5% of total  wireless  revenue in China in 2002.
This is a significantly  lower  percentage than that experienced by operators in
other markets with progressive wireless value-added-services  businesses such as
NTT DoCoMo,  Inc. in Japan with  approximately  21.0% of revenue  from  wireless
value-added  services in 2002, SK Telecom Co., Inc. in Korea with  approximately
8.5% of revenue from wireless  value-added-services  in 2002, and Vodafone Group
PLC  in   Europe   with   approximately   11.9%   of   revenue   from   wireless
value-added-services  in 2002.  Although the data  disclosed is dated,  it still
suggests that there is further room for growth in this sector.

Shanghai-based  iResearch estimates mobile value-added services to follow 2004's
65% growth with growth rates of 41% and 35% in 2005 and 2006, translating into a
market value of $4.4  billion in 2005 and $5.9  billion in 2006.  This market is
increasingly  shifting  towards the next generation  technologies,  with  mobile
operators  upgrading  their  networks to general  packet-switched  radio service


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(GPRS),  and code division  multiple  access 1x RTT, (CDMA 1x RTT),  systems and
users upgrading to next generation  handsets that can operate with  technologies
such as MMS and WAP. The mobile operators,  China Mobile and China Unicom,  have
recognized  this  opportunity  and  are  collaborating   with  selected  service
providers to further develop 2.5G/3G applications and services.

Long-term Strategy

The  Company's  long term  strategy  is to become a major  player in the  mobile
value-added services market by becoming the preferred platform for our customers
around the world to access and/or  exchange  information  with one another,  via
various  mediums  such as  mobile  terminals  or the  internet.  As part of this
transformation,  the Company  signed a Share Exchange  Agreement  dated April 3,
2004, with its intent to acquire 60% of the equity ownership  interest in Urumqi
General  Systems   Technology   Company  Ltd.  (known  as  "General  System"  or
"WestSMS"),  a leading  provider  of mobile SMS  services in the  resource  rich
province of Xinjiang, China. On January 5, 2005, the Company completed the above
acquisition where it formed True Precise Technology Limited ("True Precise"),  a
limited  liability  company  registered  in  British  Virgin  Islands,   as  its
investment  holding company,  that acquired 60% of the equity ownership interest
in General System from Keen Solution Group Limited ("Keen Solution"),  a limited
liability  company  registered  under the laws of  British  Virgin  Islands.  As
consideration  for the  acquisition,  on  July  26,  2004,  the  Company  issued
4,000,000  restricted  common shares to the shareholders of Keen Solution valued
at $480,000,  as its earnest deposit.  The Company agreed to issue an additional
14,137,500  restricted  common  shares  valued at  $1,116,862  to  complete  the
acquisition.   Upon  completion  of  the  transaction,  True  Precise  became  a
wholly-owned  subsidiary  of the Company and  General  System  became a majority
owned subsidiary of True Precise.

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

   o  a European based carrier that provides various premium rate services, such
      as 0900 service and VoIP services to  corporations  and content  providers
      within the  European  Union.  The  Company  believes  that we can  extract
      considerable  synergies  with them by  integrating  our VoIP platforms and
      extend  our reach  from  China  into  Europe  and  vice-versa.  Unforeseen
      circumstances not  withstanding,  we expect completion of this transaction
      by May 31, 2005;

   o  a SMS  company  in  China  that  is  ranked  as one of the  top 20  mobile
      value-added  service companies in China. The nationwide  footprint of this
      company will  complement  our business with WestSMS and we will be able to
      provide considerable increase to our revenues and bottom line profits. The
      acquisition  discussions  are at an early stage and no  assurances  can be
      provided that this acquisition will complete in the near future.

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

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market to foreign  participation which should create massive  opportunities that
facilitate progress toward an improved operating environment.

Urumqi General System Technology Company Ltd. ("General System" or "WestSMS")

Company Background

Urumqi  General  System  Technology  Company  Ltd. was  incorporated  in 1997 in
Urumqi, Xinjiang province, China. Xinjiang province is rich in oil & gas and has
been  earmarked for  development by the Chinese  Government  and  infrastructure
projects,  such as gas  pipelines  are  being  constructed  to tap into the rich
natural resource there.

General  System was  initially  a systems  integration  company  focusing on the
Intranet   segment   offering   wide   area   networking    solutions   to   the
finance/securities,  insurance and petrochemical  markets. The company is also a
Microsoft certified solutions provider.

In 2001,  General  System  established  the  WestSMS  portal  (www.westsms.com),
becoming the first  company in XianJiang  to offer  mobile  handset  value-added
services.  Services  now  offered  include  short  messages,  Interactive  Voice
Response  service  (IVRS),  Multimedia  Messaging  Service  (MMS)  and  Wireless
Application Protocol (WAP) services.  In March 2003,  WestSMS  was  granted  the
nationwide access short code  9996 for  SMS by China Mobile.   The  company  has
enjoyed and sustained growth in 2004 and is confident  that  growth in 2005 will
continue at a greater pace.

With the explosive  growth of the mobile value added  services  market in China,
the majority of General  System's  business is now derived from mobile  services
and the Intranet business is no longer its focus.

General System - The Business

General  System is in the  business  of  providing  nationwide  short  messaging
service, multimedia  messaging  service, interactive  voice  response and mobile
payment service to consumers and corporations.

Messages  are  either   composed  on  or  downloaded   from   WestSMS'   portal,
www.westsms.com,  or composed and  transmitted to cellular phones from the users
own handset.  WestSMS was the pioneer in introducing Uigur language support, the
native language of Xinjiang,  in their messaging  applications.  The portal also
offers  consumers a rich choice of wall paper,  games and ring-tones to download
to their  handsets.  The UMPS allows  merchants to accept order and payments via
the SMS platform.  In addition,  General  System offers a SMS based chat service
where operators chat with users on a wide variety of topics. The headquarters of
General System is in Urumqi,  the capital of Xinjiang  province in North-Western
China.

General System's service is offered via China Mobile's Monternet service.  China
Mobile is the dominant cellular service provider in China, with over 250 million
users,  and  Monternet is China  Mobile's  premium  content  service.  A content
provider,  such as General System,  enters into a revenue share arrangement with
China Mobile to provide access to their  content.  The Company is in discussions
to enter  into a similar  arrangement  with  China  Unicom,  the other  dominant
cellular service  provider in China.  Billing and collection is done by cellular

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service provider and settlement occurs monthly.  Presently, the cellular service
provider  keeps 15% of the  collected  revenue  and the  balance is passed  onto
General  System.  Users  must  first opt into General  System content service by
Making  their  selection  when  they register  their  handset with China Mobile.
Users can  also register for the service by accessing the General System portal.

Products & Services

Downloads - consumer/entertainment services:
Ring tones, wall paper, games and canned messages are charged on a one off basis
or on a monthly subscription basis. Such subscription  packages normally contain
a fixed number of monthly  downloads.  Other monthly  subscription based service
includes  SMS chat and SMS based  games where the user  interacts  with the game
server via SMS.

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

Corporate Messaging Services:
General  System also sells their mobile  messaging  service to  corporations  to
Provide  them  with a mobile  adjunct  to their  advertising  or  customer  care
function.  Each corporate user is charged also on a monthly  subscription basis.
China Eastern  Airlines,  the Shanghai based  international  carrier,  is one of
General System's flagship corporate  customer.  They use General System's system
to provide their frequent  flyer  customers with mobile access to their frequent
flyer account information as well as flight related information.

Mobile Payment Service (UMPS):
The UMP is targeted at merchants that want a mobile channel for their  customers
to access and purchase their products and services.  In this situation,  General
System  charges the merchant a percentage  of the  transacted  value.  This is a
relatively  a new service  that was  launched  earlier in the year.  So far, the
State Football  Lottery has signed onto this service.  CMT, the state authorized
Online  ticketing  system for use by cinemas in China,  has also  entered into a
Memorandum  of  Understanding  with  General  System.  We  anticipate  these two
accounts to contribute to revenue growth in the coming financial year.

Technology

All platforms and services are developed in house on Linux based Intel  servers.
New access technologies such as WAP and GPRS are also supported.

Competition

Competition in the SMS market in China is intense. The market is very fragmented
with over 400 content/service  providers offering consumer related services that
are similar to what General System is offering.  Sohu,  Netease,  Sina.com,  Tom
Online  are  the  market  leaders.  These  four  (4)  content/service  providers
collectively  own about 60% of the canned message market in China.  Other market
leaders include the recently floated Linktone and Mtone.


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On the IVRS front,  almost al leading SMS providers now offer IVRS.  Competition
is expected to be intense on this aspect of the business as well.

In order to counter the intense  competitive  pressure  on the  consumer  front,
General  System will  maintain  its present  position  in the  consumer  related
business by continuing to maintain our service and customer care at high levels.
General  System  will strive to  differentiate  itself in the  corporate  market
segment and the UMPS  segment.  General  System will  leverage off their success
with China Eastern Airlines and to continue to pursue other lucrative  corporate
accounts.

Strategy

The strategy of General System in 2005 is as follows:

   o  Defend our  position  as the leading  SMS  provider in Xinjiang  province.
      Maintain  our high level of customer  care and  service to secure  ongoing
      revenues from the consumer segment of the business
   o  Continue  to source new and  innovative  content and games to offer to our
      customers
   o  Leverage  off the success  with China  Eastern  Airlines to capture  other
      large corporate accounts in China
   o  Develop other businesses with China Eastern Airlines such as the "Shopping
      with Miles"  program.  This program  allows their  frequent  flyers to use
      their earner miles as a currency to purchase  other  products and services
      from designated  merchants.  Subject to the successful completion of field
      trials,  General  System intends to apply their UMPS to deliver the mobile
      adjunct to this program.
   o  Further grow the mobile  commerce  market by securing more  merchants onto
      the UMPS system.

PC-to-phone service, eTalk

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

In order to take  advantage  of this  opportunity,  we have  decided  to deliver
high-quality  voice-over-IP  (VoIP)  telephony  services  to  small  and  medium
businesses in China, initially,  under the brand name of eTalk. Accompanying the
growth of PCs and use of the Internet,  we believe the market potential is huge.
We have  devised a phased  approach to launching  its services  beginning in the
year 2003. Our solution provides many benefits to its customers, including:

   o  Low Cost. Our services  allow its customers to make telephone  calls often
      at a fraction of the cost of traditional  long distance  service.  Our low
      cost PC-to-phone service is also available all over the world.
   o  High  Voice  Quality.   We  offer   carrier-grade  voice  quality  through
      proprietary packet-switching  technologies,  which reduces packet loss and
      delay, route packets efficiently and perform quality-enhancing  functions,
      such as echo cancellation and massive redundancy. We intend to continue to
      enhance  the  voice  quality  of our  services  as our  customer  base and
      business grows.

                                       10

<PAGE>

   o  Ease of Use and Access.  Our services are  designed to be  convenient  and
      easy to access.  No additional  telephone  lines or special  equipment are
      required.
   o  Reliable  Service.  Elephant  Talk  Limited  developed  its own PC  client
      software  and  Gatekeeper.   Our  network  is  reliable   because  of  its
      technologically  advanced design. This flexible design allows us to expand
      our network  and add  capacity by adding  switches/spans  to the  existing
      network.  Our system also provides seamless service and high-quality voice
      transmission through its ability to reroute if problems arise.
   o  Scalability.  Our  services  platform is a flexible  solution  that can be
      readily  integrated at low cost and in large scale into existing  systems.
      Our system integrates quickly and seamlessly into the platforms of various
      communications  service providers such as medium to large carriers,  ISPs,
      and enterprises

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

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

   o  customer provisioning;
   o  customer access;
   o  call routing;
   o  call monitoring; and,
   o  detailed call records.

RISK FACTORS

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

Competition

The market for value-added  services is highly competitive.  We face competition
from a variety of sources including large communications  service providers with
more resources, longer operating histories and more established positions in the
telecommunications  marketplace.  We also compete with small  companies who have
focused primarily on Internet  telephony or traditional  switched  services.  We


                                       11

<PAGE>

believe  that  we  compete   principally  on  quality  of  service,   price  and
flexibility.  It is  arguable if any one  company  dominates  the voice and data
communications  market in the same  segment as we are.  We also  expect that the
ability to offer enhanced  service  capabilities,  including new services,  will
become an  increasingly  important  competitive  factor in the near  future.  In
addition,    we   compete   with   and   expect   continued   competition   from
telecommunications  companies  and long  distance  service  providers,  Internet
Telephony service providers, market competition and pricing pressures:

Attempting to Develop New Revenue Stream

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

   o  perceptions  that the quality of voice  transmitted  over the  Internet is
      low;
   o  our inability to deliver traffic over the Internet with  significant  cost
      advantages; and
   o  development of their own capacity on routes served by us.

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

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

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

Reliance on Third Parties Vendors

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

Parties that Maintain Phone and Data Lines

Our business is dependent upon the  availability of the Internet and traditional
telephone  networks to transmit voice and data, and to provide other value added

                                       13

<PAGE>

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

Strategic Relationships

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

Fast Leap in Technology Trends

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

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

Key Personnel

Our future success will depend,  in large part, on the continued  service of our
key  management  and  technical  personnel.  If any of such  members  of  senior
management or others at the Company are unable or unwilling to continue in their
present positions,  our business,  financial condition and results of operations



                                       14

<PAGE>

could well suffer.  While many of the members of our  management  team have been
employed with us, we cannot ensure their continued employment with us.

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

Asian Economy

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

Foreign Currencies

Fluctuations  in the  exchange  rate of the U.S.  dollar and foreign  currencies
could  have  a  material  adverse  effect  on  our  financial   performance  and
profitability.  A portion of our costs denominated in foreign  currencies.  As a
result,  changes  in the  exchange  rates  of  these  currencies  or  any  other
applicable  currencies  to the U.S.  dollar  will  affect our costs of goods and
services  sold and  operating  margins and could result in exchange  losses.  We
cannot fully  predict the impact of future  exchange  rate  fluctuations  on our
profitability.  From  time to  time,  we may  engage  in  exchange  rate-hedging
activities  in an effort to mitigate the impact of exchange  rate  fluctuations.
However,  we cannot assure you that any hedging  technique we may implement will
be  effective.  If it is not  effective,  we may  experience  reduced  operating
margins. We could suffer adverse tax and other financial consequences if U.S. or
foreign taxing  authorities do not agree with our  interpretation  of applicable
tax laws. Our corporate  structure is based,  in part, on assumptions  about the
various  tax  laws,  including  withholding  tax,  and  other  relevant  laws of
applicable  non-U.S.  jurisdictions.  We cannot  assure you that foreign  taxing
authorities will agree with our interpretations or that they will reach the same
conclusions. Our interpretations are not binding on any taxing authority and, if
these foreign  jurisdictions  were to change or to modify the relevant  laws, we
could  suffer  adverse  tax  and  other  financial   consequences  or  have  the
anticipated benefits of our corporate structure materially impaired.

Terrorism

Terrorist attacks, such as the attacks that occurred in New York and Washington,
D.C. on  September  11,  2001,  and other acts of violence or war may affect the
markets on which our securities trade, the markets in which we and our customers
operate, our operations and our profitability.  Terrorist attacks may negatively
affect our operations and your investment.  There can be no assurance that there


                                       15

<PAGE>

will not be further terrorist attacks against the United States or United States
businesses.  These attacks or armed  conflicts may directly  impact our physical
facilities or those of our suppliers or  customers.  Furthermore,  these attacks
may make travel and the  transportation  more  difficult and more  expensive and
ultimately  affect the sales of our products  and services in the United  States
and overseas.  Also as a result of  terrorism,  the United States may enter into
armed  conflicts,  which  could  have  a  further  impact  on our  domestic  and
international sales, our supply chain, our production capability and our ability
to deliver our products and services to our  customers.  Political  and economic
instability  in some  regions of the world may also result and could  negatively
impact our  business.  The  consequences  of any of these  armed  conflicts  are
unpredictable,  and we may not be able to  foresee  events  that  could  have an
adverse effect on our business or your investment.

Risks Relating to the Greater China and Asian Internet Industry

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

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

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

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



                                       16

<PAGE>

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

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

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

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

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

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

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

In future, substantial amount of our revenues,  expenses and liabilities will be
denominated  in Hong Kong  dollars and  Chinese  Renminbi.  As a result,  we are

                                       17

<PAGE>

subject to the  effects of exchange  rate  fluctuations  with  respect to any of
these  currencies.  We have not entered into  agreements  or purchase  financial
instruments  to hedge  our  exchange  rate  risks  although  we may do so in the
future.

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

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

Risks relating to operating licenses

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

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

Doing business in China

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

Environmental Regulation

ElephantTalk's  U.S. and Chinese operations are subject to various  governmental
laws and  regulations.  The costs and effects of compliance  with  environmental

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<PAGE>

laws and regulations in the United States  (federal,  state and local) and China
have not been material in the past and are not anticipated to be material in the
future.

Patents, Trademarks and Licenses

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

Employees

ElephantTalk  currently  employs in the United States one full-time  employee at
its principal  executive  office  located in Orange,  California.  The executive
office provides  corporate  administrative and advisory services to ElephantTalk
and its  affiliates.  Elephant Talk Limited  employs at its two sites located in
Hong Kong four  full-time  employees,  while  technical,  administrative,  sales
support  and  accounting  services  are  provided by full time  employees of  an
affiliate ET  Network Services Limited.  We believe that our future success will
depend in part on our continued ability to attract, hire, integrate, retain  and
motivate  highly  qualified  personnel  in  various  disciplines,  and  upon the
continued service of our senior management personnel.  None of our employees are
represented  by a labor union.  We have never  experienced  a work  stoppage and
believe our relationship with our employees is good.

Research and Development

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

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


                                       20

<PAGE>

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

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

Item 2.  Description of Property

The Company's  principal executive office is located at 438 East Katella Avenue,
Suite 217, Orange,  California  92867. The premises consist of approximately 300
square feet of office  space with a large  office and a file room.  The lease is
currently  renewed on a  month-to-month  basis. The monthly rent amounts to $344
with an escalation of monthly rent on the lease anniversary date.

Elephant Talk Limited is leasing office premises from an unaffiliated  party and
has occupied  these  premises  since  September 5, 2002.  Elephant  Talk Limited
currently  occupies  the  following  portions  of spaces  leased  by ET  Network
Services Limited ("ETNS"), an affiliate:

   o  10,000 square feet in at 8/F,  145-159 Yeung Uk Road, Tsuen Wan, Hong Kong
      for a period of two  years  commencing  May 1, 2002 for a monthly  rent of
      HK$65,200 ($8,359).
   o  5,000 square feet in 10E World Tech Centre, How Ming Street, Hong Kong for
      a monthly rent of HK$15,000 ($1,900).
   o  Various co-location spaces with square footage of under 200 square feet in
      Guangzhou,  Los Angeles, Boston and Singapore where our telecommunications
      equipment are located.

The costs  associated  with the  facilities  occupied  under ETNS are  allocated
pro-rata, based upon the relative percentage of space occupied by the Company or
ETNS, with company-specific charges applied directly to the respective company.

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

None

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

The Company  held its annual  meeting on December  10,  2004.  The  shareholders
elected Mr.  Russelle Choi, Mr. Pius Lam, Mr. Francis Lim, Mr. Manu Ohri and Mr.
James  Wang  to  one-year  term as  directors.  Additionally,  the  shareholders
ratified the  appointment of Webb & Company,  P.A. as the Company's  independent
auditor.






                                       21

<PAGE>

PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

The  Company's  common  stock is  traded  on Over  the  Counter  Bulletin  Board
maintained by the National  Association  of Securities  Dealers,  Inc. under the
symbol  "ETLK".  Prior to the merger with  ElephantTalk  on January 4, 2002, the
Company's  common stock was traded under the symbol "SRUN".  The following table
sets  forth the range of high and low bid and asked  quotations  for the  common
stock  (adjusted for 1 for 10 reverse stock split  effected on January 22, 2002)
during the two most recent years' calendar  quarters ended December 31, 2004 and
2003:

---------------------- ------------- ------------ --------------- --------------
                         High Bid      Low Bid      High Asked      Low Asked
---------------------- ------------- ------------ --------------- --------------

---------------------- ------------- ------------ --------------- --------------
March 31, 2003             0.07          0.07         0.07            0.07
---------------------- ------------- ------------ --------------- --------------
June 30, 2003              0.29          0.29         0.29            0.29
---------------------- ------------- ------------ --------------- --------------
September 30, 2003         0.28          0.28         0.28            0.28
---------------------- ------------- ------------ --------------- --------------
December 31, 2003          0.19          0.19         0.19            0.19
---------------------- ------------- ------------ --------------- --------------
March 31, 2004             0.19          0.20         0.19            0.20
---------------------- ------------- ------------ --------------- --------------
June 30, 2004              0.11          0.11         0.11            0.11
---------------------- ------------- ------------ --------------- --------------
September 30, 2004         0.08          0.09         0.07            0.07
---------------------- ------------- ------------ --------------- --------------
December 31, 2004          0.08          0.08         0.08            0.08
---------------------- ------------- ------------ --------------- --------------


The above prices were  obtained  from the National  Quotation  Bureau,  Inc. The
prices shown in the above table represent inter-dealer quotations without retail
mark-up,  mark-down or  commission,  and may not  necessarily  represent  actual
transactions.  On December 31, 2004, there were broker-dealers publishing quotes
for the common stock.

Holders

At December 31, 2004, the Company had  approximately  2,817 holders of record of
its common stock holding a total of  57,068,681  common  shares.  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 are no redemption of sinking fund provisions applicable to the
common stock.

All of the  ElephantTalk's  issued stock has been issued pursuant to Rule 144 of
The Securities Act of 1934 and could come into any market that exists under Rule
144.  Approximately  13,168,776 and 6,364,019  shares under Rule 144 shares were

                                       22

<PAGE>

held by officers  and  directors  that  existed at  December  31, 2004 and 2003,
respectively.

Dividends

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

Recent Sales of Unregistered Securities

On September 25, 2002,  pursuant to the terms of a Spin-Off  Agreement  with The
Hartcourt Companies, Inc., the Company issued 5,000,000 restricted common shares
to Hartcourt. These shares were valued at $320,000 based upon the current market
price on the  date of  distribution.  On the  close of  escrow  of the  Spin-Off
Agreement  on  January  4,  2003,  the  Company  received  back  from  Hartcourt
17,895,579  of  its  common  shares  held  by  Hartcourt  as  a  result  of  the
finalization of the terms of the Spin-Off  Agreement.  The issuances were exempt
from the  registration  provisions  of the  Securities  Act of 1933 by virtue of
Section 4(2).

On March 1,  2004,  the  Company  entered  into a Stock Sale  Agreement  with an
investor who purchased 2,000,000  restricted (Rule 144 one year restriction) for
a consideration of $300,000.  The restricted  common shares were issued on March
3, 2004 and the Company received $300,000.

On September 3, 2004,  the Company  entered into a Stock Sale  Agreement with an
investor  who  purchased  543,207  shares  under  Rule  144  restriction  for  a
consideration of $49,970.  The Company received the proceeds from sale of shares
on September 16, 2004.

Warrants

At March 22,  2005,  there was no  warrants  outstanding  convertible  to common
stock.  During the year 2004 and 2003, no warrants were converted into shares of
common stock.


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations.

General

The following is a summary of certain  information  contained in this Report and
is  qualified  in  its  entirety  by  the  detailed  information  and  financial
statements that appear elsewhere herein.  Except for the historical  information
contained herein,  the matters set forth in this Report include  forward-looking
statements  within the meaning of the "safe  harbor"  provisions  of the Private
Securities Litigation Reform Act of 1995. These  forward-looking  statements are
subject  to risks and  uncertainties  that may cause  actual  results  to differ


                                       23

<PAGE>
materially. These risks and uncertainties are detailed throughout the Report and
will be further discussed from time to time in  ElephantTalk's  periodic reports
filed with the Commission. The forward-looking statements included in the Report
speak only as of the date hereof.

Plan of Operation

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

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

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

Comparison of the fiscal years ended December 31, 2004 and December 31, 2003.

Our results of operations for 2004 primarily consisted of operations of Elephant
Talk   Communications,   Inc.  and  Elephant  Talk  Limited,   our  wholly-owned
subsidiary.  The results of operations  for 2003  consisted of operations of the
Company, its wholly-owned subsidiary Elephant Talk Limited and its 35.42% equity
investment ETNS Singapore Pte, Ltd.

Revenues and Cost of  Revenues:  The Company  reported  revenues of $636,615 and
$867,171 for the years ended December 31, 2004 and 2003, respectively.  Revenues
consisted of  telecommunications  services  such as voice and data  transmission
like IDD,  pre-paid calling cards,  eTalk and facsimile  services  provided to a
wide range of customers  including major  telecommunication  companies to retail
customers in the US,  Europe,  China,  Indonesia  and Hong Kong.  The decline in
revenues comes from price compression for long distance business voice services.
Our international  business continues to experience significant pricing pressure
on its  products as we continue to  penetrate  the retail  markets  although the
wholesale  market  continues to represent a large portion of our gross revenues.
The wholesale market continued to be extremely price  competitive in 2004. This,
in addition to bankruptcies of some customers and industry players,  resulted in
reduction in circuits  connected to customers  related to their internal network
consolidation and resulted in year-over-year decrease.

                                       24

<PAGE>

Cost of revenue was $497,234 and $845,438 for the years ended  December 31, 2004
and 2003,  respectively.  Cost of  revenue  included  cost in  providing  resale
arrangements with long distance service providers,  cost of leasing transmission
facilities,  international  gateway  switches for voice,  data  transmission and
facsimile services.  Gross margin for the year ended December 31, 2004 was 21.9%
of the revenues compared to 2.5% of the revenues for the year ended December 31,
2003.  Gross  margin  increased in 2004 due to the change in the revenue mix for
the services we provided to customers as well as the direct  result of increases
in  pricing  in  the  telecom  markets  without  adequate  volume  offsets.  Our
international  business continues to experience  significant pricing pressure on
its products.  Both the local voice revenue and long-distance  revenue decreases
were  impacted by  continued  weakness in the  telecommunications  industry  and
ongoing  economic  and  competitive  pressures  from  other   telecommunications
services providers in Hong Kong and around the world.

Selling,  General and  Administrative  Expenses  (S,G&A):  S,G&A  expenses  were
$598,486  and  $1,998,546  for the  years  ended  December  31,  2004 and  2003,
respectively. SG&A expenses decreased by $1,400,060 or 70.1% in 2004 compared to
2003  primarily  because  the Company  reduced  its  payroll and other  business
expenses  through  right-sizing  the  organization.  During  2004,  the  Company
wrote-off  uncollectible stock subscriptions  amounting to $410,781 and incurred
$596,340 in fees and expenses paid to  consultants  and  financial  advisors for
identifying  potential  targets for  acquisitions  in VoIP,  broadband and Short
Messaging Service business.  In addition,  the Company provided an allowance for
uncollectible  debt from  affiliates  for $364,745 as the Company had guaranteed
payments on promissory notes signed by the affiliates.  During 2003, the Company
incurred  significant  expenses  in  relation  to legal and  professional  fees,
shareholder and investor relation services, and consulting and business advisory
services  primarily due to increase the  Company's  awareness in the US markets.
Although  the  Company's  revenue  base in 2003  was  reduced  by 85%,  bad debt
increased to $740,000 in 2003 primarily due to the economic climate and downturn
in  telecommunications  industry.  Depreciation expense was $80,208 for the year
ended December 31, 2004 compared to $265,841 for the same period in 2003 as most
of the property and equipment had been fully depreciated.

Impairments:  Impairments  of  property  and  equipment  amounted  to $0 in 2004
compared to $250,000 in 2003.  Impairments resulted primarily due to the Company
writing down the tangible  communications  equipment on hand due to  significant
reduction in wholesale and prepaid  calling card  business  resulting in limited
use. The Company  divested its equity  interest in ETNS  Singapore Pte, Ltd. and
recorded  an  impairment  of  $106,456 in 2003.  The  Company  also  recorded an
impairment of $10,835 in its investment in Vision  Aerospace,  Inc. in 2003. The
Company did not record any impairments relating to its investments in 2004.

Other Income and Expenses: Interest income was $21,893 and $57,000 for the years
ended December 31, 2004 and 2003, respectively.  Other income was represented by
interest  income  earned on  amounts  due from  entities  related  to  officers,
directors and shareholders during 2004 and 2003. Interest expense was $51,513 in
2004 compared to $30,434 in 2003.  Increase in interest  expense in 2004 was due
to Company  obtaining  additional  loans from bank and  related  parties to fund
operations.  The Company recorded a loss of $19,424 on its equity  investment in
New Times Navigation  Limited and recorded a gain of $19,424 upon disposition of
its investment during 2004. The Company recorded a loss of $32,825 on its equity
investment in ETNS Singapore Pte, Ltd.  during 2003. The Company  recorded a net


                                       25

<PAGE>

loss of $363,205 in settlement  with  Hartcourt as a result of its spin-off from
Hartcourt  in January  2003.  The  Company  also  recorded a loss of $416,787 in
settlement of its vendors' debt of $1,635,448 during 2003.

Comprehensive  Loss: The Company records foreign currency  translation gains and
losses as  comprehensive  income or loss. The company recorded a loss of $10,071
due to foreign  currency  translations  during the year ended  December 31, 2004
compared to $1,531 for the same period in 2003.

Liquidity and Capital Resources:  The Company's  principal capital  requirements
during the year 2005 are to fund the internal operations and the acquisitions of
growth-oriented  telecommunications  and related  businesses in China, Hong Kong
and USA. The Company  plans to raise  necessary  funds by selling its own common
shares  to  selected   investors  and  bringing  in  business   partners   whose
contributions  include the necessary  cash.  In view of low  borrowing  interest
rates,  the Company is  actively  pursuing  additional  credit  facilities  with
financial  institutions  in Hong Kong and USA as a means to obtain new  funding.
The Company's  management  estimates  that it currently has the funds to operate
for at least twelve months without raising additional capital.

As shown in the accompanying  financial  statements,  the Company incurred a net
loss of  $2,128,794  for the year ended  December  31, 2004 as compared to a net
loss of  $3,844,283  for the same period in 2003.  Additionally,  the  Company's
current  liabilities  exceeded its current  assets by $1,306,505 at December 31,
2004.  These  factors and the Company's  inability to meet its debt  obligations
from current  operations,  and the need to raise  additional funds to accomplish
its  objectives,  create a  substantial  doubt about  ElephantTalk's  ability to
continue as a going concern.

Operating  activities:  Net cash used in operating activities for the year ended
December 31, 2004 was $691,616 compared to $732,237 for the same period in 2003.
The decrease in net cash in operating  activities  resulted primarily due to the
decrease in loss of $1,315,489 in 2004 compared to 2003, decrease of $285,427 in
accounts payable and customer deposits, decrease of $133,132 in accrued expenses
and other payable, and decrease of $416,394 in cash overdraft.

Investing activities.  Net cash provided by investing activities during the year
ended  December  31,  2004 was $96,453  compared  to net cash used in  investing
activities  of $54,199  for the same  period in 2003.  Cash was  provided by the
proceeds from sale of investment in ETNS  Singapore Pte Ltd. of $100,953  during
2004.  The Company  purchased  property and  equipment of $4,500  during 2004 as
compared to $67,825 in 2003 and recorded a loss of $13,626 on its  investment in
ETNS Singapore Pte, Ltd during 2003.

Financing activities.  Net cash provided by financing activities during the year
ended December 31, 2004 was $664,583 compared to $790,716 during the same period
in 2003.  Net cash was provided due to net proceeds of $269,591 from issuance of
promissory  notes,  net  proceeds  of  $349,970  from sale of  common  shares to
accredited investors,  net proceeds of $59,040 from  related parties,  offset by
payments  of  $14,018 on capital  leases.  During  2003,  the  Company  received
$1,019,355 from related parties  offset  by net cash used in payments of $30,434
on capital leases and reduction of factor payable of $198,205.




                                       26

<PAGE>

As a result of the above activities,  the Company  experienced a net increase in
cash and cash  equivalents  of $59,349 for the year ended  December  31, 2004 as
compared to $2,749 net increase in cash as of December 31, 2003.  The ability of
the Company to continue as a going concern is still  dependent on its success in
obtaining  additional  financing from the institutional  investors or by selling
its common shares and fulfilling its plan of restructuring as outlined above.

Application of Critical Accounting Policies

Revenue Recognition, Cost of Revenue and Deferred Revenue:
The  Company's  revenue  recognition  policies  are  in  compliance  with  Staff
accounting   bulletin   (SAB)   104.   The   Company   recognizes   sales   from
telecommunications  services as services are  provided.  The Company  recognizes
revenue from prepaid calling cards as the services are provided. Cost of revenue
includes the cost of capacity  associated with the revenue recognized within the
corresponding time period. Payments received before all of the relevant criteria
for revenue recognition are satisfied are recorded as deferred revenue. Deferred
revenue  represents  amounts received from the customers against future sales of
services since the Company recognizes revenue on the performance of services.

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
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  this  Statement  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 December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R").  FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based  compensation  issued to employees.  FAS
No. 123R is effective  beginning in the Company's second quarter of fiscal 2006.
The Company is in process of evaluating the impact of this  pronouncement on its
financial position.

In December  2004,  the FASB  issued  SFAS  Statement  No.  153,  "Exchanges  of
Non-monetary  Assets."  The  Statement  is an amendment of APB Opinion No. 29 to
eliminate the exception for non-monetary  exchanges of similar productive assets
and replaces it with a general  exception for exchanges of  non-monetary  assets
that do not have commercial substance. The Company believes that the adoption of
this standard will have no material impact on its financial statements.



                                       27

<PAGE>

In March 2004, the Emerging  Issues Task Force  ("EITF")  reached a consensus on
Issue  No.  03-1,  "The  Meaning  of  Other-Than-Temporary  Impairment  and  its
Application  to Certain  Investments."  The EITF  reached a consensus  about the
criteria  that should be used to  determine  when an  investment  is  considered
impaired,  whether that impairment is other-than-temporary,  and the measurement
of an  impairment  loss and how that criteria  should be applied to  investments
accounted for under SFAS No. 115 "Accounting in certain  investments in debt and
equity  securities".   EITF  03-01  also  included   accounting   considerations
subsequent to the  recognition of  other-than-temporary  impairment and requires
certain  disclosures  about  unrealized  losses that have not been recognized as
other-than-temporary   impairments.   Additionally,   EITF  03-01  includes  new
disclosure  requirements  for  investments  that are  deemed  to be  temporarily
impaired.  In September  2004, the Financial  Accounting  Standards Board (FASB)
delayed  the  accounting  provisions  of  EITF  03-01;  however  the  disclosure
requirements remain effective for annual reports ending after June 15, 2004. The
Company will evaluate the impact of EITF 03-01 once final guidance is issued.

Off Balance Sheet Arrangements

The Company has no off Balance Sheet arrangements at December 31, 2004.


Item 7.  Consolidated Financial Statements

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

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

On May 5, 2004,  the Company  dismissed  its  independent  accountants  Kabani &
Company,  Inc.  ("Kabani")  as its  auditors.  Kabani  served  as the  Company's
independent  auditors  for the fiscal  years ended  December  31, 2003 and 2002.
Kabani's report on the Company's consolidated financial statements for the years
ended  December  31,  2003 and 2002 (the  "Reports")  did not contain an adverse
opinion or  disclaimer  of opinion  and were not  qualified  or  modified  as to
uncertainty,  audit scope or accounting principles,  however, they were modified
to include an explanatory  paragraph  wherein they expressed  substantial  doubt
about the Company's ability to continue as a going concern.

During the Company's  fiscal years ended  December 31, 2003 and 2002, and during
the  period  from  January  1, 2004  until  Kabani's  dismissal,  there  were no
disagreements  with Kabani within the meaning of item 304 of  regulation  S-B or
any matter of  accounting  principles or practices,  financial  disclosures,  or
auditing scope or procedures,  which  disagreements  if not resolved to Kabani's
satisfaction,  would have caused Kabani to make  reference to the subject matter
of the disagreements in connection with its Reports.

During the Company's  fiscal years ended  December 31, 2003 and 2002, and during
the  period  from  January  1, 2004  until  Kabani's  dismissal,  there  were no
"reportable  events"  (as  such  term is  defined  in item  304(a)(1)(iv)(B)  of
regulation S-B.



                                       28

<PAGE>

On May 5, 2004,  the Company  engaged  Webb & Company,  P.A.,  Certified  Public
Accountants,  as the  independent  accountant  of the  Company.  The decision to
appoint Webb & Company,  P.A. was approved by the  Company's  Board of Directors
upon recommendation by its audit committee. During the Company's two most recent
fiscal years and any subsequent interim period prior to the engagement of Webb &
Company, P.A., neither the Company nor anyone on Company's behalf consulted with
Webb &  Company,  P.A.  regarding  either  (i)  the  application  of  accounting
principles to a specified  transaction,  either contemplated or proposed, or the
type of audit  opinion  that might be  rendered  on the  Registrant's  financial
statements or (ii) any matter that was either the subject of a "disagreement" or
a "reportable event."

Item 8A.  Controls and Procedures

Our Chief  Executive  Officer,  President,  and  Chief  Financial  Officer  (the
"Certifying   Officers")  are  responsible  for   establishing  and  maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
designed  such  disclosure  controls  and  procedures  to ensure  that  material
information is made known to them,  particularly during the period in which this
report was prepared. The Certifying Officers have evaluated the effectiveness of
the Company's  disclosure  controls and procedures within 90 days of the date of
this report and believe that the Company's  disclosure  controls and  procedures
are effective based on the required  evaluation.  There have been no significant
changes in internal controls or in other factors that could significantly affect
internal  controls  subsequent  to the date of their  evaluation,  including any
corrective  actions  with  regard  to  significant   deficiencies  and  material
weaknesses.

Item 8B.  Other Information

None.


                                    PART III

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

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

  Director Name      Age              Position                             Since
--------------------------------------------------------------------------------

Mr. Russelle Choi    50       President and Chief Executive Officer        2002

Mr. Pius Lam         46       Vice-President and Chief Operating Officer   2002

Mr. Francis Lim      46       Director                                     2003

Mr. Manu Ohri        49       Executive Vice-President of Finance and
                              Chief Financial Officer                      2002

Mr. James Wang       47       Director                                     2003


                                       29

<PAGE>

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

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

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

Manu Ohri,  Executive Vice President Finance & Chief Financial Officer: Mr. Ohri
currently  serves as the Executive Vice  President of Finance & Chief  Financial
Officer  and  Director in the  Company  since May 2002.  Mr. Ohri served in this
capacity for The Hartcourt Companies, Inc. from December 1999 to September 2002.
From June 1999 to November  1999,  Mr. Ohri  served as the  President  and Chief
Executive  Officer of Pego Systems,  Inc.,  an industrial  air and gas equipment
manufacturer's  representative  organization,  an  affiliate  of  The  Hartcourt
Companies,  Inc.  From  January  1997 to March  1999,  Mr.  Ohri served as Chief


                                       30

<PAGE>
Operating Officer and Chief Financial Officer of Dynamic Cooking Systems,  Inc.,
a privately-held  manufacturing  company.  From September 1989 to December 1996,
Mr.  Ohri served as Chief  Financial  Officer of Startel  Corporation,  a NASDAQ
company in software development  business.  Mr. Ohri's multi-faceted  experience
includes  operations,  finance  as  well  as  administrative  functions  in  the
manufacturing,  distribution and software development industries.  Mr. Ohri is a
Certified  Public  Accountant  with over six years  experience  with  Deloitte &
Touche, LLP and PriceWaterhouseCoopers,  LLP. Mr. Ohri earned his Masters degree
in Business  Administration  from  University  of Detroit in 1979 and  Bachelors
degree in Accounting from University of Delhi in India in 1975.

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

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

Item 10.  Executive Compensation.

Summary Compensation Table

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

<TABLE>
----------------- ------- --------------------------------- -------------------------------------- -------------
                                 ANNUAL COMPENSATION                LONG TERM COMPENSATION
================= ======= ================================= ====================================== =============
                                                                       Awards           Payouts
================= ======= ================================= =========================== ========== =============
                    Year                          Other       Restricted    Securities    LTIP        All Other
                                                  Annual     Stock Awards   Underlying    Payouts   Compensation
                             Salary    Bonus   Compensation      ($)         Options/       ($)          ($)
                               ($)      ($)        ($)                        SARs
                                                                              (#)
================= ======= =========== ======= ============= ============== ============ ========== =============
<S>                 <C>     <C>         <C>      <C>             <C>         <C>        <C>          <C>
Russelle Choi,      2004    $120,000     $0       $20,000        $0           -0-            $0           $0
President and CEO   2003    $120,000     $0       $20,000        $0           -0-            $0           $0
                    2002       $0        $0         $0           $0           -0-            $0           $0
================= ======= =========== ======= ============= ============== ============ ========== =============
</TABLE>
                                       31

<PAGE>


No options or SARs where granted to any executive officers.

Employment and Related Agreements

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

Compensation of Directors

For attending Board meetings,  the Board of Directors  approved the compensation
of the Company's  directors with $5,000 worth of restricted common shares valued
at the  closing  market  price of the common  shares on first day of each fiscal
quarter, starting January 1, 2003.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth  information as of December 31, 2004 with respect
to persons known to the Company to be the  beneficial  owners of more than 5% of
its voting  securities  and with  respect to the  beneficial  ownership  of such
securities  by each  director of the Company and by all  directors and executive
officers of the Company as a group.
















                                       32

<PAGE>

----------- ---------------------------------------   --------------    --------
 Title of     Name & Address of Beneficial Owner   Amount and Nature of  Percent
   Class                                           Beneficial Ownership
                                                            (1)
----------- ---------------------------------------   --------------    --------
Common      Man Eagle Limited                            4,790,955         8.1%
stock       28/F Emperor Group Centre
            288 Hennessy Road, Wanchai
            Hong Kong
----------- ---------------------------------------   --------------    --------
Common      Supreme Luck Management Company Limited      3,393,276         5.7%
stock       6/F 24 Des Voeux Road, Central
            Hong Kong
----------- ---------------------------------------   --------------    --------
Common      Russelle Choi, Director                      5,356,569         9.0%
stock       8/F, 145-159 Yeung Uk Road
            Tsuen Wan, Hong Kong
----------- ---------------------------------------   --------------    --------
Common      Pius Lam, Director                           3,113,163         5.2%
stock       8/F, 145-159 Yeung Uk Road
            Tsuen Wan, Hong Kong
----------- ---------------------------------------   --------------    --------
Common      Theresa Tsoi, Officer                        2,214,275         3.7%
stock       8/F, 145-159 Yeung Uk Road
            Tsuen Wan, Hong Kong
----------- ---------------------------------------   --------------    --------
Common      Manu Ohri, Director                          1,904,507         3.2%
stock       438 E. Katella Avenue, Suite 217
            Orange, California 92867
----------- ---------------------------------------   --------------    --------
Common      Francis Lim, Director                          479,783         0.8%
stock       8/F, 145-159 Yeung Uk Road
            Tsuen Wan, Hong Kong
----------- ---------------------------------------   --------------    --------
Common      James Wang, Director                           100,479         0.2%
stock       8/F, 145-159 Yeung Uk Road
            Tsuen Wan, Hong Kong
----------- ---------------------------------------   --------------    --------
            All Officers and Directors as a group       13,168,776        22.2%
----------- ---------------------------------------   --------------    --------

(1) 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.

Stock Option Plan

On April 11, 2002,  the Company  entered into an agreement  with an  individual,
Tang Wai Leong,  whereby the Company granted Mr. Leong an option to purchase two
million  (2,000,000) common shares of the Company at the closing market price of
April 11,  2002 i.e.  $0.32 (32 cents) per share.  Mr.  Leong  agreed to provide
consulting and advisory services to the Company in accordance with certain terms
and  conditions.  Mr. Leong shall have the right to exercise the option in whole


                                       33

<PAGE>

or in part through the close of business on April 10, 2003. On December 1, 2002,
the Company and Mr. Leong mutually  agreed to terminate the consulting  services
agreement.  Mr.  Leong did not  exercise  his option to purchase  the  Company's
common  shares  as of  the  date  of  termination  of  the  consulting  services
agreement.

Employee Benefit Plan

The Company adopted an employee  benefit plan called "The 2000 Employee  Benefit
Plan" (the "Plan") on May 30, 2000. Under the Plan, the Company may issue shares
or grant options to acquire the Company's common stock, no par value,  from time
to time to employees  of the Company or its  subsidiaries.  In addition,  at the
discretion of the Board of  Directors,  shares may be granted under this Plan to
other  individuals,  including  consultants  or advisors,  who contribute to the
success of the Company or its  subsidiaries,  provided  that bona fide  services
shall be rendered by  consultants  and advisors and such services must not be in
conjunction  with  the  offer  or  sale  of  securities  in  a  capital  raising
transaction.  No 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  Administrator  under the direction of the Board of Directors
administers the Plan. A total of four million  (4,000,000)  common shares may be
subject to, or issued pursuant to, benefits  granted under the Plan. At any time
any stock  option is granted  under the terms of this  Plan,  the  Company  will
reserve for issuance the number of shares of Stock  subject to suck option until
it is exercised or expired.  The Plan Administrator shall determine from time to
time the terms,  conditions and price of the options granted.  Options shall not
be  construed to be stock and cannot be exercised  after the  expiration  of its
term.

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

Warrants

The Company did not have any warrants outstanding at December 31, 2004.

Stock Split

As a condition precedent to the acquisition of Elephant Talk Limited and plan of
reorganization  that  completed  on January 4, 2002,  the Company  authorized  a
reverse  stock split of its common  shares  pursuant to which for every ten (10)
shares of the  issued and  outstanding  common  shares one (1) common  share was
exchanged.  On January 22, 2002 the Company completed and effected a one (1) for
ten (10) reverse stock split of its outstanding  common stock.  This reduced the
number of shares  outstanding  from 34,626,899  shares to 3,464,000 shares after
having 1,311 partial shares  redeemed.  As part of the  acquisition  and plan of
reorganization,  the  Company  issued  31,164,210  common  shares to the  former


                                       34

<PAGE>

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

Item 12: Certain Relationships and Related Transactions

On February  27, 2001,  Elephant  Talk  Limited  entered into an agreement  with
Elephant Talk, Inc. ("ETI"), a corporation organized and existing under the laws
of the Commonwealth of  Massachusetts,  whereby Elephant Talk Limited  appointed
ETI its sales agent in the United States of America for the sale of its products
and services.  The term of the sales agency  agreement  shall be for a period of
five (5) years. Elephant Talk Limited agreed to pay a fee totaling three percent
(3%) of the cost of any services or products  purchased by the customers through
the efforts of ETI.  During 2004 and 2003,  ETI  provided  calling  capacity and
prepaid  calling  card sales to Elephant  Talk  Limited in the amounts of $0 and
$123,823, respectively. Elephant Talk Limited paid commissions to ETI $0 for the
years ended December 31, 2004 and 2003, respectively.

On May 16,  2001,  Hartcourt  and  Elephant  Talk  Limited  executed  a Sale and
Purchase Agreement whereby Hartcourt acquired 51% ownership interest in Elephant
Talk Limited for a total consideration of $4,194,000. Hartcourt issued 3,756,058
shares of common stock valued at  $2,325,000  to the private  owners of Elephant
Talk Limited,  executed a Promissory  Note of $1,250,000,  and issued  1,000,000
shares to Elephant Talk Limited, for the 51% ownership interest.

The Company executed a Spin-Off Agreement, dated September 12, 2002, and through
the  subsequent  transactions  that  closed on  January  4,  2003,  the  Company
terminated  its  relationship  with  Hartcourt.  Pursuant  to the  terms  of the
Spin-Off Agreement, the Company received 17,895,579 of its common shares held by
Hartcourt  and  $349,000  in cash  advances  from  Hartcourt,  in  exchange  for
returning  4,756,000  common  shares of  Hartcourt  held by the  Company and its
affiliates,  canceling two promissory notes of Hartcourt held by the Company and
its  affiliate  in the  respective  amounts  of  $1,250,000  and  $140,595,  and
canceling  the  indebtedness  of  cash  advances  by  issuing  5,000,000  of its
restricted  common  shares to  Hartcourt.  In addition to executing the Spin-Off
Agreement,  the parties executed a mutual release to end their  relationship and
place each other in a position  whereby no party is indebted to the other party.
Upon  receipt of the  shares on close of the  escrow on  January  4,  2003,  the
Company held  17,895,579  common shares as treasury  shares.  As a result of the
completion of the spin-off agreement with Hartcourt, the Company recorded a loss
of $363,205 in the accompanying financial statements for the year ended December
31, 2003.










                                       35

<PAGE>
                                    PART IV.


Item 13.  Exhibits and Reports on Form 8-K

The following  list  describes the exhibits  filed as part of this Annual Report
Form 10-KSB.

Exhibit No.                       Description of Document
-----------                       -----------------------

      31.1     Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-
               Oxley Act of 2002
      31.2     Certification of Principal Accounting Officer Pursuant to Section
               302 of the Sarbanes-Oxley Act of 2002
      32.1     Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
               Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K:

During  the last  quarter  covered  by this  Report we did not file any  Current
Reports Form 8-K.


Item 14.  Principal Accountant Fees and Services

During the past two fiscal years, our principal accountant have billed for their
services as follows. In addition,  fees and services related to the audit of the
financial  statements of the Company for the period ended  December 31, 2004, as
contained in the Annual Report,  are not included because they were not incurred
until after the end of the fiscal year.

                                                        Year ended December 31,
                                                          2004        2003

          (1) Audit Fees                                $40,767.00   $48,961.00

          (2) Audit-Related Fees                        $     -      $     -

          (3) Tax Fees:                                 $ 1,200.00   $ 1,200.00

          (4) All Other Fees:                           $     -      $     -

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







                                       36

<PAGE>













                       ELEPHANT TALK COMMUNICATIONS, INC.
                                AND SUBSIDIARY
                       CONSOLIDATED FINANCIAL STATEMENTS
                           AS OF DECEMBER 31, 2004








































                                       F-i

<PAGE>





                        ELEPHANT TALK COMMUNICATIONS, INC.
                                 AND SUBSIDIARY


                                     CONTENTS


PAGE       F-1 - 2   REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

PAGE        F-3      INDEPENDENT AUDITOR'S REPORT OF THE SUBSIDIARY

PAGE        F-4      CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004

PAGE        F-5      CONSOLIDATED  STATEMENTS OF OPERATIONS AND COMPREHENSIVE
                     LOSS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

PAGE        F-6      CONSOLIDATED  STATEMENTS  OF CHANGES IN  STOCKHOLDERS'
                     DEFICIENCY  FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

PAGE        F-7      CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
                     DECEMBER 31, 2004 AND 2003

PAGES     F-8 - 16   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





























                                       F-ii

<PAGE>




                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

To the Board of Directors of:
Elephant Talk Communications, Inc. and Subsidiary


We have audited the  accompanying  consolidated  balance  sheet of Elephant Talk
Communications,  Inc. and  subsidiary  as of December 31, 2004,  and the related
consolidated  statements  of  operations  and  comprehensive  loss,  changes  in
stockholders' deficiency and cash flows for the year then ended. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based on our  audit.  The  financial  statements  of  Elephant  Talk
Communications,  Inc. as of December  31,  2003 were  audited by other  auditors
whose report  dated April 8, 2004,  expressed  an  unqualified  opinion on those
statements.

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  financial  position of Elephant  Talk
Communications,  Inc. and  subsidiary as of December 31, 2004 and the results of
its  operations  and its cash flows for the year then ended in  conformity  with
accounting principles generally accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will  continue as a going  concern.  As discussed in Note 15 to
the consolidated financial statements,  the Company had a loss of $2,128,794,  a
working  capital  deficiency  of  $1,306,505,   a  stockholders'  deficiency  of
$1,563,096, an accumulated deficit of $10,918,242 and used cash in operations of
$691,616. These factors raise substantial doubt about its ability to continue as
a going concern.  Management's plans concerning these matters are also described
in Note 15. The accompanying  consolidated  financial  statements do not include
any adjustments that might result from the outcome of this uncertainty.


/s/ Webb & Company, P.A.
CERTIFIED PUBLIC ACCOUNTANTS

Boynton Beach, Florida
March 28, 2005



                                      F-1

<PAGE>
                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Board of Directors
Elephant Talk Communications, Inc.


We have audited the  accompanying  consolidated  balance  sheet of Elephant Talk
Communications,  Inc. and  subsidiary  as of December 31, 2003,  and the related
consolidated statements of operations,  stockholders' deficit and cash flows for
the  year  ended  December  31,  2003.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements based on our audit. We did
not audit the financial  statements of Elephant Talk Limited,  whose  statements
reflect total assets of approximately $968,290 as of December 31, 2003 and total
net revenues of $867,171 for the year ended December 31, 2003.  Those statements
were audited by other  auditors  whose reports have been furnished to us, and in
our opinion,  insofar as it relates to the amounts  included  for Elephant  Talk
Limited for the year ended  December 31, 2003,  is based solely on the report of
the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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,  based on our audits and the  reports  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,   the  consolidated  financial  position  of  Elephant  Talk
Communications, Inc. and subsidiaries as of December 31, 2003 and the results of
its  consolidated  operations and its cash flows for the year ended December 31,
2003 in conformity with accounting  principles  generally accepted in the United
States of America.

The Company's consolidated financial statements are prepared using the generally
accepted accounting principles applicable to a going concern, which contemplates
the realization of assets and liquidation of liabilities in the normal course of
business.  The Company has accumulated  deficit of $8,789,448 which includes net
loss of  $3,844,283  for the year ended  December 31,  2003.  The Company has an
excess of total  liabilities  over total  assets of  $1,904,650  on December 31,
2003.  These factors as discussed in Note 15 to the financial  statements  raise
substantial  doubt about the Company's  ability to continue as a going  concern.
Management's plans in regard to these matters are also described in Note 15. The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

/s/ Kabani & Company, Inc.
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS

Fountain Valley, California
April 8, 2004

                                      F-2
<PAGE>



                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Board of Directors
Elephant Talk Communications, Inc.


We have audited the accompanying  balance sheet of Elephant Talk Limited, a Hong
Kong  Corporation  (the  "Company")  as of December  31,  2003,  and the related
statements of operations,  stockholders' equity (deficit) and cash flows for the
years ended  December  31, 2003 and 2002.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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 financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of Elephant Talk Limited as of
December 31, 2003 and the results of its  operations  and its cash flows for the
years ended December 31, 2003 and 2002 in conformity with accounting  principles
generally accepted in the United States of America.

The Company's  financial  statements are prepared  using the generally  accepted
accounting  principles  applicable to a going concern,  which  contemplates  the
realization  of assets and  liquidation  of  liabilities in the normal course of
business.  The Company has accumulated  deficit of $6,747,312 which includes net
losses of $1,982,530  and  $1,426,083  for the years ended December 31, 2003 and
2002,  respectively.  The Company has an excess of total  liabilities over total
assets of $1,762,184 on December 31, 2003. These factors raise substantial doubt
about the  Company's  ability to  continue  as a going  concern.  The  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.


/s/ Jimmy C. H. Cheung & Co.
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS

Hong Kong
April 13, 2004






                                      F-3

<PAGE>
                ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET

                                DECEMBER 31, 2004

                                     ASSETS
CURRENT ASSETS
  Cash and cash equivalents                               $     67,631
  Accounts receivable, net                                      26,106
  Prepaid expenses and other current assets                     77,520
                                                          ------------
         Total Current Assets                                  171,257
PROPERTY AND EQUIPMENT - NET                                   128,057
                                                          ------------
TOTAL ASSETS                                              $    299,314
                                                          ============

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
  Overdraft                                               $    132,811
  Accounts payable and customer deposits                       195,718
  Deferred revenue                                             119,888
  Accrued expenses and other payable                            77,400
  Current portion of note payable                              775,969
  Due to related parties                                       175,976
                                                            ----------
         Total Current Liabilities                           1,477,762
                                                            ----------
LONG-TERM LIABILITIES
  Note payable                                                 384,648
                                                             ---------
TOTAL LIABILITIES                                            1,862,410
                                                            ----------

COMMITMENT AND CONTINGENCIES                                         -

STOCKHOLDERS' DEFICIENCY
Preferred stock Class B, no par value,
 5,000,000  shares authorized.                                       -
 none issued and outstanding
Common stock, no par value,
 250,000,000 shares authorized,
 57,068,681 shares issued and 51,968,681 shares outstanding  9,846,748
Common stock, no par value, 4,000,000 shares
 issued as earnest deposit for acquisition                    (480,000)
Accumulated comprehensive loss                                 (11,602)
Accumulated deficit                                        (10,918,242)
                                                           -----------
         Total Stockholders' Deficiency                     (1,563,096)
                                                           -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY             $   299,314
                                                           ===========

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

                                      F-4

<PAGE>
                ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARY
          CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                 FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

                                                        2004            2003
                                                   ------------    ------------
REVENUES, NET                                      $    636,615    $    867,171

COST OF REVENUE                                         497,234         845,438
                                                   ------------    ------------
GROSS PROFIT                                            139,381          21,733
                                                   ------------    ------------
OPERATING EXPENSES
  Selling, general and administrative                   598,486       1,998,546
  Provision for uncollectible stock subscriptions       410,781             -
  Stock compensation to officers, directors
    and employees                                       560,000         447,000
  Stock compensation to consultants                     588,440         108,200
  Impairment of property and equipment                      -           250,000
  Impairment of investments                                 -           117,291
  Depreciation and amortization                          80,208         265,841
                                                   ------------    ------------
      Total Operating Expenses                        2,237,915       3,186,878
                                                   ------------    ------------
LOSS FROM OPERATIONS                                 (2,098,534)     (3,165,145)

OTHER INCOME (EXPENSE)
  Interest income                                        21,893          57,000
  Interest expense                                      (51,513)        (30,434)
  Equity loss of unconsolidated affiliate               (19,424)        (32,825)
  Loss on settlement                                        -          (363,205)
  Loss on settlement of debts                               -          (416,787)
  Gain on disposition of equity investment               19,424             -
  Miscellaneous income                                      160         107,913
                                                   ------------    ------------
         Total Other Income (Expense)                   (29,460)       (678,338)
                                                   ------------    ------------
LOSS BEFORE INCOME TAXES                             (2,127,994)     (3,843,483)
  Income taxes                                              800             800
                                                   ------------    ------------
NET LOSS                                           $ (2,128,794)   $ (3,844,283)
                                                   ------------    ------------
COMPREHENSIVE INCOME (LOSS)
  Foreign currency translation gain (loss)              (10,071)         (1,531)
                                                   ------------    ------------
                                                        (10,071)         (1,531)
                                                   ------------    ------------
COMPREHENSIVE LOSS                                 $ (2,138,865)   $ (3,845,814)
                                                   ============    ============
Net loss per common share and equivalents
 - basic and diluted                               $      (0.05)   $      (0.15)
                                                   ============    ============
Weighted average shares outstanding during the period
 - basic and diluted                                 41,554,724      25,102,850
                                                   ============    ============
       The accompanying notes are an integral part of these consolidated
                              financial statements.
                                      F-5
<PAGE>

                ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARY
          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
             FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
<TABLE>
                                                                                              Earn- Other
                                                    Common Shares       Subscrip-             est   Compre-   Accumu-     Total
                                 Common         Issued, not outstanding tions Re-   Note      Depo- hensive    lated    Shareholders
       Description          Shares     Amount    Shares       Amount    ceivable  Receivable  sit   Loss      Deficit    Deficiency
------------------------- ---------- ---------- ----------- ----------- --------- ----------  ----- -------  ----------- -----------
<S>                       <C>        <C>        <C>         <C>         <C>       <C>         <C>  <C>       <C>         <C>
Balance-December 31, 2002 41,438,210 $6,394,944           - $         -$(410,781)$(1,387,500) $ - $(553,187)$(4,945,165) $ (901,689)

Receipt of company shares
  as part of settlement
  with Hartcourt                   -          - (17,895,572) (1,288,482)       -         -      -   553,187           -    (735,295)
Settlement with Hartcourt          -          -           -           -        -   1,387,500    -         -           -   1,387,500
Shares issued to directors
  for fees                   624,172     70,000           -           -        -       -        -         -           -      70,000
Shares issued to officers
  for salaries             2,818,675    342,000           -           -        -       -        -         -           -     342,000
Shares issued to vendors
  for settlement of debt   6,259,415  1,635,448           -           -        -       -        -         -           -   1,635,448
Shares issued to
  consultants
  for services               360,000    108,200           -           -        -       -        -         -           -     108,200
Shares issued to employees
  as bonus                   367,242     35,000           -           -        -       -        -         -           -      35,000
Comprehensive loss                 -          -           -           -        -       -        -    (1,531)          -      (1,531)
Net Loss                           -          -           -           -        -       -        -         -  (3,844,283) (3,844,283)
------------------------- ---------- ---------- ----------- ----------- --------- ------ --------- -------- ----------- -----------
Balance-December 31, 2003 51,867,714  8,585,592 (17,895,572) (1,288,482)(410,781)      -        -    (1,531) (8,789,448) (1,904,650)

Shares issued to directors
  for fees                   898,915    100,000           -           -        -       -        -         -           -     100,000
Shares issued to officers
  for compensation         5,074,301    460,000           -           -        -       -        -         -           -     460,000
Shares issued to directors
  for settlement of debt      53,647     12,875           -           -        -       -        -         -           -      12,875
Shares issued to related
  parties for settlement
  of debt                    590,358    141,686           -           -        -       -        -         -           -     141,686
Shares issued
  for acquisition          5,100,000    683,400           -           -        -       -        -         -           -     683,400
Shares issued as earnest
  deposit for acquisition  4,000,000    480,000           -           -        -       - (480,000)        -           -           -
Shares issued to vendors
  for settlement of debt   1,736,111    416,667           -           -        -       -        -         -           -     416,667
Shares cancelled as a
  result of settlement   (17,895,572)(1,288,482) 17,895,572   1,288,482        -       -        -         -           -           -
Sale of shares             2,543,207    349,970           -           -        -       -        -         -           -     349,970
Shares issued to
  consultants
  for services             3,100,000    588,440           -           -        -       -        -         -           -     588,440
Uncollectible stock
  subscriptions                    -          -           -           -  410,781       -        -         -           -     410,781
Shares issued and
  not cancelled           (5,100,000)  (683,400)          -           -        -       -        -         -           -    (683,400)
Comprehensive loss                 -          -           -           -        -       -        -   (10,071)          -     (10,071)
Net loss                           -          -           -           -        -       -        -         -  (2,128,794) (2,128,794)
------------------------- ---------- ---------- ----------- ----------- --------- ------ --------- -------- ----------- -----------

Balance-December 31, 2004 51,968,681 $9,846,748           - $         - $      -  $    -$(480,000)$(11,602)$(10,918,242)$(1,563,096)
========================= ========== ========== =========== =========== ========= ====== ========= ======== =========== ===========


                    The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>












                                      F-6
<PAGE>

                 ELEPHANT TALK COMMUNICATIONS, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
<TABLE>
                                                                          2004           2003
CASH FLOWS FROM OPERATING ACTIVITIES:                                 -----------    -----------
<S>                                                                   <C>            <C>
    Net loss                                                          $(2,128,794)   $(3,844,283)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
    Depreciation and amortization                                          80,208        265,841
    Loss in equity of unconsolidated subsidiary                            19,424         32,825
    Gain on disposal of equity investment                                 (19,424)           -
    Issuance of stock in settlement                                        12,875            -
    Issuance of stock for compensation and fees                           560,000        447,000
    Issuance of stock for consulting services                             588,440        108,200
    Provision for uncollectible stock subscriptions                       410,781            -
    Impairment of property and equipment                                      -          250,000
    Impairment of investments                                                 -          117,291
    Provision for doubtful accounts                                       500,000        400,000
    Changes in operating assets and liabilities:
      Decrease in accounts receivable                                     130,086        327,470
      Decrease in prepaid expenses, deposits and other assets              31,392         17,542
      Increase (Decrease) in accounts payable and customer deposits      (285,427)       576,955
      Increase (Decrease) in deferred revenue                             (41,651)        82,602
      Increase (Decrease) in accrued expenses and other payable          (133,132)       105,167
      Increase (Decrease) in cash overdraft                              (416,394)       381,153
                                                                      -----------    -----------
         Net cash used in operating activities                           (691,616)      (732,237)
                                                                      -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                     (4,500)       (67,825)
    Proceeds from sale of investment                                      100,953            -
    Investment in unconsolidated affiliate                                    -           13,626
                                                                      -----------    -----------
       Net cash provided by (used in) investing activities                 96,453        (54,199)
                                                                      -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Decrease of factor payable                                                -         (198,205)
    Payment on capital leases                                             (14,018)       (30,434)
    Proceeds from issuance of notes                                       269,591            -
    Proceeds from sale of shares                                          349,970            -
    Proceeds from related parties                                          59,040      1,019,355
                                                                      -----------    -----------
        Net cash provided by financing activities                         664,583        790,716
                                                                      -----------    -----------
EFFECT OF EXCHANGE RATES ON CASH                                          (10,071)        (1,531)

NET INCREASE IN CASH                                                       59,349          2,749
CASH, BEGINNING OF THE YEAR                                                 8,282          5,533
                                                                      -----------    -----------
CASH, END OF THE YEAR                                                 $    67,631    $     8,282
                                                                      ===========    ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for interest                                $    50,788    $    30,435

Cash paid during the year for income taxes                            $       800    $       800

    The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>



                                      F-7

<PAGE>


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


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

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

     Elephant Talk  Communications,  Inc. (herein referred to as "ElephantTalk",
     "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 manufacturing of freeway signs. In March 1997,
     Altius  acquired  Starnet  Universe  Internet,  Inc., a web  developer  and
     Internet   Service   Provider   (ISP)  and  changed  its  name  to  Staruni
     Corporation.  On January 4,  2002,  the  Staruni  Corporation  merged  with
     Elephant Talk Limited;  a limited  company  incorporated  in Hong Kong, and
     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  acquisition,  and to  emphasize  that  the
     Company's new focus will be the business of Elephant Talk Limited.

     (B) Use of Estimates
     --------------------

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

     (C) Cash and Cash Equivalents
     -----------------------------

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

     (D) Foreign Currency Translation
     --------------------------------

     The  functional  currency  was the Hong Kong  Dollar  for the  years  ended
     December  31,  2004 and 2003.  The  December  31,  2004 and 2003  financial
     statements of the Company were  translated  to United States  dollars using
     year-end  exchange rates as to assets and liabilities and average  exchange
     rates as to revenues and  expenses.  Capital  accounts  were  translated at
     their historical exchange rates when the capital transactions occurred. Net
     gains and losses resulting from  translation of foreign currency  financial
     statements are included in the statements of stockholder's  equity as other
     comprehensive  income or (loss).  Foreign  currency  transaction  gains and
     losses are included in consolidated income (loss).

                                      F-8

<PAGE>

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


     (E) Property and Equipment
     --------------------------

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

     (F) Marketable Securities
     -------------------------

     The   Company's    investments    in   securities    are    classified   as
     available-for-sale  and, as such,  are  carried at fair  value.  All of the
     securities  comprised  of shares of common  stock of  investee.  Securities
     classified  as  available-for-sale  may be sold in  response  to changes in
     interest rates,  liquidity needs, and for other purposes.  The Company does
     not currently have any held-to-maturity or trading securities.

     Unrealized holding gains and losses for  available-for-sale  securities are
     excluded   from   earnings  and   reported  as  a  separate   component  of
     stockholder's  equity.  Realized gains and losses for securities classified
     as available-for-sale are reported in earnings based upon the adjusted cost
     of the specific security sold.

     (G) Carrier Deposit
     -------------------

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

     (H) Income Taxes
     ----------------

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





                                      F-9

<PAGE>

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


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

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

     Deferred revenue  represents  amounts  received from the customers  against
     future  sales of  services  since the  Company  recognizes  revenue  on the
     performance of services.  Deferred  revenue was $119,888 as of December 31,
     2004.

     (J) Basic and diluted net loss per share
     ----------------------------------------

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

     (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


                                      F-10

<PAGE>

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


     long-lived  assets to be disposed  of is  determined  in a similar  manner,
     except that fair market  values are reduced for the cost of  disposal.  The
     Company recorded an impairment of property and equipment of $0 and $250,000
     for the years ended December 31, 2004 and 2003, respectively.

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

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

     (M) Concentrations of Risk
     --------------------------

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

     (N) Reporting Segments
     ----------------------

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

     (O) Stock-based Compensation
     ----------------------------

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-Based
     Compensation".  SFAS No. 123 prescribes  accounting and reporting standards
     for all stock-based  compensation plans,  including employee stock options,
     restricted  stock,  employee stock  purchase  plans and stock  appreciation


                                      F-11

<PAGE>

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


     rights. SFAS No. 123 requires compensation expense to be recorded (i) using
     the new fair  value  method or (ii)  using the  existing  accounting  rules
     prescribed by Accounting  Principles Board Opinion No. 25,  "Accounting for
     stock issued to employees"  (APB 25) and related  interpretations  with pro
     forma  disclosure of what net income and earnings per share would have been
     had the Company  adopted the new fair value  method.  The company  uses the
     intrinsic value method prescribed by APB25 and has opted for the disclosure
     provisions of SFAS No.123.

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

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

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

     (Q) Comprehensive Income
     ------------------------

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

     (R) Reclassifications
     ---------------------

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




                                      F-12

<PAGE>

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


     (S) New Accounting Pronouncements
     ---------------------------------

     In December  2004, the  FASB  issued FASB Statement No. 123R,  "Share-Based
     Payment,  an  Amendment of FASB Statement No. 123" ("FAS No. 23R"). FAS No.
     123R  requires  companies to recognize in  the statement of  operations the
     grant- date fair value of stock options and other equity-based compensation
     issued to employees.  FAS No. 123R is effective  beginning in the Company's
     second quarter of fiscal 2006. The Company is in process of evaluating  the
     impact of this pronouncement on its financial position.

     In December  2004,  the FASB issued SFAS  Statement No. 153,  "Exchanges of
     Non-monetary  Assets." The  Statement is an amendment of APB Opinion No. 29
     to eliminate the exception for non-monetary exchanges of similar productive
     assets  and  replaces  it  with  a  general   exception  for  exchanges  of
     non-monetary  assets  that do not have  commercial  substance.  The Company
     believes that the adoption of this standard will have no material impact on
     its financial statements.

     In March 2004, the Emerging Issues Task Force ("EITF")  reached a consensus
     on Issue No. 03-1, "The Meaning of Other-Than-Temporary  Impairment and its
     Application to Certain Investments." The EITF reached a consensus about the
     criteria that should be used to determine  when an investment is considered
     impaired,   whether  that  impairment  is  other-than-temporary,   and  the
     measurement of an impairment  loss and how that criteria  should be applied
     to  investments  accounted  for under SFAS No. 115  "Accounting  in certain
     investments  in debt and  equity  securities".  EITF  03-01  also  included
     accounting    considerations    subsequent    to   the    recognition    of
     other-than-temporary  impairment  and requires  certain  disclosures  about
     unrealized  losses that have not been  recognized  as  other-than-temporary
     impairments.  Additionally, EITF 03-01 includes new disclosure requirements
     for investments  that are deemed to be temporarily  impaired.  In September
     2004,  the  Financial   Accounting   Standards  Board  (FASB)  delayed  the
     accounting  provisions of EITF 03-01;  however the disclosure  requirements
     remain effective for annual reports ending after June 15, 2004. The Company
     will evaluate the impact of EITF 03-01 once final guidance is issued.

     (T) Principles of Consolidation
     -------------------------------

     The  accompanying  consolidated  financial  statements  for the year  ended
     December  31, 2004 include the  accounts of Elephant  Talk  Communications,
     Inc.,  and its 100%  wholly-owned  subsidiary  Elephant Talk  Limited.  The
     consolidated  financial  statements  for the year ended  December  31, 2003
     include  the  accounts  of  Elephant   Talk   Communications,   Inc.,   its
     wholly-owned  subsidiary  Elephant  Talk  Limited  and  its  35.42%  equity
     investment  in ETNS  Singapore,  Pte  Ltd.  All  significant  inter-company
     accounts and transactions have been eliminated in consolidation.



                                      F-13

<PAGE>

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


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

     The cash flow  statements do not include the following  non-cash  investing
     and financing activities.  In 2004, the Company issued 5,973,216 restricted
     common shares valued at $560,000 to officers and directors as  compensation
     and fees for attending  Board  meetings;  issued 53,647  restricted  common
     shares valued at $12,875 to directors for settlement of their debt;  issued
     2,326,469  restricted  common  shares  valued at  $558,353  to vendors  and
     related  parties for  settlement of debt;  issued  4,000,000  common shares
     valued  at  $480,000 to a third party as earnest deposit for acquisition of
     60% equity interest in an entity; and issued 3,100,000 common shares valued
     at $588,440 to certain consultant for advisory and services.

     In 2003,  the Company issued 624,172 common shares to directors as fees for
     attending board meetings, valued at $70,000; 2,818,675 common shares valued
     at $342,000 to officers as  compensation;  367,242  common shares valued at
     $35,000 as bonus to employees; 360,000 common shares valued at $108,200 for
     consulting and advisory  services;  and 6,259,415  common shares to certain
     vendors valued at $1,635,448 in settlement of debt of Elephant Talk Ltd.


NOTE 2   MARKETABLE SECURITIES
------   ---------------------

     The Company's securities are classified as available-for-sale and, as such,
     are carried at fair value.  All of the  securities  comprised  of shares of
     common stock of investee.  Securities classified as available-for-sale  may
     be sold in response to changes in interest rates,  liquidity needs, and for
     other purposes. The Company does not currently have any held-to-maturity or
     trading securities.

     Unrealized holding gains and losses for  available-for-sale  securities are
     excluded   from   earnings  and   reported  as  a  separate   component  of
     stockholder's  equity.  Realized gains and losses for securities classified
     as available-for-sale are reported in earnings based upon the adjusted cost
     of the specific  security  sold. The Company did not have any investment in
     marketable  securities  at December  31, 2004.  On December  31, 2003,  the
     Company determined that the investment in marketable securities was at zero
     value based upon the fair value of the  marketable  securities  on December
     31, 2003.  The Company  determined  the decline in value of the  marketable
     securities  was  permanent  and   therefore,   recorded  an  impairment  on
     investments amounting to $10,835.


NOTE 3   ACCOUNTS RECEIVABLE
------   -------------------

     Accounts receivable at December 31, 2004 consisted of the following:


                                      F-14

<PAGE>

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


                                                                   2004
                                                           ------------------

     Accounts receivable                                $          26,106
     Less allowance for doubtful accounts                               -
                                                           ------------------
                                                        $          26,106
                                                           ==================

     For the years  ended  December  31, 2004 and 2003,  the Company  recorded a
     provision for bad and doubtful accounts of $0 and $20,000, respectively, in
     its statements of operations.


NOTE 4   PROPERTY AND EQUIPMENT
------   ----------------------

     Property and equipment at December 31, 2004 consisted of the following:

                                                                   2004
                                                           ------------------

     Office and computer equipment                      $       4,399,328
     Leasehold improvement                                          6,410
     Furniture and fixtures                                        91,649
                                                           ------------------
                                                                4,497,387
      Less accumulated depreciation and amortization           (4,369,329)
                                                           ------------------
                                                        $         128,058
                                                           ==================

     Depreciation and amortization expense for the years ended December 31, 2004
     and 2003 was $80,208 and $265,841, respectively.


NOTE 5   INVESTMENT IN AFFILIATE
------   -----------------------

     On February 18, 2004,  the Company's  wholly-owned subsidiary Elephant Talk
     Ltd. sold all of its 35.42% equity  interest in ETNS  Singapore,  Pte, Ltd.
     for cash consideration of $100,953.  Based upon the realizable value of the
     investment,  the Company  did  not  record any  gain or loss on sale of its
     equity investment.

     The Company's share of loss for 2003 was $32,825. On December 31, 2003, the
     Company  recorded  an  impairment  of  the  investment  based  upon  future
     realization of the investment for cash amounting $100,953, resulting in the
     impairment of $106,456 in the year ended December 31, 2003.


                                      F-15

<PAGE>

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


     On May 24, 2004,  the Company  completed  its purchase of 30% of all of the
     issued  and  outstanding  shares  of common  stock of New Times  Navigation
     Limited ("New Times") for a total  consideration  valued at $4,283,400 from
     four shareholders of Renren Holdings Limited,  parent company of New Times.
     The purchase consideration was payable as follows: $683,400 of the purchase
     consideration consisted of 5,100,000 restricted common shares valued at the
     five days average  closing price of $0.134 per common share, on the date of
     closing,  and  $3,600,000  of the purchase  consideration  to be settled by
     issuance of unsecured  convertible  promissory  notes. The parties mutually
     agreed to terminate  the purchase  agreement in December 2004 and agreed to
     exchange  the same  number of shares  issued to each of the  parties on the
     date of acquisition. During 2004, the Company recorded its share of loss of
     $19,424 in its equity  investment in New Times. The Company recorded a gain
     of $19,424 on  disposition  of its equity  investment in December 2004. The
     Company  has  returned  all of the shares of New Times as of  December  31,
     2004.  On February  22, 2005,  the Company  received  and  cancelled  share
     certificates  of  2,252,500  common  shares  and  expects  to  receive  the
     remaining shares issued for this acquisition by April 30, 2005.


NOTE 6   DUE FROM RELATED PARTIES
------   ------------------------

     The Company provided guarantees to third parties for funds advanced by them
     to entities that officers and/or  shareholders  have an ownership  interest
     in. The balances of funds advanced as of December 31, 2004 are:

                                                                   2004
                                                           ------------------

     Due from ET Network Services, Ltd.                 $         330,934

     Due from entities related to shareholders                     33,811
                                                           ------------------
                                                        $         364,745
                                                           ==================

     The amounts are due on demand,  unsecured and carry interest at the rate of
     six percent (6%) per year.  Total interest  income from the related parties
     amounted to $21,885 and $57,000 for the years ended  December  31, 2004 and
     2003. The Company  provided an allowance for doubtful  accounts of $364,745
     and  $400,000  on amounts due from such  entities at December  31, 2004 and
     2003.








                                      F-16

<PAGE>

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


NOTE 7   NOTES PAYABLE
------   -------------

     Notes payable are summarized as follows:
                                                                   2004
                                                           ------------------

          Note payable, bank, monthly principal and       $       344,920
             interest payments of $12,536 including
             interest at bank's prime rate plus 1.5% per
             anum, 6.5% at December 31, 2004,
             due December 24, 2006, secured by personal
             guarantees of three shareholders

          Note payable, bank, monthly principal and               196,361
             interest payments of $2,678 including
             interest at bank's prime rate plus 1.5% per
             anum, 6.5% at December 31, 2004,
             due December 24, 2011, secured by personal
             guarantees of three shareholders

          Note payable, bank, monthly principal and                87,284
             interest payments of $1,656 including
             interest at bank's prime rate plus 1.5% per
             anum, 6.5% at December 31, 2004,
             due June 28, 2009, secured by personal
             guarantees of three shareholders

          Note payable, bank, monthly payments of                 282,051
             interest at bank's prime rate plus 2% per
             anum, 7.0% at December 31, 2004,
             due January 16, 2006

          Notes payable, investor, interest at 6% per             250,000
             anum, due on October 24, 2005, November 29,
             2005 and December 29, 2005

                                                           ------------------

                                                                1,160,616

          Less current portion                                   (775,969)
                                                           ------------------

          Notes payable, net of current portion           $       384,647
                                                           ------------------





                                      F-17

<PAGE>

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


     The following is a summary of principal maturities of notes payable:

             2005                                         $       775,969

             2006                                                 193,409

             2007                                                  41,319

             2008                                                  44,233

             2009                                                  39,724

             Thereafter                                            65,962
                                                           ------------------

                                                          $     1,160,616
                                                           ------------------

NOTE 8   DUE TO RELATED PARTIES
------   ----------------------

     The Company  received  advances from entities that certain  officers and/or
     shareholders  have an ownership  interest.  The balances as of December 31,
     2004 are:
                                                                   2004
                                                           ------------------


     Due to entities related to certain officers,
       directors and shareholders                         $        89,756

     Due to entities related to shareholders                       16,601

     Due to directors                                              69,619

                                                           ------------------

                                                          $       175,976
                                                           ==================

     The amount due to  entities  related to  certain  officers,  directors  and
     shareholders is due on demand,  unsecured and carry interest at the rate of
     six percent (6%) per year.  Total interest  expense due to related  parties
     amounted to $10,559 and $10,200 for the years ended  December  31, 2004 and
     2003, respectively.






                                      F-18

<PAGE>

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


NOTE 9   STOCKHOLDERS' DEFICIENCY
------   ------------------------

     Common Stock

     The Company is presently  authorized to issue 250,000,000  shares of no par
     value Common Stock. The Company  currently has 57,068,681 shares issued and
     outstanding.  The  holders of common  stock,  and of shares  issuable  upon
     exercise of any Warrants or Options,  are entitled to equal  dividends  and
     distributions,  per share, with respect to the common stock when, as and if
     declared by the Board of Directors from funds legally available  therefore.
     No  holder  of any  shares  of  common  stock  has a  pre-emptive  right to
     subscribe  for any  securities  of the  Company  nor are any common  shares
     subject to redemption or convertible  into other securities of the Company.
     Upon  liquidation,  dissolution  or  winding up of the  Company,  and after
     payment of creditors and preferred stockholders, if any, the assets will be
     divided pro-rata on a share-for-share basis among the holders of the shares
     of common stock. All shares of common stock now outstanding are fully paid,
     validly issued and  non-assessable.  Each share of common stock is entitled
     to one vote with  respect  to the  election  of any  director  or any other
     matter upon which  shareholders are required or permitted to vote.  Holders
     of the Company's common stock do not have cumulative voting rights, so that
     the holders of more than 50% of the combined shares voting for the election
     of directors may elect all of the  directors,  if they choose to do so and,
     in that  event,  the  holders of the  remaining  shares will not be able to
     elect any members to the Board of Directors.

     On September 25, 2002, pursuant to the terms of the Spin-Off Agreement with
     The Hartcourt Companies,  Inc. ("Hartcourt"),  the Company issued 5,000,000
     restricted  common  shares to  Hartcourt  valued at  $320,000  based on the
     market value of the common shares on the date of issue. On January 4, 2003,
     the Company  received from  Hartcourt  all of the  17,895,579 of its common
     shares held by Hartcourt  pursuant to the  finalization of the terms of the
     Spin-Off Agreement.  Upon completion of the transaction on January 4, 2003,
     the Company recorded its 17,895,579  common shares as shares authorized but
     unissued  shares valued at  $1,288,482.  As a part of the  settlement,  the
     Company settled a note receivable  including accrued interest  thereon,  of
     $1,387,500  and a note  payable of $349,000.  The Company also  returned to
     Hartcourt  1,000,000  shares of common  stock of  Hartcourt it was holding,
     valued at $60,000,  and assumed a loan of $140,595 from a third party. As a
     result of the  completion of the spin-off  agreement  with  Hartcourt,  the
     Company  recorded a loss of  $270,613 as loss on  settlement.  On March 30,
     2004,  the Company  cancelled  17,895,579  of its common  shares  valued at
     $1,288,482 that were received as part of the settlement with Hartcourt.

     On May 24, 2004, the Company issued 5,100,000  restricted  common shares to
     four  shareholders of New Times Navigation  Limited ("New Times") valued at
     $683,400 as partial consideration for purchase of its 30% equity investment
     interest in New Times. The purchase  transaction was mutually  rescinded by


                                      F-19

<PAGE>

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


     both  parties on  December  10,  2004.  The  Company  did not  receive  the
     5,100,000 restricted common shares from the shareholders of New Times as of
     December 31, 2004,  and has recorded such common shares as shares issued to
     be  cancelled  at  December  31,  2004.  The  Company  recorded a loss from
     operations of $19,424 of its equity  investment in New Times as of December
     31, 2004, and a gain of $19,424 on disposal of the equity investment.

     During 2004, the Company issued  2,380,116 common shares valued at $571,228
     to directors,  related  parties and vendors for settlement of debt;  issued
     4,000,000 common  shares  valued at  $480,000  to a third  party as earnest
     deposit for the acquisition of 60% of the equity interest in an entity; and
     issued  3,100,000  common shares valued at $588,440 to certain  consultants
     for advisory  and  services.  As of December 31, 2004,  the Company had not
     closed on the  acquisition and the earnest deposit was recorded as a contra
     equity. The Company completed the acquisition on January 5, 2005.

     During  2004,  the  Company  entered  into a  Stock  Sale  Agreements  with
     accredited  investors who purchased  2,543,207 common shares under Rule 144
     restriction, for cash consideration of $349,970.

     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.

     (A) Stock Issued to officers and directors for Services
     -------------------------------------------------------

     During 2004 and 2003, the Company issued 5,973,216 and 3,442,847 restricted
     common shares valued at $560,000 and $412,000 as  compensation to directors
     for salaries and fees for attending Board meetings.  The common shares were
     valued at the closing market price of the common shares on the first day of
     each month.  The Company  recorded  $560,000 and  $412,000 as  compensation
     expense for the years ended December 31, 2004 and 2003, respectively.



                                      F-20

<PAGE>

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


     (B) Stock Issued for settlement of Debt
     ---------------------------------------

     During 2004 and 2003, the Company issued 2,380,116 and 6,259,415 restricted
     common  shares valued at $ 571,228 and  $1,635,448  to  directors,  related
     parties and certain  vendors in settlement of their debts.  The shares were
     valued at the average  market price of five days  trading  before and after
     the date of  issuance.  The Company  recorded a loss of $0 and  $416,787 on
     settlement of debt in the accompanying  financial statements for the period
     ended December 31, 2004 and 2003, respectively.

NOTE 10  RELATED PARTY TRANSACTIONS
-------  --------------------------

     (A) Elephant Talk, Inc.
     -----------------------

     During 2004 and 2003,  the  Company  provided  calling  capacity on prepaid
     calling card sales to a company related to certain officers,  directors and
     shareholders.
                                               2004                   2003
                                         -----------------     -----------------

     Capacity costs
     (included in cost of revenue)    $                 -    $          123,823
                                        ==================     =================

     (B) ET Network Services, Ltd.
     -----------------------------

     During 2004 and 2003, the Company  provided  management and  administrative
     services  to  a  company  related  to  certain   officers,   directors  and
     shareholders.  The total cost of such services during 2004 and 2003 were $0
     and $22,031, respectively.

     During   2004  and  2003,   the  Company  was   provided   management   and
     administrative  services  from  a  company  related  to  certain  officers,
     directors and shareholders. The total cost of such services received during
     2004 and 2003 were $0 and $181,199, respectively.

     (C) Well Gear Inc.
     ------------------

     During 2004 and 2003,  the Company  received  income and  incurred  carrier
     charges  from  a  company  related  to  certain  officers,   directors  and
     shareholder.  The total  amount of income  received in 2004 and 2003 was $0
     and $14,170,  and carrier charges incurred was $0 and $20,229.  The Company
     incurred  rental expense of $46,266 and $0 for the years ended December 31,
     2004 and 2003, respectively.


                                      F-21

<PAGE>
                       ELEPHANT TALK COMMUNICATIONS, INC.
                                AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11  COMMITMENTS AND CONTINGENCIES
-------  -----------------------------

     Operating Leases
     ----------------
     The  Company  leases one of its  corporate offices  space with an affiliate
     under a month to month operating lease.  Monthly rental  expense  under all
     the leases are  $3,339 per month.  Rent expense  under operating leases for
     the  years  ended  December 31,  2004  and  2003  was  $40,068  and $3,918,
     respectively.

     Guarantees
     ----------
     The Company and three  shareholders have provided personal  guarantees to a
     bank on  installment  loans  of  $628,566 given to a third party affiliate.
     The  loans  are recorded in the accompanying  financial  statements  as  of
     December 31, 2004.

     Employment Agreement
     --------------------
     The Company entered into  an employment  agreement with its Chief Executive
     Officer  to  provide  salary,  bonuses  and other  fringe  benefits through
     December 31,  2005.   Annual  base  salary  payable  under  the  employment
     agreement for 2005 is $150,000.

NOTE 12  INCOME TAXES
-------  ------------

     Income tax expense (benefit) for the years ended December 31, 2004 and 2003
     is summarized as follows:
                                                  2004                2003
                                            ---------------     ----------------
     Current:
       Federal                            $       (723,800)   $     (1,190,000)
       State                                      (127,700)           (210,000)
     Deferred taxes                                852,300           1,399,200
                                            ===============     ================
     Income tax expense (benefit)         $            800    $            800
                                            ===============     ================

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

                                         December 31,             December 31,
                                             2004                     2003
                                        ------------             ------------
     Tax expense (credit)
     at statutory rate-federal               (34%)                     (34%)
     State tax expense net of federal tax     (6%)                      (6%)
     Permanent differences                     -                         -
     Valuation allowance                      40%                       40%
                                        ------------             ------------
     Tax expense at actual rate                -                         -
                                        ============             ============

                                      F-22
<PAGE>

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


     The tax  effects of  temporary  differences  that gave rise to  significant
     portions of deferred tax assets and liabilities at December 31, 2004 are as
     follows:

       Deferred tax assets:
       Net operating loss carry forward                         $     4,367,300
                                                               -----------------
          Total gross deferred tax assets                             4,367,300
       Less valuation allowance                                      (4,367,300)
                                                               -----------------
       Net deferred tax assets                                 $             -
                                                               =================

     At December 31, 2004,  the Company had net operating loss carry forwards of
     approximately $10,918,200 for U.S. federal income tax purposes available to
     offset future taxable income expiring on various dates through 2018.

     The net change in the valuation  allowance  during the year ended  December
     31,  2004  and  2003  was  an  increase  of  $1,687,300   and   $1,400,000,
     respectively.


NOTE 13  CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
-------  -------------------------------------------------

     During 2004 and 2003, the Company  received 43% and 42% of its revenue from
     three customers.  The Company had accounts  receivable due from these three
     customers in 2004 and 2003 of $12,256 and $12,071 respectively.

     During  2004 and 2003,  the  Company  purchased  65% and 10% of its calling
     capacity from one supplier.

NOTE 14  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


                                      F-23

<PAGE>

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


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

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

NOTE 15  GOING CONCERN
-------  -------------

     The accompanying  consolidated  financial  statements have been prepared in
     conformity with generally accepted accounting  principles which contemplate
     continuation  of  the  company  as a  going  concern.  The  Company  has an
     accumulated  deficit of  $10,918,242  at December 31, 2004 which includes a
     net loss of $2,128,794  for the year ended December 31, 2004. The Company's
     total current liabilities exceed its total current assets by $1,306,505,  a
     stockholders'  deficiency  of  $1,563,096  and  the  Company  used  cash in
     operations of $691,616. This raises a substantial doubt about the Company's
     ability to continue as a going  concern.  In view of the matters  described
     above,  recoverability  of a major  portion of the recorded  asset  amounts
     shown in the  accompanying  consolidated  balance  sheet is dependent  upon
     continued  operations of the company,  which in turn is dependent  upon the
     Company's ability to raise additional capital, obtain financing and succeed
     in its future  operations.  The  financial  statements  do not  include any
     adjustments  relating to the  recoverability and classification of recorded
     asset amounts or amounts and  classification  of liabilities  that might be
     necessary should the Company be unable to continue as a going concern.

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



                                      F-24

<PAGE>

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


NOTE 16  SUBSEQUENT EVENTS
-------  -----------------

     On January 5, 2005,  the Company  completed a  transaction  where it formed
     True Precise  Technology  Limited  ("True  Precise"),  a limited  liability
     company  registered in British  Virgin Island,  as its  investment  holding
     company,  that  acquired  60% of the equity  ownership  interest in Urumqui
     General System Technology Ltd. ("WestSMS") from Keen Solution Group Limited
     ("Keen Solution"), a limited liability company registered under the laws of
     British Virgin Islands.. As consideration for the acquisition,  on July 26,
     2004,  the  Company  issued  4,000,000  restricted  common  shares  to  the
     shareholders  of Keen Solution  valued at $480,000, as its earnest deposit.
     The Company  agreed to issue an  additional  14,137,500  restricted  common
     shares  valued at  $1,116,862 to complete the acquisition.  Upon completion
     of the  transaction,  True Precise became a wholly-owned subsidiary  of the
     Company and  General System  became  a majority  owned  subsidiary  of True
     Precise.

     Subsequent to December 31, 2004,  the Company has issued  3,801,528  common
     shares to officers and directors as  compensation  and fees to attend Board
     meetings.  The Company  issued  400,000  common shares to a consultant  for
     business and advisory services. On February 22, 2005, the Company cancelled
     2,252,500  restricted  common shares received from two  shareholders of New
     Times pursuant to rescission of its equity investment in New Times.



























                                      F-24

<PAGE>



                                   SIGNATURES

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

                                            ELEPHANT TALK COMMUNICATIONS, INC.


Date:  March 31, 2005                       By: /s/ Russelle Choi
                                            ------------------------------
                                            Russelle Choi
                                            Chairman of the Board
                                            President & Chief Executive Officer
                                            (Principal Executive Officer)

Date:  March 31, 2005                       By: /s/ Manu Ohri
                                            ------------------------------
                                            Manu Ohri
                                            Executive Vice President, Finance &
                                            Chief Financial Officer
                                            (Principal Financial Officer and
                                            Principal Accounting Officer)


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


Signature                    Title                              Date
--------------------------   -----------------------------      ---------------

/s/ Russelle Choi            President, Chief Executive         March 31, 2005
-----------------            Officer and Director
Russelle Choi

/s/ Pius Lam                 Chief Operating Officer            March 31, 2005
------------                 and Director
Pius Lam

/s/ Manu Ohri                Chief Financial Officer            March 31, 2005
-------------                Director and Secretary
Manu Ohri

/s/ Francis Lim              Director                           March 31, 2005
---------------
Francis Lim






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