**UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549

FORM
10-Q

|X|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934


For
the quarterly period ended March 31, 2005

OR

|_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
SECURITIES EXCHANGE ACT OF 1934

For
the transition period from _________ to _________

Commission
file number 000 -[1]-32421

**Fusion Telecommunications International,
      Inc.**—————————————————————(Exact
      name of registrant as specified in its charter)**Delaware**
    **58-2342021**—————————————
    ————————(State
      or other jurisdiction of
      incorporation
      or organization)
    (I.R.S.
      Employer
      Identification
      No.)**420
      Lexington Avenue, Suite 518, New York New York**
    **10170**————————————————————
    —————(Address
      of principal executive offices)
    (Zip
      Code)**(212) 972 2000**——————————————————————Registrant’s
      telephone number, including area code

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

Yes
|X|       No |_|

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act).

Yes
|_|       No |X|

The
number of shares outstanding of the Registrant's capital stock as of May 11,
2005 is as follows:

Title
      of each Class
    Number of Shares
    OutstandingClass
      A Common Stock, $0.01 par value
    17,479,993Common Stock, $0.01 par value
    9,345,788Redeemable Common Stock Purchase
      Warrants
    7,281,838




Fusion
Telecommunications International, Inc. and Subsidiaries

INDEX

**Part
      I****:****Financial
      Information**
    **Page**Item
      l. Financial Statements
    1Item
      2. Management’s Discussion and Analysis of Financial  Condition
      and Results of Operations
    13Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
    23Item
      4. Controls and Procedures
    23**Part
      II****:****Other
      Information**Item
      1. Legal Proceedings
    24Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
    24Item
      3. Defaults Upon Senior Securities
    24Item
      4. Submission of Matters to a Vote of Security Holders
    24Item
      5. Other Information
    25Item
      6. Exhibits
    25




**Item
1. FINANCIAL STATEMENTS**

**PART
1 – FINANCIAL INFORMATION**
****
**ITEM 1: FINANCIAL
STATEMENTS**
****
**FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.**
**AND
SUBSIDIARIES**
**Consolidated Balance
Sheets**

**March
      31,**
    
    **December
      31,****2005**
    
    **2004**(unaudited)**ASSETS****Current
      assets**Cash
      and cash equivalents
    
    $
    21,487,802
    
    $
    4,368,726Accounts
      receivable, net of allowance for doubtful accounts ofapproximately
      $441,000 and $414,000, in 2005 and 2004, respectively
    
    
    4,539,079
    
    
    3,145,535Restricted
      cash
    
    
    92,100
    
    
    145,000Prepaid
      expenses and other current assets
    
    
    640,363
    
    
    889,761Total
      current assets
    
    
    26,759,344
    
    
    8,549,022**Property
      and equipment, net**
    
    
    3,331,065
    
    
    3,271,474Other
      assetsSecurity
      deposits
    
    
    719,092
    
    
    902,028Restricted
      cash
    
    
    218,176
    
    
    235,276Goodwill
    
    
    928,671
    
    
    —Intangible
      assets, net
    
    
    4,690,235
    
    
    —Other
    
    
    133,929
    
    
    704,317Total
      other assets
    
    
    6,690,103
    
    
    1,841,621$
    36,780,512
    
    $
    13,662,117**LIABILITIES
      AND STOCKHOLDERS’ EQUITY (DEFICIT)****Current
      liabilities**Long-term
      debt, related parties, current portion
    
    $
    217,589
    
    $
    1,739,025Long-term
      debt, current portion
    
    
    150,494
    
    
    2,660,281Capital
      lease obligations, current portion
    
    
    1,146,459
    
    
    1,131,830Accounts
      payable and accrued expenses
    
    
    9,039,650
    
    
    10,274,688Investment
      in Estel
    
    
    280,101
    
    
    140,821Liabilities
      of discontinued operations
    
    
    786,518
    
    
    1,116,090Total
      current liabilities
    
    
    11,620,811
    
    
    17,062,735**Long-term
      liabilities**Capital
      lease obligations, net of current portion
    
    
    59,204
    
    
    156,495Preferred
      stock, Series C, subject to mandatory redemption(liquidation
      preference in the aggregate of approximately $10,932,000in
      2004)
    
    
    —
    
    
    9,716,026Total
      long-term liabilities
    
    
    59,204
    
    
    9,872,521**Minority
      interests**
    
    
    144,118
    
    
    16,890**Commitments
      and contingencies****Stockholders’
      equity (deficit)**Common
      stock, $.01 par value, authorized 105,000,000 shares, 8,659,003 and 0shares
      issued and outstanding in 2005 and 2004, respectively
    
    
    86,590
    
    
    —Common
      stock, Class A $.01 par value, authorized 21,000,000 shares,
      17,479,993
      shares issued and outstanding in 2005 and 2004
    
    
    174,800
    
    
    174,800Capital
      in excess of par value
    
    
    105,752,700
    
    
    65,127,291Accumulated
      deficit
    
    
    (81,057,711
    )
    
    (78,592,120
    )Total
      stockholders’ equity (deficit)
    
    
    24,956,379
    
    
    (13,290,029
    )$
    36,780,512
    
    $
    13,662,117
See
accompanying condensed notes to consolidated financial
statements.

-1-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
AND
SUBSIDIARIES
Consolidated
Statements of Operations
Three
      months ended
      March
      31,2005
    
    2004(unaudited)
    
    (unaudited)Revenues
    
    $
    11,929,052
    
    $
    10,187,664Operating
      expenses:Cost
      of revenues, exclusive of depreciation
      and
      amortization shown separately below
    
    
    10,997,423
    
    
    8,709,021Depreciation
      and amortization
    
    
    433,024
    
    
    437,568Selling,
      general and administrative expenses
    
    
    2,705,407
    
    
    2,142,416Operating
      loss
    
    
    (2,206,802
    )
    
    (1,101,341
    )Other
      income (expense)Interest
      expense, net
    
    
    (275,803
    )
    
    (285,131
    )Forgiveness
      of debt
    
    
    —
    
    
    1,819,412Loss
      from investment in Estel
    
    
    (156,915
    )
    
    (154,880
    )Other
    
    
    —
    
    
    9,250Minority
      interests
    
    
    (1,071
    )
    
    (21,883
    )(433,789
    )
    
    1,366,768Income
      (loss) from continuing operations
    
    
    (2,640,591
    )
    
    265,427Discontinued
      operations:Income
      from discontinued operations
    
    
    175,000
    
    
    —Net
      income (loss)
    
    $
    (2,465,591
    )
    $
    265,427Losses
      applicable to common stockholders:Income
      (loss) from continuing operations
    
    $
    (2,640,591
    )
    $
    265,427Preferred
      stock dividends
    
    
    —
    
    
    (19,957
    )Net
      income (loss) applicable to common stockholders from continuing
      operations
    
    
    (2,640,591
    )
    
    245,470Income
      from discontinued operations
    
    
    175,000
    
    
    —Net
      income (loss) applicable to common stockholders
    
    $
    (2,465,591
    )
    $
    245,470Basic
      net income (loss) per common share:Income
      (loss) from continuing operations
    
    $
    (0.12
    )
    $
    0.02Income
      from discontinued operations
    
    
    0.01
    
    
    —Basic
      net income (loss) applicable to common stockholders
    
    $
    (0.11
    )
    $
    0.02Diluted
      net income (loss) per common share:Income
      (loss) from continuing operations
    
    $
    (0.12
    )
    $
    0.03Income
      from discontinued operations
    
    
    .01
    
    
    —Diluted
      net income (loss) applicable to common stockholders
    
    $
    (0.11
    )
    $
    0.03Basic weighted
      average shares outstanding
    
    
    21,288,610
    
    
    15,393,778Diluted
      weighted average shares outstanding
    
    
    21,288,610
    
    
    16,823,960

See
accompanying condensed notes to consolidated financial statements.


-2-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
AND
SUBSIDIARIES
Consolidated
Statements of Cash Flows
Three
      months ended March 31,2005
    
    2004(unaudited)
    
    (unaudited)Cash
      flows from operating activitiesNet
      income (loss)
    
    $
    (2,465,591
    )
    $
    265,427Adjustments
      to reconcile net income (loss) to net cashused
      in operating activities:Gain
      from sale of assets
    
    
    —
    
    
    (9,250
    )Depreciation
      and amortization
    
    
    433,024
    
    
    437,568Bad
      debt expense
    
    
    81,000
    
    
    44,760Gain
      on forgiveness of debt
    
    
    —
    
    
    (1,819,412
    )Gain
      on discontinued operations
    
    
    (175,000
    )
    
    —Accretion
      of Series C Preferred Stock
    
    
    287,115
    
    
    224,828Loss
      from investment in Estel
    
    
    156,915
    
    
    154,880Minority
      interest
    
    
    1,071
    
    
    21,883Increase
      (decrease) in cash attributable tochanges
      in operating assets and liabilities:Accounts
      receivable
    
    
    (1,355,535
    )
    
    (989,267
    )Prepaid
      expenses and other current assets
    
    
    377,885
    
    
    (137,882
    )Other
      assets
    
    
    670,391
    
    
    (1,858
    )Accounts
      payable and accrued expenses
    
    
    (943,672
    )
    
    (649,260
    )Liabilities
      of discontinued operations
    
    
    (154,572
    )
    
    (32,966
    )Net
      cash used in operating activities
    
    
    (3,086,969
    )
    
    (2,490,549
    )Cash
      flows from investing activitiesPurchase
      of property and equipment
    
    
    (395,024
    )
    
    (184,043
    )Advances
      to Estel
    
    
    (71,935
    )
    
    (62,867
    )Purchase
      of Jamaican joint venture, net of cash acquired
    
    
    (146,486
    )
    
    —Purchase
      of minority interest in Efonica joint venture, net of cash
      acquired
    
    
    (460,419
    )
    
    —Return
      of security deposits
    
    
    182,936
    
    
    49,147Repayments
      of (payments for) restricted cash
    
    
    70,000
    
    
    (185,000
    )Net
      cash used in investing activities
    
    
    (820,928
    )
    
    (382,763
    )Cash
      flows from financing activitiesProceeds
      from sale of common stock, net
    
    
    23,286,008
    
    
    187,071Proceeds
      from sale of Series C preferred stock, net
    
    
    —
    
    
    4,630,626Proceeds
      from exercise of stock options
    
    
    50,250
    
    
    —Proceeds
      from (repayments of) escrow advances
    
    
    —
    
    
    (73,000
    )Payment
      of dividends on Preferred C Stock
    
    
    (664,634
    )
    
    —Payments
      of long-term debt and capital lease obligations
    
    
    (1,626,691
    )
    
    (285,042
    )Contributions
      to minority stockholders of joint ventures
    
    
    (17,960
    )
    
    (5,418
    )Net
      cash provided by financing activities
    
    
    21,026,973
    
    
    4,454,237Net
      increase in cash and cash equivalents
    
    
    17,119,076
    
    
    1,580,925Cash
      and cash equivalents,beginning
      of period
    
    
    4,368,726
    
    
    3,205,645Cash
      and cash equivalents,end
      of period
    
    $
    21,487,802
    
    $
    4,786,570
See accompanying condensed notes to consolidated financial
statements.

-3-
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
AND
SUBSIDIARIES

Consolidated
Statements of Cash Flows (continued)
Three
      months ended March 31,2005
    
    2004(unaudited)
    
    (unaudited)Supplemental
      disclosure of cash flow information:Cash
      paid during the period for interest
    
    $
    541,106
    
    $
    52,497Supplemental
      disclosure of noncash investing and financing activities:Acquisition
      of capital leases
    
    $
    21,140
    
    $
    —Conversion
      of accounts payable to common stock
    
    $
    —
    
    $
    2,070Note
      issued in settlement agreement
    
    $
    —
    
    $
    150,000Credits
      received from sale of property and equipment
    
    $
    —
    
    $
    9,250Conversion
      of convertible notes payable and related debt offering
    costs
    
    $
    2,444,395
    
    $
    —Conversion
      of Series C preferred stock to common stock
    
    $
    10,003,141
    
    
    —Conversion
      of long-term debt to Series C preferred stock
    
    $
    —
    
    $
    176,620Conversion
      of escrow advances to Series C preferred stock
    
    $
    —
    
    $
    573,195Stock
      dividends issued
    
    $
    —
    
    $
    573,195Stock
      dividends declared
    
    $
    —
    
    $
    19,957Supplemental
      disclosure of joint venture acquisition activities:Fair
      value of tangible assets, net of cash acquired
    
    $
    433,585
    
    
    —Fair
      value of indentifiable intangible assets
    
    
    4,690,235
    
    
    —Goodwill
      acquired
    
    
    928,671
    
    
    —Liabilities acquired
    
    
    (373,268
    )Minority
      interest acquired
    
    
    (144,118
    )
    
    —Common stock
      issued, net of shares in escrow
    
    
    (4,928,200
    )
    
    —Cash
      paid for acquisition of joint ventures, net of cash
      acquired
    
    $
    (606,905
    )
    
    —


See accompanying condensed notes to consolidated financial
statements.


-4-
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements

1. Basis
of Presentation

The
accompanying consolidated financial statements should be read in conjunction
with the 2004 Form 10-K for Fusion Telecommunications Corporation (the
“Company”). These financial statements have been prepared in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X and therefore, omit
or condense certain footnotes and other information normally included in the
financial statements prepared in accordance with accounting principles generally
accepted in the United States. In the opinion of the Company’s management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair financial statement presentation have been made. The results of operations
for an interim period may not give true indication of the results for the
year.

During
the three months ended March 31, 2005 and 2004, the Company did not have any
changes in its equity resulting from non-owner sources and, accordingly,
comprehensive income (loss) was equal to the net income (loss) amounts presented
for the respective periods in the accompanying Consolidated Statements of
Operations.

*Goodwill
and Other Intangible Assets*

Goodwill
represents the excess of the purchase price of an acquired businessover the amounts assigned to assets acquired and liabilities assumed. In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets,” goodwill is not being amortized but is
reviewed for impairment on an annual basis. Other intangible assets consist
primarily of the trade name and trademarks associated with the Company’s Efonica
wholly owned subsidiary. These long-lived assets are not amortized because they
have indefinite lives. The remaining intangible asset acquired in the Efonica
transaction is a customer list which is being amortized using the straight-line
method over the 10 year estimated useful life.

*Earnings
Per Share*

SFAS
No. 128, “Earnings Per Share,” requires dual presentation of basic and diluted
income per share for all periods presented. Basic income per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding during the period.
Diluted income per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the income of the Company.

Basic
and diluted earnings per share and weighted average shares are the same for the
three months ended March 31, 2005 as all securities are antidilutive. The
following table sets forth the computation of basic and diluted earnings per
share for the three months ended March 31, 2004:

NumeratorNumerator for
      basic earnings per common share-income applicable to common
      stockholders
    
    $
    245,470Effect
      of dilutive securitiesAccretion
      on Series C preferred Stock
    
    
    223,642Interest
      expense on convertible notes, net of tax
    
    
    4,826Total
      effect of dilutive securities
    
    
    228,468Numerator
      for diluted earnings per common share
    
    $
    473,938DenominatorDenominator for
      basic earnings per share-weighted average common
    shares
    
    
    15,393,778Effect
      of dilutive securitiesSeries
      C preferred stock
    
    
    1,256,829Convertible
      notes
    
    
    14,268Stock
      options
    
    
    142,941Warrants
    
    
    16,144Dilutive
      potential common shares
    
    
    1,430,182Denominator
      for diluted earnings per common share
    
    
    16,823,960Basic
      earnings per common share
    
    $
    0.02Diluted
      earnings per common share
    
    $
    0.03

Unexercised
stock options to purchase 1,577,860 shares of the Company’s common stock as
of March 31, 2005 were not included in the computation of diluted earnings per
share because the exercise of the stock options would be anti-dilutive to
earnings per share. Unexercised
stock options to purchase 436,986 shares of the Company’s common stock as of
March 31, 2004 were not included in the computation of diluted earnings per
share as the exercise prices of these options were greater than the average
market price of the common shares.

Unexercised
warrants to purchase 7,568,416 shares of the Company’s common stock as of
March 31, 2005 were not included in the computation of diluted earnings per
share because the exercise of the warrants would be anti-dilutive to earnings
per share. Unexercised
warrants to purchase 121,667 shares of the Company’s common stock as of March
31, 2004 were not included in the computation of diluted earnings per share as
the exercise prices of these warrants were greater than the average market price
of the common shares.

Nonconverted
debt to purchase 14,268 shares of the Company’s common stock as of March 31,
2004 was not included in the computation of diluted earnings per share because
the conversion price of the debt was greater than the average market price of
the common share. As of March 31, 2005, the Company did not have any convertible
debt.
*Stock-Based
Compensation*

The
Company follows SFAS No. 123, “Accounting for Stock-Based Compensation”. The
provisions of SFAS No. 123 allow companies to either expense the estimated fair
value of stock options or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion 25, “Accounting for Stock Issued to
Employees” (“APB 25”) but disclose the pro forma effect on net income (loss) had
the fair value of the options been expensed. The Company has elected to continue
to apply APB 25 in accounting for its stock option incentive plans.

-5-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements

The
Company provides the disclosure only requirements of SFAS No. 148, “Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123”. If compensation expense for the Company’s stock option
incentive plan had been determined based on the fair value at the grant dates as
calculated in accordance with SFAS No. 123, the Company’s net income (loss)
attributable to common stockholders and net income (loss) per common share would
approximate the pro forma amounts below:

Quarter
      Ended
      March
      31, 2005
    
    
    Quarter
      Ended
      March
      31, 2004Basic
      net income (loss) applicable to common stockholders,as
      reported
    
    $
    (2,465,591
    )
    $
    245,470Deduct:
      total stock-based compensation expenseunder
      fair value method for awards, net of relatedtax
      effect
    
    
    (131,846
    )
    
    (164,798
    )Basic
      net income (loss) applicable to common stockholders,pro
      forma
    
    $
    (2,597,437
    )
    $
    80,672Diluted
      net income (loss) applicable to common stockholders, as
      reported
    
    $
    (2,465,591
    )
    $
    473,938Deduct:
      total stock-based compensation expense under fair value methods for
      awards, net of related tax effect
    
    
    (131,846
    )
    
    (164,287
    )Diluted
      net income (loss) applicable to common stockholders, pro
    forma
    
    $
    (2,597,437
    )
    $
    309,140Earnings
      per share:Basic
      net income (loss) applicable to common stockholders, as
      reported
    
    $
    (0.11
    )
    $
    0.02Basic
      net income (loss) applicable to common stockholders, pro
      forma
    
    $
    (0.12
    )
    $
    0.01Diluted
      net income (loss) applicable to common stockholders, as reported
    
    $
    (0.11
    )
    $
    0.03Diluted
      net income (loss) applicable to common stockhoders, pro
      forma
    
    $
    (0.12
    )
    $
    0.02

The
Company calculated the fair value of each common stock option grant on the date
of grant using the Black Scholes option pricing model method with the following
assumptions: dividend yield of 0%; volatility of 86.0% and 0% during the three
months ended March 31, 2005 and 2004, respectively; weighted average option term
of four years; average risk free interest rate of 4.05% and 4.08% during the
three months ended March 31, 2005 and 2004, respectively. The weighted-average
fair value of common stock options granted was $5.54 and $0.00 during the three
months ended March 31, 2005 and 2004, respectively.

2.
Acquisitions

*Jamaica*

On
December 16, 2004, the Company entered into an agreement to acquire 51% of the
common stock of a Jamaican company for $150,000.  This
acquisition was completed to establish the Company as a licensed carrier
operation in Jamaica providing the Company an entrance into this emerging
market. The Jamaican joint venture did not have any results of operations during
the first quarter of 2005.The closing of this acquisition took place on
January 11, 2005. The following table summarizes the estimated fair values of
the assets acquired and the minority interest on January 11, 2005:
Cash
    
    $
    3,514Prepaid
      expenses and other current assets
    
    
    17,385Property
      and equipment, net
    
    
    25,800Other
      assets
    
    
    100,000Goodwill
    
    
    147,419Minority
      interest
    
    
    (144,118
    )Total
      cash paid
    
    $
    150,000

-6-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements
The
initial purchase price allocations may be adjusted within one year of the
purchase date for changes in estimates of the fair value of the assets acquired.
The excess of the purchase price over the fair values of the assets acquired was
allocated to goodwill.

*Efonica*

During
February 2005, the Company closed on its agreement to acquire the 49.8% minority
interest in one of its joint ventures, Efonica from Karamco, Inc. This
acquisition was completed to better enable Efonica to serve as the retail VoIP
services division of Fusion, offering a full suite of VoIP solutions to
customers in Asia, the Middle East, Africa, Latin America and the Caribbean.
With 100% control, the Company can better leverage the significant experience
and relationships of Efonica. The operating results for the 49.8%
minority interest acquired are included in the consolidated statement of
operations from the date of acquisition. The proforma effect of this acquisition
on the statements of operations for the three months ended March 31, 2005 and
2004 is not material.The
purchase price will be a minimum of $5,500,000 and a maximum of $14,300,000, as
adjusted for the approximate $196,000 representing Karamco’s portion of
Efonica’s debt owed to the Company as of the closing date and the $500,000 which
was paid in cash, based upon a multiple of earnings achieved by Efonica during
the 12-month period ending February 28, 2006 (4.5 x Efonica’s net income as
adjusted for certain intracompany and other expenses). Karamco received cash of
$500,000, with the balance paid in shares of common stock. The number of shares
issued to Karamco was determined by the $6.45 per share initial price of the
common stock at the date of the Company’s IPO. On the date of the transaction,
approximately $4,400,000 worth of such shares of common stock (675,581 shares)
were issued to Karamco and are being held in escrow until the final valuation of
the joint venture is determined after the year ending February 28, 2006. In the
event that the purchase price would be lower (based upon Efonica’s net income
for that one year period) than $10,000,000, the excess of the common shares in
escrow will be returned to the Company for cancellation. In the event that the
purchase price would be higher than the $10,000,000 (based upon Efonica’s net
income), the Company will issue Karamco additional shares of our common stock
(based on the IPO price of $6.45 per share), subject to the $14,300,000 maximum.
Karamco is owned by Roger Karam, who became the CEO of Efonica and the Company’s
President of VoIP Services upon the effective date.

The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed on February 18, 2005:
Cash
    
    $
    39,581Accounts
      Receivable
    
    
    64,709Prepaid
      expenses and other current assets
    
    
    175,040Property
      and equipment, net
    
    
    50,651Intangible
      assets
    
    
    4,690,235Goodwill
    
    
    781,252Accounts
      payable, accrued expenses and other
    
    
    (373,268
    )Common
      stock issued
    
    
    (4,928,200
    )Total
      cash paid
    
    $
    500,000

The
initial purchase price allocations were based upon an independent appraisal. The
intangible assets acquired were allocated $4,402,931 to the Efonica trade name
and trademarks and $287,304 was allocated to the customer list. In determining
the purchase price allocation, the trademark was determined based upon the
income approach through the application of the relief from royalties method and
the customer list was determined based upon the income approach through the
application of the excess earnings method. The rate used to discount the net
cash flows to present values was based upon a weighted average cost of capital
of approximately 28%. The allocation of purchase price may be adjusted within
one year of the purchase date for changes in estimates of the fair value of the
assets acquired and liabilities assumed. The excess of the purchase price over
the fair values of the assets acquired and liabilities assumed was allocated to
goodwill.

-7-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements

*Turkey*

On
March 8, 2005, a new wholly owned subsidiary of the Company, Fusion Turkey, LLC
entered into a Stock Purchase Agreement to acquire 75% of the shares of LDTS
Uzak Mesafe Telekomikasyon ve Iletism Hizmetleri San. Tic. A.S. (“LDTS”) from
the existing shareholders. LDTS possesses a Type 2 telecommunications license
approved by the Turkish Telecom Authority. This license will permit the Company
to offer VoIP services under its Efonica brand and other Internet services
to corporations and consumers in Turkey. The Company is acquiring the shares for
approximately $300,000 cash and the posting of a bank guarantee of $251,000. The
transaction was subject to receipt of approval from the Turkish Telecom
Authority which was received during April 2005. The primary net asset acquired
was the license which was issued on March 17, 2004 and is valid for 15 years.
Consequently, this license will be amortized over the remaining 14-year term. As
the transaction had not closed as of March 31, 2005, no activity was recorded in
the Consolidated Statement of Operations for the three months ended March
31, 2005.

3.   Discontinued
operations

During
2001, management of the Company decided to cease the operations of its domestic
retail telecommunication services business lines. In connection with this
decision, a liability at December 31, 2004 of approximately $984,000 remained
which related to trade payables and accrued expenses. During the quarter ended
March 31, 2005,
theCompany determined that one of the accrued liabilities would be settled for
$175,000 less than the amount that was accrued at December 31, 2004, which
resulted in a gain on discontinued operations of $175,000.

4.
Goodwill and identifiable intangible assets

The
changes in the amount of goodwill for the three months ended March 31, 2005
by reporting segment are as follows:
VoIP
      to Consumers and Corporations
    
    Internet,
      Managed Private Networks and Other
    
    TotalBalance
      as of December 31, 2004
    
    $
    —
    
    $
    —
    
    $
    —Goodwill
      for Jamaican acquisition
    
    
    —
    
    
    147,419
    
    
    147,419Goodwill
      for purchase of Efonica Minority interest
    
    
    781,252
    
    
    
    
    
    781,252Balance
      as of March 31, 2005
    
    $
    781,252
    
    $
    147,419
    
    $
    928,671
Identifiable
intangible assets as of March 31, 2005 are composed of:
Trademarks
    
    $
    4,402,931Customer
      list
    
    
    287,304$
    4,690,235
These
identifiable intangible assets were acquired in connection with the Company's
purchase of the 49.8% minority interest in its Efonica joint venture.  The
trademarks are not subject to amortization as they have an indefinite
life.  Amortization on the customer list will begin in April 2005. 
The following table presents estimated amortization expense for each of the
following periods:
2005
    
    $
    21,5482006
    
    
    28,7302007
    
    
    28,7302008
    
    
    28,7302009
    
    
    28,730Thereafter
    
    
    150,836$
    287,304
5.   Accounts
payable and accrued expenses

Accounts
payable and accrued expenses consist of the following at March 31, 2005 and
December 31, 2004:

March
      31,2005
    
    
    December
      31,2004Trade
      accounts payable
    
    $
    6,009,331
    
    $
    5,662,058Accrued
      expenses
    
    
    1,530,031
    
    
    2,050,175Interest
      payable
    
    
    275,046
    
    
    814,262Dividends
      payable on Series C Preferred Stock
    
    
    —
    
    
    664,635Deferred
      revenue
    
    
    1,006,059
    
    
    971,456Other
    
    
    219,183
    
    
    112,102$
    9,039,650
    
    $
    10,274,688


-8-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements

6.
Long-term debt and capital lease obligations

At
March 31, 2005 and December 31, 2004 components of long-term debt and capital
lease obligations of the Company are comprised of the following:

March
      31, 2005 (unaudited)
    
    
    December
      31,
      2004Convertible
      notes payable
    
    
    (a
    )
    $
    0
    
    $
    250,000Demand
      notes payable
    
    
    (b
    )
    
    0
    
    
    898,931Promissory
      notes payable
    
    
    (c
    )
    
    150,000
    
    
    150,000Demand
      notes payable
    
    
    (d
    )
    
    0
    
    
    81,790Promissory
      notes payable
    
    
    (e
    )
    
    0
    
    
    150,000Promissory
      notes payable
    
    
    (f
    )
    
    0
    
    
    25,000Promissory
      notes payable
    
    
    (g
    )
    
    0
    
    
    102,000Promissory
      notes payable
    
    
    (h
    )
    
    218,083
    
    
    233,252Convertible
      notes payable
    
    
    (i
    )
    
    0
    
    
    2,508,333Capital
      lease obligations
    
    
    (j
    )
    
    1,205,663
    
    
    1,288,325Total
      long-term debt and capital lease obligations
    
    
    
    
    
    1,573,746
    
    
    5,687,631Less
      current portion
    
    
    
    
    
    1,514,542
    
    
    5,531,136$
    59,204
    
    $
    156,495

(a)
Balance at December 31, 2004 represented two convertible subordinated note
agreements. Interest rate was 9.25% at December 31, 2004 payable semi-annually
on January 31 and July 31. During February 2005, these notes were paid in full
upon completion of the Company’s IPO.

(b)
Two officers of the Company entered into various loan agreements with the
Company in exchange for demand notes payable. The interest rates ranged from
4.0%-4.75% per annum and were due on demand. During February 2005, these notes
were paid in full upon completion of the Company’s IPO.

(c)
During February 2004, the Company entered into a settlement agreement for
$600,000. In the same month, the Company paid $450,000 and agreed to make 12
monthly payments for the remaining $150,000. The debt has not been repaid as of
March 31, 2005, as the debtor has not complied with the terms of the settlement
agreement.

(d)
Balance at December 31, 2004 represented promissory notes to three stockholders.
The interest rates ranged from 4.75%-12.0% per annum and were due on demand.
During February 2005, these notes were paid in full upon completion of the
Company’s IPO.

(e)
Balance at December 31, 2004 related to various promissory notes. Interest rate
was 4.75% per annum. During February 2005 these notes were paid in full upon
completion of the Company’s IPO.

(f)
Balance at December 31, 2004 represented promissory note which bore
interest at 4.5% per annum. Principal and interest were payable in one lump sum
on the earlier of 15 days from the completion of an IPO or September 1, 2005.
During February 2005, this note was repaid in full upon completion of the
Company’s IPO.

(g)
Balance at December 31, 2004 represented a loan agreement which bore interest at
15%. During February 2005, the note was repaid in full upon completion of the
Company’s IPO.

(h)
The balance at March 31, 2005 relates to $217,589 in promissory notes to various
stockholders for the purpose of resolving the Company’s capital lease debt
service contract with the lessor of the equipment under lease. The notes accrue
interest at 8% per annum and are to be paid in equal monthly installments of
approximately $500 to $2,000 per month with the outstanding principal due on
June 30, 2005. The remaining balance at March 31, 2005, of $494 relates to an
equipment lease with a non-related party.


-9-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements

(i)
Balance at December 31, 2004 represented two convertible notes which bore
interest at 6.5% per annum. In February 2005, these notes were automatically
converted into 651,515 common shares (based upon a conversion price of $3.85 per
share) upon the completion of the Company’s IPO.

(j)
At March 31, 2005 and December 31, 2004, approximately $720,000 of the capital
lease obligations were in default and accordingly have been classified as
currently due.

7. Series
C preferred stock

At
December 31, 2004, there were 109,962 shares of the $90 Series C Convertible
Redeemable Preferred Stock (“Series C Preferred Stock”) outstanding.The
holders of the Series C Preferred Stock were entitled to receive cumulative
dividends of 8% per share per annum which were payable annually beginning on
December 18, 2004 and were payable in cash, unless the Company completed its IPO
before December 18, 2004. Since the IPO was not completed until February 2005,
the dividends on the Series C Preferred Stock of approximately $665,000 were
paid on January 18, 2005. Upon the closing of the Company’s initial public
offering during February 2005, the 109,962 outstanding shares of the Series C
preferred stock were automatically converted into 3,141,838 shares of the
Company’s common stock and 3,141,838 Redeemable Common Stock Purchase Warrants.
There was no beneficial conversion feature associated with this conversion.

8.   Equity
Transactions

On
February 17, 2005, the Company closed its initial public offering of securities
of 3,600,000 shares of common stock at a price of $6.45 per share and 3,600,000
redeemable common stock purchase warrants at $0.05 per warrant. Gross proceeds
of the offering were approximately $23,300,000. Total estimated offering costs
were approximately $3,000,000 which resulted in net proceeds to the Company of
$20,400,000. On March 30, 2005 our underwriters exercised their over-allotment
option and purchased an additional 480,000 shares of common stock and 540,000
purchase warrants. The Company received an additional $2,900,000 in net
proceeds from the closing on the over-allotment option.

Subsequent
to the IPO, the Company has two classes of outstanding common stock.  The
holders of the class A common stock have identical rights and privileges as the
regular common stock, except that they will not be able to transfer shares of
class A common stock until the first anniversary of the date of the prospectus,
which was February 11, 2005.  The class A common stock will automatically
convert into the regular common stock on the first anniversary of the date of
the prospectus.

Upon
completion of the IPO, $2.5 million of convertible debt was converted into
651,515 shares of common stock. In addition, 1,439,643 shares of common stock
were issued (of which 675,581 shares are held in escrow) in connection with the
Company’s acquisition of the 49.8% minority interest in Efonica (see Note 2 for
further discussion). In accordance with SFAS 141, since 675,581 of these shares
are held in escrow and this consideration is contingent on specified events in
the future, these shares are not reflected as outstanding as of March 31, 2005.
In addition, as discussed in Note 7, all outstanding Series C preferred stock
was converted into common stock.

During February
2005, one individual exercised stock options which resulted in the issuance of
21,429 shares.

9.
Current Accounting Pronouncements

In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123 (revised 2004) (“123R”), “Share-Based Payment”. Statement 123(R) will
provide investors and other users of financial statements with more complete and
neutral financial information by requiring that the compensation cost relating
to share based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock Based
Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees”. SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion No. 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair-value based method been used. In addition, in March 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB 107). SAB 107 provides supplemental implementation
guidance on FAS 123(R), including guidance on valuation methods, classification
of compensation expense, inventory capitalization of share-based compensation
cost, income tax effects, disclosures in Management's Discussion and Analysis,
and several other issues.  The Company will be required to adopt FAS 123(R)
and SAB 107 in the first quarter of fiscal year 2006 at the earliest. We are in
the process of evaluating whether the adoption of SFAS No. 123(R) will have a
significant impact on our overall results of operations or financial
position.
**10.  Contingencies**

*Legal
Matters*

The
Company is a defendant in an employment claim that management believes has no
merit. The claim is filed in the State of New York before an administrative
agency. The administrative department is currently reviewing the case and
management believes it will be dismissed. Regardless, management believes that
this claim will not have a material effect on the Company’s business or results
of operations.

In April
2003, a former customer of the Company brought an action against the Company for
recovery of preferential transfers and other claims under the Bankruptcy Code.
The suit, brought in the United States Bankruptcy Court for the Northern
District of Illinois Eastern Division, seeks damages in the amount of
approximately $335,000. The Company filed a Proof of Claim with the Court in the
amount of approximately $85,000 for amounts that were due the Company at the
time this customer filed for bankruptcy. In March 2005, the Company settled this
matter for $5,500 and the Company agreed to waive its Proof of Claim in the
amount of approximately $85,000. The Company is in the process of executing the
formal settlement agreement.

In May
2003, a shareholder of the Company brought an action in the District Court in
and for the City and County of Denver and the State of Colorado. The action is
seeking damages in the amount of $400,000. The Company and management plan to
defend this suit vigorously and do not expect the outcome to have an adverse
effect on the Company’s financial condition. This action was dismissed in August
2004. The plaintiff has filed an appeal for the motion, which is pending.

The
Company is involved in other claims and legal actions arising in the normal
course of business. Management does not expect that the outcome of these cases
will have a material effect on the Company’s financial position or results of
operations. Due to the regulatory nature of the industry, the Company is
periodically involved in various correspondence and inquiries from state and
federal regulatory agencies. Management does not expect the outcome of these
inquiries to have a material impact on the operations or the financial condition
of the Company.
-10-
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIESCondensed Notes to Consolidated Financial
Statements

11.   Segment Information
The
Company has four reportable segments, that it operates and manages which are
organized by products and services. The Company measures and evaluates its
reportable segments based on revenues and cost of revenues. This segment income
excludes unallocated corporate expenses and other adjustments arising during
each period. The other adjustments include transactions that the chief operating
decision makers exclude in assessing business unit performance due primarily to
their non-operational and/or non-recurring nature. Although such transactions
are excluded from the business segment results, they are included in reported
consolidated earnings. Each segment is managed according to the products, which
are provided to the respective customers, and information is reported on the
basis of reporting to the Company’s Chief Operating Decision Maker.

The
Company’s segments and their principal activities consist of the following:

Traditional
Voice — This segment includes the termination of voice telephony minutes from or
to the countries served by the Company, utilizing traditional Time Division
Multiplexing (TDM) and “circuit-switched” technology. Typically, this will
include interconnection with traditional telecommunications carriers either
located internationally or those carriers that interconnect with the Company at
its US Points of Presence (POP) and provide service to other destinations.

VoIP
(Voice over Internet Protocol) to Carriers — VoIP includes the termination of
voice telephony minutes by the internet rather than older circuit-switched
technology. This permits far less costly and more rapid interconnection between
the Company and international telecommunications carriers.

VoIP
(Voice over Internet Protocol) to Consumers and Corporations — Primarily through
the Company’s Efonica  subsidiaryand Estel joint venture, the Company provides VoIP services targeted to
end-users and corporations. The Company offers services that permit consumers or
corporations to originate calls via IP telephones or telephone systems that use
the Internet for completion to standard telephone lines anywhere in the world.
The Company also provides PC-to-phone service that utilizes the Internet to
allow consumers to use their personal computers to place calls to the telephone
of their destination party.

Internet,
Private Networks & Other — The Company provides Internet connectivity to
telecommunications carriers, Internet Service Providers, government entities,
and multinational customers via its POPs in the US, India, and through its
partners elsewhere. The Company also offers point-to-point private lines,
virtual private networking, and call center communications services to customers
in its target markets. Lastly, the Company offers the Interview
desktop-to-desktop video conferencing service to customers anywhere in the
world.

-11-

FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated
Financial Statements


Operating
segment information for the three months ended March 31, 2005 and 2004 is
summarized as follows:
**March
      31, 2005**
    
    
    
    
    
    VoIP
      to
    
    Internet,
      ManagedConsumers
    
    PrivateTraditionalVoice
    
    VoIP
      toCarriers
    
    and
      Corporations
    
    Networks
      & Other
    
    Corporate
      &Unallocated
    
    ConsolidatedNet
      revenues
    
    $
    2,850,159
    
    $
    7,279,039
    
    $
    1,109,889
    
    $
    689,965
    
    $
    --
    
    $
    11,929,052Cost
      of revenues (exclusive of depreciation and
    amortization)
    
    $
    (2,803,298
    )
    $
    (6,902,887
    )
    $
    (854,573
    )
    $
    (436,665
    )
    $
    --
    
    $
    (10,997,423
    )Depreciation
      and amortization
    
    $
    (102,392
    )
    $
    (260,740
    )
    $
    (7,659
    )
    $
    (22,593
    )
    $
    (39,640
    )
    $
    (433,024
    )Selling,
      general and administrative
    
    $
    (426,377
    )
    $
    (987,690
    )
    $
    (206,887
    )
    $
    (106,646
    )
    $
    (977,807
    )
    $
    (2,705,407
    )Other
      income (expense)
    
    $
    (155,621
    )
    $
    (204,859
    )
    $
    (39,490
    )
    $
    (33,819
    )
    $
    -
    
    $
    (433,789
    )Income
      (loss) from continuing operations
    
    $
    (637,529
    )
    $
    (1,077,137
    )
    $
    1,280
    
    $
    90,242
    
    $
    (1,017,447
    )
    $
    (2,640,591
    )Income
      from discontinued operations
    
    $
    175,000
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    --
    
    $
    175,000Net
      income (loss)
    
    $
    (462,529
    )
    $
    (1,077,137
    )
    $
    1,280
    
    $
    90,242
    
    $
    (1,017,447
    )
    $
    (2,465,591
    )Capital
      Expenditures
    
    $
    84,943
    
    $
    216,938
    
    $
    33,078
    
    $
    20,563
    
    $
    39,502
    
    $
    395,024

**March
      31, 2004**
    
    
    
    
    
    VoIP
      to
    
    Internet,
      ManagedConsumers
    
    PrivateTraditionalVoice
    
    VoIP
      toCarriers
    
    and
      Corporations
    
    Networks
      & Other
    
    Corporate
      &Unallocated
    
    ConsolidatedNet
      Revenues
    
    $
    2,368,660
    
    $
    6,915,570
    
    $
    284,711
    
    $
    618,723
    
    $
    --
    
    $
    10,187,664Cost
      of revenues (exclusive of depreciation and
    amortization)
    
    $
    (2,063,084
    )
    $
    (6,055,813
    )
    $
    (178,772
    )
    $
    (411,352
    )
    $
    --
    
    $
    (8,709,021
    )Depreciation
      and amortization
    
    $
    (117,272
    )
    $
    (246,422
    )
    $
    (4,742
    )
    $
    (28,791
    )
    $
    (40,341
    )
    $
    (437,568
    )Selling,
      general and administrative
    
    $
    (405,320
    )
    $
    (808,398
    )
    $
    (75,726
    )
    $
    (111,834
    )
    $
    (741,138
    )
    $
    (2,142,416
    )Other
      income (expense)
    
    $
    1,298,762
    
    $
    348,877
    
    $
    848
    
    $
    7,183
    
    $
    (288,902
    )
    $
    1,366,768Net
      income (loss)
    
    $
    1,081,746
    
    $
    153,814
    
    $
    26,319
    
    $
    73,929
    
    $
    (1,070,381
    )
    $
    265,427Capital
      expenditures
    
    $
    38,511
    
    $
    112,439
    
    $
    4,629
    
    $
    10,060
    
    $
    18,404
    
    $
    184,043**Assets**March
      31, 2005
    
    $
    2,176,743
    
    $
    5,381,790
    
    $
    5,702,071
    
    $
    873,601
    
    $
    22,646,307
    
    $
    36,780,512December
      31, 2004
    
    $
    2,074,700
    
    $
    4,563,839
    
    $
    547,588
    
    $
    433,707
    
    $
    6,042,283
    
    $
    13,662,117
The
Company employs engineering and operations resources that service across
multiple product lines. Depreciation and indirect operating expenses were
allocated to each product line based upon their respective revenues. The amounts
reflected as Corporate and unallocated represent those expenses that were not
appropriate to allocate to each product line.

-12-

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this annual report.
This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this report the words
“anticipate,” “believe,” “estimate,” “expect” and similar expressions as they
relate to our management or us are intended to identify such forward-looking
statements. Our actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements. Historical operating results are not necessarily indicative of the
trends in operating results for any future period.

Overview
We
are an international communications carrier delivering VoIP, private networks,
Internet access, Internet protocol video conferencing and other advanced
services to, from, in and between emerging markets in Asia, the Middle East,
Africa, the Caribbean and Latin America. In 2000, after early acquisitions, our
focus on domestic retail and residential services and incurring significant
losses, our board of directors selected a new management team to develop and
initiate a new corporate strategy, improve our operational and financial
performance and identify growth opportunities.

The
new corporate strategy focused our resources on VolP and the emerging
international markets, and we exited the more highly competitive,
infrastructure-dependent businesses that characterized us in 2000 and 2001.
Since then, we sought to gain early entry in high growth emerging markets, often
in partnership with local organizations that have strong distribution channels,
regulatory experience, market intelligence, the ability to deliver local loops
and the capability of providing customer service support. This approach enabled
us to introduce our Internet protocol communications services in these markets,
thereby benefiting from the time-to-market advantages, expanded geographic reach
and reduced capital requirements that local partnerships afford. We embarked on
a network strategy that employs the most currently available Softswitch
technology, relieving us of the burden of costly, inefficient legacy systems and
allowing more rapid and cost-effective deployment and expansion of services
worldwide. Additionally, long-range efforts in cost controls and reductions were
initiated, which included significant reductions in staffing, fixed overhead
expenses and debt. The combination of these efforts has led to improved
financial results.


The
following table summerizes our results of operations for the periods indicated:
Three
      Months Ended March 31,2004
    
    
    2005Revenues
    
    
    10,187,664
    
    $
    11,
      929,052Operating
      Expenses:Cost
      of Revenues
    
    
    8,709,021
    
    
    10,997,423Depreciation
      and amortization
    
    
    437,568
    
    
    433,024Selling,
      general and administrative
    
    
    2,142,416
    
    
    2,705,407Operating
      loss
    
    
    (1,101,341
    )
    
    (2,206,802
    )Other
      income (expense)Interest
      expense, net
    
    
    (285,131
    )
    
    (275,803
    )Forgiveness
      of debt
    
    
    1,819,412
    
    
    —Loss
      on equity investment
    
    
    (154,880
    )
    
    (156,915
    )Other
      income
    
    
    9,250
    
    
    —Minority
      interests
    
    
    (21,883
    )
    
    (1,071
    )1,366,768
    
    
    (433,789
    )Income
      (loss) from continuing operations
    
    
    265,427
    
    
    (2,640,591
    )Income
      from discontinued operations
    
    
    —
    
    
    175,000Net
      income (loss)
    
    $
    265,427
    
    $
    (2,465,591
    )
The
following table presents our historical operating results as a percentage of
revenues for the periods indicated:

Three
      Months Ended March 31,2004
    
    
    2005Revenues
    
    
    100.0
    %
    
    100.0
    %Operating
      expenses:Cost
      of revenues
    
    
    85.5
    %
    
    92.2
    %Depreciation
      and amortization
    
    
    4.3
    %
    
    3.6
    %Selling,
      general and administrative
    
    
    21.0
    %
    
    22.7
    %Operating
      loss
    
    
    -10.8
    %
    
    -18.5
    %Other
      income (expense)Interest
      expense, net
    
    
    -2.8
    %
    
    -2.3
    %Forgiveness
      of debt
    
    
    17.8
    %
    
    0.0
    %Loss
      on equity investment
    
    
    -1.5
    %
    
    -1.3
    %Other
      income
    
    
    0.1
    %
    
    0.0
    %Minority
      interests
    
    
    -0.2
    %
    
    0.0
    %13.4
    %
    
    -3.6
    %Income
      (loss) from continuing operations
    
    
    2.6
    %
    
    -22.1
    %Income
      from discontinued operations
    
    
    0.0
    %
    
    1.4
    %Net
      Income (loss)
    
    
    2.6
    %
    
    -20.7
    %


-13-
Revenues

Since
our restructuring in 2001, we have generated the majority of our revenue from
voice traffic sold to other carriers, with a primary focus on VoIP terminations
to the emerging markets. We have increased our business in this area through an
internal focus on the growth of our existing customer base, which is primarily
U.S. based, as well as the addition of new customers, and the establishment of
in-country partnerships that help us to more quickly deploy direct VoIP
terminating arrangements with postal telephone and telegraph companies and other
licensed carriers in emerging markets. Although we believe that this business
continues to be strong, ongoing competitive and pricing pressures have caused us
to increase our focus on higher margin, value-added services (VoIP to consumers
and businesses, Internet access, Internet protocol videoconferencing and private
networks) and market them to, or in conjunction with, international carriers,
Internet service providers, cable companies and wireless operators on a direct,
co-branded or private label basis.

In
an effort to further increase margins, expand our customer base, and develop
more stable revenue streams, we have begun to target enterprise customers (large
corporations, government entities and other businesses). Revenues generated from
sales to these customers are primarily derived from the sale of the value-added
services mentioned above. With a primary focus on marketing VoIP services to
these Enterprise customers, we believe we will recognize higher margin and
stronger growth opportunities. While this does not yet represent a significant
portion of our revenue base, we expect to continue to increase our emphasis in
this area. We believe that this will complement our carrier business with a
higher margin and more stable customer base.

-14-


In
2002, we established Efonica F-Z, LLC as a retail services company marketing
VoIP products to consumer and corporate customers in emerging markets. Beginning
in the Middle East, Asia and Africa, then extending into Latin America,
Efonica’s services are primarily sold through distribution channels on a
pre-paid basis. Efonica’s customers can place calls from anywhere in the world
to any destination using a personal computer, Internet protocol telephone or
regular telephone when accompanied by a hardware device that may be purchased
through Efonica. We believe that the introduction of advanced features such as
voicemail, call waiting and call forwarding enhance this value-added offering.
We expect to add these features by the end of the year. In February 2005,
we closed on the purchase of the 49.8% minority interest in Efonica.

Our
increased focus on VoIP services to Enterprise customers resulted in a growing
upward trend for this product segment.  During
the first quarter 2005, VoIP services to consumers and corporations accounted
for 9.3% of our total consolidated  revenue compared to 2.8% in the
first quarter 2004.

We
manage our revenues by product and customer. We manage our costs by provider
(vendor). We track total revenue at the customer level because our sales force
has to manage the revenue generation at the customer level, and invoices are
billed to and collected at the customer level. We also have to track the same
revenues by product, because different products have different billing and
payment terms, and individual customers may have multiple billing and payment
terms if they purchase multiple products.

We
manage our revenue segments based on gross margin, which is net revenues less
cost of revenues, rather than on net profitability, due to the fact that our
infrastructure is built to support all products, rather than individual
products. This applies both to the capital investments made (such as switching
and transmission equipment), and to Selling, General and Administrative
resources. The majority of our sales and operations personnel support all
product lines, and are not separately hired to support individual product
segments. For segment reporting purposes, all expenses below cost of revenues
are allocated based on percentage of revenues unless the items can be
specifically identified to one of the product segments.

We
manage our cost of revenues by managing the margins that we realize from
individual providers. We also monitor the cost of revenue terminated over our
own networks (On-net) versus cost of revenue terminated by third party providers
(Off-net). Our On-net cost of revenues are managed through our relationships
with strategic partners and our joint ventures, routing traffic to those
networks where we can effectively do so. Our Off-net cost of revenues are
managed by routing to our third party providers based on a least cost approach,
and focusing on maximizing margins by providers. Most providers offer multiple
destinations for termination, and give better rates for higher volumes.

Off-net
revenue does not typically mirror On-net revenue in regional geographic
termination percentages, because Off-net revenues are terminated by those other
third party providers, and may terminate anywhere in the world. On-net revenues
only terminate to areas supported by our own network of strategic partners that
we have agreements with and also typically have made investments with. If we
have traffic to On-net destinations that exceeds our capacity, we overflow such
traffic to other providers (Off-net).

Total
Consolidated Revenue includes VoIP to carriers, Traditional Voice to carriers,
VoIP to Consumers, and Internet, Private Network & Other. Revenues are
further broken down between On-net and Off-net as mentioned above. All
categories of revenue are recorded and tracked at the product and customer
level.

-15-


Fusion
Telecommunications International
Terminating
Revenue by Geographic Region
On-Net
Versus Off-Net

ConsolidatedTerminating
    
    Consolidated
    
    TotalMiddle
    
    
    
    On-Net
    
    Off-Net
    
    ConsolidatedYear
    
    Caribbean
    
    
    
    Asia
    
    East
    
    Africa
    
    Revenue
    
    Revenue
    
    RevenueQuarter
      ended March 31, 2005
    
    $
    447,789
    
    
    
    $
    1,190,887
    
    $
    513,737
    
    $
    13,342
    
    $
    2,165,755
    
    $
    9,763,297
    
    $
    11,929,0523.8
    %
    
    
    
    10.0
    %
    
    4.3
    %
    
    0.1
    %
    
    18.2
    %
    
    81.8
    %Quarter
      ended March 31, 2004
    
    $
    26,469
    
    
    
    $
    2,522,570
    
    $
    1,511,239
    
    $
    76,990
    
    $
    4,137,268
    
    $
    6,050,396
    
    $
    10,187,6640.3
    %
    
    
    
    24.8
    %
    
    14.8
    %
    
    0.8
    %
    
    40.7
    %
    
    59.3
    %
Regional
percentages are calculated based on Total Consolidated Revenue.

OPERATING
EXPENSES

Our
operating expenses are categorized as cost of revenues, depreciation and
amortization, loss on impairment, and selling, general and administrative
expenses.

Cost
of revenues includes costs incurred with the operation of our leased network
facilities, and the purchase of voice termination and Internet protocol services
from other telecommunications carriers and Internet service providers. We
continue to work to lower the variable component of the cost of revenue through
the use of least cost routing, and continual negotiation of usage-based and
fixed costs with domestic and international service providers.

Depreciation
and amortization includes depreciation of our communications network equipment,
amortization of leasehold improvements of our switch locations and
administrative facilities, and the depreciation of our office equipment and
fixtures.

Selling,
general and administrative expenses include salaries and benefits, commissions,
occupancy costs, sales, marketing and advertising, professional fees and other
administrative expenses.

COMPANY
HIGHLIGHTS

The
following summary of significant events during the three months
ended March 31, 2005 highlights the accomplishments and events that have
influenced our performance during that time period.

-16-


•
    
    Capital
      fund-raising—In
      February 2005, we closed on our initial public offering of securities of
      3,600,000 shares of common stock at a price of $6.45 per share and
      3,600,000 redeemable common stock purchase warrants at $.05 per warrant.
      Net proceeds of the offering were approximately $20.4 million. On March
      30, 2005 our underwriters exercised their over-allotment option and
      purchased an additional 480,000 shares of common stock and 540,000
      purchase warrants. We received an additional $2.9 million in net proceeds
      from the closing on the over-allotment option.•
    
    Debt
      Reduction—Upon completion of our IPO we repaid approximately $1.5 million in
      outsanding debt. In addition,  $2.5 million of convertible debt was
      converted into 651,515 shares of common stock.•
    
    Conversion
      of Series C preferred stock - The $10.0 million liability related
      to the 109,962 shares of outstanding Series C preferred stock was
      converted into equity (3,141,997 shares of common stock).•
    
    Revenue
      Growth—Revenue
      grew 17.1% in the first quarter 2005 over the first quarter
      2004.•
    
    Purchase
      of a Jamaica Entity—In
      January 2005, we concluded the purchase of a 51.0% interest in Convergent
      Technologies, which has international and domestic license agreements with
      the Jamacian government.•
    
    Purchase
      of Efonica—In
      February 2005, we acquired the remaining 49.8% interest in our Efonica
      joint venture.•
    
    Turkey
      Purchase Agreement—Entered
      into a stock purchase agreement with an entity in Turkey to acquire 75% of
      the shares from the existing Shareholders.
The
information in our period-to-period comparisons below represents only our
results from continuing operations.

Three
Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004

Revenues
Consolidated
revenues increased $1.7 million or 17.1% to approximately $11.9 million in the
three months ended March 31, 2005 compared to $10.2 million in the three months
ended March 31, 2004. Revenues for VoIP services to consumers and corporations
represented $0.8 million or 47.4% of the consolidated revenue growth, increasing
from $0.3 million in the first quarter 2004 to $1.1 million in the first quarter
2005, mainly due to the growth of Efonica.

VoIP
services sold to carriers increased $0.4 million or 5.2% in the first quarter of
2005 versus the first quarter of 2004. This increase represented 27.6% of the
consolidated revenue growth for the quarter. During the first quarter of 2005,
VoIP services sold to carriers continued to have limited growth due to the
technical difficulties associated with the migration to the new Softswitch,
however a significant portion of these issues have now been addressed and
revenues are again trending upward. Additionally, Traditional Voices
services sold to carriers increased $0.5 million or 20.3% in the first quarter
of 2005 versus the first quarter of 2004. This increase represented 27.7% of the
consolidated revenue growth.

Revenues
from our Internet, Private Network & Other Services represented the
remaining $0.1 million of the growth, increasing 11.5% from $0.6 million in the
first quarter 2004 to $0.7 million in the first quarter 2005. Growth in this
area was primarily due to the addition of new corporate customers in the latter
part of 2004.

Cost of
Revenues

Consolidated
cost of revenues increased $2.3 million or 26.3% to $11.0 million in the first
quarter of 2005 from $8.7 million in the first quarter of 2004. $1.6 million of
this increase was attributable to an increase in voice services to carriers, of
which $0.9 million was an increase in VoIP services cost of revenues to
carriers, and $0.7 million was an increase in cost of Traditional Voice services
to carriers.



-17-


The
cost of revenues for VoIP services to consumers and corporations grew $0.7
million in the first quarter 2005, from $0.2 million to $0.9 million, due
primarily to the rapid growth in that revenue base. Cost of revenues for
Internet, Private Network & Other remained flat at $0.4 million for both
quarters.

Consolidated
gross margin decreased $0.5 million for the first quarter 2005 over the first
quarter 2004. Gross margin for total Voice services to carriers decreased by
$0.8 million, but was partially offset by an improvement in the gross margin for
VoIP services to consumers and corporations of $0.2 million and an improvement
in gross margin for Internet, Private Networks and Other of $0.1
million.

The
decline in gross margin for Voice services to carriers was primarily related to
the technical difficulties associated with the migration to the Softswitch
technology, which adversely impacted our ability to route traffic to the least
cost provider. Price pressure sensitivity associated with some of our on-net
routes negatively impacted the margin as well.
Operating
Expenses

*Depreciation
and Amortization.*Depreciation and amortization remained consistent at $0.4 million during the
quarter ended March 31, 2005 and 2004. This is attributed to increased
depreciation resulting from assets added during 2004 and the first quarter of
2005 including the new SoftSwitch net with certain assets becoming fully
depreciated during 2004 and the first quarter of 2005.

*Selling,
General and Administrative.*Selling,
general and administrative expenses increased $0.6 million or 26.3% to $2.7
million during the three months ended March 31, 2005 from $2.1 million during
the three months ended March 31, 2004. This increase is primarily attributed to
increased salaries and benefits, as more personnel are required to support
our growth. In addition, also increasing as a result of growth are our legal and
professional fees, advertising/marketing expenses and bad debt expense. As a
percentage of revenues, selling, general and administrative expenses increased
from 21.0% during 2004 to 22.7% during 2005. We believe that as we execute our
business strategies, selling, general and administrative expenses as a
percentage of revenue will begin to decline.

*Operating
Loss.*Our
operating loss increased $1.1 million or 100.4% to a loss of $2.2 million during
the three months ended March 31, 2005 from a loss of $1.1 million during the
three months ended March 31, 2004. The increase in operating loss was primarily
attributable to both the decrease in gross margin and the increase in selling,
general and administrative expenses associated with infrastructure
growth.

*Other
Income (Expense).*Total
other income (expense) changed from other income of approximately $1.4 million
during the three months ended March 31, 2004 to other expense of $0.4 million
during the three months ended March 31, 2005. Interest expense remained fairly
consistent at $0.3 million during the two periods. The 2004 period included
accretion of $0.2 million (in accordance with SFAS 150) representing a full
quarter of accretion on only a portion of the Series C convertible preferred
stock. This is due to the second tranche of the Series C preferred stock closing
at the end of the first quarter of 2004 so accretion did not begin until April
of 2004. In contrast the 2005 period included accretion of $0.3 million on all
the issued and outstanding Series C preferred stock, however, such stock was
only outstanding for half of the quarter as all Series C preferred stock was
converted to common stock in connection with the IPO. Consequently, we only
recognized accretion expense for the period that the preferred stock was
outstanding as all accretion ceased when the preferred stock converted to common
stock. Also contributing to the 2005 interest expense is a reduction resulting
from the reduction of average outstanding debt. Gain on debt forgiveness
decreased in 2005 by $1.8 million to $0.0 from $1.8 million during 2004. The
2004 gain on debt forgiveness was attributed to $0.2 million of settlements of
capital lease obligations, $0.1 million of settlements of general obligations
and $1.5 million of settlements of network obligations. The loss from investment
in Estel remained consistent at approximately $0.2 million during the two
periods. Minority interest due from joint venture partners changed from a
$22,000 loss during 2004 to a $1,000 loss during 2005.

*Net
Loss.*The
primary factors impacting our net loss for the three months ended March 31, 2005
was a decrease in gross margin, an increase in selling, general and
administrative, and the reduction in forgiveness of debt (was $1.8 million
during the three months ended March 31, 2004 in comparison to 0 during the three
months ended March 31, 2005).
-18-


Liquidity
and Capital Resources

Since
our inception, we have incurred significant operating and net losses. In
addition, we have not generated positive cash flows from operations. As of March
31, 2005, we had an accumulated deficit of approximately $81.1 million. During
February 2005, we closed on our initial public offering of securities of
3,600,000 shares of common stock at a price of $6.45 per share and 3,600,000
redeemable common stock purchase warrants at $0.05 per warrant. Net proceeds of
the offering were approximately $20.4 million. On March 30, 2005 our
underwriters exercised their over-allotment option and purchased an additional
480,000 shares of common stock and 540,000 purchase warrants. We received an
additional $2.9 million in net proceeds from the closing on the over-allotment
option. As a result of this offering, we have total stockholders’ equity at
March 31, 2005 of approximately $25.0 million. In addition, as a result of the
offering, we converted $2.5 million of convertible debt into 651,515 shares of
common stock and we repaid approximately $1.5 million in outstanding debt and
$0.6 million of accrued interest. In addition, 109,962 shares of outstanding
Series C preferred stock was converted into 3,141,997 shares of common stock.

Below
is a summary of our cash flows for the periods indicated. These cash flow
results are consistent with prior years in that we continued to use significant
cash in connection with our operating and investing activities and had
significant cash provided by financing activities.

A
summary of our cash flows for the periods indicated is as follows:

QuarterEnded
    
    Quarter
      EndedMarch
      31,
    
    March
      31,2005
    
    2004Cash
      used in operating activities
    
    $
    (3,086,969
    )
    $
    (2,490,549
    )Cash
      used in investing activities
    
    
    (820,928
    )
    
    (382,763
    )Cash
      provided by financing activities
    
    
    21,026,973
    
    
    4,454,237Increase
      in cash and cash equivalents
    
    
    17,119,076
    
    
    1,580,925Cash
      and cash equivalents, beginning of period
    
    
    4,368,726
    
    
    3,205,645Cash
      and cash equivalents, end of period
    
    $
    21,487,802
    
    $
    4,786,570

Our
cash flow results have historically been and continue to be impacted by the
costs associated with implementing the new corporate strategy focusing our
resources on VoIP and the emerging international markets, as we completed our
exit from the more highly competitive, infrastructure dependent business that
previously characterized us. During the first quarter of 2005, we largely
completed the transition and integration to the Softswitch. Therefore, we have
only recently completed the deployment of our packet-based network
infrastructure. Because certain of our costs are fixed, we would expect that as
our revenues increase, total expenses will represent a smaller percentage of our
revenues.

Source of
Liquidity

As
of March 31, 2005, as a result of our recent IPO, we had cash and cash
equivalents of approximately $21.5 million. In addition, as of March 31, 2005,
we had approximately $0.3 million of cash restricted from withdrawal and held by
banks as certificates of deposits securing letters of credit (equal to the
amount of the certificates of deposit).

-19-

From
our inception through March 31, 2005, we financed our operations from cash
provided from financing activities. These activities were primarily through net
proceeds of approximately $23.3 million from our February 2005 IPO and prior to
2005, the private placement of approximately $52.2 million of equity securities
and $21.6 million from the issuance of notes. In addition, since inception we
have financed the acquisition of $6.8 million of fixed assets through capital
leases.

Although
we believe the net proceeds from our February 2005 IPO, together with our
existing cash and cash equivalents and revenues from operations will be
sufficient to meet our working capital and capital expenditure needs for the
next 12 months, our long-term liquidity is dependent on our ability to attain
future profitable operations. We cannot predict if and when we will be able to
attain future profitability.

Uses of
Liquidity

Our
short-term and long-term liquidity needs arise primarily from interest and
principal payments relating to our capital lease obligations, capital
expenditures, working capital requirements as may be needed to support the
growth of our business, and any additional funds that may be required for
business expansion opportunities.

Our
cash capital expenditures were approximately $0.4 million and $0.2 million
during the three months ended March 31, 2005 and 2004, respectively. We expect
our cash capital expenditures to be approximately $4.0 million for the year
ending December 31, 2005. The 2005 estimated capital expenditures include
network expansion, purchase of additional software for expanded product
offerings, new international deployments and customer premise equipment.

Cash
used in operations was approximately $3.1 million and $2.5 million during the
three months ended March 31, 2005 and 2004, respectively. The cash used in our
operations has historically been a function of our net losses, gains on
forgiveness of debt, and changes in working capital as a result of the timing of
receipts and disbursements. The increase in cash used in operations during the
three months ended March 31, 2005 is primarily attributed to the net loss of
approximately $2.5 million during the three months ended March 31, 2005 in
comparison to income of approximately $0.3 million during the three months ended
March 31, 2004 (this income is attributed to the $1.8 million of forgiveness of
debt during the quarter). The transition to the SoftSwitch has contributed to
the net loss during the first quarter of 2005. We believe the transition issues
are largely behind us and expect improved financial results in the
future.

In
some situations, we may be required to guarantee payment or performance under
agreements, and in these circumstances we would need to secure letters of credit
or bonds to do so.

We
intend to fund corporate overhead, including management salaries from the
working capital that we have raised from our IPO.

Debt
Service Requirements

As
a result of our IPO, we repaid a majority of our outstanding debt and converted
$2.5 million in convertible notes payable to common stock . In addition,
approximately $10.0 million of our Series C Convertible Preferred Stock was
converted into common stock. As a result, at March 31, 2005, our debt balance
decreased significantly to approximately $1.6 million comprised primarily of
$1.2 million in capital leases. All of this debt, other than $0.1 million is due
during the 12 months ending March 31, 2006. We expect our interest expense to
decrease significantly during 2005 due to the following factors:

1.
    
    During
      the year ended December 31, 2004, we recorded $1.7 million of accretion to
      interest expense related to our Series C Preferred Stock. This Series C
      Preferred Stock was converted to common stock during February 2005 and
      consequently, accretion ceased on this date. Accretion expense during the
      three months ended March 31, 2005 was only $0.3 million. Although the
      accretion represented a non cash charge to interest expense during 2004
      and the first quarter 2005, approximately $0.7 million in cash dividends
      were paid during January 2005 in connection with the Series C Preferred
      Stock.2.
    
    As
      discussed above, subsequent to the IPO, we repaid approximately $1.5
      million of debt and $2.5 million in debt was converted into equity. This
      reduction in our debt balances during February 2005 is expected to result
      in a significant reduction in our cash interest expense in the
      future.


-20-

Capital
Instruments

As
of March 31, 2005, the only outstanding stock we had is our two classes of
Common Stock.

Critical
Accounting Policies and Estimates

We
have identified the policies and significant estimation processes below as
critical to our business operations and the understanding of our results of
operations. The listing is not intended to be a comprehensive list. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management’s judgment in their application. In other cases,
management is required to exercise judgment in the application of accounting
principles with respect to particular transactions. The impact and any
associated risks related to these policies on our business operations is
discussed throughout “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” where such policies affect reported and
expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 2 in the Notes to Consolidated
Financial Statements for the year ended December 31, 2004 included in our Annual
Report on Form 10-K. Our preparation of our consolidated financial statements
requires us to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of our consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting periods. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. There can be no assurance
that actual results will not differ from those estimates and such differences
could be significant.

Revenue
Recognition—Our
revenue is primarily derived from fees charged to terminate voice services over
our network, and from monthly recurring charges associated with Internet and
Private Line services.

Variable
revenue is earned based on the number of minutes during a call and is recognized
upon completion of a call, adjusted for allowance for doubtful accounts
receivable and billing adjustments. Revenue for each customer is calculated from
information received through our network switches. Customized software has been
designed to track the information from the switch and analyze the call detail
records against stored detailed information about revenue rates. This software
provides us the ability to do a timely and accurate analysis of revenue earned
in a period. Consequently, the recorded amounts are generally accurate and the
recorded amounts are unlikely to be revised in the future.

Fixed
revenue is earned from monthly recurring services provided to the customer that
are fixed and recurring in nature, and are contracted for over a specified
period of time. The initial start of revenue recognition is after the
provisioning, testing and acceptance of the service by the customer. The charges
continue to bill until the expiration of the contract, or until cancellation of
the service by the customer. Additionally, the majority of our VoIP services to
consumers are prepaid. The revenue received from the prepayments that is related
to VoIP termination services in the current month is booked to the current
month’s revenue, and the remainder of the prepayments are booked to deferred
revenue, until usage occurs.

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Accounts
Receivable—Accounts
receivable are recorded net of an allowance for doubtful accounts. On a periodic
basis, we evaluate our accounts receivable and record an allowance for doubtful
accounts, based on our history of past write-offs and collections and current
credit conditions. Specific customer accounts are written off as uncollectible
if the probability of a future loss has been established and payments are not
expected to be received.

Cost
of revenues and cost of revenues accrual—Cost
of revenues is comprised primarily of costs incurred from other domestic and
international telecommunications carriers to originate, transport and terminate
calls. The majority of our cost of revenue is variable, based upon the number of
minutes of use, with transmission and termination costs being the most
significant expense. Call activity is tracked and analyzed with customized
software that analyzes the traffic flowing through our network switches. Each
period the activity is analyzed and an accrual is recorded for minutes not
invoiced. This cost accrual is calculated using minutes from the system and the
variable cost of revenue based upon predetermined contractual rates.

In
addition to the variable cost of revenue, there are also fixed expenses. One
category of fixed expenses are those that are associated with the network
backbone connectivity to our switch facilities. These would consist of hubbing
charges at our New York switch facility that allow other carriers to send
traffic to our switch, satellite or cable charges to connect to our
international network, or Internet connectivity charges to connect customers or
vendors to Fusion’s switch via the public Internet, a portion of which are
variable costs. The other category of fixed expenses is associated with charges
that are dedicated point to point connections to specific customers (both
private line and Internet access).

Income
Taxes—We
account for income taxes in accordance with the provisions of SFAS No. 109,
“Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires companies to
recognize deferred tax liabilities and assets for the expected future income tax
consequences of events that have been recognized in our consolidated financial
statements. Deferred tax liabilities and assets are determined based on the
temporary differences between the consolidated financial statements carrying
amounts and the tax bases of assets and liabilities, using enacted tax rates in
the years in which the temporary differences are expected to reverse. In
assessing the likelihood of utilization of existing deferred tax assets and
recording a full valuation allowance, we have considered historical results of
operations and the current operating environment.

Recently
Issued Accounting Pronouncements

In
December 2004, the Financial Accounting Standards Board “FASB”) issued SFAS No.
123 (revised 2004) (“123R”), “Share-Based Payment”. Statement 123(R) will
provide investors and other users of financial statements with more complete and
neutral financial information by requiring that the compensation cost relating
to share based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights and employee share purchase
plans. SFAS No. 123(R) replaces SFAS No. 123, “Accounting for Stock Based
Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees”. SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, that Statement permitted entities the
option of continuing to apply the guidance in APB Opinion No. 25, as long as the
footnotes to financial statements disclosed what net income would have been had
the preferable fair-value based method been used. In addition, in March 2005,
the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107,
Share-Based Payment (SAB 107). SAB 107 provides supplemental implementation
guidance on FAS 123(R), including guidance on valuation methods, classification
of compensation expense, inventory capitalization of share-based compensation
cost, income tax effects, disclosures in Management's Discussion and Analysis,
and several other issues.  We will be required to adopt FAS 123(R) and SAB
107 in the first quarter of fiscal year 2006 at the earliest. We are in the
process of evaluating whether the adoption of SFAS No. 123(R) will have a
significant impact on our overall results of operations or financial position.

Inflation

We
do not believe inflation has a significant effect on our operations at this
time.

-22-

FORWARD-LOOKING
STATEMENTS

Certain
matters discussed in this Report under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources" contain certain forward-looking statements which involve risks and
uncertainties and depend upon certain assumptions, some of which may be beyond
our control, including, but not limited to, uncertainty of financial estimates
and projections, the competitive environment for Internet telephony, our limited
operating history, changes of rates of all related telecommunications services,
the level and rate of customer acceptance of new products and services,
legislation that may affect the Internet telephony industry, rapid technological
changes, as well as other risks referenced from time to time in our filings with
the Securities and Exchange Commission, and, accordingly, there can be no
assurance with regard to such statements. All forward-looking statements and
risk factors included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or risk factors.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
are exposed to certain market risks that are inherent in our financial
instruments. These instruments arise from transactions in the normal course of
business.

At
March 31, 2005, the majority of our cash balances were held primarily in the
form of a short-term highly liquid investment grade money market fund in a major
financial institution. Due to the short-term nature of our investments, we
believe that we are not subject to any material interest or market rate
risks.

At
March 31, 2005, we were not subject to interest rate risk as all of our current
debt at March 31, 2005 is at fixed interest rates. During the first quarter of
2005, we did not conduct our business in currencies other than the United States
dollar. The reporting currency for our financial statements has been the United
States dollar and the functional currency for both of our respective
subsidiaries had been the U.S. dollar. However, in the near future, in
connection with our Joint Ventures in Jamaica and Turkey, we likely will be
conducting a percentage of our business in other foreign currencies that could
have an adverse impact on our future results of operations. In addition, we
might enter into other foreign joint ventures in the future which might conduct
business in other foreign currencies that could have an adverse impact on our
future results of operations.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation
of Disclosure Controls and Procedures

As
of the end of the period covered by this report, our management, under the
supervision and with the participation of our Chief Executive Officer and Vice
President of Finance, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that
evaluation, the Chief Executive Officer and the Vice President of Finance
concluded that our disclosure controls and procedures as of the end of the
period covered by this report have been designed and are functioning effectively
to provide reasonable assurance that the information we (including our
consolidated subsidiaries) are required to disclose in reports filed under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.

Changes
in Internal Controls over Financial Reporting

There
was no change in our internal control over financial reporting that occurred
during the quarter ended March 31, 2005, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

-23-

Fusion
Telecommunications International, Inc. and Subsidiaries

Part II:
Other Information

Item
1.Legal
Proceedings

Certain
legal proceedings in which we are involved are discussed in Part I, Item 3 of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Item
2.Unregistered
Sales of Securities and Use of Proceeds

None.

Item
3.Defaults
Upon Senior Securities

None.

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

We
held our Annual Meeting of Stockholders on May 6, 2005. At this meeting, the
stockholders voted in favor of the following items listed in the Proxy Statement
dated April 7, 2005:

(1)
Election of Directors:
Nominee
    
    
    For
    
    
    WithheldMarvin
      S. Rosen
    
    
    17,565,933
    
    
    17,044Raymond
      E. Mabus
    
    
    17,563,633
    
    
    19,344Mathew
      D. Rosen
    
    
    17,565,933
    
    
    17,044Philip
      D. Turits
    
    
    17,565,933
    
    
    17,044E.
      Alan Brumberger
    
    
    17,564,133
    
    
    18,844Julius
      Erving
    
    
    17,561,833
    
    
    21,844Michael
      J. Del Giudice
    
    
    17,563,133
    
    
    19,844Evelyn
      Langlieb Greer
    
    
    17,563,433
    
    
    19,544Fred
      P. Hochberg
    
    
    17,565,633
    
    
    17,344Manuel
      D. Medina
    
    
    17,563,433
    
    
    19,544Dennis
      Mehiel
    
    
    17,563,633
    
    
    19,344Paul
      C. O'Brien
    
    
    17,565,933
    
    
    17,044


-24-

(2)
The ratification of the appointment by the Audit Committee of the Board of
Directors ofRothstein,
Kass & Company, P.C.,
as independent auditors for the year ending December 31, 2005:

For
    Against
    Abstain17,551,133
    21,100
    10,744

Item
5.Other
Information

None.

Item
6.Exhibits

Exhibit
      No.
    
    Description31.1
    
    Certification
      of the Chief Executive Officer, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    
    Certification
      of the Principal Accounting Officer, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32
    
    Certification
      of the Chief Executive Officer and Principal Accounting Officer pursuant
      to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


-25-

SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**Date:
      May 16, 2005
    By:
    /s/
      Marvin S. RosenMarvin S. RosenChairman
      of the Board and Chief Executive Officer

Date: May 16, 2005
    By:
    /s/ Barbara
  HughesBarbara
      HughesVice President of Finance and
      Principal Accounting
      and
      Financial Officer**


-26-