proxy.htm

PRE 14A 1 proxy.htm ELEPHANT TALK PROXY STATEMENT proxy.htm

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

x Filed by Registrant

o Filed by a Party other than the Registrant

Check the appropriate box:

x Preliminary Proxy Statement

o Confidential, for use by Commission Only (as permitted by Rule 14a-6(e)(2))

o Definitive Proxy Statement

o Definitive Additional Materials

o Soliciting Material Pursuant to §240.14a-12

ELEPHANT TALK COMMUNICATIONS, INC.

(Name of Registrant As Specified in its Charter)

N/A

(Name of Persons Filing Proxy Statement, if other than Registrant)

Payment of Filing Fee (Check the appropriate box):

x No fee required.

o Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies:

N/A

2) Aggregate number of securities to which transaction applies:

N/A

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:Set forth the amount on which the filing fee is calculated

and state how it was determined.

N/A

4) Proposed maximum aggregate value of transaction:

N/A

5) Total fee paid:

N/A

o Fee paid previously with preliminary materials.

o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and date of its filing.

1) Amount Previously Paid:

N/A

2) Form, Schedule or Registration Statement No.:

N/A

3) Filing Party:

N/A

4) Date Filed:

N/A

ELEPHANT TALK COMMUNICATIONS, INC.

438 Katella Avenue, Suite 217

Orange, California 92867

November __, 2007

To the stockholders of Elephant Talk Communications, Inc.:

Elephant Talk Communications, Inc. cordially invites you to attend our annual meeting of stockholders to be held at 9:00 a.m. (Eastern Standard Time) on Tuesday, December 18, 2007 at the offices of Ellenoff Grossman & Schole LLP, which are located at 370 Lexington Avenue, 19^th Floor, New York, New York 10017.

The notice of annual meeting of stockholders and the proxy statement accompanying this letter describe the specific matters to be acted upon. In addition to the specific matters to be acted upon, there will be an opportunity for questions of general interest to the stockholders.

It is important that your shares be represented at the meeting. Please date, sign and return your proxy card in the enclosed envelope as soon as possible to ensure that your shares will be represented and voted at the meeting even if you cannot attend.

Thank you for your continued interest in Elephant Talk Communications, Inc.

Sincerely yours,

Steven van der Velden

Chairman of the Board of Directors

- 2 -

ELEPHANT TALK COMMUNICATIONS, INC.

438 Katella Avenue, Suite 217

Orange, California 92867

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

December 18, 2007

To the stockholders of Elephant Talk Communications, Inc.:

The annual meeting of stockholders of Elephant Talk Communications, Inc. will be held at 9:00 a.m. (Eastern Standard Time) on Tuesday, December 18, 2007 at the offices of Ellenoff Grossman & Schole LLP, which are located at 370 Lexington Avenue, 19^th Floor, New York, New York 10017, for the following purposes:

To elect seven Directors for a term expiring in 2008, or until their successors are duly elected and qualified;

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

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

To adopt our 2007 Long-Term Incentive Plan; and

To transact such other business as may properly come before the meeting or any adjournment or postponements thereof.

The above matters are set forth in the proxy statement attached to this notice to which your attention is directed.

If you are a stockholder of record at the close of business on November __, 2007, you are entitled to vote at the Meeting or any adjournment or postponement of the Meeting. This notice and proxy statement are first being mailed to stockholders on or about, 2007.

BY ORDER OF THE BOARD OF DIRECTORS,

Alex Vermeullen

Secretary

Dated: November __, 2007

Orange, California

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED PRE-ADDRESSED POSTAGE-PAID ENVELOPE AS DESCRIBED ON THE ENCLOSED PROXY CARD IN ORDER TO ASSURE REPRESENTATION OF YOUR SHARES AT THE MEETING. YOUR PROXY, GIVEN THROUGH THE RETURN OF THE ENCLOSED PROXY CARD, MAY BE REVOKED IN THE MANNER DESCRIBED IN THE ATTACHED PROXY STATEMENT. IF YOUR BROKER HOLDS YOUR SHARES OF THE COMPANY’S COMMON STOCK IN STREET NAME, YOU MUST DIRECT YOUR BROKER ON HOW TO VOTE YOUR SHARESOR OBTAIN A PROXY FROM YOUR BROKER TO VOTE IN PERSON AT THE ANNUAL MEETING.

- 3 -

ELEPHANT TALK COMMUNICATIONS, INC.

TABLE OF CONTENTS

		Page

INTRODUCTION		5

PROPOSAL 1. ELECTION OF DIRECTORS		8

PROPOSAL 2. APPROVAL OF A 25 TO 1 REVERSE STOCK SPLIT		15

PROPOSAL 3. APPROVAL OF ADOPTION OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION		18

PROPOSAL 4. APPROVAL OF ADOPTION OF THE 2007 LONG TERM INCENTIVE PLAN		20

OTHER INFORMATION		25

	Proxy Solicitation	25

	Proxies	25

	Securities Outstanding; Votes Required	25

	Other Business	25

	Beneficial Ownership of Principal Stockholders, Officers and Directors	25

	Deadline for Submission of Stockholder Proposals for 2007 Annual Meeting of Stockholders	26

	Stockholder Communications	26

	Additional Information	26

- 4 -

ELEPHANT TALK COMMUNICATIONS, INC.

438 Katella Avenue, Suite 217

Orange, California 92867

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

December 18, 2007

This proxy statement is being furnished in connection with the solicitation of proxies by the board of directors (the “Board of Directors”) of Elephant Talk Communications, Inc. (the “Company”) for use at the Annual Meeting of Stockholders of the Company (the “Meeting”) to be held at 9:00 a.m. (Eastern Standard Time) on Tuesday, December 18, 2007 at the offices of Ellenoff Grossman & Schole LLP, which are located at 370 Lexington Avenue, 19^th Floor, New York, New York 10017, and at any adjournment or postponements thereof.

INFORMATION ABOUT THE MEETING

When is the Annual Meeting?

December 18, 2007, 9:00 a.m. (local time).

Where will the Annual Meeting be held?

The annual meeting will be held at the office of the Company located at at the offices of Ellenoff Grossman & Schole LLP, which are located at 370 Lexington Avenue, 19^th Floor, New York, New York 10017.

What is being considered at the meeting?

At the Meeting, Stockholders will be considering the following proposals:

To elect seven Directors for a term expiring in 2008, or until their successors are duly elected and qualified;

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

To adopt our 2007 Long-Term Incentive Plan; and

To transact such other business as may properly come before the meeting or any adjournment or postponements thereof.

In addition, our management will report on our progress and respond to your questions.

- 5 -

Who is entitled to vote at the meeting?

You may vote at the meeting if you owned common stock as of the close of business on November 19, 2007. Each share of common stock is entitled to one vote.

YOUR BOARD OF DIRECTORS HAS APPROVED EACH OF THE PROPOSALS SET FORTH HEREIN.

ACCORDINGLY, THE BOARD RECOMMENDS A VOTE FOR THE ELECTION OF THE DIRECTORS, THE 25 TO 1 REVERSE SPLIT, THE ADOPTION OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION AND THE ADOPTION OF THE 2007 LONG-TERM INCENTIVE PLAN.

How do I vote?

You can vote in two ways:

·	by attending the meeting and voting thereat; or

·	by completing, signing, dating and returning the enclosed proxy card.

What if I return my proxy card but do not include voting instructions?

Proxies that are signed and returned but do not include voting instructions will be voted FOR the election of directors, FOR the 25 TO 1 reverse split, FOR the adoption of the Amended and Restated Articles of Incorporation and FOR the adoption of the 2007 Stock Incentive Plan.

What does it mean if I receive more than one proxy card?

It means you have multiple accounts with brokers and/or our transfer agent. Please vote all of these shares of common stock. We recommend that you contact your broker and/or our transfer agent to consolidate as many accounts as possible under the same name and address. Our transfer agent is Signature Stock Transfer, Inc. and their telephone number is (972) 612-4120.

Will my shares be voted if I do not provide my proxy?

If you hold your shares directly in your own name, they will not be voted if you do not provide a proxy.

Your shares may be voted under certain circumstances if they are held in the name of a brokerage firm. Brokerage firms generally have the authority to vote customers’ unvoted shares on certain “routine” matters, including the election of directors. Neither the adoption of the Amended and Restated Articles of Incorporation nor the adoption of the 2007 Stock Incentive Plan are considered “routine” matters. When a brokerage firm votes its customers’ unvoted shares, these shares are counted for purposes of establishing a quorum. At our meeting these shares will be counted as voted by the brokerage firm in the election of directors.

How do I vote if I hold shares registered in the name of a broker or bank?

If, on November 19, 2007, your shares were not held in your name, but rather were held in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and a Notice of Proxy Materials was forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares held in your account. You are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent and bring such proxy to the annual meeting. If you want to attend the annual meeting, but not vote at the annual meeting, you must provide proof of beneficial ownership as of the record date, such as your most recent account statement prior to November 19, 2007, a copy of the voting instruction card provided by your broker or other agent, or other similar evidence of ownership. Whether or not you plan to attend the meeting, we urge you to vote by proxy in advance of the annual meeting to ensure your vote is counted.

Can I change my mind after I return my proxy?

Yes. You may change your vote at any time before your proxy is voted at the annual meeting. If you are a stockholder or shareholder of record, you can do this by giving written notice to your respective corporate secretary, by submitting another proxy with a later date, or by attending the meeting and voting in person. If you are a stockholder in “street” or “nominee” name, you should consult with the bank, broker or other nominee regarding that entity’s procedures for revoking your voting instructions.

How many votes must be present to hold the meeting?

Your shares are counted as present at the meeting if you attend the meeting and vote in person or if you properly return a proxy by mail. In order for us to conduct our meeting, a majority of our outstanding shares of common stock as of November 23, 2007 must be present in person or by proxy at the meeting. This is referred to as a quorum. On November 23, 2007, there were 238,265,927 shares of common stock outstanding and entitled to vote.

- 6 -

What vote is required to elect directors?

Directors are elected by a plurality of the votes cast. Abstentions and broker “non-votes” will have no effect on the vote for election of directors.

What vote is required to approve the 25 to 1 reverse split?

The approval of the 25 to 1 reverse split will require the affirmative vote of at least a majority of the Company’s outstanding shares of Common Stock. Thus, any abstentions, “broker non-votes” (shares held by brokers or nominees as to which they have no discretionary authority to vote on a particular matter and have received no instructions from the beneficial owners or persons entitled to vote thereon), or other limited proxies will have the effect of a vote against the 25 to 1 reverse split.

What vote is required to adopt the Amended and Restated Certificate of Incorporation?

The adoption of the Amended and Restated Articles of Incorporation will require the affirmative vote of at least a majority of the Company’s outstanding shares of Common Stock. Thus, any abstentions, “broker non-votes” (shares held by brokers or nominees as to which they have no discretionary authority to vote on a particular matter and have received no instructions from the beneficial owners or persons entitled to vote thereon), or other limited proxies will have the effect of a vote against the Amended and Restated the Company’s Articles of Incorporation.

What vote is required to adopt the 2007 Stock Incentive Plan?

The adoption of the 2007 Stock Incentive Plan will require an affirmative vote of the majority of the votes cast in person or by proxy, provided that a quorum is present at the Meeting. Therefore, abstentions and broker non-votes will have no effect on the vote to adopt the 2007 Stock Incentive Plan.

How will voting on any other business be conducted?

Although we do not know of any business to be conducted at the Annual Meeting other than the proposal described in this proxy statement, if any other business comes before the Annual Meeting, your signed proxy card gives authority to the proxy holders to vote on those matters at their discretion.

Who will bear the costs of this solicitation?

We will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement, the proxy card and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of common stock beneficially owned by others to forward to the beneficial owners. We may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to the beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, facsimile or personal solicitation by our directors, officers or other regular employees.

How can I find out the results of the voting at the Annual Meeting?

Preliminary voting results will be announced at the Annual Meeting. Final voting results will be published in our quarterly report or on a Current Report on Form 8-K.

When are shareholder proposals for the 2008 annual meeting due?

Any shareholder proposals for the 2008 annual meeting must be received by us, directed to the attention of the Company’s President, Mr. Steven Van Der Velden, Elephant Talk Communications, Inc., 438 Katella Avenue, Suite 217, Orange, California 92867 no later than April 30, 2008. The use of certified mail, return receipt requested, is advised. To be eligible for inclusion, a proposal must comply with our Bylaws, Rule 14a-8 and all other applicable provisions of Regulation 14A under the Securities Exchange Act of 1934.

- 7 -

PROPOSAL 1

ELECTION OF DIRECTORS

At the Annual Meeting, seven individuals will be elected to serve as directors until the next annual meeting or until their successors are duly elected, appointed and qualified. The Company's Board of Directors currently consists of seven persons. Five of the individuals who are nominated for election to the Board of Directors are existing directors of the Company. Unless a stockholder WITHHOLDS AUTHORITY, a properly signed and dated proxy will be voted “FOR” the election of the persons named below, unless the proxy contains contrary instructions. Management has no reason to believe that any of the nominees will not be a candidate or will be unable to serve as a director. However, in the event any nominee is not a candidate or is unable or unwilling to serve as a director at the time of the election, unless the stockholder withholds authority from voting, the proxies will be voted “FOR” any nominee who shall be designated by the present Board of Directors to fill such vacancy.

The two new nominees are _______ and _______. The two new nominees are not related to each other and are “independent.”

The five current Directors to be considered for re-election are Steven van der Velden, Willem Ackermans, Martin Zuurbier, Yves R. Van Sante and Johan Dejager, all of whom currently are not independent.

Our Amended and Restated Articles of Incorporation will authorize the Board of Directors to fix the number of Directors that constitute the whole Board at any number that is not less than six and not more than eleven. The Bylaws also give our Board of Directors the authority to appoint new Directors to fill vacancies and newly created positions on the Board.

As described above, our Directors will generally serve one-year terms. If all the nominees are elected, the Board of Directors will consist of seven Directors.

Although we plan to have a seven-person Board of Directors following the 2007 Annual Meeting of Shareholders, our Board may utilize its authority granted in the Bylaws to increase the number of Directors and to appoint Directors to ensure compliance with NASDAQ rules that require that a majority of our Directors be “independent” as defined in NASDAQ rules. This means the number of Directors may be different than we currently plan.

Information about each of the nominees, and current Directors, is set forth below.

Unless proxy cards are otherwise marked, the persons named as proxies will vote all proxies received FOR the election of each nominee named in this section.

If any director nominee is unable or unwilling to serve as a nominee at the time of the annual meeting, the persons named as proxies may vote for a substitute nominee designated by the present Board to fill the vacancy or for the balance of the nominees, leaving a vacancy. Alternatively, the Board may reduce the size of the Board. The Board has no reason to believe that any of the nominees will be unwilling or unable to serve, if elected as a director. Such persons have been nominated to serve until the annual meetings described in this Proxy Statement or until their successors, if any, are elected or appointed. This section contains the names and biographical information for each of the nominees and current Directors.

Our Amended and Restated Articles of Incorporation allow directors to be elected by a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of directors.

The following table sets forth certain information concerning each nominee for election as a Director of the Company:

Name	Age	Position	Director Since
Steven van der Velden	51	Chairman of the Board President, Chief Executive Officer and Director	2006
Willem Ackermans	52	Chief Financial Officer and Director	2007
Martin Zuurbier	48	Chief Operating Officer, Chief Technical Officer and Director	2007
Yves R. Van Sante	47	Director	2006
Johan Dejager	48	Director	2006
(1)(2)		Director
(1)(2)		Director

(1) Member of Audit Committee.

(2) Member of Nominating Committee.

Each of the directors is to be elected at this meeting to hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified.

- 8 -

Background

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

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

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

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

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

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

- 9 -

CORPORATE GOVERNANCE

As the Over-the-Counter Bulletin Board, on which the Company’s shares of common stock are quoted, has no independence requirements, the Company has adopted the independence definitions and requirements of NASDAQ. The discussion below reflects such standards of independence.

Director Independence

The Board of Directors has determined that _________ and _________ are independent for NASDAQ Stock Market purposes. If elected, _________ and _________ will be the members of the standing committees of the Board of Directors. These committees are: the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.

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

Committee Membership, Meetings and Attendance

During the fiscal year ended December 31, 2006, there were:

·	4 meetings of the Board of Directors;

·	1 meeting of the Audit Committee;

·	no meetings of the Compensation Committee (as it was newly formed in November 2007);

·	no meetings of the Nominating Committee (as it was newly formed in November 2007); and

Each director attended or participated in at least 75% of the meetings of the Board of Directors and his respective committees held during our fiscal year ended December 31, 2006 and during his term of service.

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

Board Committees

We have a separately designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our Audit Committee is involved in discussions with management and our independent registered public accounting firm with respect to financial reporting and our internal accounting controls. The Audit Committee has the sole authority and responsibility to select, evaluate and replace our independent registered public accounting firm or nominate the independent auditors for stockholder approval. The Audit Committee must pre-approve all audit engagement fees and terms and all non-audit engagements with the independent auditors. The Audit Committee consults with management but does not delegate these responsibilities. See “Audit Committee Report.” A copy of the Audit Committee charter is attached hereto as Annex A and can be found on our website at www.elephanttalk.com.

The Audit Committee reviewed and discussed our audited financial statements as of and for the year ended December 31, 2006 with the Board of Directors.

The Board of Directors reviewed and discussed with representatives of Kabani & Company, Inc., our independent registered public accounting firm, the matters required to be discussed by Statement on Auditing Standards No. 61 (Codification of Statements on Auditing Standards, AU §380), as amended. The Board of Directors has also received and reviewed the written disclosures and the letter from Kabani & Company, Inc. required by Independence Standard No. 1, “Independence Discussions with Audit Committees,” as amended by the Independence Standards Board, and has discussed with Kabani & Company, Inc. their independence.

Our Compensation Committee consists of _________ and _________ and was formed in November 2007 and therefore did not meet in fiscal 2006. Our Compensation Committee awards stock options to officers and employees. The Committee has overall responsibility for approving and evaluating the executive officer compensation plans, policies and programs of the company. See “Compensation Committee Report on Executive Compensation.” A copy of the Compensation Committee charter is attached hereto as Annex B and can be found on our website at www.elephanttalk.com.

- 10 -

Our Nominating and Corporate Governance Committee consists of _________ and _________ and was formed in November 2007 and therefore did not meet in fiscal 2006. The Nominating and Corporate Governance Committee is responsible for (1) reviewing suggestions of candidates for director made by directors and others; (2) identifying individuals qualified to become Board members, and recommending to the Board the director nominees for the next annual meeting of stockholders; (3) recommending to the Board director nominees for each committee of the Board; (4) recommending to the Board the corporate governance principles applicable to the company; and (5) overseeing the annual evaluation of the Board and management. Pursuant to the Nominating and Corporate Governance Committee charter, there is no difference in the manner in which a nominee is evaluated based on whether the nominee is recommended by a stockholder or otherwise. A copy of the Nominating and Corporate Governance Committee charter is attached hereto as Annex C and can be found on our website at www.elephanttalk.com.

Stockholder Communications

Mail can be addressed to Directors in care of the Office of the Secretary, Elephant Talk Communications, Inc., 438 Katella Avenue, Suite 217, Orange, California 92867. At the direction of the Board of Directors, all mail received will be opened and screened for security purposes. The mail will then be logged in. All mail, other than trivial or obscene items, will be forwarded to the Secretary of the Company. Mail addressed to a particular Director will be forwarded or delivered to that Director. Mail addressed to the “Board of Directors” will be forwarded or delivered to the Chairman of the Board.

Guidelines for Business Conduct and Governance Guidelines

Our Board of Directors has adopted a Code of Business Ethics and Standards of Conduct which has been designated as the code of ethics for directors, officers and employees in performing their duties. The Code of Business Ethics and Standards of Conduct also sets forth information and procedures for employees to report ethical or accounting concerns, misconduct or violations of the Code in a confidential manner. The Code of Business Ethics and Standards of Conduct may be found on our website at www.elephanttalk.com.

Our Board of Directors has also adopted Corporate Governance guidelines as required by NASDAQ rules to assist the Board in exercising its responsibilities to the Company and its stockholders. The Corporate Governance Guidelines may be found on our website at www.elephanttalk.com.

Procedures for Considering Nominations Made by Stockholders.

The Nominating and Corporate Governance Committee will consider recommendations for nominations from shareholders if submitted in a timely manner in accordance with the procedures established in our bylaws and will apply the same criteria to all persons being considered. Nominations must be delivered to our Secretary at our principal executive offices not later than the close of business on the one hundred twentieth (120th) day nor earlier than the close of business on the one hundred fiftieth (150th) day prior to the first anniversary of the preceding year’s annual meeting; provided however, that in the event the annual meeting is called for a date that is not within thirty (30) calendar days of the anniversary date of the date on which the immediately preceding annual meeting of shareholders was called, to be timely, notice by the shareholder must be so received not later than the close of business on the tenth (10th) calendar day following the day on which public announcement of the date of the annual meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. A shareholder notice to the Secretary of the corporation must set forth (i) the shareholder’s intent to nominate one or more persons for election as a director of the corporation, the name of each such nominee proposed by the shareholder giving the notice, and the reason for making such nomination at the annual meeting, (ii) the name and address, as they appear on the corporation’s books, of the shareholder proposing such nomination and the beneficial owner, if any, on whose behalf the nomination is proposed, (iii) the class and number of shares of the corporation that are owned beneficially and of record by the shareholder proposing such nomination and by the beneficial owner, if any, on whose behalf the nomination is proposed, (iv) any material interest of such shareholder proposing such nomination and the beneficial owner, if any, on whose behalf the proposal is made, (v) a description of all arrangements or understandings between or among any of (A) the shareholder giving the notice, (B) each nominee and (C) any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder giving the notice, (vi) such information as the board of directors or a nomination or similar committee appointed by the board of directors may require pursuant to resolutions of the board of directors or such committee’s charter, (vii) such other information regarding each nominee proposed by the shareholder giving the notice as would be required to be included in a proxy statement filed in accordance with the proxy rules of the United States Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the board of directors and (viii) the signed consent of each nominee proposed by the shareholder giving the notice to serve as a director of the corporation if so elected.

Qualifications

It is the policy of the Nominating Committee to select individuals as director nominees who shall have the highest personal and professional integrity, who shall have demonstrated exceptional ability and judgment and who shall be most effective, in conjunction with the other nominees to the Board of Directors, in collectively serving the long-term interests of the stockholders.

Identification and Evaluation of Candidates for the Board of Directors.

Candidates to serve on our Board of Directors will be identified from all available sources, including recommendations made by stockholders. The Nominating Committee has a policy that there will be no differences in the manner in which the Nominating Committee evaluates nominees recommended by stockholders and nominees recommended by the committee or management, except that no specific process shall be mandated with respect to the nomination of any individuals who have previously served on our Board of Directors. The evaluation process for individuals other than existing members of our Board of Directors will include:

·	a review of the information provided to the Nominating Committee by the proponent;

·	a review of reference letters from at least two sources determined to be reputable by the Nominating Committee; and

·	a personal interview of the candidate, together with a review of such other information as the Nominating Committee shall determine to be relevant.

- 11 -

Third Party Recommendations.

We will not pay a fee to any third-party to identify or evaluate nominees. In connection with our annual meeting, the Nominating Committee, we did not receive any nominations from any shareholder or group of shareholders that owned more than 5% of our common stock for at least one year or any other third-party source.

Compensation of Directors and Executive Officers

The following table provides certain summary information concerning compensation paid to the named executive officers and directors for the years stated. Individuals we refer to as our “named executive officers” include our current Chief Executive Officer, our former Chief Executive Officer, and our most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2006.

SUMMARY COMPENSATION TABLE

Name and Principal Position	Year	Salary ($)	Bonus ($)	Stock Awards ($)	All Other Compensation ($)	Total ($)
Russelle Choi,	2006	$120,000	-	$332,517⁽¹⁾	$61,444⁽³⁾	$513,961
Former President and CEO, Director	2005	$ 127,500	-	-	$5,000⁽⁴⁾	$132,500

Steven van der Velden	2006	-	-	-	-	-
Chief Executive Officer, Director	2005	-	-	-	-	-

Manu Ohri	2006	$103,835	-	$332,517⁽²⁾	$61,444⁽³⁾	$497,796
Chief Financial Officer, Director	2005	$111,000	-	-	$5,000⁽⁴⁾	$116,000

Pius Lam	2006	$102,000	-	$332,517⁽¹⁾	$61,444⁽³⁾	$495,961
Former Chief Operating Officer, Director	2005	$96,375	-	-	$5,000⁽⁴⁾	$101,375

(1)

Based on 8,312,920 common shares to the director in consideration of such director’s role in raising capital funding pursuant to the share purchase agreement with Rising Water Capital. The value of common shares issued was accounted for by adjusting such value against the funds raised by the Company.

(2)

Based on 8,312,919 common shares to the director in consideration of such director’s role in raising capital funding pursuant to the share purchase agreement with Rising Water Capital. The value of common shares issued was accounted for by adjusting such value against the funds raised by the Company.

(3)	Directors’ fee for attending Board meetings during the period April 1, 2005 to September 2006

(4)	Directors’ fee for attending Board meetings during the period January 1, 2005 to March 31, 2005.

Narrative Disclosure to Summary Compensation Table.

Employment Agreements

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

Steven van der Velden, Chief Executive Officer, Mr. van der Velden became a board member on October 24, 2006 and replaced Russelle Choi as our Chief Executive Officer and Chairman of the Board of Directors on October 30, 2006. He agreed to accept no compensation for his services through the end of the 2006 fiscal year. The Company intends to enter into an employment agreement with Mr. van der Velden effective as of January 1, 2007, which will provide for his continued employment in his present capacity as Chief Executive Officer through December 31, 2009. This agreement will continue thereafter in one year periods, unless terminated by either party by giving notice at least ninety days prior to termination.

Manu Ohri, Former Chief Financial Officer– On August 21, 2006, the Company entered into an employment agreement with Manu Ohri in order to secure his services as Chief Financial Officer. The agreement provided for a thirty-six month term, for the election of Mr. Ohri to the Board of Directors, severance provisions, confidentiality provisions, covenants not to compete and indemnity provisions. Pursuant to the agreement, Mr. Ohri was entitled to receive as base compensation the sum of $140,000 for the period of August 1, 2006 through July 31, 2007, $161,000 for the period of August 1, 2007 through July 31, 2008 and $181,150 for the period of August 1, 2008 through July 31, 2009. In addition, Mr. Ohri was awarded 8,312,919 shares of our common stock in connection with his assistance in our securing financing via a transaction on June 30, 2005.

Mr. Ohri resigned from his position effective upon the appointment of a replacement Chief Financial Officer by the directors of the Company in accordance with the Company's By-Laws. Mr. Ohri's resignation became effective on January 1, 2007. In connection therewith, the Company intends to sign a Consulting Agreement with Mr. Ohri.

- 12 -

Russelle Choi, Former President and Chief Executive Officer– On August 21, 2006, the Company entered into an employment agreement with Russelle Choi in order to secure his services as President and Chief Executive Officer. The agreement provided for a thirty-six month term, for the election of Mr. Choi to the Board of Directors, severance provisions, confidentiality provisions, covenants not to compete and indemnity provisions. Pursuant to the agreement, Mr. Choi was entitled to receive as base compensation the sum of $150,000 for the period of August 1, 2006 through July 31, 2007, $172,500 for the period of August 1, 2007 through July 31, 2008 and $198,375 for the period of August 1, 2008 through July 31, 2009. In addition, Mr. Choi was awarded 8,312,920 shares of our common stock in connection with his assistance in our securing financing via a transaction on June 30, 2005.

On October 30, 2006, Russell Choi, President, resigned from any and all positions as an officer of the Company and its subsidiaries. The Company entered into a Termination and General Release Agreement with Russelle Choi effective November 1, 2006 whereby the Company a) agreed to ratify the aforementioned issuance of 8,312,920 shares of common stock issued to Mr. Choi as stock grants, and b) agreed to severance pay of $90,000 payable in 36 monthly installments of $2,500 per month. In addition, the Company signed a Consulting Agreement with Mr. Choi for a three year term whereby, the Company agreed to pay a monthly consulting fee of $2,500 and made available a performance related option to purchase up to 1,000,000 shares of common stock at the end of each year of the term of the Consulting Agreement subject to certain stipulations.

Pius Lam, Former Chief Operating Officer – On August 21, 2006, the Company entered into an employment agreement with Pius Lam in order to secure his services as Chief Operating Officer. The agreement provided for a thirty-six month term, for the election of Mr. Lam to the Board of Directors, severance provisions, confidentiality provisions, covenants not to compete and indemnity provisions. Pursuant to the agreement, Mr. Lam was entitled to receive as base compensation the sum of $144,000 for the period of August 1, 2006 through July 31, 2007, $165,600 for the period of August 1, 2007 through July 31, 2008 and $190,440 for the period of August 1, 2008 through July 31, 2009. In addition, Mr. Lam was awarded 8,312,920 shares of our common stock in connection with his assistance in our securing financing via a transaction on June 30, 2005.

On October 30, 2006, Mr. Lam resigned from his positions with Company and its subsidiaries. The Company accepted his resignation, which became effective immediately. The Company entered into a Termination and General Release Agreement with Mr. Lam effective November 1, 2006 whereby the Company a) agreed to ratify issuance of 8,312,919 shares of common stock issued to Mr. Lam as stock grants, and b) agreed to severance pay of $76,500 payable in 36 monthly installments of $2,125 per month. In addition, the Company signed a Consulting Agreement with Mr. Lam for a three year term whereby, the Company agreed to pay a monthly consulting fee of $4,250, including $2,125 as an advance against commissions which may be earned pursuant to the consulting agreement and made available a performance related option to purchase up to 1,000,000 shares of common stock at the end of each year of the term of the Consulting Agreement subject to certain stipulations. (we also pay him an advance against future commissions; do we need to mention this?)

Furthermore all former directors (and Choi) were given shares in 2005 and 2006 for their services as a board member; this is disclosed in our filings

Outstanding Equity Awards

		STOCK AWARDS
Name	Number of Shares or Units of Stock that have not Vested (#)	Market Value of Share or Units of Stock that have not Vested ($)	Equity Uncentive Plan Awards: Number of Unearned Shares, Units or other Rights that have not Vested(#)	Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested(#)

Russelle Choi	-	-	-	-
Steven van der Velden	-	-	-	-
Manu Ohri	-	-	-	-
Pius Lam	-	-	-	-

Narrative Disclosure to Outstanding Equity Awards

There are no current outstanding unvested equity awards.

Compensation of Directors Summary Table

The following table represents compensation paid in 2006 to our directors who are not “named executive officers.”

Name	Fees Earned or Paid in Cash ($)	Stock Awards ($)(1)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Non-Qualified Deferred Compensation Earnings ($)	All Other Compensation	Total ($)

Francis Lim	-	$61,444	-	-	-	-	$61,444
James Wong	-	$61,444	-	-	-	-	$61,444

(1) Directors fee for attending Board meetings during the period April 1, 2005 thru September 2006, paid to the directors on September 28, 2006.

- 13 -

Narrative to Director Compensation

For attending Board meetings, the Board of Directors approved the quarterly 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 month of each fiscal quarter. During the fiscal year ended December 31, 2006, the directors of the Company were issued in the aggregate 680,690 shares of common stock valued at $75,000 for attending the Board meetings for the three quarters ending September 30, 2006. The common shares were valued at the market price of the Company’s shares on the first day of each month of each fiscal quarter in 2006. The Company terminated the director’s compensation policy to attend Board meetings effective October 1, 2006, and, therefore, no additional compensation was paid to directors for attending Board meetings.

Recommendation of the Board of Directors

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF EACH OF STEVEN VAN DER VELDEN, WILLEM ACKERMANS, MARTIN ZUURBIER, YVES R. VAN SANTE AND __________, JOHAN DEJAGER AND __________ TO SERVE ON THE COMPANY’S BOARD OF DIRECTORS UNTIL THE 2008 ANNUAL MEETING OR UNTIL THEIR SUCCESSORS ARE DULY ELECTED AND QUALIFIED

- 14 -

PROPOSAL 2

PROPOSAL TO APPROVE A TWENTY FIVE TO ONE REVERSE SPLIT OF OUR ISSUED AND OUTSTANDING COMMON STOCK

On _________, 2007, the Board of Directors, believing it to be in the best interests of the Company and its shareholders, approved a twenty five to one reverse split (the “Reverse Split”) of our issued and outstanding common stock.

Reverse Split

We are requesting shareholder approval to grant the Board of Directors the authority to effect the Reverse Split for the following reasons:

(1) the Board of Directors believes a higher stock price may help generate investor interest in the Company; and

(2) the Board of Directors believes this action may attract additional investment in the Company; and

On October 24, 2007, the Company's Common Stock closed at $0.08 per share. In approving the resolution seeking shareholder approval of the Reverse Split, the Company's Board of Directors considered that the Company's Common Stock may not appeal to brokerage firms that are reluctant to recommend lower priced securities to their clients. Investors may also be dissuaded from purchasing lower priced stocks because the brokerage commissions, as a percentage of the total transaction, tend to be higher for such stocks. Moreover, the analysts at many brokerage firms do not monitor the trading activity or otherwise provide coverage of lower priced stocks.

The Company currently has outstanding two convertible promissory notes (the “Notes”) and agreements (the “Purchase Agreements”) to issue $10,305,500 worth of its Common Stock to a total of 10 investors. In addition, the Company is currently obligated to issue an aggregate of 72,036,800 shares of common stock to its officers and directors as compensation for employment commitments till December 31, 2009. The Company is also obligated to issue to Rising Water Capital 95,947,395 shares of common stock, the remaining part of a Stock Purchase Agreement of June 30, 2005 and an additional 258,546,313 shares of common stock as pursuant to a certain settlement agreement entered into October 31, 2006.

Accordingly, the Board of Directors has unanimously adopted a resolution seeking shareholder approval to amend and restate the Articles of Incorporation to, among other things, effect the Reverse Split.

THERE ARE RISKS ASSOCIATED WITH THE REVERSE SPLIT, INCLUDING THAT THE REVERSE SPLIT MAY NOT RESULT IN AN INCREASE IN THE PER SHARE PRICE OF THE COMPANY'S COMMON STOCK, THAT ANY INCREASE MAY NOT BE PROPORTIONAL TO THE SPLIT RATIO, OR THAT ANY INCREASE IN THE PER SHARE PRICE OF THE COMMON STOCK WILL NOT BE SUSTAINED.

The Company cannot predict whether the Reverse Split will increase the market price for the Common Stock. The history of similar reverse stock splits for companies in like circumstances is varied. There can be no assurance that:

(1) the market price per share of the Common Stock after the Reverse Split will rise in proportion to the reduction in the number of shares of the Company's Common Stock outstanding before the Reverse Split; or

(2) the Reverse Split will result in a per share price that will attract brokers and investors who do not trade in lower priced stocks.

The market price of the Company's Common Stock will also be based on the Company's performance and other factors, some of which are unrelated to the number of shares outstanding. If the Reverse Split is effected and the market price of the Company's Common Stock declines, the percentage decline as an absolute number and as a percentage of the Company's overall market capitalization may be greater than would occur in the absence of the Reverse Split. Furthermore, the liquidity of the Common Stock could be adversely affected by the reduced number of shares that would be outstanding after the Reverse Split.

As of November 19, 2007, a total of 238,265,927 shares of the Company's currently authorized 250,000,000 shares of common stock are issued and outstanding. The Reverse Split would enable the Company, without further shareholder approval, to reserve shares underlying the Notes and the Purchase Agreement and to issue shares from time to time as may be required for proper business purposes, such as raising additional capital for ongoing operations, business and asset acquisitions, stock splits and dividends, present and future employee benefit programs and other corporate purposes. However, the Board of Directors has not authorized a corresponding reduction in the Company’s authorized common stock. Therefore, to the extent the Company issues additional common stock, you will experience voting dilution in your holdings of the Company.

- 15 -

Procedure for Effecting the Reverse Split and Exchange of Stock Certificates

The Company will file the Amended and Restated Articles of Incorporation with the Secretary of State of the State of California at such time as the Board of Directors has determined the appropriate effective time for the Reverse Split (the “Split Effective Date”). The form of Amended and Restated Articles of Incorporation is attached as Exhibit “A” to this Proxy Statement. The Reverse Split will become effective on the Split Effective Date. Beginning on the Split Effective Date, each certificate representing old shares will be deemed for all corporate purposes to evidence ownership of new shares.

As soon as practicable after the Split Effective Date, shareholders will be notified that the Reverse Split has been effected. The Reverse Split will take place on the Split Effective Date without any action on the part of the holders of the Common Stock and without regard to current certificates representing shares of Common Stock being physically surrendered for certificates representing the number of shares of Common Stock each shareholder is entitled to receive as a result of the Reverse Split.

Effect on Certificated Shares

If you hold any of your shares in certificate form, you will receive a transmittal letter from our transfer agent as soon as practicable after the effective date of the Reverse Split. The letter of transmittal will contain instructions on how to surrender your certificate(s) representing your pre-Reverse Split shares to the transfer agent.

Fractional Shares

There shall be no fractional shares issued. A holder of record of Common Stock on the Split Effective Date who would otherwise be entitled to a fraction of a share shall have the number of new shares to which they are entitled rounded down to the nearest number of whole shares. No shareholders will receive cash in lieu of fractional shares.

Effect on Outstanding Warrants and Options

The exercise price on all of our outstanding options and warrant shall be proportionately adjusted to account for the reverse split.

Potential Anti-Takeover Effect

Although the reduction in the issued and outstanding shares of common stock as a result of the Reverse Split and the increased proportion of authorized shares of common stock that may be issued could, under certain circumstances, have an anti-takeover effect, the Reverse Split proposal is not being proposed in response to any effort of which the Company is aware of to accumulate shares of the Company's Common Stock or to obtain control of the Company, nor is it part of a plan by management to recommend a series of similar amendments to the Board of Directors and shareholders.

Accounting Matters

If a reverse split were to become effective, the per share net income or net loss and net book value would be increased because there would be fewer common stock outstanding. We do not anticipate any other accounting consequences would arise as a result of the reverse stock split.

Federal Income Tax Consequences

The following is a summary of certain material federal income tax consequences of the Reverse Split and does not purport to be a complete discussion of all of the possible federal income tax consequences of the Reverse Split and is included for general information only. Further, it does not address any state, local or foreign income or other tax consequences. For example, the state and local tax consequences of the Reverse Split may vary significantly as to each shareholder, depending upon the state in which such shareholder resides. Also, it does not address the tax consequences to holders that are subject to special tax rules, such as banks, insurance companies, regulated investment companies, personal holding companies, foreign entities, nonresident alien individuals, broker-dealers and tax-exempt entities. The discussion is based on the provisions of the United States federal income tax law as of the date hereof, which is subject to change retroactively as well as prospectively. This summary also assumes that the old shares were, and the new shares will be, held as a “capital asset,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”) (generally, property held for investment). The tax treatment of a shareholder may vary depending upon the particular facts and circumstances of such shareholder. Each shareholder is urged to consult with such shareholder's own tax advisor with respect to the tax consequences of the Reverse Split.

No gain or loss should be recognized by a shareholder upon such shareholder's exchange of old shares for new shares pursuant to the Reverse Split. The aggregate tax basis of the new shares received in the Reverse Split (including any fraction of a new share deemed to have been received) will be the same as the shareholder's aggregate tax basis in the old shares exchanged therefore. The shareholder's holding period for the new shares will include the period during which the shareholder held the old shares surrendered in the Reverse Split.

The Company's view regarding the tax consequence of the Reverse Split is not binding on the Internal Revenue Service or the courts. Accordingly, each shareholder should consult with such shareholder's own tax advisor with respect to all of the potential tax consequences to such shareholder of the Reverse Split.

- 16 -

Dissenter's Rights

Under California Law, our shareholders do not have any dissenters' or appraisal rights with respect to the approval of the amendment and restatement of our Articles of Incorporation.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL 2 TO ENACT A TWENTY FIVE TO ONE REVERSE SPLIT (THE “REVERSE SPLIT”) OF OUR ISSUED AND OUTSTANDING COMMON STOCK

[remainder of page intentionally left blank]

- 17 -

PROPOSAL 3

PROPOSAL TO APPROVE THE ADOPTION OF AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION IN THE FORM ATTACHED HERETO AS EXHIBIT “A” TO: (1) AUTHORIZE 50,000,000 SHARES OF PREFERRED STOCK, WHICH MAY BE ISSUED IN ONE OR MORE SERIES, WITH SUCH RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS AS SHALL BE FIXED BY THE COMPANY'S BOARD OF DIRECTORS FROM TIME TO TIME, (2) REVISE THE PURPOSE OF THE COMPANY TO ENGAGE IN ANY LAWFUL ACT UNDER THE CORPORATE LAW OF THE STATE OF CALIFORNIA, (3) TO CHANGE THE NUMBER OF DIRECTORS FROM NINE TO ANY NUMBER BETWEEN SIX AND ELEVEN, SUCH NUMBER TO BE DETERMINED IN THE MANNER PROVIDED IN THE BY-LAWS; (4) INCLUDE INDEMNIFICATION PROVISIONS FOR DIRECTORS AND OTHER AGENTS OF THE COMPANY, AND (5) ENACT OTHER SUCH ANCILLARY CHANGES NECESSARY TO ACCOMPLISH THE AFORESAID WHICH APPEAR IN THE AMENDED AND RESTATED ARTICLES OF INCORPORATION.

Authorization of Blank Check Preferred Stock

In addition to the Reverse Split, the Board is seeking shareholder approval for the authorization to create and issue various series of Preferred Stock without additional shareholder approval. The Board believes such authorization will provide the Company with the flexibility to seek additional capital through equity financings in a competitive environment from time to time in the future.

Under the proposed Amended and Restated Articles of Incorporation, the Preferred Stock may be issued from time to time by the board of directors as shares of one or more series, without further shareholder approval. Subject to the provisions of the Amended and Restated Articles of Incorporation and the limitations prescribed by law, the board of directors would be expressly authorized, by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the California Secretary of State a certificate setting forth the resolutions so adopted pursuant to the General Corporation Law of California, to establish the number of shares to be included in each such series and to fix the designation and relative powers, including voting powers, preferences, rights, qualifications and limitations and restrictions thereof, relating to the shares of each such series. The rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote), or senior to any of those of any present or future class or series of Preferred Stock or Common Stock. The board of directors is also authorized to increase or decrease the number of shares of any series prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

The authority of the board of directors with respect to each series shall include, but not be limited to, determination of the following:

(i) the distinctive serial designation of such series and the number of shares constituting such series;

(ii) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates;

(iii) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(iv) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund;

(v) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;

(vi) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights;

(vii) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and

(viii) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series.

Shares of any series of Preferred Stock which have been redeemed (whether through the operation of a sinking fund or otherwise) or which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes shall have the status of authorized and unissued shares of Preferred Stock of the same series and may be reissued as a part of the series of which they were originally a part or may be reclassified and reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors or as part of any other series of Preferred Stock, all subject to the conditions and the restrictions on issuance set forth in the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock.

- 18 -

Authorization of “Blank Check” Preferred Stock. The term “blank check” preferred stock refers to stock for which the designations, preferences, conversion rights, cumulative, relative, participating, optional or other rights, including voting rights, qualifications, limitations or restrictions thereof are determined by the Board of Directors of a company. The Board of Directors believes that having such blank check preferred stock available for, among other things, financing transactions, as well as possible issuances in connection with such activities as public or private offerings of shares for cash, dividends payable in stock of the Company, acquisitions of other companies or businesses, and otherwise, is in the best interest of the Company and its shareholders. The Amended and Restated Articles of Incorporation would cancel the Board of Director’s previous authorization to designate the rights, preferences and privileges of one class of Preferred Stock: the Series B Preferred Stock.

Possible Anti-Takeover Effect. Although it is not the purpose for the authorization of “Blank Check” Preferred Stock, the Company could also issue shares of Preferred Stock that may, depending on the terms of such series, make more difficult or discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or other means. When, in the judgment of the Board of Directors, this action will be in the best interest of the shareholders and the Company, such shares could be used to create voting or other impediments or to discourage persons seeking to gain control of the Company. Such shares also could be privately placed with purchasers favorable to the Board of Directors in opposing such action. In addition, the Board of Directors could authorize holders of a series of Common or Preferred Stock to vote either separately as a class or with the holders of the Company's Common Stock, on any merger, sale or exchange of assets by the Company or any other extraordinary corporate transaction. The existence of the additional authorized shares could have the effect of discouraging unsolicited takeover attempts. The issuance of new shares also could be used to dilute the stock ownership of a person or entity seeking to obtain control of the Company should the Board of Directors consider the action of such entity or person not to be in the best interest of the shareholders of the Company. The issuance of new shares also could be used to entrench current management or deter an attempt to replace the Board of Directors by diluting the number or rights of shares held by individuals seeking to control the Company by obtaining a certain number of seats on the Board of Directors.

Amendments Regarding Other Matters

The Company's original Articles of Incorporation, as amended, (the “Original Articles”), were adopted by the Company's predecessor prior to the merger whereby the Company acquired its current business operations. The Original Articles also contained certain provisions that the current Board of Directors deemed to be confusing or unnecessary for inclusion in the Company's Articles of Incorporation. The Board of Directors believed it to be in the best interests of the Company to address these matters by amending and restating the Articles of Incorporation in their entirety. The material changes(other than the changes related to the Reverse Split and blank check preferred stock described above) resulting from adopting the Amended and Restated Articles of Incorporation, or Amended Articles, and the reasons the Board of Directors is recommending such changes are set forth below.

Revision of Purpose Clause of Company. Generally, a corporation is required to state the business purposes for which it is being formed. The Original Articles enumerated several powers the Company may have. The Amended Articles provide that the Company can engage in any lawful activities allowed under California law. The enumeration of the additional powers was deemed unnecessary and repetitive of the powers the Company possesses as a matter of California corporate law.

Indemnification Provisions Related to Directors and Agents. The Original Articles did not provide for the indemnification of any director or agent of the Company. The Amended Articles provide that the liability of the Company's directors for monetary damages is to be eliminated and the Company's directors are to be indemnified, each to the fullest extent provided under California corporate law. In addition, the Amended Articles provide that the Corporation may agree to indemnify its agents, including its officers, through by-law provisions, agreements with such agents, votes of shareholders or disinterested directors, or any combination thereof, subject only to the limits set forth in Section 204 of the California General Corporation Law. Our Amended and Restated By-Laws provide that we shall indemnify each of our officers or directors who is made a party or is threatened to be made a party to or is otherwise involved in any proceeding against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any such proceeding arising by reason of the fact any such person is or was an agent of the Company. Our Amended and Restated By-Laws further provide that such indemnification rights include the right for expenses to be paid in advance of the final disposition of the proceeding. As a result of adopting the Amended Articles, our directors and officers would not be individually liable to the Company or its shareholders for any damage resulting form the director's or officer's acts or failures to act unless the officers and directors’ failure to act involved a breach of the director's or officer's fiduciary duties or intentional misconduct, fraud or a knowing violation of law. We believe that these provisions are necessary to attract and retain qualified directors and officers. There is currently no pending litigation or proceeding involving any of our directors or officers for which indemnification is being sought.

Number of Directors. The Original Articles provided that the number of directors of the Company be nine. The Amended Articles provide that the number may be anywhere from six to eleven, with the exact number to be determined by the by-laws of the Company.

Delete Provision Regarding Amending the Company's Bylaws. The Original Articles provided that the Company's bylaws could be amended to change the number of directors of the Company only by action of the shareholders. This provision has been deleted and accordingly the by-laws may be amended with respect to the number of directors either by the vote of 66% of our shareholders or our directors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL 2 TO ADOPT AN AMENDED AND RESTATED CERTIFICATE OF INCORPORATION IN THE FORM ATTACHED HERETO AS EXHIBIT “A” TO: (1) AUTHORIZE 50,000,000 SHARES OF PREFERRED STOCK, WHICH MAY BE ISSUED IN ONE OR MORE SERIES, WITH SUCH RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS AS SHALL BE FIXED BY THE COMPANY'S BOARD OF DIRECTORS FROM TIME TO TIME, (2) REVISE THE PURPOSE OF THE COMPANY TO ENGAGE IN ANY LAWFUL ACT UNDER THE CORPORATE LAW OF THE STATE OF CALIFORNIA, (3) TO CHANGE THE NUMBER OF DIRECTORS FROM NINE TO ANY NUMBER BETWEEN SIX AND ELEVEN, SUCH NUMBER TO BE DETERMINED IN THE MANNER PROVIDED IN THE BY-LAWS; (4) INCLUDE INDEMNIFICATION PROVISIONS FOR DIRECTORS AND OTHER AGENTS OF THE COMPANY, AND (5) ENACT OTHER SUCH ANCILLARY CHANGES NECESSARY TO ACCOMPLISH THE AFORESAID WHICH APPEAR IN THE AMENDED AND RESTATED ARTICLES OF INCORPORATION.

- 19 -

PROPOSAL 4

THE INCENTIVE PLAN PROPOSAL

Background

The Company’s 2007 Long-Term Incentive Plan has been approved by the Company’s Board of Directors. The purposes of our Incentive Plan are to create incentives designed to motivate our employees to significantly contribute toward our growth and profitability, to provide our executives, directors and other employees, and persons who, by their position, ability and diligence, are able to make important contributions to our growth and profitability, with an incentive to assist us in achieving our long-term corporate objectives, to attract and retain executives and other employees of outstanding competence, and to provide such persons with an opportunity to acquire an equity interest in us.

We may grant incentive and non-qualified stock options, stock appreciation rights, performance units, restricted stock awards and performance bonuses, or collectively, awards, to our officers and key employees, and those of our subsidiaries. In addition, the Incentive Plan authorizes the grant of non-qualified stock options and restricted stock awards to our directors and to any independent contractors and consultants who by their position, ability and diligence are able to make important contributions to our future growth and profitability. Generally, all classes of our employees are eligible to participate in our Incentive Plan. No options, restricted stock or other awards under the Incentive Plan have been made or committed to be made as of the date of this proxy statement.

The following is a summary of the material provisions of our Incentive Plan and is qualified in its entirety by reference to the complete text of our Incentive Plan, a copy of which is attached to this proxy statement as Annex “E”.

Stock Subject to the 2007 Incentive Plan

We have reserved a maximum of 5,000,000 shares of our authorized common stock for issuance upon the exercise of awards to be granted pursuant to our Incentive Plan. Each share issued under an option or under a restricted stock award will be counted against this limit. Shares to be delivered at the time a stock option is exercised or at the time a restricted stock award is made may be available from authorized but unissued shares or from stock previously issued but which we have reacquired and hold in our treasury.

In the event of any change in our outstanding common stock by reason of any reorganization, recapitalization, stock split, stock dividend, combination of shares, asset acquisition, consolidation, issuance of rights or other similar transactions, the number of shares of our common stock which may be issued upon exercise of outstanding options, and the exercise price of options previously granted under our Incentive Plan, will be proportionally adjusted to prevent any enlargement or dilution of the rights of holders of previously granted options as may be appropriate to reflect any such transaction or event.

Administration

Our Board has established a compensation committee that, among other duties, will administer the Incentive Plan. The compensation committee will be composed of [two] members of the Board, a majority of whom will be “non-employee directors” within the meaning of Rule 16b-3(b)(3) of the Securities Exchange Act of 1934, as amended. Members of our compensation committee will serve at the pleasure of our Board. In connection with the administration of our Incentive Plan, the compensation committee, with respect to awards to be made to any person who is not one of our directors, will:

·	determine which employees and other persons will be granted awards under our Incentive Plan;

·	grant the awards to those selected to participate;

·	determine the exercise price for options; and

·	prescribe any limitations, restrictions and conditions upon any awards, including the vesting conditions of awards.

With respect to stock options or restricted stock awards to be made to any of our directors, the Compensation Committee will make recommendations to our Board of Directors as to:

·	which of such persons should be granted stock options, restricted stock awards, performance units or stock appreciation rights;

·	the terms of proposed grants of awards to those selected by our Board of Directors to participate;

·	the exercise price for options; and

·	any limitations, restrictions and conditions upon any awards.

Any grant of awards to any of directors under our Incentive Plan must be approved by our Board of Directors.

In addition, the compensation committee will:

·	interpret our Incentive Plan; and

·	make all other determinations and take all other action that may be necessary or advisable to implement and administer our Incentive Plan.

- 20 -

Types of Awards

Our Incentive Plan permits the Compensation Committee to grant the following types of awards.

Stock Options. Stock options are contractual rights entitling an optionee who has been granted a stock option to purchase a stated number of shares of our common stock at an exercise price per share determined at the date of the grant. Options are evidenced by stock option agreements with the respective optionees. The exercise price for each stock option granted under our Incentive Plan will be determined by our Board of Directors or a committee of the Board at the time of the grant, but will not be less than fair market value on the date of the grant. Our Board of Directors or a committee of the Board will also determine the duration of each option; however, no option may be exercisable more than ten years after the date the option is granted. Within the foregoing limitations, the Board of Directors or committee of the Board may, in its discretion, impose limitations on exercise of all or some options granted under our Incentive Plan, such as specifying minimum periods of time after grant during which options may not be exercised. Options granted under our Incentive Plan will vest at rates specified in the option agreement at the time of grant; however, all options granted under our Incentive Plan will vest upon the occurrence of a change of control, as defined in the Incentive Plan. Our Incentive Plan also contains provisions for our Board of Directors or a committee of the Board to provide in the participants’ option award agreements for accelerating the right of an individual employee to exercise his or her stock option or restricted stock award in the event of retirement or other termination of employment. No cash consideration is payable to us in exchange for the grant of options.

The exercise price for Non-Qualified Options may not be less than the fair market value of our common stock on the date the Non-Qualified Option is granted. Non-Qualified Options are not subject to any of the restrictions described above with respect to Incentive Stock Options. The exercise price of stock options may be paid in cash, in whole shares of our common stock, in a combination of cash and our common stock, or in such other form of consideration as our Board of Directors or the committee of the Board may determine, equal in value to the exercise price. However, only shares of our common stock which the option holder has held for at least six months on the date of the exercise may be surrendered in payment of the exercise price for the options. In no event may a stock option be exercised after the expiration of its stated term.

Stock Appreciation Rights. A stock appreciation right permits the grantee to receive an amount (in cash, common stock, or a combination thereof) equal to the number of stock appreciation rights exercised by the grantee multiplied by the excess of the fair market value of our common stock on the exercise date over the stock appreciation rights’ exercise price. Stock appreciation rights may or may not be granted in connection with the grant of an option. The exercise price of stock appreciation rights granted under the Incentive Plan will be determined by the Board of Directors or a committee of the Board; provided, however, that such exercise price cannot be less than the fair market value of a share of common stock on a date the stock appreciation right is granted (subject to adjustments). A stock appreciation right may be exercised in whole or in such installments and at such times as determined by the Board of Directors or a committee of the Board.

Restricted Stock. Restricted shares of our common stock may be granted under our Incentive Plan subject to such terms and conditions, including forfeiture and vesting provisions, and restrictions against sale, transfer or other disposition as the Board of Directors or a committee of the Board may determine to be appropriate at the time of making the award. In addition, the Board of Directors or a committee of the Board may direct that share certificates representing restricted stock be inscribed with a legend as to the restrictions on sale, transfer or other disposition, and may direct that the certificates, along with a stock power signed in blank by the grantee, be delivered to and held by us until such restrictions lapse. The Board of Directors or a committee of the Board, in its discretion, may provide in the award agreement for a modification or acceleration of shares of restricted stock in the event of permanent disability, retirement or other termination of employment or business relationship with the grantee.

Performance Units. The Incentive Plan permits grants of performance units, which are rights to receive cash payments equal to the difference (if any) between the fair market value of our common stock on the date of grant and its fair market value on the date of exercise of the award, except to the extent otherwise provided by the Board of Directors or a committee of the Board or required by law. Such awards are subject to the fulfillment of conditions that may be established by the Board of Directors or a committee of the Board including, without limitation, the achievement of performance targets based upon the factors described above relating to restricted stock awards.

Performance Bonus. The Incentive Plan permits grants of performance bonuses, which may be paid in cash, common stock or combination thereof as determined by the Board of Directors or a committee of the Board. The maximum value of performance bonus awards granted under the Incentive Plan shall be established by the compensation committee at the time of the grant. An employee’s receipt of such amount will be contingent upon achievement of performance targets during the performance period established by the compensation committee. The performance targets will be determined by the Board of Directors or a committee of the Board based upon the factors described above relating to restricted stock awards. Following the end of the performance period, the Board of Directors or a committee of the Board will determine the achievement of the performance targets for such performance period. Payment may be made within 60 days of such determination. Any payment made in shares of common stock will be based upon the fair market value of the common stock on the payment date.

- 21 -

Transferability

With the exception of Non-Qualified Stock Options, awards are not transferable other than by will or by the laws of descent and distribution. Non-Qualified Stock Options are transferable on a limited basis. Restricted stock awards are not transferable during the restriction period.

Change of Control Event

The Incentive Plan provides for the acceleration of any unvested portion of any outstanding awards under the Incentive Plan upon a change of control event unless the terms of a particular award state otherwise.

Termination of Employment/Relationship

Awards granted under our Incentive Plan that have not vested will generally terminate immediately upon the grantee’s termination of employment or business relationship with us or any of our subsidiaries for any reason other than retirement with our consent, disability or death. The Board of Directors or a committee of the Board may determine at the time of the grant that an award agreement should contain provisions permitting the grantee to exercise the stock options for any stated period after such termination, or for any period the Board of Directors or a committee of the Board determines to be advisable after the grantee’s employment or business relationship with us terminates by reason of retirement, disability, death or termination without cause. Incentive Stock Options will, however, terminate no more than three months after termination of the optionee’s employment, twelve months after termination of the optionee’s employment due to disability and three years after termination of the optionee’s employment due to death. The Board of Directors or a committee of the Board may permit a deceased optionee’s stock options to be exercised by the optionee’s executor or heirs during a period acceptable to the Board of Directors or a committee of the Board following the date of the optionee’s death but such exercise must occur prior to the expiration date of the stock option.

Dilution; Substitution

As described above, our Incentive Plan will provide protection against substantial dilution or enlargement of the rights granted to holders of awards in the event of stock splits, recapitalizations, asset acquisitions, consolidations, reorganizations or similar transactions. New award rights may, but need not, be substituted for the awards granted under our Incentive Plan, or our obligations with respect to awards outstanding under our Incentive Plan may, but need not, be assumed by another corporation in connection with any asset acquisition, consolidation, acquisition, separation, reorganization, sale or distribution of assets, liquidation or like occurrence in which we are involved. In the event that our Incentive Plan is assumed, the stock issuable with respect to awards previously granted under our Incentive Plan shall thereafter include the stock of the corporation granting such new option rights or assuming our obligations under the Incentive Plan.

Amendment of the Incentive Plan

Our Board may amend our Incentive Plan at any time. However, without stockholder approval, our Incentive Plan may not be amended in a manner that would:

·	increase the number of shares that may be issued under our Incentive Plan;

·	materially modify the requirements for eligibility for participation in our Incentive Plan;

·	materially increase the benefits to participants provided by our Incentive Plan; or

·	otherwise disqualify our Incentive Plan for coverage under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended.

Awards previously granted under our Incentive Plan may not be impaired or affected by any amendment of our Incentive Plan, without the consent of the affected grantees.

Accounting Treatment

Under generally accepted accounting principles with respect to the financial accounting treatment of stock options used to compensate employees, upon the grant of stock options under our Incentive Plan, the fair value of the options will be measured on the date of grant and this amount will be recognized as a compensation expense ratably over the vesting period. Stock appreciation rights granted under the Incentive Plan must be settled in common stock. Therefore, stock appreciation rights granted under the Incentive Plan will receive the same accounting treatment as options. The cash we receive upon the exercise of stock options will be reflected as an increase in our capital. No additional compensation expense will be recognized at the time stock options are exercised, although the issuance of shares of common stock upon exercise may reduce basic earnings per share, as more shares of our common stock would then be outstanding.

When we make a grant of restricted stock, the fair value of the restricted stock award at the date of grant will be determined and this amount will be recognized over the vesting period of the award. The fair value of a restricted stock award is equal to the fair market value of our common stock on the date of grant.

Due to consideration of the accounting treatment of stock options and restricted stock awards by various regulatory bodies, it is possible that the present accounting treatment may change.

- 22 -

Tax Treatment

The following is a brief description of the federal income tax consequences, under existing law, with respect to awards that may be granted under our Incentive Plan.

Incentive Stock Options. An optionee will not realize any taxable income upon the grant or the exercise of an Incentive Stock Option. However, the amount by which the fair market value of the shares covered by the Incentive Stock Option (on the date of exercise) exceeds the option price paid will be an item of tax preference to which the alternative minimum tax may apply, depending on each optionee’s individual circumstances. If the optionee does not dispose of the shares of our common stock acquired by exercising an Incentive Stock Option within two years from the date of the grant of the Incentive Stock Option or within one year after the shares are transferred to the optionee, when the optionee later sells or otherwise disposes of the stock, any amount realized by the optionee in excess of the option price will be taxed as a long-term capital gain and any loss will be recognized as a long-term capital loss. We generally will not be entitled to an income tax deduction with respect to the grant or exercise of an Incentive Stock Option.

If any shares of our common stock acquired upon exercise of an Incentive Stock Option are resold or disposed of before the expiration of the prescribed holding periods, the optionee would realize ordinary income, instead of capital gain. The amount of the ordinary income realized would be equal to the lesser of (i) the excess of the fair market value of the stock on the exercise date over the option price; or (ii) in the case of a taxable sale or exchange, the amount of the gain realized. Any additional gain would be either long-term or short-term capital gain, depending on whether the applicable capital gain holding period has been satisfied. In the event of a premature disposition of shares of stock acquired by exercising an Incentive Stock Option, we would be entitled to a deduction equal to the amount of ordinary income realized by the optionee.

Non-Qualified Options. An optionee will not realize any taxable income upon the grant of a Non-Qualified Option. At the time the optionee exercises the Non-Qualified Option, the amount by which the fair market value at the time of exercise of the shares covered by the Non-Qualified Option exceeds the option price paid upon exercise will constitute ordinary income to the optionee in the year of such exercise. We will be entitled to a corresponding income tax deduction in the year of exercise equal to the ordinary income recognized by the optionee. If the optionee thereafter sells such shares, the difference between any amount realized on the sale and the fair market value of the shares at the time of exercise will be taxed to the optionee as capital gain or loss, short- or long-term depending on the length of time the stock was held by the optionee before sale.

Stock Appreciation Rights. A participant realizes no taxable income and we are not entitled to a deduction when a stock appreciation right is granted. Upon exercising a stock appreciation right, a participant will realize ordinary income in an amount equal to the fair market value of the shares received minus any amount paid for the shares, and we will be entitled to a corresponding deduction. A participant’s tax basis in the shares of common stock received upon exercise of a stock appreciation right will be equal to the fair market value of such shares on the exercise date, and the participant’s holding period for such shares will begin at that time. Upon sale of the shares of common stock received upon exercise of a stock appreciation right, the participant will realize short-term or long-term capital gain or loss, depending upon whether the shares have been held for more than one year. The amount of such gain or loss will be equal to the difference between the amount realized in connection with the sale of the shares, and the participant’s tax basis in such shares.

Restricted Stock Award. A recipient of restricted stock generally will not recognize any taxable income until the shares of restricted stock become freely transferable or are no longer subject to a substantial risk of forfeiture. At that time, the excess of the fair market value of the restricted stock over the amount, if any, paid for the restricted stock is taxable to the recipient as ordinary income. If a recipient of restricted stock subsequently sells the shares, he or she generally will realize capital gain or loss in the year of such sale in an amount equal to the difference between the net proceeds from the sale and the price paid for the stock, if any, plus the amount previously included in income as ordinary income with respect to such restricted shares.

A recipient has the opportunity, within certain limits, to fix the amount and timing of the taxable income attributable to a grant of restricted stock. Section 83(b) of the Code permits a recipient of restricted stock, which is not yet required to be included in taxable income, to elect, within 30 days of the award of restricted stock, to include in income immediately the difference between the fair market value of the shares of restricted stock at the date of the award and the amount paid for the restricted stock, if any. The election permits the recipient of restricted stock to fix the amount of income that must be recognized by virtue of the restricted stock grant. We will be entitled to a deduction in the year the recipient is required (or elects) to recognize income by virtue of receipt of restricted stock, equal to the amount of taxable income recognized by the recipient.

Performance Units and Performance Bonuses. A participant realizes no taxable income and we are not entitled to a deduction when performance units or performance bonuses are awarded. When the performance units or performance bonuses vest and become payable upon the achievement of the performance objectives, the participant will realize ordinary income equal to the amount of cash received or the fair market value of the shares received minus any amount paid for the shares, and we will be entitled to a corresponding deduction. A participant’s tax basis in shares of common stock received upon payment will be equal to the fair market value of such shares when the participant receives them. Upon sale of the shares, the participant will realize short-term or long-term capital gain or loss, depending upon whether the shares have been held for more than one year at the time of sale. Such gain or loss will be equal to the difference between the amount realized upon the sale of the shares and the tax basis of the shares in the participant’s hands.

- 23 -

Section 162(m) of the Code. Section 162(m) of the Code precludes a public corporation from taking a deduction for annual compensation in excess of $1.0 million paid to its chief executive officer or any of its four other highest-paid officers. However, compensation that qualifies under Section 162(m) of the Code as “performance-based” is specifically exempt from the deduction limit. Based on Section 162(m) of the Code and the regulations thereunder, our ability to deduct compensation income generated in connection with the exercise of stock options or stock appreciation rights granted under the Incentive Plan should not be limited by Section 162(m) of the Code. Further, we believe that compensation income generated in connection with performance awards granted under the Incentive Plan should not be limited by Section 162(m) of the Code. The Incentive Plan has been designed to provide flexibility with respect to whether restricted stock awards or performance bonuses will qualify as performance-based compensation under Section 162(m) of the Code and, therefore, be exempt from the deduction limit. If the vesting restrictions relating to any such award are based solely upon the satisfaction of one of the performance goals set forth in the Incentive Plan, then we believe that the compensation expense relating to such an award will be deductible by us if the awards become vested. However, compensation expense deductions relating to such awards will be subject to the Section 162(m) deduction limitation if such awards become vested based upon any other criteria set forth in such award (such as the occurrence of a change in control or vesting based upon continued employment with us).

Certain Awards Deferring or Accelerating the Receipt of Compensation. Section 409A of the Internal Revenue Code, enacted as part of the American Jobs Creation Act of 2004, imposes certain new requirements applicable to “nonqualified deferred compensation plans.” If a nonqualified deferred compensation plan subject to Section 409A fails to meet, or is not operated in accordance with, these new requirements, then all compensation deferred under the plan may become immediately taxable. Stock appreciation rights and deferred stock awards which may be granted under the plan may constitute deferred compensation subject to the Section 409A requirements. It is our intention that any award agreement governing awards subject to Section 409A will comply with these new rules.

Required Vote

Approval of our Incentive Plan will require the affirmative vote of the holders of a majority of the shares of the Company’s common stock represented in person or by proxy and entitled to vote at the Meeting. Assuming the presence of a quorum of more than 50% of the shares of our common stock, the failure to vote will have no effect on the outcome of the vote.

Recommendation

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE INCENTIVE PLAN PROPOSAL.

[remainder of page intentionally left blank]

- 24 -

OTHER INFORMATION

Proxy Solicitation

All costs of solicitation of proxies will be borne by the Company. In addition to solicitation by mail, the Company’s officers and regular employees may solicit proxies personally or by telephone. The Company does not intend to utilize a paid solicitation agent.

Proxies

A stockholder may revoke his, her or its proxy at any time prior to its use by giving written notice to the Secretary of the Company, by executing a revised proxy at a later date or by attending the Meeting and voting in person. Proxies in the form enclosed, unless previously revoked, will be voted at the Meeting in accordance with the specifications made thereon or, in the absence of such specifications in accordance with the recommendations of the Company’s Board of Directors.

Securities Outstanding; Votes Required

As of the close of business on the Record Date there were 238,265,927 shares of Common Stock outstanding. Stockholders are entitled to one vote for each share of Common Stock owned. The affirmative vote of a majority of the shares of Common Stock present at the Meeting, in person or by proxy, is required for approval of the amended and restated articles of incorporation and the stock incentive plan proposals. The election of each nominee for director requires the affirmative vote of the holders of a plurality of the shares of Common Stock cast in the election of directors. Shares of the Common Stock represented by executed proxies received by the Company will be counted for purposes of establishing a quorum at the Meeting, regardless of how or whether such shares are voted on any specific proposal.

Other Business

The Company’s Board of Directors knows of no other matter to be presented at the Meeting. If any additional matter should properly come before the meeting, it is the intention of the persons named in the enclosed proxy to vote such proxy in accordance with their judgment on any such matters.

Beneficial Ownership of Principal Stockholders, Officers and Directors

The following table sets forth, as of November 19, 2007, certain information as to the stock ownership of each person known by the Company to own beneficially five (5%) percent or more of the outstanding Common Stock, of each of the Company’s named officers and directors who owns any shares and of all officers and directors as a group. In computing the outstanding shares of Common Stock, the Company has excluded all shares of Common Stock subject to options or warrants that are not currently exercisable or exercisable within 60 days and are therefore not deemed to be outstanding and beneficially owned by the person holding the options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person.

Title of Class	Name & Address of Beneficial Owner	Amount and Nature of Beneficial Ownership (A)	Percent

Common stock	Rising Water Capital, A.G. (B) Baarerstrasse 12 Zug, Switzerland 6300	100,000,000	42.0%
Common stock	Calfin Trust Postfach 1518 Lettstrasse 10 FL-9490 Vaduz, Liechtenstein	40,000,000	16.8%
Common stock	Steven van der Velden (C) President, CEO and Director Avenue Louise 109 Brussels, Belgium 1050	33,492,950	14.06%
Common stock	Russelle Choi (F) (G) 8/F, 145-159 Yeung Uk Road Tsuen Wan, Hong Kong	18,289,953	7.7%
Common stock	Lam Kwok Hung, (G) 8/F, 145-159 Yeung Uk Road Tsuen Wan, Hong Kong	12,032,710	5.1%
Common stock	Yves R. van Sante, Director (D) Avenue Louise 109 Brussels, Belgium 1050	3,185,730	1.34%
Common stock	Johan Dejager (E) Nijverheidslaan 70 Deerlijk, Belgium 8540	3,734,640	0.0%
Common Stock	Martin Zuubier, Director	17,000,000	7.14%
Common Stock	Anarjay Concepts, Inc. (H) 438 E. Katella Ave., Suite 217 Orange, CA 92867	12,024,221	5%
	All Officers and Directors as a group	87,735,983	36.82%

- 25 -

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

(B)

Rising Water Capital, A.G. (“RWC”) is the record owner of 100,000,000 shares of common stock, representing 42.0% of the total outstanding shares as of December 31, 2006, and could be the beneficial owner of 592,499,579 shares of common stock, representing 72.5% of the total outstanding shares. The additional 483,425,437 shares could be acquired within 60 days by RWC upon exercise of conversion of its two Convertible Promissory Notes of $3.5 million and $3.0 million to the extent permissible based upon the receipt of all of the $3.5 million received on the Convertible Promissory Note and $2,660,411 received against the $3.0 million Convertible Promissory Note. In addition, the Company has agreed to issue 23,137,500 shares of common stock as part compensation for the failed True Precise acquisition that Rising Water Capital indirectly funded, and an additional issuances of 258,546,313 shares of common stock as compensation to Rising Water Capital to bring its effective ownership in the Company to be 72.5% upon the above stated issuances of shares. In the event that RWC converts all of its convertible promissory notes and receives 23,137,500 shares as aforesaid, RWC would beneficially own 597,350,851 shares of common stock representing 72.5% of the then outstanding shares of common stock. Currently, there is not sufficient authorized capital to convert the Convertible Promissory Note into more shares of common stock. In that regard, the Company has filed with the Commission a preliminary information statement on Schedule 14C to authorize an increase of its common stock.

(C)

Steven van der Velden is a beneficial owner of approximately 32.15% of the issued and outstanding shares of QAT Investments SA, which is the majority (51.3%) shareholder of RWC. In addition, Mr. Velden owns directly approximately 17% of the issued and outstanding shares of RWC. On December 28, 2006, Mr. Velden purchased an additional 25,186,667 shares of common stock valued at $944,500.

(D)

Yves R. van Sante is the beneficial owner of approximately 6.21% of the issued and outstanding shares of QAT Investments SA, which is the majority (51.3%) shareholder of RWC. On December 28, 2006, Mr. Sante purchased an additional 2,911,111 shares of the common stock valued at $109,167. The purchase share price of the shares was at a 50% discount of the closing market price.

(E)

Johan DeJager is the beneficial owner of approximately 7.28% of the issued and outstanding shares of QAT Investments SA, which is the majority (51.3%) shareholder of RWC. On December 28, 2006, Mr. Dejager purchased an additional 25,186,667 shares of the common stock valued at $944,500. The purchase share price of the shares was at a 50% discount of the closing market price.

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

(G)	Lam Kwok Hung is a beneficial owner of 805,739 shares of common stock held by Wiseley International Limited, which shares are included in the ownership figure reported. Lam Kwok Hung is married to Russelle Choi’s sister.

(H)	Manu Ohri is the beneficial owner of Anarjay Concepts, Inc.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act, as amended, requires our executive officers, directors and persons who own more than ten percent of a registered class of our equity securities (“Reporting Persons”) to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission. These Reporting Persons are required by SEC regulation to furnish us with copies of all Forms 3, 4 and 5 they file with the SEC. Based solely upon our review of the copies of the forms we have received, we believe that all Reporting Persons complied on a timely basis with all filing requirements applicable to them with respect to transactions during fiscal 2006.

Deadline for Submission of Stockholder Proposals for 2008 Annual Meeting of Stockholders

Stockholders may present proposals for inclusion in the Proxy Statement for the 2008 Annual Meeting of Stockholders provided that such proposals are received by the Secretary of the Company in accordance with the time schedules set forth in, and otherwise in compliance with, applicable SEC regulations. Proposals submitted not in accordance with such regulations will be deemed untimely or otherwise deficient; however, the Company will have discretionary authority to include such proposals in the 2008 Proxy Statement.

Stockholder Communications

Stockholders wishing to communicate with the Board of Directors may direct such communications to the Board of Directors c/o the Company, Attn: Alex Vermeullen. Mr. Vermeullen will present a summary of all stockholder communications to the Board of Directors at subsequent Board of Directors meetings. The directors will have the opportunity to review the actual communications at their discretion.

Additional Information

Accompanying this Proxy Statement is a copy of the Company’s 2006 Annual Report to Stockholders, which includes the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006. Such Report constitutes the Company’s Annual Report to its Stockholders for purposes of Rule 14a-3 under the Securities Exchange Act of 1934. Such Report includes the Company’s audited financial statements for the 2006 fiscal year and certain other financial information, which is incorporated by reference herein.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information are available on the SEC’s website at www.sec.gov.

Stockholders who have questions in regard to any aspect of the matters discussed in this Proxy Statement should contact Alex Vermeullen, Secretary of the Company, at (___) ___-____.

- 26 -

Preliminary Copy

ELEPHANT TALK COMMUNICATIONS, INC.

THIS PROXY IS BEING SOLICITED ON BEHALF OF OUR BOARD OF DIRECTORS

The undersigned hereby appoints _________ and _________, together as proxies and each with full power of substitution, to represent and to vote all shares of common stock of Elephant Talk Communications, Inc. (“ETC”) at the special meeting of stockholders of ETC to be held on December 18, 2007 at 9:00 a.m. Eastern Time, and at any adjournment or postponement thereof, hereby revoking any and all proxies heretofore given.

Proposal 1: To elect seven Directors for a term expiring in 2008, or until their successors are duly elected and qualified.

INSTRUCTION: To withhold authority to vote for any individual nominee, mark “For All Except” and write that nominee’s name in the space provided below.

Nominees: Steven van der Velden, Willem Ackermans; Martin Zuurbier; Yves R. Van Sante; Johan Dejager; _________ and _________;

o FOR o WITHHOLD o FOR ALL EXCEPT

Proposal 2: To approve a twenty five to one reverse split (the “Reverse Split”) of our issued and outstanding common stock;

o FOR o AGAINST o ABSTAIN

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

o FOR o AGAINST o ABSTAIN

4.	Proposal 4: To adopt our 2007 Long-Term Incentive Plan.

o FOR o AGAINST o ABSTAIN

Our Board of Directors believes that Proposal 1, Proposal 2, Proposal 3, and Proposal 4 are fair to, and in the best interests of, all of our shareholders. Accordingly, our Board of Directors unanimously recommends that you vote “FOR” Proposal 1, “FOR” Proposal 2, “FOR” Proposal 3, and “FOR” Proposal 4.

In their discretion, the proxies are authorized to vote upon such other matters as may properly come before the special meeting or any adjournments thereof. If you wish to vote in accordance with our Board of Directors’ recommendations, just sign below. You need not mark any boxes.

Dated		2007
Signature of Shareholder
Signature of Shareholder (if held jointly)

NOTES:

1. Please sign your name exactly as your name appears hereon. If the shares are owned by more than one person, all owners should sign. Persons signing as executors, administrators, trustees or in similar capacities should so indicate. If a corporation, please sign the full corporate name by the president or other authorized officer. If a partnership, please sign in the partnership name by an authorized person.

2. To be valid, the enclosed form of proxy for the special meeting, together with the power of attorney or other authority, if any, under which it is signed, must be received by [ : ], Eastern Time, on [ ], 2007 at the offices of our transfer agent, Signature Stock Transfer, Inc., 2301 Ohio Drive, Suite 100, Plano, TX, 75093.

3. Returning the enclosed form of proxy will not prevent you from attending and voting in person at the special meeting or any adjournment or postponement thereof.

PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD

PROMPTLY TO SIGNATURE STOCK TRANSFER, INC.

- 27 -

AMENDED AND RESTATED ARTICLES OF INCORPORATION OF

ELEPHANT TALK COMMUNICATIONS, INC.

Steven van der Velden and _________ hereby certify as follows:

1. They are the President and Secretary, respectively, of Elephant Talk Communications, Inc., a California corporation.

2. The Amended and Restated Articles of Incorporation of said corporation, as amended, are hereby amended and restated in their entirety to read as follows:

ARTICLE 1.

The name of this corporation (“Corporation”) is Elephant Talk Communications, Inc.

ARTICLE 2.

The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California, other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.

ARTICLE 3.

This Corporation is authorized to issue two classes of stock, designated “Preferred Stock” and “Common Stock,” respectively. The total number of shares which this Corporation shall have authority to issue is three hundred million (300,000,000), having no par value. The number of shares of Common Stock authorized to be issued is two hundred fifty million (250,000,000) shares, having no par value. The number of shares of Preferred Stock authorized to be issued is fifty million (50,000,000), having no par value.

A. The holders of shares of the Common Stock shall be entitled to vote on all matters to be voted on by the shareholders of the Corporation and shall be entitled to one vote for each share thereof held of record.

B. The Preferred Stock may be issued from time to time by the board of directors as shares of one or more series, without further shareholder approval. Subject to the provisions hereof and the limitations prescribed by law, the board of directors is expressly authorized, by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the California Secretary of State a certificate setting forth the resolutions so adopted pursuant to the General Corporation Law of California, to establish the number of shares to be included in each such series and to fix the designation and relative powers, including voting powers, preferences, rights, qualifications and limitations and restrictions thereof, relating to the shares of each such series. The rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote), or senior to any of those of any present or future class or series of Preferred Stock or Common Stock. The board of directors is also authorized to increase or decrease the number of shares of any series prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

The authority of the board of directors with respect to each series shall include, but not be limited to, determination of the following:

(i) the distinctive serial designation of such series and the number of shares constituting such series;

(ii) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates;

(iv) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund;

(vi) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights;

(vii) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and

(viii) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series

- 28 -

ARTICLE 4.

The number of directors to constitute the whole board of directors shall not be less than six (6) nor more than eleven (11), and the exact number of directors shall be fixed within these specified limits by the board of directors in the manner provided in the bylaws. Directors shall continue in office until others are elected and qualified in their stead. In case of any vacancies, by reason of an increase in the number of directors, removal by the shareholders or otherwise, subject to the rights of the holders of any series of Preferred Stock then outstanding, each additional director may be elected by a majority of the directors then in office to serve until the end of the term he or she is elected to fill and until his or her successor shall have been elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director.

Election of directors at all meetings of the shareholders at which directors are to be elected shall be by written ballot or in a manner otherwise determined by the by-laws of the Corporation, and, except with respect to the right of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, a plurality of the votes cast thereat shall elect directors.

ARTICLE 5.

The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

ARTICLE 6.

The Corporation is authorized to provide indemnification of agents, as defined in Section 317 of the California General Corporation law, through bylaw provisions, agreements with such agents, votes of shareholders or disinterested directors otherwise, or any combination of the foregoing, in excess of the indemnification otherwise permitted by said Section 317, subject only to the limits set forth in Section 204 of the California General Corporation Law with respect to actions for breach of duty to the Corporation and its shareholders.

* * *

3. Upon the effectiveness (the “Effective Date”) of the certificate of amendment to the Articles of Incorporation containing this sentence, each twenty five (25) shares of the Common Stock issued and outstanding as of the date and time immediately preceding [date on which the certificate of amendment is filed], the effective date of a reverse stock split (the “Split Effective Date”) shall be automatically changed and reclassified, as of the Split Effective Date and without further action, into one (1) fully paid and nonassessable share of Common Stock. There shall be no fractional shares issued. A holder of record of Common Stock on the Split Effective Date who would otherwise be entitled to a fraction of a share shall have the number of new shares to which they are entitled rounded down to the nearest number of whole shares. No shareholders will receive cash in lieu of fractional shares.

4. The foregoing amendment and restatement of the Articles of Incorporation of Elephant Talk Communications, Inc. has been duly approved by the Board of Directors of said corporation.

5. The foregoing Amended and Restated Articles of Incorporation has been duly approved by the required vote of the shareholders of the Corporation in accordance with sections 603 and 903 of the California Corporations Code. The total number of outstanding shares of the Corporation entitled to vote with respect to the foregoing amendment and restatement of the Articles of Incorporation was ___________ shares of Common Stock and zero shares of Series B Preferred Stock. The number of shares voting in favor of this amendment and restatement equaled or exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock.

[SIGNATURE PAGE FOLLOWS]

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Dated: , 2007

Steven van der Velden, President

__________, Secretary

- 29 -

Annex “A”

ELEPHANT TALK COMMUNICTIONS, INC.

AUDIT AND FINANCE COMMITTEE CHARTER

There shall be a Committee of the Board of Directors (the “Board”) of Elephant Talk Communications, Inc. (the “Corporation”) to be known as the Audit and Finance Committee (“Committee”) with purpose, composition, duties, authority, and responsibilities, as follows:

I. PURPOSE OF THE COMMITTEE. The primary purpose of the Committee is to assist the Board in oversight and monitoring of: (i) the Corporation’s financial statements and other financial information provided by the Corporation to its shareholders and others; (ii) compliance with legal and regulatory requirements; (iii) the independent auditors, including their qualifications and independence; (iv) the Corporation’s systems of internal controls, including the Internal Audit function; and (v) the auditing., accounting, and financial reporting process generally. The Committee shall prepare the report required by the rules of the Securities and Exchange Commission (“SEC”) to be included in the Corporation’s annual proxy statement. The Committee does not itself prepare financial statements or perform audits, and its members are not auditors or certifiers of the Corporation’s financial statements. It is not the duty of the Committee to conduct audits or to determine that the Corporation’s financial statements and disclosures are complete and accurate and are in accordance with Generally Accepted Accounting Principles and applicable rules and regulations. These are the responsibilities of Management and the independent auditors.

II. COMPOSITION OF THE, COMMITTEE. The members of the Committee shall be appointed by the Board. The Committee will be composed of not less than two (2) members and shall be composed of directors satisfying the independence requirements of applicable NASDAQ and SEC rules. The Chairman of the Committee shall be designated by the Board. Each member shall be able to read and understand fundamental financial statements, in accordance with the NASDAQ Audit Committee requirements, and at least one member ‘Will have past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background, including a current or past position as a principal financial officer or other senior officer with financial oversight responsibilities and will otherwise qualify as an “audit committee financial expert” as defined by applicable SEC rules.

III. COMMITTEE MEETINGS. The Committee shall meet at least quarterly, or more frequently as circumstances dictate. The Committee shall meet at least quarterly with Management, the Director of Internal Audit, and the independent auditors in separate executive sessions to discuss any matters that the Committee or any of these groups believe should be discussed privately. The Committee shall meet with the independent auditors and Management quarterly to review the Corporation’s financial information. The Committee shall report to the full Board with respect to its meetings. The Chairman of the Board, any member of the Committee, or the Secretary of the Corporation may call meetings of the Committee. The Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board.

IV. AUTHORITY AND RESOURCES. The Committee may request any officer or employee of the Corporation or the Corporation’s outside counselor independent auditor to attend a Committee meeting or to meet with any members of, or consultants to, the Committee. The Committee shall have the power to conduct or authorize investigations into any matters within the Committee’s scope of responsibilities. The Committee shall be empowered to retain independent counsel, accountants, or other advisors and experts to assist in any investigation and performance of its functions at the Corporation’s expense.

V. DUTIES ANDRESPONSIBILITIES. To fulfill its responsibilities and duties the Committee shall:

Independent Auditor

1.	Appoint, compensate, and oversee the work of the independent auditors (including resolving disagreements between Management and the independent auditors regarding financial reporting) for the purpose of preparing or issuing an audit report or related work.

Pre-approve audit and non-audit services to be provided to the Corporation by the independent auditors. In this regard, the Committee shall have the sole authority to approve the hiring and firing of the independent auditors and all fees and terms of audit and non-audit engagements with the independent auditors, in each case as may be permissible and compatible with the auditors’ independence. The Committee shall also review and approve disclosures with respect to non-audit services.

Review and provide guidance with respect to the external audit and the Corporation’s relationship with its independent auditors by (i) reviewing the independent auditors’ proposed audit scope, approach and independence; (ii) obtaining on a periodic basis a statement from the independent auditors regarding relationships and services with the Corporation which may impact independence and presenting this statement to the Board, and to the extent there are relationships, monitoring and investigating them; (iii) ensuring that the independent auditors submit to the Committee on an annual basis a written statement (consistent with Independence Standards Board Standards No.1) delineating all relationships and services that may impact the objectivity and independence of the independent auditors; and (iv) reviewing reports submitted to the Committee by the independent auditors in accordance with the applicable SEC requirements.

Obtain and review an annual report from the independent auditors describing (i) the independent auditors’ internal quality control procedures and (ii) any material issues raised by the recent internal quality control review, or peer review, of the independent auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the independent auditors, and steps taken to deal with any such issues.

5.	Review the experience and qualifications of the senior members of the independent auditor team.

- 30 -

6.	Review and concur with the Corporation’s hiring of employees of the independent auditor who were engaged on the Corporation’s account.

7.	Review the performance of the independent auditors on an annual basis.

Periodically discuss with the independent auditors, (i) their judgments about the quality, appropriateness, and acceptability of the Corporation’s accounting principles and financial disclosure practices, as applied in its financial reporting, and (ii) the completeness and accuracy of the Corporation’s financial statements.

Financial Reporting

9.	Review with Management and the independent auditor:

The Corporation’s annual audited financial statements, and related footnotes, and quarterly unaudited financial statements, including the disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” prior to t11ing the Corporation’s Annual Report on Form 10-KSB and Quarterly Reports on Form 10-QSB, respectively, with the SEC.

·	The independent auditors’ audit of the annual financial statements and their report thereon.

·	The accompanying Management Letter and any reports with respect to interim periods.

·	Any major changes to the Corporation’s accounting principals and practices.

·	Any significant changes required in the independent auditors’ audit plan.

·	Any difficulties or disputes with Management encountered during the course of the audit.

·	Other matters related to the conduct of the audit that are to be communicated to the Committee under Generally Accepted Auditing Standards.

10.	Review with Management, the independent auditors, and the Corporation’s counsel, as appropriate, any legal and regulatory matters that may have a material impact on the financial statements, related compliance policies, and programs and reports received from regulators.

11.	Review and discuss earnings press releases prior to public disclosure.

12.	Provide a report for inclusion in the Corporation’s proxy statement in accordance \\ith the rules and regulations of the SEC.

13.	Oversee compliance -with the requirements of the SEC for disclosure of auditors’ services and audit committee member qualifications and activities.

14.

Discuss with the independent auditors the financial statements and audit findings, including any significant adjustments, Management judgments and accounting estimates, significant new accounting policies and disagreements with Management and any other matters described in SAS No. 61, as may be modified or supplemented.

Internal Controls

15.	Review the adequacy of the Corporation’s internal controls and the procedures designed to ensure compliance with applicable laws and regulations.

16.	Consider and review with the independent auditor and the Director of Internal Audit the adequacy of the Corporation’s internal controls and any related significant findings and recommendations of the independent auditor and internal auditing together with Management’s responses thereto.

17.

Establish procedures for receiving, retaining and treating complaints received by the Corporation regarding accounting, internal accounting controls, or auditing matters and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

Internal Audit

18.	Review and concur with the appointment, replacement, reassignment, or dismissal of the Director of Internal Audit.

19.	Consider, in consultation with the Director of Internal Audit and the independent auditor, the audit scope and plan of the internal auditors and the independent auditors.

20.	Review with the Director of Internal Audit and the independent auditor the coordination of audit effort to assure completeness of coverage, reduction of redundant efforts, and the effective use of audit resources.

- 31 -

21. Consider and review with Management and the Director of Internal Audit:

·	Significant findings during the year and Management’s responses thereto.

·	Any difficulties encountered in the course of their audits, including any restrictions on the scope of their work or access to required information.

·	Any changes required in the planned scope of their audit plan.

·	The Internal Audit department budget and staffing.

Management Discussions

22.	Review and discuss with Management (i) Management’s financial risk assessment and risk management policies, (ii) the Corporation’s major financial risk exposures and the steps Management has taken to monitor and control such exposures.

23.	Review with Management and the independent auditors any correspondence with regulators or governmental agencies and any employee complaints regarding the Corporation’s financial statements or accounting policies.

24.

Periodically review separately with each of Management, the independent auditors, and the Director of Internal Audit (i) any disagreements between Management and the auditors in connections with any audits, (ii) any difficulties encountered during the course of audits, including restrictions in scope or access to required information, and (iii) Management’s response.

25.

Consider and approve, if appropriate, significant changes to the Corporation’s accounting principles and financial disclosure practices as recommended by Management and the independent auditors. Review with Management and the independent auditors, at appropriate intervals, the extent to which any changes or improvements in accounting or financial practices, as approved by the Committee, have been implemented.

26.

Inquire about the application of the Corporation’s accounting policies and its consistency from period to period, and the compatibility of these accounting policies with Generally Accepted Accounting Principles, and, when applicable, the provisions for future occurrences that may have a material impact on the financial statements of the Corporation.

27.	Review and discuss with Management the program that Management has established to monitor compliance with the Corporation’s code of business ethics and conduct.

28.	Review and discuss with Management all disclosures made by the Corporation concerning any material changes in the financial condition or operations of the Corporation.

29.	Review annually the independent auditors’ letter of recommendations to Management and Management’s responses.

30.	Review any Management decision to seek a second opinion from independent auditors other than the Corporation’s regular independent auditors with respect to any significant accounting issues.

31.	Review with Management and the independent auditors the sufficiency and quality of the Internal Audit Department staff and other financial and accounting personnel of the Corporation.

Treasury and Finance

32.	Review periodically the capital structure of the Corporation, and, when necessary, recommend to the Board transactions or alterations to the Corporation’s capital structure.

33.	Review and recommend to the Board changes in the Corporation’s treasury resolutions and expenditure authorizations.

34.	Periodically review matters pertaining to the Corporation’s investment practices for cash management, foreign exchange, investments, and derivatives.

- 32 -

Other

35.

Review for approval or disapproval special transactions or expenditures as specifically delegated by the Board, or such other special transactions or expenditures not specifically delegated by the Board if determined by the Committee that approval by the full Board is not necessary or convenient, such as transactions that require relatively rapid decisions.

36.

Review and discuss with Management all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), leases and other relationships of the Corporation with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital resources, capital reserves, or significant components of revenues or expenses. Review with Management the sale or acquisition of equity investments and asset acquisitions or dispositions that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital resources, capital reserves, or significant components of revenues or expenses.

38.	Review and discuss with Management the Corporation’s effective tax rate, adequacy of tax reserves and significant tax developments.

39.	Provide an open avenue of communication between the internal auditors, the independent auditor, and the Board.

40.	Review the Committee’s charter, structure, processes, and membership requirements at least once a year.

41.	Report Committee actions to the Board with such recommendations as the Committee deems appropriate.

42.	Review and approve in advance any proposed related-party transactions and report to the full Board on any approved transactions.

43.	The Committee can delegate any of its responsibilities to the extent allowed under applicable law.

44.	The Committee will perform such other functions as assigned by law, the Corporation’s charter or bylaws, or the Board.

- 33 -

ANNEX “B”

ELEPHANT TALK COMMUNICATIONS, INC.

COMPENSATION COMMITTEE CHARTER

There shall be a Committee of the Board of Directors to be known as the Compensation Committee with purpose, composition, duties and responsibilities, as follows:

Purpose of the Committee. The Committee shall (i) establish and modify compensation and incentive plans and programs, (ii) review and approve compensation and awards under compensation and incentive plans and programs for elected officers of the Corporation, and (iii) be the administering committee for equity compensation plans as designated by the Board.

Composition. The members of the Committee shall be appointed by the Board of Directors. The Committee will be composed of not less than two (2) Board members. Each member shall be “independent” in accordance with applicable law, including the rules and regulations of the Securities and Exchange Commission and the rules of the NASDAQ. Committee members are prohibited from interlocking or insider participation with any member of the board or compensation committee of another company. At least two Committee members will qualify as “outside directors” under Section 162(m) of the Internal Revenue Code. The Chairman of the Committee shall be designated by the Board of Directors. The Chairman of the Board, any member of the Committee or the Secretary of the Corporation may call meetings of the Committee.

Members of the Committee shall serve until their successors are duly elected and qualified or their earlier resignation or removal. The Board may replace any member of the Committee.

Authority and Resources. The Committee may request any officer or employee of the Corporation or the Corporation’s outside counsel to attend a Committee meeting. The Committee has the right at any time to obtain advice, reports or opinions from internal and external counsel and expert advisors and has the authority to hire and terminate independent legal, financial and other advisors as it may deem necessary, at the Corporation’s expense, without consulting with, or obtaining approval from, any officer of the Corporation in advance.

Meetings. The Committee shall meet as often as it deems appropriate, but not less than twice a year, to perform its duties and responsibilities under this charter. The Committee shall maintain written minutes of its meetings, which will be filed with the meeting minutes of the Board.

Duties and Responsibilities. The duties and responsibilities of the Committee shall include the following:

·	Review periodically and approve all compensation, incentive, and benefits programs.

·	Conduct and review with the Board of Directors an annual evaluation of the performance of the Chief Executive Officer and review with the CEO and report to the Board annually on the performance of other executive officers.

·	Review and approve periodically the salaries, bonuses and perquisites of elected officers of the Corporation and its subsidiaries, including the Chief Executive Officer.

Act as administering committee of the Corporation’s various bonus plans, stock plans and equity arrangements that may be adopted by the Corporation from time to time, with such authority and powers as are set forth in the respective plans’ instruments, including but not limited to establishing performance metrics, determining bonus payouts and the granting of equity awards to employees and executive officers.

Review for approval or disapproval special hiring or termination packages for officers and director-level employees of the Corporation and its subsidiaries that go beyond the Board’s adopted criteria for management authority, if it is determined by the members of the Committee that approval by the full Board is not necessary.

·	To the extent it deems necessary, recommend to the Board of Directors the establishment or modification of employee stock-based plans for the Corporation and its subsidiaries.

·	To the extent it deems necessary, review and advise the Board of Directors regarding other compensation plans.

·	Review and comment on management’s Compensation Discussion & Analysis and prepare an annual Compensation Committee Report for inclusion in the Corporation’s proxy statement.

·	Review the Committee charter, structure, process and membership requirements at least once a year.

·	Assume all responsibilities held heretofore by the Option Committee of the Corporation.

·	Report to the Board of Directors concerning the Committee’s activities at least once a year.

·	The Committee can delegate any of its responsibilities to the extent allowed under applicable law.

- 34 -

Exceptions. Notwithstanding any implication to the contrary above:

·	In making its determination regarding compensation and plans which it is responsible for administering, the Committee shall take into account compensation received from all sources, including plans or arrangements which it is not responsible to administer.

The Committee should take into consideration the tax-deductibility requirements of Section 162(m) of the Internal Revenue Code when reviewing and approving compensation for executive officers and, if deemed advisable, have such compensation approved by no less than two outside Committee members. If the Committee does not have two outside directors as defined in Section 162(m) of the Internal Revenue Code, such compensation should be approved by a majority of the outside Board members.

·	The Committee shall not be empowered to approve matters which applicable law, the Corporation’s charter, or the Corporation’s bylaws require be approved by a vote of the entire Board.

- 35 -

ANNEX “C”

CHARTER FOR THE NOMINATING AND CORPORATE GOVERNANCE COMMITTEE OF THE BOARD OF DIRECTORS OF ELEPHANT TALK COMMUNICATIONS, INC.

Purpose:

The purpose of the Nominating and Corporate Governance Committee (the “Committee”) of the Board of Directors of Elephant Talk Communications, Inc. shall be to consider and report periodically to the Board of Directors on matters relating to the identification, selection and qualification of the Board of Directors and candidates nominated to the Board of Directors and to advise and make recommendations to the Board of Directors with respect to corporate governance matters.

Membership:

The Committee shall consist of two or more directors designated as members of the Committee by the full Board of Directors. The Committee shall be appointed by, and will serve at the discretion of, the Board of Directors. Each director shall be “independent” according to the American Stock Exchange requirements.

Responsibilities:

·	The responsibilities of Committee shall be:

·	Developing and recommending to the Board of Directors specific guidelines and criteria for screening and selecting nominees to the Board of Directors;

·	Reviewing the qualifications of, and recommending to the Board of Directors, those persons to be nominated for membership on the Board of Directors and to be elected by the Board to fill vacancies and newly created directorships;

·	Developing a pool of potential director candidates for consideration in the event of a vacancy on the Board of Directors;

·	Overseeing the Board of Directors performance evaluation process including conducting surveys of director observations, suggestions and preferences;

·	Considering the performance of incumbent members of the Board of Directors in determining whether to recommend that they be nominated for reelection;

·	Evaluating and recommending termination of membership of individual directors in accordance with the Board of Directors' governance principles, for cause or for other appropriate reasons;

·	Making recommendations to the Board of Directors concerning the size, structure and composition of the Board of Directors and its committees;

·	Considering shareholder nominees for election to the Board of Directors;

·	Performing such other functions and duties as may be requested by the Board of Directors from time to time;

·	Consider and make recommendations to the Board of Directors regarding compensation for members of the Board of Directors and its committees;

·	Review this Charter annually and make recommendations to the Board of Directors for any proposed changes;

·	Review the Corporate Governance Guidelines annually and make recommendations to the Board of Directors for any proposed changes.

The Committee shall have authority to retain, terminate and obtain advice, reports or opinions from search firms or other internal or outside advisors in the performance of its responsibilities.

Meetings:

The Committee may establish its own schedule for meetings throughout the year, and shall determine the number of meetings necessary and proper for the conduct of the business of the Committee.

Minutes:

The Committee shall maintain written minutes of its meetings, which minutes shall be filed with the minutes of the meetings of the Board of Directors.

- 36 -

ANNEX “D”

Code of Business Ethics

The way we do business worldwide

Contents

1.	Fundamental Principles

2.	Responsibilities to ETC

A.	Opportunity is for everyone

B.	Confidential information

C.	Public communications

D.	Mail and electronic communication systems

E.	Conflicts of interest

F.	It’s a matter of record

3.	Responsibilities to Others

A.	Putting the customer first

B.	Quality in all we do

C.	Using ETC and third-party copyrighted material

D.	Environmental health and safety

4.	Responsibilities to the Public

A.	Buying and selling ETC stock

B.	Meeting export requirements

C.	Dealing with government contracts and other government requirements

D.	Political contributions and activities

E.	Trade practices

5.	Compliance and Consequences

A.	Being vigilant

B.	ETC compliance

C.	Consequences

D.	ETC Ethics Policy

1.	Fundamental Principles

Underlying the way we do business at Elephant Talk Communications, Inc. (“ETC”) is one fundamental principle: use good judgment. To give a context for using good judgment, set forth below are some of the basic legal and ethical parameters under which ETC operates. ETC is a publicly held company, and as such, has a responsibility to its shareholders to pay constant attention to all legal and ethical boundaries and to comply with all applicable laws. ETC has the same obligation to the communities in which it does business and to the customers with whom it does business.

Although no two situations are alike, ETC aims for consistency and balance when encountering any ethical issues. At the same time, ETC understands that each employee is responsible for his or her own actions. No one will be excused for misconduct directed or requested by someone else. Part of your job and ethical responsibility is to help enforce these ethics guidelines. You should be alert to possible violations and report possible violations to the Human Resources Department or ETC’s management. You must cooperate in any internal or external investigations of possible violations. Reprisals, threats, retribution or retaliation against any person who has in good faith reported a violation or a suspected violation of law, these ethics guidelines or other ETC policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited.

ETC employees are expected to refer to ETC’s [Employee Handbook] for specific internal policies and procedures for implementing the general principles set forth below.

The way ETC does business centers on six simple general standards:

·	ETC expects its employees, including those of its subsidiaries worldwide, and third parties with whom ETC does business, to maintain the highest standards of business conduct.

·	ETC expects its employees to be totally honest and ethical in all ETC business dealings.

·	ETC expects its employees to avoid situations where a conflict of interest might occur or appear to occur.

·	ETC expects its employees to respect the confidentiality of ETC information and the information of third parties, including our customers and our vendors.

·	ETC conducts its business in accordance with all applicable laws and rules, and in such a way as to attain the highest standards of corporate citizenship, and expects the same of those with whom we do business.

·	ETC conducts its business so that the communities in which we operate are benefited by our presence.

- 37 -

ETC may take action against any employee, independent contractor, consultant, or other party whose actions violate ETC’s standards, policies, or guidelines. Such disciplinary action may include termination of employment or other working relationship, and may subject the person or party to civil and criminal sanctions.

2. Responsibilities to ETC

A.	Opportunity is for everyone

ETC encourages a creative, culturally diverse, and supportive work environment. ETC will not tolerate discrimination, harassment, slurs, jokes or threats based on a person’s race, color, sex, sexual orientation, gender identity characteristics or expression, religion, national origin, age, marital status, disability, or veteran status. This applies to employees, applicants for employment, or others who may be present in the workplace at any ETC location.

Any ETC employee who believes he or she has been discriminated against or harassed, or has witnessed such action, is strongly encouraged to report the incident to any member of the Human Resources Department or to any manager.

B.	Confidential information

ETC’s success is a direct result of its technologically innovative products. The company’s continued success and growth depends on our ability to preserve the confidentiality of our confidential, proprietary and trade secret information, as well as that of others in our possession. Each ETC employee has the duty to respect and protect the confidentiality of all such information. Employees (including temporary workers, consultants, independent contractors and members of the Board of Directors) are expected to read and to comply with ETC’s information protection practices, including information classification, and procedures for handling confidential information.

Employees must also comply with ETC’s policies with respect to personal information of our employees and customers, in addition to complying with all applicable laws governing ETC’s use of such personal information, worldwide.

No ETC employee, employee of a temporary agency, or independent contractor shall disclose any ETC confidential, proprietary, or trade secret information to an outside party unless an authorized ETC representative has previously signed au appropriate agreement or license approved by ETC’s management. No ETC employee, employee of a temporary agency, or independent contractor shall use or disclose to any other party any confidential, proprietary, and trade secret information in ETC’s possession belonging to a third party unless authorized by the third party to do so, and until the party receiving the information has signed an appropriate confidentiality agreement with ETC,

To protect ETC’s interests in its research and development investment, any unsolicited third-party confidential information sent to ETC must be refused or, if inadvertently received by an ETC employee, sent to ETC’s management for appropriate disposition. Employees must be careful not to use or disclose, at ETC, information of former employers or other third parties,

C.	Public communications

ETC has specific policies regarding who can communicate information to the press and the financial analyst community. All inquiries or calls from the press and financial analysts should be referred to the management of the company. ETC has designated its CEO, CFO, COO, and Treasurer and as official ETC spokespeople for financial matters. ETC has designated these officers as official ETC spokespeople for marketing, technical and other such information. Unless authorized by the CEO, these designees are the only people who may communicate with the press and financial analysts.

D. Use of ETC equipment and electronic systems and communications

ETC equipment, networks and electronic systems (such as Internet access, voicemail, e-mail, instant messaging and ETCWeb) are provided to help employees perform their duties while supporting ETC’s business needs, and are for ETC business use. ETC equipment, networks and electronic systems should be used only for ETC business-related purposes; incidental personal use is permitted on a limited basis. Use of ETC-owned equipment for non-ETC commercial use is prohibited.

ETC equipment, networks, mail and electronic systems are provided for use in conducting ETC business, so there should be no expectation of privacy in files, voicemail, e-mail or Internet use. Management may at any time review and monitor any ETC equipment, networks, mail or electronic systems, whether used for business or personal purposes, unless and to the extent that such review and monitoring is otherwise prohibited or limited by applicable law.

E. Conflicts of interest

Conflicts of interest can compromise an employee’s business ethics. At ETC, a conflict of interest is any activity that is inconsistent with or opposed to ETC’s best interests, or that gives the appearance of impropriety. The way to identify a conflict is to decide whether there is potential for even the appearance of divided loyalty on the part of the ETC employee.

Common areas where conflicts of interest may occur are described below. Although these focus on employees, activities of employees’ family members, household members and other third parties in significant relationships with employees should also be examined for any circumstances which may give rise to a conflict of interest, impropriety, or ethical or legal risks, whether real or perceived, for ETC or the ETC employee (examples of significant relationships include domestic partners, dating relationships, and business partnerships outside of ETC).

- 38 -

Payments to or from third parties. All ETC employees must pay for and receive only that which is proper. ETC will make no payments or promises to influence another’s acts or decisions, and the company will give no gifts beyond those extended in normal business dealings. At a minimum, ETC will observe all government restrictions on gifts and entertainment.

Interests in other businesses. ETC employees must avoid any direct or indirect financial or other relationship that could cause divided loyalty. This type of relationship could include, for example, membership on the board of directors of an outside commercial or nonprofit enterprise. ETC employees must receive written permission from _______________ before beginning any employment, business, consulting, financial, or other relationship with another company if the proposed activity is in ETC’s present or reasonably anticipated future business; uses any ETC or third-party confidential, proprietary, or trade secret information; or relates to the services performed by the employee on behalf of ETC. This does not mean, however, that family members are precluded from being employed by one of ETC’s customers, competitors, or suppliers.

Corporate opportunities. ETC employees must not exploit for their own personal gain opportunities that are discovered through the use of ETC property, information, or position unless the opportunity is disclosed fully in writing to ETC’s Board of Directors and the Board of Directors declines to pursue the opportunity.

Projects or inventions. Before beginning work on any project or invention, outside the course and scope of an employee’s work for ETC, that will involve any ETC time, equipment, or materials, or that relates to ETC’s present or reasonably anticipated future business, ETC employees must receive the written permission of the ETC Senior Vice President for their organization.

Investments. Passive investments of not more than one percent of total outstanding shares of companies listed on a national or international securities exchange, or quoted daily by NASDAQ or any other board, are permitted without ETC’s approval, provided the investment is not so large that it creates the appearance of a conflict of interest, and provided it does not involve the improper use of confidential or proprietary information.

Market Intelligence. Though market intelligence is important, only authorized ETC employees should obtain it, and only in straightforward ways. ETC and its employees must never accept or use information otherwise presented. ETC employees may not contact competitors for market intelligence.

Family. ETC employees should avoid conducting ETC business with members of their families (and others with whom they have significant relationships) in another company or business, unless they have prior written permission from the ETC Senior Vice President for their organization. ETC employees must avoid a direct reporting relationship within ETC with any member of their family or others with whom they have a significant relationship. ETC employees must also avoid any direct or indirect financial, business, consulting, or other relationships that could cause divided loyalty, unless the employee has first obtained written permission from the ETC Senior Vice President for his or her organization.

Tips, gifts, and entertainment. ETC employees must not give or receive valuable gifts, including gifts of equipment or money, discounts, or favored personal treatment, to or from any person associated with ETC’s vendors or customers. Such gifts (including advertising novelties, favors, and entertainment) are allowed only when the following conditions are met:

·	They are consistent with our business practices.

·	They are of limited value (US $100 or less).

·	They do not violate any applicable law.

·	Public disclosure would not embarrass ETC.

·	They are not given to any government personnel (see the “Dealing with government contracts” section, below).

This is not intended to preclude ETC from receiving or evaluating appropriate complimentary products and services. It is al so not intended to preclude ETC from making a gift of equipment to a company or an organization, provided that the gift is given openly, with full knowledge by the company or organization, and is consistent with applicable law and ETC’s business interests. It is also not intended to preclude ETC’s attendance at social functions, provided such attendance is approved by management and does not present a conflict of interest or the appearance of a conflict of interest.

In some circumstances, local custom in countries other than the United States may call for the exchange of gifts having more than nominal value as part of a business relationship. In these situations, gifts may be given or received only if they comply with written guidelines that have been approved by ETC’s managing director for the country. Such gifts may be accepted only on behalf of ETC (not an individual) and must be turned over to the Human Resources Department for appropriate disposition, in all cases, the exchange of gifts must be conducted so there is no appearance of impropriety.

No “kickbacks” of any type may be given to any customer’s or vendor’s employees or representatives, No kickback of any type may be received by any ETC employee, particularly those involved in any ETC business transaction, including purchasing goods or services for ETC.

Outside vendors (including temporary agencies and contractors). When dealing with any outside vendors or potential vendors, ETC employees must maintain the highest ethical standards. Only arm’s - length transactions should be conducted. Employees of outside vendors are also expected to maintain the highest ethical standards, including maintaining the confidentiality of any ETC and third-party information that they receive.

Honoraria. Speaking at events, when it is determined to be in ETC’s best interests, is considered part of an employee’s normal j ob responsibilities. Because employees will be compensated by ETC for most or all of their time spent preparing for, attending, and delivering presentations approved by management, employees should not request or negotiate a fee or receive any form of compensation from the organization that requested the speech, unless the employee first receives express written authorization from the ETC Vice President for his or her organization.

- 39 -

These examples above do not list all possible conflicts, but do illustrate some of the conflicts of interest ETC employees must avoid. Ultimately, it is the responsibility of each individual to avoid any situation that would even appear to be a conflict of interest or to be improper. Each employee should feel free to discuss any potential conflict of interest situations with his or her manager or Human Resources.

F. It’s a matter of record

Records count. They are a vital part of maintaining a high level of ethical business transactions. ETC records must be maintained and disposed of properly, in accord with established procedures and ETC policies. All business and accounting transactions must be fully and accurately described in ETC’s formal records, and payments on ETC’s behalf should never be made other than as described in the records. At ETC, there is never any reason for false or misleading entries, and there is no place for undisclosed or unrecorded funds, payments, or receipts.

ETC is required by local, state, federal, foreign and other applicable laws, rules and regulations to retain certain records and to follow specific guidelines in managing its records. Civil and criminal penalties for failure to comply with these guidelines can be severe for ETC and its employees, agents and contractors, and failure to comply with these guidelines may subject an employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at ETC’s sole discretion.

A “legal hold” suspends all document destruction procedures in order to preserve appropriate records under special circumstances, such as litigation or government investigations. ETC’s management determines and identifies what types of records or documents are required to be placed under a legal hold. Every ETC employee, agent and contractor must comply with this policy. Failure to comply with this policy may subject the employee, agent or contractor to disciplinary action, up to and including termination of employment or business relationship at ETC’s sole discretion. ETC will notify you if a legal hold is placed on records for which you are responsible. You then must preserve and protect the necessary records in accordance with instructions from ETC. RECORDS OR SUPPORTING DOCUMENTS THAT HAVE BEEN PLACED UNDER A LEGAL HOLD MUST NOT BE DESTROYED, ALTERED OR MODIFIED UNDER ANY CIRCUMSTANCES. A legal hold remains effective until it is officially released in writing by ETC. If you are unsure whether a document has been placed under a legal hold, you should preserve and protect that document while you check with ETC. If you have any questions about this policy you should contact ETC.

All ETC bank accounts that are to be established must be approved and established by ETC’s Treasurer. All payments must be made by recorded and traceable methods: checks (correctly dated), bank drafts, or bank transfers. No payments shall be made in cash, except petty cash reimbursements.

3. Responsibilities to Others

A. Putting the customer first

ETC creates, manufactures, and markets computing products so people can use them to make their lives better. ETC strives to understand our customers’ needs, to provide customers with the tools and skills to enhance their use of ETC products, and to be courteous and instructive.

B. Quality in all we do

There is no upper limit on the quality of the products and services that we want to provide. Employees should at all times strive for the highest quality in all they do. No employee shall knowingly misrepresent in any way the condition of any products. Testing must be done in a manner that verifies that products are being designed and manufactured to meet all appropriate quality criteria. Accurate documentation of all tests must be appropriately maintained.

C. Using ETC and third-party copyrighted material

Unauthorized duplication of copyrighted computer software and other copyrighted materials violates the law and is contrary to ETC’s standards of conduct. ETC will not tolerate the making or use of unauthorized copies under any circumstances and will comply with the law and all license or purchase terms regulating the use of any software and other copyrighted materials we acquire or use.

D. Environmental health and safety

At ETC, meeting the challenges of rapidly expanding and changing technology means more than making the finest products. We strive to produce those products in a manner that conserves the environment and protects the safety and health of our employees, our customers, and the community.

To accomplish these objectives, ETC will:

·	Comply with applicable environmental, health, and safety laws and regulations in those countries in which we do business.

·	Adopt our own corporate standards for protection of human health and the environment.

·	Provide a safe work environment by integrating a comprehensive program of safety training and evaluation.

·	Strive to anticipate future environmental, health, and safety risks and regulatory requirements, and have a proactive approach to dealing with them whenever appropriate.

- 40 -

We believe that a comprehensive environmental health and safety program is an essential component of our forward-looking business approach. Our goal of providing a safe work environment depends on a conscientious effort and commitment to excellence from all ETC employees.

4. Responsibilities to the Public

A. Buying and selling ETC stock

ETC’s Insider Trading Policy prohibits ETC employees from making transactions (i.e. buying or selling) in ETC stock, including options and derivatives like puts and calls, at any time when the employee may possess material information about ETC that has not been publicly disclosed. United States securities laws dictate this policy, and it applies to all executive officers, members of the Board of Directors, employees, consultants and contractors, including members of their immediate families, and members of their households, who receive or have access to material nonpublic information regarding ETC

In addition, members of ETC’s Board of Directors, executive officers and other individuals with access to material nonpublic information are subject to additional restrictions on the trading of stock. including mandatory “blackout periods” during which they may not engage in any ETC securities transactions.

ETC employees should review ETC’s Insider Trading Policy for more information, and to determine if they are restricted from trading during blackout periods. A copy of this policy is available to ETC employees [on the Company’s website] or may be requested from ETC. We strongly urge all ETC employees to read the Insider Trading Policy, paying particular attention to the specific policies and the potential criminal and civil liability and/or disciplinary action for insider trading violations which may include termination of employment. Any questions about buying or selling ETC stock should be directed to the management of the Company.

B. Meeting export requirements

Export laws that control commodities that various governments consider to be strategically important, usually because the information and products have the potential to be used for military purposes, regulate most of ETC’s confidential information and products. Compliance with export controls is critical to maintaining our good reputation in the international business community. All ETC employees, temporary employees, independent contractors and business partners must comply with ETC’s policies when exporting ETC products, working with technical data, traveling overseas, developing new products, and exporting third-party products.

C. Dealing with government contracts and other government requirements

Special requirements may apply when contracting with any government body (including national, state, provincial, municipal, or other similar government divisions in local jurisdictions). ETC employees are expected to read and to comply with all applicable ETC policies and laws relating to our dealings with governmental bodies.

Disclosure and certification requirements. In addition to ETC’s own general high standards imposed on all ETC employees, government agencies often place special disclosure and certification requirements on firms with which they do business. These requirements impose on ETC employees the need to be especially vigilant to ensure that our general business practices conform to special government pricing, contracting, and certification requirements” In certain situations, for example, ETC may have to certify that it is supplying the government with its lowest price charged to our commercial customers. ETC may also have to certify that its prices have been arrived at independently, that is, without any collaboration with a third party. ETC depends on all of its employees to make sure that these and other promises to the government are satisfied. Any doubts about such matters should be brought to the attention of ETC’s management.

Employment of former government employees. ETC is committed to observing all laws limiting the duties and types of services that former government and military employees may perform as ETC employees or as consultants to ETC. In the United States, for example, laws and regulations prohibit employment negotiations with any government employee while he or she is participating in a matter involving ETC’s interest. They also prohibit a former government employee from acting on behalf of ETC in a matter in which he or she participated substantially while employed by the government. State and local employees are often subject to similar limitations. Retired military officers have additional restrictions on their dealings with their former service. All questions in this area should be directed to ETC’s management.

Gratuities for government officials In additional to the limitations that exist on ETC employees when giving or receiving any tips, gifts, and entertainment in the context of ETC business generally, additional considerations may apply when dealing with government personnel and their representatives.

Governments have wrestled with determining when a gift or gratuity is a “bribe” or merely a “courtesy”. As a result, in many instances government regulations prohibit giving what might seem like a simple courtesy to a governmental employee. For example, the regulations of various United States government bodies prohibit employees of contractor firms (firms doing business with the government in the U.S., or a subcontractor to those firms) from providing meals, refreshments, entertainment, token gifts, or other business courtesies to government employees or military personnel. Even if a particular country does not prohibit the above activities, the U.S. Foreign Corrupt Practices Act places restrictions on American companies, and their local subsidiaries, doing business with governmental agencies outside of the United States.

- 41 -

There are some exceptions, though. For example, in many countries, but not the United States, it is considered common courtesy to provide small gifts on certain occasions to government officials. Within limits appropriate to the country, such gifts may be permissible (see the discussion of the Foreign Corrupt Practices Act, below). Also, serving lunch to participants (including government officials) in a business conference held on ETC premises is often not prohibited, if the purpose is to make the best use of ETC’s time and that of any government employee. Seeking advice from the government employee in advance may help to avoid embarrassment and protect the interest of ETC employees. In other words, ETC employees-before offering even the most common amenities of this sort-should check with the government employee. If circumstances warrant, employees should check with ETC’s management to see if offering the courtesy is permissible in order to avoid situations that are potentially embarrassing or, possibly, illegal.

Kickbacks, bribes and the Foreign Corrupt Practices Act. Kickbacks and bribes to obtain business are against ETC’s business practices. They are also against the law in almost every country in the world. The U.S. Foreign Corrupt Practices Act makes it illegal for a United States citizen, a U.S. company and its U.S. and non-U.S. subsidiaries, and in some instances non-U.S. nationals, to offer or to give anything of value, directly or indirectly, to a foreign government official in order to gain or retain business or to obtain an unfair competitive advantage over competitors. Numerous countries have either passed similar laws or have committed to do so.

ETC employees may not, directly or indirectly, offer or give any payment or other gift (including equipment) that could even appear to be a bribe, kickback, payoff; or other irregular type of payment to a foreign government official to influence an official act or decision. More specifically, ETC employees may not make payments or give anything of value to foreign officials or their representatives for the purpose of gaining or maintaining business or gaining an improper advantage.

These prohibitions apply to giving something to a third party, such as an agent, reseller or lobbyist, with the intention that they give it to a foreign official or with the reasonable belief that the third party will do so. Before retaining third parties to represent ETC in any business relationships with a government agency, a thorough and careful analysis of their ownership structure and business reputation in their relationship with the government agencies and officials must be undertaken.

To protect ETC and its employees, employees must check in advance with ETC’s management before giving, directly or indirectly, anything of value to government officials or their representatives.

Facilitating payments exceptions. Payments that are customary in a foreign country and that are necessary to facilitate or expedite ministerial actions ordinarily performed by foreign officials-such as obtaining routine permits or licenses; processing visas and work permits; or receiving customs, police, mail, and inspection services-are not prohibited by the U.S. Foreign Corrupt Practices Act. In the United States, facilitating payments are neither customary nor legal, and are not allowed by ETC’s policy. Further, it is not generally ETC’s policy to favor facilitating payments outside the U.S., even though legally permitted by U.S. laws. Therefore, all such facilitating payments outside the U.S. in excess of US $100 require prior approval by ETC’s management, except in exigent circumstances. In all cases, such payments must be accurately recorded in expense reports and in ETC’s books and records.

D. Political contributions and activities

Corporate contributions to political causes are illegal in many jurisdictions and electoral processes. In those cases, no ETC assets-including employee work time, use of ETC premises, or equipment-may be contributed to any political candidate, party, or campaign. Even in those cases when political contributions are legal, no company contributions shall be made without permission from ETC’s management. ETC employees may participate in any political activities of their choice on an individual basis, with their own money, and on their own personal time, subject to all applicable laws and provided that their activities otherwise comply with ETC policies.

E. Trade practices

The economy of the United States, and of most nations in which ETC does business, is based on the principle that competition and profit will produce high-quality goods at fair prices. To ensure that this principle is allowed to thrive in the marketplace, most countries have laws prohibiting certain business practices that could inhibit the competitive process. ETC supports these laws not only because they are the law, but also because we believe in the free market and the idea that healthy competition is essential to our long-term success. ETC employees should keep these thoughts in mind while performing their jobs, because the penalties for violations can be very serious-both to ETC and to the individual.

Customers. Generally, ETC may choose the parties with which it wants to do business. ETC employees should follow established procedures to respond to persons and parties seeking a business relationship with ETC, and should treat all applicants with dignity and respect. ETC may not agree with other companies, whether they are competitors or not, to refrain from doing business with a particular buyer or vendor. ETC must make such decisions independently and without collaboration with third parties. In certain countries, ETC may not condition the sale of one product to a customer on a commitment by the customer that it will purchase a second product.

- 42 -

Competitors. ETC must be especially careful when dealing with competitors. For example, agreements with competitors that affect product or service pricing or output, or allocate customers or sales territories, are prohibited, because they are counter to the principle of free competition, and often illegal under applicable law. ETC employees must not discuss these topics with competitors, because there is no way to legally justify any understanding that might be reached that limits our competition with such companies. Also, ETC employees must not discuss terms of sale, costs, inventories, product plans, or any other confidential or proprietary information with a competitor. In some cases, the law may also view our resellers as our competitors when we are actually competing for the same types of customers in the marketplace.

Role of ETC’s Counsel. Whether they are termed anti trust, competition, or free trade laws, the rules are designed to keep the marketplace thriving and competitive. The foregoing is merely a brief overview of the many laws applicable to our business activities in the marketplace. Understanding and applying these laws to our business activities requires the involvement of ETC’s lawyers. ETC is committed to compliance, and the consequences of violations--or even the appearance of violations--can be severe for the company and individuals. If you have any questions or issues about these rules as they apply to ETC business activities, contact ETC’s lawyers for assistance.

5. Compliance and Consequences

A. Being vigilant

It is essential that all employees be sensitive to possible violations of ETC’s business ethics-whether these violations occur in dealings with the government or the private sector, and whether they occur because of oversight or intention. Any ETC employee who has knowledge of possible violations must notify his or her manager or the Human Resources Department, as appropriate.

To assist employees in the day-to-day protection of ETC’s business, below is a list of some areas where violations of ethics policies, practices, and principles could occur.

Danger areas

Improper or excessive payments of any of the following:

·	Consulting fees Public relations fees

·	Advertising fees

·	Legal fees

·	Agents’ fees

·	Commissions

·	Insurance premiums

·	Other professional fees

·	Expense reports

·	Employee bonuses or compensation arrangements

·	Employee loans

·	Miscellaneous expenses

·	Nondeductible expenses

·	Director and officer payments

In addition, violations of ethics policies, practices, and principles may often occur during the following situations:

·	Questionable payments to agents, consultants, or professionals whose backgrounds have not been adequately investigated, who do not have signed contracts or letters of engagement, or whose association with ETC would be embarrassing if exposed.

·	Payroll-related expenditures, bonuses, awards, and non-cash gifts given to or by ETC employees without proper approval and adequate documentation.

·	Payments made in cash.

·	Checks drawn payable to “Cash” or “Bearer”.

·	Transfers to or deposits in the bank account of an individual, rather than in the account or the company with which ETC is doing business.

·	Bank accounts or property titles not in ETC’s name.

·	Billings made higher or lower than normal prices or fees, at a customer’s request.

·	Payments made for any purpose other than that described in supporting documents.

·	Payments made to employees of customers or agencies through intermediary persons or organizations, or that seem to deviate from normal business transactions.

·	Any large, abnormal, unexplained or individually approved contracts or expenditures made without review of supporting documentation. Specific attention should also be given to large individual gifts.

·	Unusual transactions occurring with nonfunctional, inactive, or shell subsidiaries.

·	Undisclosed or unrecorded assets or liabilities.

·	Use of unethical or questionable means to obtain information, including information about competitors or information about government acquisition plans, procurement decisions, or actions.

·	An employment, consulting, or business relationship between an ETC employee and another company, especially a company in the same, or a related, business as ETC.