Forward-Looking Statements

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

Overview

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

Our Business

Services and Solutions

Elephant Talk is an international provider of business software and outsourced services to the telecommunications and financial services industry.

Full-MVNE/MVNO Mobile Services - wholesale services and managed services to Mobile Network Operators and Virtual Network Operators.

The company enables both mobile carriers and virtual operators to offer a full suite of products, delivery platforms, support services, superior industry expertise and high quality customer service without substantial upfront investments from clients. Elephant Talk provides global telecommunication companies, mobile network operators, banks, supermarkets, consumer product companies, media firms, and other businesses a full suite of products and services that enables them to fully provide telecom services as part of their business offerings. The company offers various dynamic products that include remote health care, credit card fraud prevention, mobile internet ID security, multi-country discounted phone services, loyalty management services, and a whole range of other emerging customized mobile services.

As of 2007 we positioned ourselves as an MVNE to MNOs and MVNOs offering a wide range of mobile enabling/enhancing services through sophisticated, proprietary technology supported by multi-country operations with a focus on business to business, outsourcing /partnering strategy. Important milestones in this respect are:

· On September 17, 2008 a hosting agreement was signed with T-Mobile in the Netherlands. T-Mobile is one of the three MNOs in the Netherlands. Elephant Talk will connect MVNOs in the Netherlands to its platform, making use of the mobile network of T-Mobile.

· In Spain, we have provided since June 2009, managed services to Vodafone Enabler.

· In the course of 2010 we signed a framework hosting agreement with KPN Group Belgium NV. Elephant Talk will connect MVNOs in Belgium to its platform, making use of the mobile network of KPN in Belgium. The platform will be ready for services as of Q2 2012.

· In 2011 the company closed a contract with Zain KSA in Saudi Arabia to provide its mobile platform which is now ready for service.

· In November 2011 we executed a mass migration of SIMs on to our platform in Spain. This live migration - without having to replace the SIM cards - was a unique achievement and milestone for the Company.

· In February 2012 we acquired out of liquidation proceedings the assets of Ensercom, a small MVNE in Germany giving us instant footprint in the German market.

· Following the Ensercom take-over and wholesale partner agreement with Telekom Deutschland, we signed in May 2012 an MVNO contract for 50,000 sims in Germany, using the network of Telekom Deutschland.

ValidSoft - Fraud Prevention and Security Software Solutions

ValidSoft is a subsidiary of Elephant Talk Communications Corp. and is a thought and technology leader in providing solutions to counter electronic fraud relating to card, the internet, and telephone channels. ValidSoft's solutions are at the cutting edge of the market and are used to verify the authenticity of both parties to a transaction (Mutual Authentication), and the integrity of the transaction itself (Transaction Verification) for the mass market, in a highly cost effective and secure manner, yet easy to use and intuitive.

As the banking and payments world, in particular, begins to converge onto smart telecommunications-based devices, the ValidSoft integrated security platform, built solely on a real-time zero client-footprint model, allows organizations to leverage these convergence devices to provide visible and invisible security layers for all transaction channels, whilst also providing protection where the device itself is the channel.

This integrated platform, using proprietary technologies including Out-of-Band authentication and transaction verification, Proximity Correlation Logic, Pseudo Device Theft detection and biometric voice verification, allows organizations to protect all of their customer transaction channels within a single platform. This combination of technologies provides solutions from simply detecting SIM Swap fraud through to the world's first commercially available Four-factor authentication solution. Internet banking, M-banking, Mobile Wallet, Mobile Payments, Card-present, card-not-present, NFC, citizen online services and more are all supported through either one or more of these integrated telecommunications-based techniques. The key operational highlights:

· In September 2011 ValidSoft and Adeptra (www.adeptra.com) form partnership to Extend Global Fraud Detection and Customer Communications. The partnership provides financial organizations with best-in-class fraud detection and prevention functionality, as well as total control over their customer communications.

· Following a successful pilot project at a long-standing Adeptra client, one of the ten largest international financial institutions has now implemented the SIM Swap solution and is now in live production. This truly market changing solution is the first to successfully address the issue of SIM card fraud. The institution's adoption of the application is another step toward securing all transaction channels, using leading edge technology and communications to benefit its customers.

· ValidSoft was successful in a joint bid for the provision of a Self Certification project to an EU Government in the area of citizen benefit payments. The solution will evaluate the use of technology and incorporate ValidSoft's Speaker Verification Platform, VALid-SVP™ to provide automation in the processing of citizen benefits with a view to achieving cost reduction and efficiencies.

· The Company launched VALid-SVP™ (Speaker Verification Platform), a voice biometric technology to improve secure authentication.

· ValidSoft has filed applications for three new patents in the Card Not Present fraud prevention area and the high end security area.

· ValidSoft successfully renewed the European Privacy Seal in regards to its anti-fraud technology software, VALid-POS®, which is designed to detect and prevent card related fraud, a global multibillion dollar problem for financial institutions.

· ValidSoft was awarded its Second European Privacy Seal for its VALid-4F™solution and continues to be the only Security Software Company in the world to be certified to the EuroPriSe standards. The European Privacy Seal certifies IT products and IT-based services privacy compliance with European data protection regulations.

Landline network outsourcing services

Through our fixed line telecom infrastructure and our centrally operated and managed ET Boss and Infitel platform, the Company also provides traditional landline services like Carrier Select and Carrier Pre-Select Services, Toll Free and Premium Rate Services to the business market.

Support technology

Business Support and Operational Support System ("ET BOSS") and Intelligent Network - IN - ("Infitel")

Through our European and Chinese development centers, we develop in-house telecom and media related systems and software, related to companies' proprietary platforms ET BOSS and IN

Electronic fraud prevention products: VALid-POS®, VALid®, VALid-SVP™ and VALid-4F®

Our subsidiary ValidSoft has given us ownership of technology and intellectual property to combat fraud relating to card, the internet, and telephone channels. ValidSoft solutions are marketed under VALid-POS®, VALid® and VALid-4F®. For its biometrics based product it trades under VALid-SVP™.

Telecom infrastructure & network

We currently operate a switch-based telecom network with national licenses and direct fixed line interconnects with the Incumbents/National Telecom Operators in seven (7) European countries and one (1) in the Middle East (Bahrain). To this we have added mobile access coverage in order to cater for our mobile services and solutions. Our first mobile partners are T-Mobile in the Netherlands, Vodafone Enabler in Spain, KPN in Belgium and wholesale partner Telekom Deutschland in Germany. In Saudi Arabia we partnered with Zain KSA to provide our mobile platform services.

Application of Critical Accounting Policies and Estimates

Revenue Recognition and Deferred Revenue

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

Stock-based Compensation

Effective January 1, 2006, we adopted the provisions of ASC 718 "Compensation-Stock Compensation", using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee's requisite service period (the vesting period, generally three years), which we have elected to amortize on a straight-line basis.

Business Combinations

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price includes the direct costs of the acquisition. However, beginning in fiscal 2009, acquisition-related costs will be expensed as incurred, in accordance with ASC 805 "Business Combinations" amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

Intangible Assets and Impairment of long Lived Assets

In accordance with ASC 350, intangible assets are carried at cost less accumulated amortization and impairment charges. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between three and ten years. Other intangible assets are reviewed for impairment in accordance with ASC 360, "Property and Equipment", annually, or whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

Goodwill Impairment

On September 15, 2011, the FASB issued ASU 2011-08, Intangibles - Goodwill and Other, which simplifies how an entity is required to test goodwill for impairment. This ASU would allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under the ASU, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The ASU includes a number of factors to consider in conducting the qualitative assessment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard in 2011 had no material impact on the Company's financial statements.

Results of Operations

Our results of operations for the three months ended March 31, 2012, consisted of the operations of Elephant Talk Communications Corp., its wholly-owned subsidiaries, Elephant Talk Limited and its subsidiaries, Elephant Talk Europe Holding BV and its subsidiaries, and ValidSoft Ltd and its subsidiaries.

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

The constant currency analysis presented within the comparison of the year-to-year results is calculated by using the average exchange rates over the three months ended March 31, 2012. The same exchange rates are used in the income statement of the three months ended March 31, 2012. The following table shows the USD equivalent of the major currencies for the quarter ended March 31, 2012:

                    USD
                 equivalent
Euro            $     1.3104
British Pound   $     1.5705

Adjusted EBITDA

In order to provide investors additional information regarding our financial results, we are disclosing Adjusted EBITDA, a non-GAAP financial measure. We employ Adjusted EBITDA, defined as earnings before derivative accounting, such as warrant liabilities and conversion feature expensing, income taxes, depreciation and amortization and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy are yielding the desired results. Accordingly, we believe that Adjusted EBITDA provides useful information for investors and others, which allows them to better understand and evaluate our operating results.

A reconciliation of Adjusted EBITDA to net loss, the most directly comparable measure under U.S. GAAP, for each of the fiscal periods indicated, is as follows:

                                                                    Three months ended March 31,
EBITDA Adjusted                                         2012             2011          2011 in constant currency

Net loss                                            $ (6,005,189 )     (4,713,224 )                    (4,552,654 )
Provision for income taxes                                     0              800                             800
Net loss attributable to non-controlling interest              0               80                              80
Depreciation and amortization                          1,278,469        1,302,675                       1,249,410
Intangible assets impairment charge                            0                0                               0
Stock-based compensation                               1,691,746        1,130,063                       1,123,644
Other income & expenses                                  171,322         (230,000 )                      (230,000 )
Interest income and expenses                             (14,555 )         43,778                          43,807
Adjusted EBITDA                                     $ (2,878,207 )     (2,465,828 )                    (2,364,913 )

Comparison of Three Months Ended March 31, 2012 and December 31, 2011

Revenue

Revenue for the three months ended March 31, 2012 was $8,580,968, an increase of $72,954 or 0.9%, compared to $8,508,014 for the three months ending March 31, 2011. The rise in revenues was led by an increase of $1,245,539 (or 105.4%) in our revenues in the higher margin mobile and security solutions business, including revenues derived from the commencement of the operation phase of our agreement with Adeptra and one of the ten largest international financial institutions' implementation of Validsoft's SIM Swap solution. We expect that revenue from this contract will continue.

This rise in revenues was off-set by the expected continued decrease in our low margin legacy landline business by $1,172,585 (or 16.0%). The increase in our higher margin mobile and security solutions business is mainly due to the increasing revenues of already existing customers and a customer with a large consumer base with monthly recurring revenues coming on to our mobile platform at the end of the 4th quarter 2011.

                                Three months ended March 31,
                                   2012                2011           Variance
Landline Services             $     6,153,261       $ 7,325,846     $ (1,172,585 )
Mobile & Security Solutions         2,427,707         1,182,168        1,245,539
Total revenue                       8,580,968         8,508,014     $     72,954

Cost of service

Cost of service for the three months ended March 31, 2012 was $6,889,217, a decrease of $668,268 or 8.8%, compared to $7,557,485 for the three months ending March 31, 2011. This decrease is fully related to the decline in landline revenue. Cost of service as a percent of the total revenue was 80.3% and 88.8% for the three months ended March 31, 2012 and 2011, respectively.

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

Management expects cost of service to decline further as a percent of revenue as a greater proportion of future revenue is comprised of our mobile services and security solutions, which have a substantially lower cost of service than our traditional landline business.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expense for the three months ended March 31, 2012 and 2011, were $4,569,958 and $3,416,357, respectively. SG&A expenses increased by $1,153,601, or 33.8%, in the first three months 2012 compared to the same period 2011. This was led by an increase of 31.6% in our staffing levels on March 31, 2012 compared to March 31, 2011, largely in sales force and European hires, as well as by higher investor relation and marketing & communication related expenses. The increases in staffing levels and higher marketing and selling costs are mainly related to expected future revenues.

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

Non-cash compensation for the three months ended March 31, 2012 and 2011 was $1,691,746 and $1,130,063, respectively. The increase of $561,683 is primarily attributable to the increased staffing levels. Moreover, the non-cash compensation for the three months ended March 31, 2012 included also the grants of the yearly companywide incentive plan, whereas in 2011 these were not granted nor expensed until the second quarter.

Non-cash compensation is comprised of:

· the companywide 2008 Long-Term Incentive Compensation Plan;

· expense related to shares of restricted common stock that were issued to directors and officers in lieu of cash compensation.

Depreciation and amortization

Depreciation and amortization for the three months ended March 31, 2012 and 2011, was $1,278,469 and $1,302,675 respectively. Depreciation and amortization expenses decreased by $24,206 or 1.9% in the first three months 2012 compared to the same period 2011.

Intangible assets impairment charge

The March 31, 2012 consolidated balance sheet includes: $12.8 million of intangible assets, net, and $3.3 million of goodwill. Management updated its analysis of intangible assets and long-lived assets as of March 31, 2012 and we determined that for the first three months 2012 no asset impairment charges are necessary.

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

Other Income and Expenses

Interest income was $105,162 and $22,986 for the three months ended March 31, 2012 and 2011. Interest income was interest received on bank balances and interest on loans to related and third parties.

Interest expense was $90,607 and $66,764 for the years ended March 31, 2012 and 2011 respectively.

Other expense was ($163,331) and $230,000 for the three months ended March 31, 2012 and 2011 respectively. The other income for 2011 related to the release of an accrual for a tax provision, following a successful abatement. For 2012 other expense was incurred as a result of the company's equity share in the losses of its financial investment in a joint venture.

Non-controlling Interest.

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

We incurred a non-controlling interest charge attributable to minority shareholders' interest for the three months ended March 31, 2012 and 2011 of $0 and $80 respectively.

Net Loss

Net Loss was ($6,005,189) and ($4,713,224) for the three months ended March 31, 2012 and 2011 respectively. The increase in loss of ($1,291,965) was the result a ($949,856) increase in loss from operations and a higher other expense of ($342,109).

Other Comprehensive Income (Loss)

We record foreign currency translation gains and losses as other comprehensive income or loss. Other comprehensive Income (Loss) for the three months ended March 31, 2012 and 2011 was 869,783 and $2,319,564 respectively. This change is primarily attributable to the translation effect resulting from the substantial fluctuations in the USD/Euro exchange rates.

Constant currency Comparison of Three Months Ended March 31, 2012 and 2011

                                                   Constant currency
Revenue                          2012            2011          Variance
Landline Services             $ 6,153,261     $ 7,011,324     $  (858,063 )
Mobile & Security Solutions     2,427,707       1,133,985       1,293,722
Total Revenue                 $ 8,580,968     $ 8,145,309     $   435,659

Revenue - constant currency. In constant currency, the revenue for the three months ended March 31, 2012 increased by $435,659 or 5.35% compared to the same period 2011. The increase in revenue was led by an increase of $1,293,722 (or 114.1%) in our revenues in the higher margin mobile and security solutions business, which was off-set by the expected continued decrease in our low margin legacy landline business by $858,063 (or 12.2%).

Cost of service- constant currency. In constant currency the cost of service for the three months ended March 31, 2012 decreased by $349,846 or 4.83% compared to the same period in 2011, primarily as a result of lower levels of revenue in our landline business and the lower cost of service associated with our mobile and security solutions business.

Selling, general and administrative expenses - constant currency. In constant currency, SG&A increased by $1,298,799 or 39.7%, compared to the same period in 2011. The increase in expenses was mainly attributable to increased staffing levels.

Non-cash compensation to officers, directors, consultants and employees - constant currency. Since non-cash compensation comprises United States Dollars denominated shares, options and warrants, a constant currency analysis is not applicable.

Depreciation and amortization- constant currency. In constant currency the depreciation and amortization expenses decreased by $29,059 or 2.33% compared to the same period in 2011.

Liquidity and Capital Resources

We have an accumulated deficit of $186,133,560 as of March 31, 2012. Historically, we have relied on a combination of debt and equity financings to fund our ongoing cash requirements.

In the first quarter of 2012 we received a total of $694,090 in gross proceeds from warrants and options exercised. After the deduction of deferred financing costs ($50,000) the net proceeds from financing activities amounted to $644,090.

We believe that together with our cash balance at March 31, 2012, of $3,118,890, the convertible secured loan the Company secured on March 29th 2012 for the net proceeds of $5.7 million and an up to $2 million commitment from an affiliated party, we believe that the funds available are sufficient to carry out our business plans.

In addition, the Company believes that it will continue to attract funds, through additional rounds of financing, including private or public equity or . . .