**UNITED STATES        SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

(Mark One)

| **x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-----------------------------------------------------------------------------------------------------------------------------------|

For the quarterly period ended September 30, 2009

 

Commission File Number: 001-32421

**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 1718, New York, New York** | **10170**  |
|----------------------------------------------------------|------------|
| (Address of principal executive offices)                 | (Zip Code) |

**(212) 201-2400**( Registrant’s telephone number, including area code )

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such        files).    Yes     o      No     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

| Large accelerated filer                                           | o | Accelerated filer         | o |
|-------------------------------------------------------------------|---|---------------------------|---|
| Non-accelerated filer (Do not check if smaller reporting company) | o | Smaller reporting company | x |

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b—2 of the Exchange Act.     Yes   o   No   x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date: October 19, 2009.

| **Title Of Each Class**       | **Number of Shares Outstanding** |
|-------------------------------|----------------------------------|
| Common Stock, $0.01 par value | 87,054,131                       |

 

****FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES****

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**TABLE  of contents**

 

****PART I** – FINANCIAL INFORMATION**

 

Item 1.          Financial Statements.

 

Item 2.          Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 3.          Quantitative and Qualitative Disclosures About Market Risk.  

 

Item 4T.        Controls and Procedures.

         

****PART II** — OTHER INFORMATION**

 

Item 1.         Legal Proceedings.

Item 1A.      Risk Factors.

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

Item 3.         Defaults Upon Senior Securities.

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

Item 5.         Other Information.

Item 6.         Exhibits.

         

****SIGNATURES****

**INDEX TO EXHIBITS**

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

----

**PART I – FINANCIAL INFORMATION**

**Item 1.           Financial Statements.**

**CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS**

 

|                                                                                                                                                |   | **September 30, 2009** |   | **December 31, 2008** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|
|                                                                                                                                                |   | **(unaudited)**        |   |                  |
| **ASSETS**                                                                                                                                          |   |                   |   |                  |
| **Current assets:**                                                                                                                                 |   |                   |   |                  |
| Cash and cash equivalents                                                                                                                           | $      | 376,250                | $      | 427,433               |
| Accounts receivable, net of allowance for doubtful accounts of approximately $576,000 and $635,000 in 2009 and 2008, respectively                   |   | 2,289,143              |   | 3,240,670             |
| Prepaid expenses and other current assets                                                                                                           |   | 660,347                |   | 261,863               |
| Assets held for sale                                                                                                                                |   | 27,850                 |   |  ̄                |
| Current assets reclassified to discontinued operations                                                                                              |   | 316,124                |   | 302,533               |
| **Total current assets**                                                                                                                            |   | 3,669,714              |   | 4,232,499             |
| **Property and equipment, net**                                                                                                                     |   | 1,985,536              |   | 3,829,669             |
| **Other assets:**                                                                                                                                   |   |                   |   |                  |
| Security deposits                                                                                                                                   |   | 51,042                 |   | 50,241                |
| Restricted cash                                                                                                                                     |   | 416,566                |   | 416,566               |
| Intangible assets, net                                                                                                                              |   | 563,781                |   | 810,908               |
| Other assets                                                                                                                                        |   | 63,203                 |   | 127,908               |
| **Total other assets**                                                                                                                              |   | 1,094,592              |   | 1,405,623             |
| **TOTAL ASSETS**                                                                                                                                    | $      | 6,749,842              | $      | 9,467,791             |
| **LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                                     |   |                   |   |                  |
| **Current liabilities:**                                                                                                                            |   |                   |   |                  |
| Long-term debt, current portion – non-related parties                                                                                         | $      | 942,500                | $      | 1,350,000             |
| Long-term debt – related parties                                                                                                              |   | 1,568,121              |   | 1,012,992             |
| Capital lease/equipment financing obligations, current portion                                                                                      |   | 112,728                |   | 122,960               |
| Accounts payable and accrued expenses                                                                                                               |   | 10,201,286             |   | 10,039,015            |
| Current liabilities reclassified to discontinued operations                                                                                         |   | 28,322                 |   | 261,972               |
| **Total current liabilities**                                                                                                                       |   | 12,852,957             |   | 12,786,939            |
| **Long-term liabilities:**                                                                                                                          |   |                   |   |                  |
| Long-term debt, net of current portion- non-related parties                                                                                         |   |  ̄                 |   | 960,000               |
| Capital lease/equipment financing obligations, net of current portion                                                                               |   | 6,082                  |   |  ̄                |
| Other long-term liabilities                                                                                                                         |   | 346,912                |   | 485,431               |
| **Total long-term liabilities**                                                                                                                     |   | 352,994                |   | 1,445,431             |
| **Commitments and contingencies**                                                                                                                   |   |                   |   |                  |
| **Stockholders’ deficit:**                                                                                                               |   |                   |   |                  |
| Preferred Stock, $0.01 par value, 10,000,000 shares authorized, 7,995 shares issued and outstanding in 2009 and 2008, respectively                  |   | 80                     |   | 80                    |
| Common Stock, $0.01 par value, 175,000,000 shares authorized 86,859,686 and 45,750,003 shares issued and outstanding in 2009 and 2008, respectively |   | 868,598                |   | 457,500               |
| Capital in excess of par value                                                                                                                      |   | 130,125,893            |   | 124,384,568           |
| Accumulated deficit                                                                                                                                 |   | (137,450,680)          |   | (129,606,727)         |
| **Total stockholders’ deficit**                                                                                                               |   | (6,456,109)            |   | (4,764,579)           |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT**                                                                                               | $      | 6,749,842              | $      | 9,467,791             |

See accompanying notes to the Condensed Consolidated Interim Financial Statements.

1

 

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS            (UNAUDITED)**
|                                                                                                                                                                                                                                                                                                                  |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|
|                                                                                                                                                                                                                                                                                                                  |   | **2009**                             |   | **2008**                            |   | **2009** |   | **2008** |
| **Revenues**                                                                                                                                                                                                                                                                                                          | $      | 11,853,020                           | $      | 14,301,428                          | $ | 29,505,082 | $ | 36,664,770 |
| **Operating expenses**:                                                                                                                                                                                                                                                                                               |   |                                 |   |                                |   |   |   |   |
| Cost of revenues, exclusive of depreciation and amortization shown separately below                                                                                                                                                                                                                                   |   | 10,865,824                           |   | 13,414,976                          |   | 27,291,855 |   | 34,358,378 |
| Depreciation and amortization                                                                                                                                                                                                                                                                                         |   | 304,121                              |   | 454,564                             |   | 1,020,536 |   | 1,346,674 |
| Loss of impairment of long-lived assets                                                                                                                                                                                                                                                                               |   |  ̄                               |   |  ̄                              |   | 243,000 |   |  ̄ |
| Selling, general and administrative expenses (includes approximately $144,201 and $136,548 for the three months ended September 30, 2009 and September 30, 2008, respectively, and approximately $263,968 and $442,626 for the nine months ended September 30, 2009 and 2008, respectively, stock-based compensation) |   | 2,279,704                            |   | 2,524,692                           |   | 6,992,151 |   | 8,165,918 |
| Advertising and marketing                                                                                                                                                                                                                                                                                             |   | 4,006                                |   | 13,739                              |   | 14,518 |   | 30,283 |
| Total operating expenses                                                                                                                                                                                                                                                                                              |   | 13,453,655                           |   | 16,407,971                          |   | 35,562,060 |   | 43,901,253 |
| **Operating loss**                                                                                                                                                                                                                                                                                                    |   | (1,600,635)                          |   | (2,106,543)                         |   | (6,056,978) |   | (7,236,483) |
| **Other income (expenses):**                                                                                                                                                                                                                                                                                          |   |                                 |   |                                |   |   |   |   |
| Interest income                                                                                                                                                                                                                                                                                                       |   | 3,447                                |   | 7,658                               |   | 4,057 |   | 10,174 |
| Interest expense                                                                                                                                                                                                                                                                                                      |   | (112,893)                            |   | (134,223)                           |   | (328,674) |   | (204,810) |
| Gain on settlements of debt                                                                                                                                                                                                                                                                                           |   |  ̄                               |   | 25,000                              |   |  ̄ |   | 659,991 |
| Other                                                                                                                                                                                                                                                                                                                 |   | 1,992                                |   | 4,059                               |   | 5,485 |   | (56,071) |
| Total other income (expenses)                                                                                                                                                                                                                                                                                         |   | (107,454)                            |   | (97,506)                            |   | (319,132) |   | 409,283 |
| Income (loss) from continuing operations                                                                                                                                                                                                                                                                              |   | (1,708,089)                          |   | (2,204,050)                         |   | (6,376,110) |   | (6,827,200) |
| **Discontinued operations:**                                                                                                                                                                                                                                                                                          |   |                                 |   |                                |   |   |   |   |
| Loss from discontinued operations                                                                                                                                                                                                                                                                                     |   | (102,900)                            |   | (367,683)                           |   | (1,467,843) |   | (1,001,484) |
| **Net loss**                                                                                                                                                                                                                                                                                                          | $      | (1,810,989)                          | $      | (2,571,733)                         | $ | (7,843,953) | $ | (7,828,684) |
|                                                                                                                                                                                                                                                                                                                  |   |                                 |   |                                |   |   |   |   |
| **Loss applicable to Common Stockholders:**                                                                                                                                                                                                                                                                           |   |                                 |   |                                |   |   |   |   |
| Loss from continuing operations                                                                                                                                                                                                                                                                                       | $      | (1,708,089)                          | $      | (2,204,050)                         | $ | (6,376,110) | $ | (6,827,200) |
| Preferred Stock dividends in arrears                                                                                                                                                                                                                                                                                  |   | (161,214)                            |   | (161,214)                           |   | (478,386) |   | (480,138) |
| **Net loss from continuing operations applicable to Common Stockholders**                                                                                                                                                                                                                                             |   | (1,869,303)                          |   | (2,365,264)                         |   | (6,854,496) |   | (7,307,338) |
| Loss from discontinued operations                                                                                                                                                                                                                                                                                     |   | (102,900)                            |   | (367,683)                           |   | (1,467,843) |   | (1,001,484) |
| **Net loss applicable to Common Stockholders**                                                                                                                                                                                                                                                                        | $      | (1,972,204)                          | $      | (2,732,947)                         | $ | (8,322,339) | $ | (8,308,821) |
|                                                                                                                                                                                                                                                                                                                  |   |                                 |   |                                |   |   |   |   |
| **Net loss per Common Share: basic and diluted:**                                                                                                                                                                                                                                                                     |   |                                 |   |                                |   |   |   |   |
| Loss from continuing operations                                                                                                                                                                                                                                                                                       | $      | (1,708,089)                          | $      | (2,204,050)                         | $ | (6,376,110) | $ | (6,827,200) |
| Income (loss) from discontinued operations                                                                                                                                                                                                                                                                            |   | (102,900)                            |   | (367,683)                           |   | (1,467,843) |   | (1,001,484) |
| **Net loss applicable to Common Stockholders**                                                                                                                                                                                                                                                                        | $      | (0.03)                               | $      | (0.07)                              | $ | (0.14) | $ | (0.23) |
|                                                                                                                                                                                                                                                                                                                  |   |                                 |   |                                |   |   |   |   |
| **Weighted average common shares outstanding:**                                                                                                                                                                                                                                                                       |   |                                 |   |                                |   |   |   |   |
| Basic and diluted                                                                                                                                                                                                                                                                                                     |   | 67,663,257                           |   | 37,151,093                          |   | 57,568,953 |   | 35,377,144 |

See accompanying notes to the Condensed Consolidated Interim Financial Statements.

2

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS****(UNAUDITED)**

|                                                                                         |   | **Nine Months Ended September 30****,** |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------|
|                                                                                         |   | **2009**                                |   | **2008** |
| **Cash flows from operating activities:**                                                    |   |                                    |   |   |
| Net loss                                                                                     | $      | (7,843,953)                             | $ | (7,828,684) |
| **Adjustments to reconcile net loss to net cash used in operating activities:**              |   |                                    |   |   |
| Loss on impairment / continuing operations                                                   |   | 243,000                                 |   |  ̄ |
| Loss on impairment / discontinued operations                                                 |   | 545,047                                 |   |  ̄ |
| Depreciation and amortization                                                                |   | 1,020,536                               |   | 1,372,371 |
| Gain on sale / disposal of fixed assets                                                      |   |  ̄                                  |   | 59,158 |
| Bad debt expense                                                                             |   | 125,938                                 |   | 105,048 |
| Stock-based compensation                                                                     |   | 263,968                                 |   | 442,626 |
| Gain on extinguishment of debt                                                               |   |  ̄                                  |   | (659,991) |
| **Increase (decrease) in cash attributable to changes in operating assets and liabilities:** |   |                                    |   |   |
| Accounts receivable, net                                                                     |   | 825,587                                 |   | 1,892,572 |
| Prepaid expenses and other current assets                                                    |   | (510,914)                               |   | 38,989 |
| Other assets                                                                                 |   | 61,637                                  |   | (6,435) |
| Accounts payable and accrued expenses                                                        |   | 161,815                                 |   | 1,898,641 |
| Other long-term liabilities                                                                  |   | (138,519)                               |   | (128,054) |
| **Net cash used in operating activities**                                                    |   | (5,245,858)                             |   | (2,813,759) |
| **Cash flows from investing activities:**                                                    |   |                                    |   |   |
| Purchase of property and equipment                                                           |   | (34,640)                                |   | (329,485) |
| Receipt (payment) for security deposits                                                      |   | (801)                                   |   | 7,755 |
| Returns of other intangible assets                                                           |   | 2,640                                   |   |  ̄ |
| **Net cash used in investing activities**                                               |   | (32,801)                                |   | (321,730) |
| **Cash flows from financing activities:**                                                    |   |                                    |   |   |
| Proceeds from sale of Common Stock, net                                                      |   | 2,543,545                               |   | 2,466,433 |
| Proceeds from notes payable — related parties                                          |   | 2,525,682                               |   | 580,000 |
| Proceeds from notes payable — non-related parties                                      |   |  ̄                                  |   | 1,075,000 |
| Payments of long-term debt and capital lease /equipment financing obligations                |   | (28,149)                                |   | (82,964) |
| Repayments of notes payable - related parties                                                |   |  ̄                                  |   | (406,671) |
| Repayments of notes payable – non-related parties                                      |   |  ̄                                  |   | (250,000) |
| **Net cash provided by financing activities**                                           |   | 5,041,078                               |   | 3,381,798 |
| **Net increase (decrease) in cash and cash equivalents from continuing operations**          |   | (237,581)                               |   | 246,309 |
| **Cash flows from discontinued operations:**                                                 |   |                                    |   |   |
| Cash provided by operating activities of discontinued operations                        |   | 186,398                                 |   | 84,249 |
| Cash provided by investing activities of discontinued operations                        |   |  ̄                                  |   | 22,410 |
| **Net increase in cash and cash equivalents from discontinuing operations**             |   | 186,398                                 |   | 106,659 |
| **Net increase (decrease) in cash and equivalents:**                                         |   | (51,183)                                |   | 352,968 |
| **Cash and cash equivalents, beginning of year**                                             |   | 427,433                                 |   | 70,883 |
| **Cash and cash equivalents, end of year**                                                   | $      | 376,250                                 | $ | 423,851 |
|                                                                                         |   |                                    |   |   |
| **Supplemental disclosure of cash flow information:**                                        |   |                                    |   |   |
| Cash paid during the period for interest                                                     | $      | 52,604                                  | $ | 150,810 |
| **Supplemental schedule of non—cash investing and financing activities:**              |   |                                    |   |   |
| Acquisition of capital lease/equipment financing obligations                                 | $      | 24,000                                  | $ |  ̄ |
| Note transfer to a related party from a non-related party                                    | $      | (500,000)                               | $ |  ̄ |
| Note transfer from a non-related party to a related party                                    | $      | 500,000                                 | $ |  ̄ |
| Conversion of notes payable – related party to Common Stock                            | $      | 3,345,159                               |   |  ̄ |

 

See accompanying notes to the Condensed Consolidated Interim Financial Statements.

3

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)**

**1. Basis of Presentation, Consolidation, and Summary of Selective Significant Accounting Policies**

     The accompanying notes to the Condensed Consolidated Interim Financial Statements should be read in conjunction with the Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008 for        Fusion Telecommunications International, Inc. and its Subsidiaries (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. These Condensed Consolidated Interim Financial Statements have been prepared in accordance with instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”) and therefore, omit or condense certain footnotes        and other information normally included in the Condensed Consolidated Interim Financial Statements prepared in accordance with accounting principles generally accepted in the United States (the “U.S. GAAP”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) considered necessary for fair Condensed Consolidated Interim Financial Statement presentation have been made. The results of operations for an interim period may        not give true indication of the results for the entire year.             During the nine months ended September 30, 2009 and 2008, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying Condensed Consolidated Interim Statements of Operations.

**Income taxes**

     The Company accounts for income taxes in accordance with the requirements under U.S. GAAP, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and the tax bases of assets and liabilities that        will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. The Company accounts for uncertainty in income taxes in accordance with the requirements under U.S. GAAP, which creates a single accounting and disclosure model for uncertain tax        positions, provides guidance on the minimum threshold that a tax uncertainty is required to meet before it can be recognized in the financial statements and applies to all tax positions taken by a company, both those deemed to be routine as well as those for which there may be a high degree of uncertainty. During the three month period ended September 30, 2009, the Company recognized no adjustments for uncertain tax positions.

**Earnings (loss) per Share**

    The Company accounts for earnings per share in accordance with the requirements under U.S. GAAP, which requires dual presentation of basic and diluted loss per share for all periods presented. Basic loss per share excludes dilution and is computed by dividing income available to Common Stockholders by the weighted-average number of Common        Stock shares outstanding during the period. Diluted loss 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.             Unexercised Stock Options to purchase 4,915,449 and 4,288,325 shares of the Company’s Common Stock as of September 30, 2009 and 2008, respectively, were not included in the computation of diluted loss per share because the exercise of the Stock Options would be anti-dilutive to loss per share.             Unexercised Warrants to purchase 27,693,278 and 17,207,843 shares of the Company’s Common Stock as of September 30, 2009 and 2008, respectively, were not included in the computation of diluted loss per share because the exercise of the Warrants would be anti-dilutive to loss per share.             Net loss per share calculations include provisions for Preferred Stock dividend, in the amount of approximately $478,000 and $480,000 for the nine months ended September 30, 2009 and 2008 respectively. As of September 30, 2009, the Board of Directors had declared no dividend. As of September 30, 2009, the Company has accumulated approximately $1,657,000 of Preferred Stock dividends.

4

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Accounting for Costs Associated with Exit or Disposal Activities**

    The Company accounts for restructuring activities, including costs for the one-time termination benefits, in accordance with the requirements under U.S. GAAP for costs associated with the impairment and disposal of long-lived assets. Employee termination costs are recorded when actions are probable and estimatable. Asset impairment costs are recorded        in accordance with U.S. GAAP. As of September 30, 2009, the Company recorded a loss on impairment of discontinued assets of $544,943.

**Stock–Based Compensation**

    The Company accounts for stock-based compensation by recognizing the fair value of compensation cost for all stock awards over the service period (generally equal to the vesting period). This compensation cost is determined using option pricing models intended to estimate the fair value of the awards at the grant date. An offsetting increase to        Stockholders’ equity is recorded equal to the amount of the compensation expense charge. The fair value of issued stock options and warrants are estimated on the date of grant using the Black-Scholes option-pricing model. The impact on the Company’s consolidated results of operations of recording Stock-Based Compensation expense for the nine-months ended September 30, 2009 and 2008 was approximately $264,000 and $443,000, respectively, which is included in selling, general        and administrative expenses in the Condensed Consolidated Interim Statements of Operations.                       The following table summarizes Stock Option activity for the nine months ended September 30, 2009:          

|                              | (unaudited)           |
|-----------------------------------|-----------------------|
| **Activity**                      | **Number of Options** |   | **Weighted Average Exercise P****rice** |
| Outstanding at January 1, 2009    | 4,096,609             | $ | 1.72 |
| Granted                           | 1,354,500             | $ | 0.11 |
| Cancelled or expired              | (535,660)             | $ | 1.87 |
| Outstanding at September 30, 2009 | 4,915,449             | $ | 1.26 |
| Exercisable at September 30, 2009 | 2,497,413             | $ | 2.22 |

     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:          

|                            | (unaudited)                               |
|---------------------------------|-------------------------------------------|
|                            | **Nine Months Ended September 30** , |
|                            | **2009**                                  | **2008** |
| Dividend yield                  | 0.0%                                      | 0.0% |
| Stock volatility                | 195.21%                                   | 109.93% |
| Average Risk-free interest rate | 2.44%                                     | 3.21% |
| Average option term (years)     | 4                          | 4    |

     As of September 30, 2009, there was approximately $79,048 of total unrecognized compensation cost, net of estimated forfeitures, related to Stock Options granted under our Stock Incentive Plans, which is expected to be recognized over a weighted-average period of two (2) years.

**Fair Value of Financials Instruments**

    The carrying amount of the Company’s assets and liabilities approximate fair value presented in the accompanying consolidated condensed interim balance sheets, due to their short-term maturities.

5

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Subsequent Events**

    The condensed consolidated interim financial statements were approved by the Board of Directors and were issued on November 16, 2009. Subsequent events have been evaluated through this date.

 

      On October 14, 2009, the Company entered into a subscription agreement with two (2) accredited investor for the sale of 194,445 shares of Common Stock and five-year Warrants to purchase 38,890 shares of Common Stock, in consideration for an aggregate of $35,000. Each Warrant is exercisable at $0.22 per share,        which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the closing.          

     On October 19, 2009, the Company borrowed $60,000 from Marvin S. Rosen, a Director of the Company. The note (a) is payable on demand in full upon ten days notice of demand from the lender, (b) bears interest on the unpaid principal amount at the rate of 8% per annum and (c) grants the lender a collateralized        security interest, pari passu with other lenders, in the Company’s accounts receivable.          

     On November 9, 2009 and November 10, 2009, the Company borrowed the aggregate of $135,000 from Marvin S. Rosen, a Director of the Company. These notes (a) are payable on demand in full upon ten days notice of demand from the lender, (b) bears interest on the unpaid principal amount at the rate of 3.25% per annum        and (c) grants the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.                        On November 13, 2009, the Company entered into a subscription agreement with one (1) accredited investor who is also a Director, for the sale of 277,778 shares of Common Stock and five-year Warrants to purchase  55,556 shares of Common Stock, in consideration for $50,000. Each Warrant is exercisable at $0.22 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the        closing.             The Company uses the proceeds from these transactions primarily for general corporate purposes.

**2.     Going Concern**

    At September 30, 2009, the Company had a working capital deficit of approximately $9.0 million and an accumulated deficit of approximately $137.5 million. The Company has continued to sustain losses from operations. In addition, the Company has not generated positive cash flow from operations since inception. Management is aware that        its current cash resources are not adequate to fund its operations for the remainder of the year. During the nine months ended September 30, 2009, the Company raised approximately $2.5 million net of expenses from sale of its securities through private placement. The Company cannot make any guarantees if and when it will be able to attain profitability. These conditions, among others, raise substantial doubt about the Company’s ability to continue operations as a going concern. No        adjustment has been made in the Condensed Consolidated Interim Financial Statements to the amounts and classification of assets and liabilities, which could result, should the Company be unable to continue as a going concern.

**3.     Prepaid Expenses and Other Current Assets**

    Prepaid expenses and other current assets consist of the following at September30, 2009 and December 31, 2008 :          

|             |   | **September 30, 2009** |   | **December 31, 2008** |
|------------------|--------|------------------------|--------|-----------------------|
|             |   | ( unaudited )          |   |                  |
| Prepaid expenses | $      | 617,143                | $      | 241,909               |
| Inventory        |   | 40,204                 |   | 16,954                |
| Notes receivable |   | 3,000                  |   | 3,000                 |
| **Total**        | $      | 660,347                | $      | 261,863               |

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**4.     Discontinued Operations**

                The following table represents the assets and liabilities of the discontinued operations as of September 30, 2009 and December 31, 2008:              

|                                                                  |   | **September 30, 2009** |   | **December 31,****2008** |
|-----------------------------------------------------------------------|--------|------------------------|--------|--------------------------|
|                                                                  |   | (unaudited)            |   |                     |
| Cash and cash equivalents                                             | $      | 14,358                 | $      | 30,813                   |
| Accounts receivable, net of allowance for doubtful accounts |   | 54,739                 |   | 90,237                   |
| Prepaid expenses and other current   assets                 |   | 7,911                  |   | 68,105                   |
| Property and equipment, net                                           |   | 237,597                |   | 111,859                  |
| Other assets                                                          |   | 1,519                  |   | 1,519                    |
| Total current assets reclassified to discontinued operations          | $      | 316,124                | $      | 302,533                  |
|                                                                  |   |                   |   |                     |
|                                                                  |   |                   |   |                     |
| Accounts payable and accrued expenses                                 | $      | 28,322                 | $      | 261,972                  |
| Current liabilities reclassified to discontinued operations      | $      | 28,322                 | $      | 261,972                  |

     The following is a summary of the operating results of the discontinued operations for the three and nine months ended September 30, 2009 and 2008:

|                                 |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |
|--------------------------------------|--------|--------------------------------------|--------|-------------------------------------|
|                                 |   | **2009**                             |   | **2008**                            |   | **2009** |   | **2008** |
|                                 |   | **(unaudited)**                      |   | **(unaudited)**                     |   | **(unaudited)** |   | **(unaudited)** |
| Revenues                             | $      | (5,617)                              | $      | 214,003                             | $ | 443,459 | $ | 781,317 |
| Cost of revenues                     |   | (1,182)                              |   | (193,548)                           |   | (345,914) |   | (611,733) |
| Depreciation and amortization        |   | (44,509)                             |   | (16,018)                            |   | (307,900) |   | (48,107) |
| Loss on impairment of assets         |   | —                              |   | —                             |   | (544,943) |   | — |
| Selling, general, and administrative |   | (51,592)                             |   | (349,482)                           |   | (709,800) |   | (1,067,396) |
| Advertising and marketing            |   | —                              |   | (21,810)                            |   | (2,749) |   | (53,690) |
| Other income (expense)               |   | —                              |   | (827)                               |   | 4 |   | (1,875) |
| Net income (loss)                    | $      | (102,900)                            | $      | (367,683)                           | $ | (1,467,843) | $ | (1,001,484) |

**5.      Intangible Assets**

      Identifiable intangible assets, as of September 30, 2009 (unaudited), are comprised of:

|                             |   | **Trademarks** |   | **Intellectual Property** |   | **Totals** |
|----------------------------------|--------|----------------|--------|---------------------------|--------|------------|
| Balance as of January 01, 2009   | $      | 721,871        | $      | 89,037                    | $      | 810,908    |
| Current year amortization        |   | (1,487)        |   |  ̄                    |   | (1,487)    |
| Current year impairment          |   | (243,000)      |   | (2,640)                   |   | (245,640)  |
| Balance as of September 30, 2009 | $      | 477,384        | $      | 86,397                    | $      | 563,781    |

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**6.     Accounts Payable and Accrued Expenses**

     Accounts payable and accrued expenses consist of the following at September 30, 2009 and December 31, 2008:
|                         |   | **September 30, 2009**  |   | **December 31, 2008** |
|------------------------------|--------|-------------------------|--------|-----------------------|
|                         |   | **(****unaudited****)** |   |                  |
| Trade accounts payable       | $      | 7,828,052               | $      | 8,162,514             |
| Accrued expenses             |   | 1,176,253               |   | 944,443               |
| Accrued payroll and vacation |   | 221,812                 |   | 200,472               |
| Cost accrual                 |   | 463,342                 |   | 274,185               |
| Interest payable             |   | 223,488                 |   | 110,473               |
| Deferred revenue             |   | 118,753                 |   | 186,655               |
| Other                        |   | 169,586                 |   | 160,273               |
|                         | $      | 10,201,286              | $      | 10,039,015            |

**7.     Long–Term Debt and Capital Lease/Equipment Financing Obligations**

     At September 30, 2009 and December 31, 2008, components of long-term debt and capital lease / equipment financing obligations of the Company are comprised of the following:                      
|                                                                         |   | **September 30, 2009** |   | **December 31, 2008** |
|------------------------------------------------------------------------------|--------|------------------------|--------|-----------------------|
|                                                                         |   | **(unaudited)**        |   |                  |
| Promissory notes payable – related parties                             | $      | 1,568,122              | $      | 1,972,992             |
| Promissory notes payable – non-related parties                         |   | 942,500                |   | 1,350,000             |
| Capital lease / equipment financing obligations                              |   | 118,810                |   | 122,960               |
| Total long-term debt and capital lease / equipment financing obligations     |   | 2,629,432              |   | 3,445,952             |
| Less current portion – capital lease / equipment financing obligations |   | (112,728)              |   | (122,960)             |
| Promissory notes payable - less current portion – related parties      |   | (1,568,122)            |   | (1,012,992)           |
| Promissory notes payable - less current portion – non-related parties  |   | (942,500)              |   | (1,350,000)           |
|                                                                         | $      | 6,082                  | $      | 960,000               |

**Promissory Notes Payable – non-related parties**

     During February 2004, the Company entered into a settlement agreement with a vendor for $600,000. In the same month, the Company paid $450,000 under the agreement and agreed to make 12 monthly payments for the remaining $150,000. The promissory note has not been repaid as of September 30, 2009, as the other party to the settlement                    agreement has not complied with the terms of the agreement.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     During 2008, the Company borrowed an aggregate of $1,200,000 from several stockholders. These loans are evidenced by five (5) promissory notes, which mature on various dates through December of 2009 and bear interest at rates ranging from 10 percent (10%) to twelve percent (12%) per annum. In the event that any note is not repaid                        by the maturity date, that note will automatically convert to a demand note, and the principal sum and all accrued interest for that note will become payable in full upon ten days notice from the lender. Each note also grants the lender a collateralized security interest in the Company’s accounts receivable. During 2008 and as of the date of this filing three of these promissory notes have matured, however, no demand for payment has been received, one of these                        notes, in an amount of $200,000 has not matured and remains outstanding and in January 2009, one of these promissory notes, in an amount of $500,000, was transferred to a related party of the Company and later in September 2009, the entire outstanding security interest of the lender related to this note was released for the consideration of the value of the outstanding amount having been converted into shares of the Company’s Common Stock, at market price.                             On June 19, 2009, the Company borrowed $67,500 from a stockholder. This loan is evidenced by a promissory note, which matures on July 19, 2009 and bears an interest rate of 8 percent (8%) per annum. In the event that the note is not repaid by the maturity date, the note will automatically convert to a demand note, and the principal sum and all accrued interest on the note will become payable in full upon ten days notice from the lender. The                        note also grants the lender a collateralized security interest in the Company’s accounts receivable. The note became a demand note on July 19, 2009. At September 30, 2009, this note remains outstanding.                             On September 30, 2009, the Company and a lender agreed to amend a promissory note (the “Amended Note”) originally issued May 27, 2008 (and thereafter amended and restated on June 30, 2009, April 15, 2009, January 31, 2009, December 15, 2008, November 5, 2008, October 15, 2008, September 15, 2008, and July 15, 2008) evidencing $200,000 borrowed from the lender, which Amended Note extends the maturity date of the note to December                        31, 2009. This Amended Note bears interest on the unpaid principal amount from July 8, 2009 until the outstanding principal amount is paid in full, at the rate of 12% per annum. In the event this note is not repaid by the maturity date, the note will automatically convert to a demand note, and the principal sum and all accrued interest will become payable in full upon ten (10) days notice from the lender. The Amended Note also grants the lender a collateralized security                        interest, pari passu with other lenders, in the Company’s account(s) receivable. At September 30, 2009, this note remains outstanding.                          

     The Company uses the proceeds from these transactions primarily for general corporate purposes.

**Promissory Notes Payable – related parties**

     On December 3, 2007, December 18, 2007, and December 19, 2007, the Company borrowed an aggregate of $540,000 from two Directors: Philip Turits, and Marvin Rosen. These loans are evidenced by three (3) promissory notes each of which is payable in 24 equal monthly installments of principal and interest at the rate of ten percent                        (10%) per annum, commencing January 4, 2008, January 18, 2008 and January 19, 2008 respectively, provided that the lenders have the right to demand payment of all unpaid principal and interest at any time after December 4, 2008, December 18, 2008 and December 19, 2008, respectively. The Company’s obligations under the promissory notes are collateralized by a security interest in the Company’s accounts receivables. On August 31, 2009 and September 16, 2009,                        Philip D. Turits converted $200,000 and $4,900, respectively, of indebtedness evidenced by one (1) of the promissory notes into 2,222,222 and 40,834 shares of Common Stock and 667, 335 and 8,167 Warrants, respectively. The Warrants are exercisable for five-years at 120% of the closing price of the Company’s Common Stock the business day before closing. As of September 30, 2009, approximately $148,000 remains due under these promissory notes and the Company has not                        received a demand for payment.                             During 2008, the Company borrowed an additional $590,000 from these two Directors, evidenced by ten (10) promissory notes, which matured at different dates throughout 2008 and bear interest at the rate of ten percent (10%) per annum. During the year ended December 31, 2008, $80,000 was repaid. Each promissory note provides that (a) it shall constitute an event of default if the Maker shall fail to make any payment when due as set forth                        therein, and (b) in the event of default, the Maker will have ten (10) days to cure after written notice is received. The Company did not pay these promissory notes on the maturity date; however, no lender has made a demand for payment. Each note also grants the lender a collateralized security interest in the Company’s accounts receivable. On September 16, 2009, Philip D. Turits converted $85,000 of indebtedness evidenced by these notes into 708,334 shares of                        Common Stock and 141,667 Warrants. The Warrants are exercisable for five - years at 120% of the closing price of the Company’s Common Stock the business day before closing. At September 30, 2009, approximately $425,000 remains due under these promissory notes.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     During 2009, the Company borrowed an additional $1,230,130 from these two Directors, evidenced by fifteen (15) promissory notes, which mature at various dates throughout 2009 and bear interest at rates ranging from eight percent (8%) to ten percent (10%) per annum. In the event that a note is not repaid by the maturity date,                            that note will automatically convert to a demand note, and the principal sum and all accrued interest for that note will become payable in full upon ten (10) days notice from the lender. Each note also grants the lender a collateralized security interest in the Company’s accounts receivable. On August 31, 2009 and September 16, 2009, Marvin Rosen converted an aggregate of $325,000 of indebtedness evidenced by these notes into 3,263,890 shares of Common Stock                            and 875,669 Warrants. The Warrants are exercisable for five-years at the price of 120% of the closing price of the Company’s Common Stock the business day before the closing. On September 16, 2009, Philip D. Turits converted $35,100 of indebtedness evidenced by these promissory notes into 292,500 shares of Common Stock and 58,500 Warrants. The Warrants are exercisable for five - years at 120% of the closing price of the Company’s Common Stock the business                            day before closing. At September 30, 2009, $870,030 remains outstanding under these promissory notes.                                 During 2008, the Company borrowed an aggregate of $1,760,000 from West End Special Opportunities Fund II, a stockholder of the Company. These loans are evidenced by nine (9) promissory notes bearing interest at rates ranging from ten percent (10%) to thirteen percent (13%) per annum with maturities extending through February 2010. During 2008, the Company repaid two (2) of these promissory notes ($250,000) and converted two (2)                            additional promissory notes ($400,000) into 2,222,223 shares of Common Stock and 888,890 Warrants to purchase one (1) share of Common Stock. The Warrants are exercisable for five years at 120% of the closing price of the Company’s Common Stock the business day before closing. In the event that any note is not repaid by its maturity date, that note will automatically convert to a demand note, and the principal sum and all accrued interest for that note will be                            payable in full upon ten (10) days notice from the lender. Each note also grants the lender a collateralized security interest in the Company’s accounts receivable. On September 11, 2009, West End Special Opportunity Fund II converted all of its outstanding 2008 loans and interest into 6,623,973 shares of Common Stock.                                 During 2009, the Company borrowed an aggregate of $1,410,000 from West End Special Opportunities Fund II, a shareholder of the Company. These loans are evidenced by twelve (12) promissory notes, each bearing an interest rate of twelve percent (12%) per annum with maturities extending through June 2010. In the event that any note is not repaid by its maturity date, that note will automatically convert to a demand note, and the principal                            sum and all accrued interest for that note will be payable in full upon ten (10) days notice from the lender. Each note also grants the lender a collateralized security interest in the Company’s accounts receivable. On September 13, 2009, West End Special Opportunity Fund II, converted all of its outstanding 2009 loans and interest into 8,349,133 shares of Common Stock.                                  On May 21, 2009, the Company borrowed $125,000 from Marose, LLC, of which Marvin Rosen, Chairman of the Board of Directors, is a member. This loan is evidenced by a promissory note, which matures on July 20, 2009 and bears an interest rate of eight percent (8%) per annum. In the event that the note is not repaid by the maturity date, the note will automatically convert to a demand note and the principal sum and all accrued interest                            for that note will be payable in full upon ten (10) days notice from the lender. The note also grants the lender a collateralized security interest in the Company’s accounts receivable. On July 20, 2009, the note became a demand note and at September 30, 2009, this note remains outstanding.                                 On August 31, 2009, the Company and Marvin S. Rosen agreed to amend and restate two promissory notes originally issued August 7, 2009 (evidencing $105,000) and August 18, 2009 (evidencing $85,267.81), respectively (the “Amended Notes”). Each of the Amended Notes (a) is payable on demand, (b) bears interest on the unpaid principal amount at the rate of 8% per annum and (c) grants the lender a collateralized security                            interest, pari passu with other lenders, in the Company’s accounts receivable.                                  The Company uses proceeds from these transactions primarily for general corporate purposes. 

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Capital Lease / Equipment Financing Obligations**

    Future aggregate principal payments for the Company’s capital lease / equipment financing obligations as of September 30, 2009 (unaudited), are as follows:

 
|                              |   | **September 30, 2009** |
|-----------------------------------|--------|------------------------|
|                              |   | (unaudited)            |
| Total minimum payments            | $      | 131,551                |
| Less amount representing interest |   | (12,741)               |
| Present value of minimum payments |   | 118,810                |
| Less current portion              |   | (112,728)              |
|                              | $      | 6,082                  |

**8.     Equity Transactions**

**Common Stock**

      In January 2009, the Company entered into subscription agreements with ten (10) accredited investors, including two (2) Directors, Marvin S. Rosen and Philip D. Turits for the sale of an aggregate 2,106,213 shares of Common Stock and five–year Warrants to purchase 842,491 shares of Common Stock, in                                consideration for an aggregate of $375,000. The Warrants are exercisable at prices that range from $0.20 to $0.22 per share, which is equal to the respective closing price of the Company’s Common Stock on the business day before each closing. Following these transactions, the private placement commenced in July 2008 was closed.                                     In February 2009, the Company entered into subscription agreements with five (5) accredited investors’ including two (2) Directors, Marvin S. Rosen and Philip D. Turits, for the sale of 958,825 shares of Common Stock and five-year Warrants to purchase 383,533 shares of Common Stock, in consideration for $148,000 the Warrants are exercisable at a price of 120% of the closing price of the Company’s Common Stock the business                                day before closing.                                     In February 2009, the Company entered into a Service Agreement with an investor relations company. This investor relations company agreed to act as the Company financial advisor for its finance, shareholder relations, and acquisition program for a one-year period; the compensation included a monthly fee and the issuance of 350,000 shares of restricted Common Stock.                                     In March 2009, the Company entered into subscription agreements with two (2) accredited investors for the sale of 1,153,847 shares of Common Stock and five-year Warrants to purchase 461,540 shares of Common Stock, in consideration for $150,000. The Warrants are exercisable at the price of 120% of the closing price of the Company’s Common Stock the business day before closing.                                     From April 8, 2009 through June 29, 2009, the Company entered into subscription agreements with various accredited investors, including three (3) Directors of the Company, Marvin S. Rosen, Philip D. Turits, and E. Alan Brumberger, for the sale of an aggregate 11,313,438 shares of Common Stock, for an aggregate consideration of $1,415,000. In addition, the Company issued five-year Warrants to purchase 3,397,442 shares of Common Stock                                at exercise prices equal to 120% of the closing price of the Company’s Common Stock the business day before the respective closing. 

     

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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    In August, 2009, the Company entered into subscription agreements with six (6) accredited investors for the sale of 2,758,335 shares of Common Stock and five-year Warrants to purchase 828,332 shares of Common Stock, in consideration for $277,000. Each Warrant is exercisable at 120% of the closing price of the                                    Company’s Common Stock on the business day before the closing.                                         On August 31, 2009, two Directors of the Company, Marvin S. Rosen and Philip D. Turits, converted an aggregate of $400,000 owed to them by the Company and evidenced by three promissory notes dated December 3, 2007, August 18, 2009 and August 25, 2009, into an aggregate of 4,444,446 shares of Common Stock and Warrants to purchase 1,334,670 shares of Common Stock as determined by the closing price of the Common Stock on the                                    business day prior to the closing of this conversion. Each Warrant is exercisable at $0.11 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before conversion.                                         On September 4, 2009, the Company entered into a subscription agreement with one (1) accredited investor for the sale of 250,000 shares of Common Stock and five-year Warrants to purchase 75,076 shares of Common Stock, in consideration for $25,000. Each Warrant is exercisable at $0.12 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the closing.                                         On September 10, 2009, the Company entered into a subscription agreement with one (1) accredited investor for the sale of 166,667 shares of Common Stock and five-year Warrants to purchase 50,051 shares of Common Stock, in consideration for $20,000. Each Warrant is exercisable at $0.14 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the closing.                                         On September 11, 2009, West End Special Opportunity Fund II, LP, a shareholder of the Company, converted an aggregate of $2,695,159 of collateralized indebtedness due to them by the Company and evidenced by seventeen (17) promissory notes originally issued October 22, 2008 (further amended October 31, 2008, December 31, 2008 and March 31, 2009), November 17, 2008, December 12, 2008, December 22,                                    2008, December 24, 2008, January 5, 2009, January 14, 2009, January 30, 2009, February 6, 2009, February 20, 2009, March 13, 2009, March 19, 2009, April 3, 2009, April 8, 2009, April 10, 2009, April 13, 2009 and April 27, 2009,  into an aggregate of 14,973,106 shares of the Company's Common Stock. The conversion price was determined by the market closing price of the Company's stock on the business day prior                                    to conversion. 

     On September 14, 2009, the Company entered into a subscription agreement with two (2) accredited investors for the sale of 176,472 shares of Common Stock and five-year Warrants to purchase 52,995 shares of Common Stock, in consideration for an aggregate of $30,000. Each Warrant is exercisable at                                    $0.20 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the closing.                                         On September 15, 2009, the Company commenced a new private placement to raise working capital for the Company’s operations. This private placement provides for the sale of up to $7.0 million of the Company’s Common Stock. Through September 30, 2009, the Company has sold 375,000 shares of Common Stock for which proceeds of approximately $60 thousand were received, net of expenses of approximately $500. In addition, the                                    Company issued five-year Warrants to purchase 75,000 shares of Common Stock at an exercisable price of 120% of the closing price of the Company’s Common Stock the business day before closing.                                          On September 16, 2009, two Directors of the Company, Marvin S. Rosen and Philip D. Turits, converted an aggregate of $250,000 of outstanding principal owed to them by the Company as evidenced by ten (10)  promissory notes dated September 2, 2009, August 27, 2009, June 30, 2009, May 22, 2009, May 18, 2009, October 10, 2008, October 3, 2008, September 18, 2008, May 19, 2008 and December 3, 2007 into an                                    aggregate of 2,083,334 shares of Common Stock and Warrants to purchase 416,668 shares of Common Stock. The conversion price was determined by the closing price of the Common Stock on the business day prior to conversion. Each Warrant is exercisable at $0.14 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before conversion.                                          The Company uses the proceeds from these transactions primarily for general corporate purposes.

 

     The Company previously disclosed that it had issued Common Stock for $75,000 to a vendor for the settlement of a debt. Inasmuch as the vendor has failed to preform its obligations under the settlement agreeement, the Company had not yet isued the shares, however,  as of the date of this filing, the Company                                    continues to reserve the shares for issuance in the event that a settlement or other agreement or determination eventually requires the issuance of the shares.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Preferred Stock**

    As of September 30, 2009, the Company has authorized 10,000,000 shares of Preferred Stock. As of September 30, 2009 there were 7,995 shares of Preferred Stock (Series A—1 to A—4) issued and outstanding.

**Preferred Stock Dividends**

    The holders of the Series A-1, A-2, A-3 and A-4 Preferred Stock are entitled to receive cumulative dividends of eight percent (8%) per annum payable in arrears, when and as declared by the Company’s Board of Directors, on January 1 of each year, commencing on January 1, 2008. As of September 30, 2009, the Board of                                        Directors has declared no dividends.

**9.     Adoption of New Accounting Policies**

    In January 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance related to the, "Amendments to the Impairment Guidance”, previously issued on the, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be                                        Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether any other-than-temporary impairment (OTTI) has occurred. The FSP eliminates the requirement that a holder’s best estimate of cash flows be based upon those that “a market participant” would use, instead, the FSP requires that another-than-temporary impairment (OTTI) be recognized as a realized loss through earnings as a                                        realized loss when it is “probable” there has been an adverse change in the holder’s estimated cash flows from the cash flows previously projected. The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of the new guidance did not have a material impact on the                                        Company’s Condensed Consolidated Interim Financial Statements.                                             In April 2009, the FASB issued new guidance related to, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a business combination under previous guidance for, “Business Combinations”.                                        Under the new guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. The FSP is effective for assets or liabilities arising from contingencies in business                                        combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the new guidance did not have a material impact the Company’s Condensed Consolidated Interim Financial Statements.                                             In April 2009, the FASB issued new guidance requiring, “Interim Disclosures about Fair Value of Financial Instruments”. The new guidance requires disclosures about fair value of financial instruments whenever summarized financial information for interim reporting periods is presented. Entities shall disclose the methods and significant assumptions used to estimate the fair value of financial instruments and shall                                        describe changes in methods and significant assumptions, if any, during the period. Companies should also provide qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The new guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the new guidance                                        did not have a material impact on the Company’s Condensed Consolidated Interim Financial Statements.                                             In April 2009, the FASB issued new guidance on, "Recognition and Presentation of Other-Than-Temporary Impairments". The new guidance clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security, or (b) it is more likely than not that it will be                                        required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing another-than-temporary impairment. Companies must follow the                                        guidelines established by FSP to determine if another-than-temporary impairment of a debt security has occurred. The new guidelines are effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the new guidelines did not have a material impact on the Company’s Condensed Consolidated Interim Financial Statements.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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    In April 2009, the FASB issued new guidance on, “Determining Fair Value when the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions that are not Orderly”, which is effective for the Company for the quarter beginning April 1, 2009.                                            The guidance affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions, provides guidance for estimating fair value when the volume and level of market activity for an asset or liability have significantly decreased, and provides                                            guidelines determining whether a transaction was orderly. This FSP applies to all fair value measurements when appropriate. FSP 157-4 does not have a material impact on the Company’s condensed consolidated financial statements.                                                 In May 2009, the FASB issued guidance on, “Subsequent Events”, which provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may                                            occur for potential recognition or disclosure in the financial statements. The statement also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. Furthermore, this statement identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted the new guidance during the second                                            quarter of 2009, as required, and evaluated subsequent events through the filing date of this quarterly report.                                                 In June 2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 168 *The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162*.  This statement modifies the Generally Accepted Accounting Principles (“GAAP”) hierarchy by establishing only two levels of GAAP, authoritative and                                            nonauthoritative accounting literature. Effective July 2009, the FASB Accounting Standards Codification (“ASC”), also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC.  Nonauthoritative guidance and literature would include, among other things, FASB                                            Concepts Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance.  It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation.  The Company adopted this statement on                                            July 1, 2009.

**10.     New Accounting Pronouncements**

     In June 2009, the FASB issued guidance on, “Accounting for Transfers of Financial Assets – an amendment for which previous guidance was issued on improving the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements                                            about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The FASB undertook this project to address (1) practices that have developed since the issuance of the original guidance, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, that                                            are not consistent with the original intent and key requirements of that statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of the transferors. The new guidance must be applied as of January 1, 2010, the beginning of our first annual reporting period after November 15, 2009. Earlier application is                                            prohibited. The new guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective, the concept of a qualifying SPE is no longer relevant for accounting purposes. Therefore, a formerly qualifying SPE should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results                                            in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The disclosure provisions of the new guidance should be applied to transfers that occurred both before and after the effective date of this statement. The adoption of the new guidance is not currently expected to have a material effect on our consolidated financial statements.

14

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     In June 2009, the FASB issued new guidance that will amend the existing criteria for consolidating variable interest entities (the “VIE”). Te new consolidation criteria will require an on-going qualitative assessment of which entity has the power to direct matters that most significantly impact the activities of the VIE and has        obligation to absorb losses or benefits that could be potentially significant to the VIE. The new guidance is effective for the Company beginning in 2010, and is not currently expected to have a material effect on our consolidated financial statements             In August 2009, the FASB issued update to provide further guidance on how to measure the fair value of a liability, an area where practitioners have been seeking further guidance. It primarily does three things: (1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, (2) clarifies that when estimating the fair value of a liability, a reporting        entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability and (3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This        standard is effective beginning fourth quarter of 2009 for the Company. The adoption of this standard update is not expected to impact the Company’s consolidated financial statements.

**11.     Commitments and Contingencies**

**Legal Matters**

     In July 2009, the Company received a notice of a third-party complaint filed with the SEC regarding the Company’s failure to issue certain stock relating to services that were to have been performed, but those services were not received. The Company has responded to the SEC, advising that the issue is in the nature of a contractual        dispute, and requested that the third party be referred to the court system for resolution of its complaint.             In August 2009, Global IP Solutions, Inc. (“GIPS”), a vendor associated with the Company’s discontinued operations, filed an action requesting an injunction and a temporary restraining order in the Southern District of New York, Case No. 09-CV-6981, asserting infringement of copyrighted software. The Company is no longer using the software, but is taking measures to ensure that there is not any copyright infringement by any of its former        customers or distributors that may have been previously granted access to the software.              On or about September 10, 2009, a landlord over premises leased by the Company commenced a proceeding entitled “Nonpayment Notice of Petition” in the Civil Court of the State of New York, County of New York (Index No. 084795 09), in which the landlord is seeking a judgment of eviction and damages in the amount of approximately $246,000.  The Company and the landlord have agreed in principle to settle the proceeding under a stipulation of        settlement that provides, among other things, that Fusion consent to entry of a judgment for $246,035  and a warrant of eviction; and the parties have agreed that execution on the judgment is to be stayed pending Fusion’s payment of rent for November and December 2009 by the first of each of those months, and its paying the landlord  the $246,035  by December 2, 2009.   The Company has a ten day grace period to cure should the        December 2nd payment date not be met. The Company has executed the stipulation of settlement and delivered the signed stipulation to the landlord, however, the landlord has not yet returned a fully signed copy of the stipulation to the Company.  The settlement will not become effective unless and until it is executed by the landlord, however, the landlord has worked with the Company in the past regarding payment issues, and the Company expects their continued        cooperation.   In the absence of settlement, the Company is required to respond to the Notice of Petition by November 20,2009.              The Company is from time to time involved in claims and legal actions arising in the ordinary course of business. Management does not expect that the outcome of these cases will have a material effect on the Company’s financial position.             Due to the regulatory nature of the industry, the Company periodically receives and responds to various correspondence and inquiries from state and federal regulatory agencies. Management does not expect the outcome on these inquiries to have a material impact on our operations or financial condition.

**Restricted Cash**

     As of September 30, 2009 and December 31, 2008, the Company had approximately $416,566 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit. This restricted cash is required as security deposits under the Company’s non-cancelable operating leases for office facilities and to secure a        license to do business.

**12.     Segment Information**

    The Company reports segment information in accordance with the requirements under U.S. GAAP, which requires disclosures of segment information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments.

15

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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    The Company has two 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 services and other expenses and other adjustments arising during each period. The other adjustments include transactions that the Executive Officers 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 based on reporting to the appropriate Chief Operating Decision Maker. The Company’s segments and their principal activities        consist of the subtopics noted below:

**Carrier Services**

     Carrier Services includes VoIP services, which are the termination of voice telephony minutes by the Internet rather than older circuit-switched technology. VoIP permits a less costly and more rapid interconnection between our network and international telecommunications carriers. Traditional termination of voice telephony minutes from or to the        countries served by the Company utilizes 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 us at their U.S. Points of Presence (POP) and provide service to other destinations. These minutes are sold to carriers on a wholesale basis.

**Corporate Services and Other**

    The Company provides VoIP services targeted to end-users and corporations and provides Internet connectivity to telecommunications carriers, Internet service providers, government entities, and multinational customers via its POPs in the U.S. and through its partners elsewhere.             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 percent utilization of those resources. The amounts reflected as Corporate services and unallocated represent those expenses that were not appropriate to allocate to each product line.             Operating segment information for the three months ended September 30, 2009 and 2008 is summarized as follows:

 

**Three Months Ended September 30, 2009 (unaudited)**

|                                                               |   | **CARRIER SERVICES** |   | **CORPORATE SERVICES AND OTHER** |   | **CORPORATE AND UNALLOCATED** |   | **CONSOLIDATED** |
|--------------------------------------------------------------------|--------|----------------------|--------|----------------------------------|--------|-------------------------------|--------|------------------|
| Revenues                                                           | $      | 11,548,186           | $      | 304,834                          | $      |  ̄                        | $      | 11,853,020       |
| Cost of revenues (exclusive of depreciation and amortization) |   | (10,669,479)         |   | (196,345)                        |   |  ̄                        |   | (10,865,824)     |
| Depreciation and amortization                                      |   | (294,484)            |   | (9,637)                          |   |  ̄                        |   | (304,121)        |
| Loss on impairment of long-lived assets                            |   |  ̄               |   |  ̄                           |   |  ̄                        |   |  ̄           |
| Selling, general, and administrative expenses                      |   | (1,587,235)          |   | (692,469)                        |   |  ̄                        |   | (2,279,704)      |
| Advertising and marketing                                          |   | (56)                 |   | (3,950)                          |   |  ̄                        |   | (4,006)          |
| Other income (expenses)                                            |   | (74,143)             |   | (33,311)                         |   |  ̄                        |   | (107,454)        |
| Total loss from continuing operations                              |   | (1,077,211)          |   | (630,878)                        |   |  ̄                        |   | (1,708,089)      |
| Loss from discontinued operations                                  |   |  ̄               |   | (102,900)                        |   |  ̄                        |   | (102,900)        |
| Net loss                                                           | $      | (1,077,211)          | $      | (733,778)                        | $      |  ̄                        | $      | (1,810,989)      |
| Total Assets                                                       | $      | 4,760,177            | $      | 1,124,961                        | $      | 864,704                       | $      | 6,749,842        |
| Capital expenditures                                               | $      | 10,825               | $      |  ̄                           | $      | 9,742                         | $      | 20,567           |

16

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Three Months Ended September 30, 2008 (unaudited)**

 
|                                                               |   | **CARRIER SERVICES** |   | **CORPORATE SERVICES AND OTHER** |   | **CORPORATE AND UNALLOCATED** |   | **CONSOLIDATED** |
|--------------------------------------------------------------------|--------|----------------------|--------|----------------------------------|--------|-------------------------------|--------|------------------|
| Revenues                                                           | $      | 14,205,082           | $      | 96,346                           | $      |  ̄                        | $      | 14,301,428       |
| Cost of revenues (exclusive of depreciation and amortization) |   | (13,356,119)         |   | (58,857)                         |   |  ̄                        |   | (13,414,976)     |
| Depreciation and amortization                                      |   | (444,927)            |   | (9,637)                          |   |  ̄                        |   | (454,564)        |
| Loss on impairment of long-lived assets                            |   |  ̄               |   |  ̄                           |   |  ̄                        |   |  ̄           |
| Selling, general, and administrative                               |   | (1,933,729)          |   | (590,963)                        |   |  ̄                        |   | (2,524,692)      |
| Advertising and marketing                                          |   | (5,231)              |   | (8,508)                          |   |  ̄                        |   | (13,739)         |
| Other income (expenses)                                            |   | (67,280)             |   | (30,227)                         |   |  ̄                        |   | (97,507)         |
| Total loss from continuing operations                              |   | (1,602,204)          |   | (601,846)                        |   |  ̄                        |   | (2,204,050)      |
| Loss from discontinued operations                                  |   |  ̄               |   | (367,683)                        |   |  ̄                        |   | (367,683)        |
| Net loss                                                           | $      | (1,602,204)          | $      | (969,529)                        | $      |  ̄                        | $      | (2,571,733)      |
| Total Assets                                                       | $      | 6,666,633            | $      | 8,209,387                        | $      | 473,586                       | $      | 15,349,606       |
| Capital expenditures                                               | $      | 34,003               | $      | 64,428                           | $      | 13,087                        | $      | 111,518          |

                     Operating segment information for the nine months ended September 30, 2009 and 2008 is summarized as follows:

 

**Nine Months Ended September 30, 2009 (Unaudited)**
|                                                               |   | **CARRIER SERVICES** |   | **CORPORATE SERVICES AND OTHER** |   | **CORPORATE AND UNALLOCATED** |   | **CONSOLIDATED** |
|--------------------------------------------------------------------|--------|----------------------|--------|----------------------------------|--------|-------------------------------|--------|------------------|
| Revenues                                                           | $      | 28,816,910           | $      | 688,172                          | $      |  ̄                        | $      | 29,505,082       |
| Cost of revenues (exclusive of depreciation and amortization) |   | (26,857,032)         |   | (434,823)                        |   |  ̄                        |   | (27,291,855)     |
| Depreciation and amortization                                      |   | (776,309)            |   | (244,227)                        |   |  ̄                        |   | (1,020,536)      |
| Loss on impairment of long-lived assets                            |   |  ̄               |   |  ̄                           |   | (243,000)                     |   | (243,000)        |
| Selling, general, and administrative                               |   | (4,418,333)          |   | (2,573,818)                      |   |  ̄                        |   | (6,992,151)      |
| Advertising and marketing                                          |   | (2,169)              |   | (12,349)                         |   |  ̄                        |   | (14,518)         |
| Other income (expenses)                                            |   | (198,681)            |   | (120,451)                        |   |  ̄                        |   | (319,132)        |
| Total loss from continuing operations                              |   | (3,435,614)          |   | (2,697,496)                      |   | (243,000)                     |   | (6,376,110)      |
| Loss from discontinued operations                                  |   |  ̄               |   | (1,467,843)                      |   |  ̄                        |   | (1,467,843)      |
| Net loss                                                           | $      | (3,435,614)          | $      | (4,165,339)                      | $      | (243,000)                     | $      | (7,843,953)      |
| Total Assets                                                       | $      | 4,760,177            | $      | 1,124,961                        | $      | 864,704                       | $      | 6,749,842        |
| Capital expenditures                                               | $      | 18,817               | $      |  ̄                           | $      | 18,832                        | $      | 37,649           |

17

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Nine Months Ended September 30, 2008 (Unaudited)**
|                                                               |   | **CARRIER SERVICES** |   | **CORPORATE SERVICES AND OTHER** |   | **CORPORATE AND UNALLOCATED** |   | **CONSOLIDATED** |
|--------------------------------------------------------------------|--------|----------------------|--------|----------------------------------|--------|-------------------------------|--------|------------------|
| Revenues                                                           | $      | 36,460,007           | $      | 204,763                          | $      |  ̄                        | $      | 36,664,770       |
| Cost of revenues (exclusive of depreciation and amortization) |   | (34,230,661)         |   | (127,718)                        |   |  ̄                        |   | (34,358,378)     |
| Depreciation and amortization                                      |   | (1,317,762)          |   | (28,911)                         |   |  ̄                        |   | (1,346,674)      |
| Loss on impairment of long-lived assets                            |   |  ̄               |   |  ̄                           |   |  ̄                        |   |  ̄           |
| Selling, general, and administrative                               |   | (6,184,498)          |   | (1,981,420)                      |   |  ̄                        |   | (8,165,918)      |
| Advertising and marketing                                          |   | (12,221)             |   | (18,062)                         |   |  ̄                        |   | (30,283)         |
| Other income (expenses)                                            |   | 282,405              |   | 126,878                          |   |  ̄                        |   | 409,283          |
| Total loss from continuing operations                              |   | (5,002,729)          |   | (1,824,471)                      |   |  ̄                        |   | (6,827,200)      |
| Loss from discontinued operations                                  |   |  ̄               |   | (1,001,484)                      |   |  ̄                        |   | (1,001,484)      |
| Net loss                                                           | $      | (5,002,729)          | $      | (2,825,955)                      | $      |  ̄                        | $      | (7,828,684)      |
| Total Assets                                                       | $      | 6,666,633            | $      | 8,209,387                        | $      | 473,586                       | $      | 15,349,606       |
| Capital expenditures                                               | $      | 56,269               | $      | 234,794                          | $      | 38,421                        | $      | 329,484          |

**13.     Subsequent Events.**

    On October 14, 2009, the Company entered into a subscription agreement with two (2) accredited investor for the sale of 194,445 shares of Common Stock and five-year Warrants to purchase 38,890 shares of Common Stock, in consideration for an aggregate of $35,000. Each Warrant is exercisable at $0.22 per share, which is equal to 120%            of the closing price of the Company’s Common Stock on the business day before the closing.              

     On October 19, 2009, the Company borrowed $60,000 from Marvin S. Rosen, a Director of the Company. The note (a) is payable on demand in full upon ten days notice of demand from the lender, (b) bears interest on the unpaid principal amount at the rate of 8% per annum and (c) grants the lender a collateralized security interest, pari passu            with other lenders, in the Company’s accounts receivable.              

     On November 9, 2009 and November 10, 2009, the Company borrowed the aggregate of $135,000 from Marvin S. Rosen, a Director of the Company. These notes (a) are payable on demand in full upon ten days notice of demand from the lender, (b) bears interest on the unpaid principal amount at the rate of 3.25% per annum and (c) grants the lender a            collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.                               On November 13, 2009, the Company entered into a subscription agreement with one (1) accredited investor who is also a Director, for the sale of 277,778 shares of Common Stock and five-year Warrants to purchase  55,556 shares of Common Stock, in consideration for $50,000. Each Warrant is exercisable at $0.22 per share, which is equal to 120% of the closing price of the Company’s Common Stock on the business day before the            closing.                 The Company uses the proceeds from these transactions primarily for general corporate purposes.

18

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Item 2.           Management's Discussion and Analysis of Financial Condition and Results of Operations.**

**Forward—Looking Statements**

|                                                                                                                                                                                                                                                                                                                |   | **Three Months ended September 30,** |   | **Nine Months ended                         September 30,** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                |   | **2009**                             |   | **2008**                                                    |   | **2009** |   | **2008** |
|                                                                                                                                                                                                                                                                                                                |   | (unaudited)                          |   | (unaudited)                                                 |   | (unaudited) |   | (unaudited) |
| Revenues                                                                                                                                                                                                                                                                                                            | $      | 11,853,020                           | $      | 14,301,428                                                  | $ | 29,505,082 | $ | 36,664,770 |
| **Operating expenses:**                                                                                                                                                                                                                                                                                             |   |                                 |   |                                                        |   |   |   |   |
| Cost of revenues, exclusive of depreciation and amortization, shown separately below                                                                                                                                                                                                                                |   | 10,865,824                           |   | 13,414,976                                                  |   | 27,291,855 |   | 34,358,378 |
| Depreciation and amortization                                                                                                                                                                                                                                                                                       |   | 304,121                              |   | 454,564                                                     |   | 1,020,536 |   | 1,346,674 |
| Loss on impairment of long-lived assets                                                                                                                                                                                                                                                                             |   |  ̄                               |   |  ̄                                                      |   | 243,000 |   |  ̄ |
| Selling, general, and administrative expenses (includes approximately $144,201 and $136,548 for the three months ended September 30, 2009 and September 30, 2008, respectively, and approximately $263,968 and $442,626 for the nine months ended September 30, 2009 and 2008, respectively, non-cash compensation) |   | 2,279,704                            |   | 2,524,692                                                   |   | 6,992,151 |   | 8,165,918 |
| Advertising and marketing                                                                                                                                                                                                                                                                                           |   | 4,006                                |   | 13,739                                                      |   | 14,518 |   | 30,283 |
| Total operating expenses                                                                                                                                                                                                                                                                                            |   | 13,453,655                           |   | 16,407,971                                                  |   | 35,562,060 |   | 43,901,253 |
| Operating loss                                                                                                                                                                                                                                                                                                      |   | (1,600,635)                          |   | (2,106,543)                                                 |   | (6,056,978) |   | (7,236,483) |
| **Other income (expenses):**                                                                                                                                                                                                                                                                                        |   |                                 |   |                                                        |   |   |   |   |
| Interest income                                                                                                                                                                                                                                                                                                     |   | 3,447                                |   | 7,658                                                       |   | 4,057 |   | 10,174 |
| Interest expense                                                                                                                                                                                                                                                                                                    |   | (112,893)                            |   | (134,223)                                                   |   | (328,674) |   | (204,810) |
| Gain on settlement of debt                                                                                                                                                                                                                                                                                          |   |  ̄                               |   | 25,000                                                      |   |  ̄ |   | 659,991 |
| Other                                                                                                                                                                                                                                                                                                               |   | 1,992                                |   | 4,059                                                       |   | 5,485 |   | (56,071) |
| Total other income (expenses)                                                                                                                                                                                                                                                                                       |   | (107,454)                            |   | (97,506)                                                    |   | (319,132) |   | 409,283 |
| Income (loss) from continued operations                                                                                                                                                                                                                                                                             |   | (1,708,089)                          |   | (2,204,050)                                                 |   | (6.376,110) |   | (6,827,200) |
| **Discontinued operations:**                                                                                                                                                                                                                                                                                        |   |                                 |   |                                                        |   |   |   |   |
| Income (loss) from discontinued operations                                                                                                                                                                                                                                                                          |   | (102,900)                            |   | (367,683)                                                   |   | (1,467,843) |   | (1,001,484) |
| Net loss                                                                                                                                                                                                                                                                                                            | $      | (1,810,989)                          | $      | (2,571,733)                                                 | $ | (7,843,953) | $ | (7,828,683) |

19

**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     The following table presents our historical operating results as a percentage of revenues for the periods indicated:              
|                                                                                                                                                                                                                                                                                                                | **Three Months ended September 30** |   | **Nine Months ended September 30** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------|--------|------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                | **2009**                            |   | **2008**                           |   | **2009** |   | **2008** |   |
|                                                                                                                                                                                                                                                                                                                | (unaudited)                         |   | (unaudited)                        |   | (unaudited) |   | (unaudited) |   |
| Revenues                                                                                                                                                                                                                                                                                                            | 100.0                               | %      | 100.0                              | %      | 100.0 | % | 100.0 | % |
| Operating expenses:                                                                                                                                                                                                                                                                                                 |                                |   |                               |   |   |   |   |   |
| Cost of revenues, exclusive of depreciation and amortization, shown separately below                                                                                                                                                                                                                                | 91.7                                | %      | 93.8                               | %      | 92.5 | % | 93.7 | % |
| Depreciation and amortization                                                                                                                                                                                                                                                                                       | 2.6                                 | %      | 3.2                                | %      | 3.5 | % | 3.7 | % |
| Loss on impairment of long-lived assets                                                                                                                                                                                                                                                                             |  ̄                              | %      |  ̄                             | %      | 0.8 | % |  ̄ | % |
| Selling, general, and administrative expenses (includes approximately $144,201 and $136,548 for the three months ended September 30, 2009 and September 30, 2008, respectively, and approximately $263,968 and $442,626 for the nine months ended September 30, 2009 and 2008, respectively, non-cash compensation) | 19.2                                | %      | 17.7                               | %      | 23.7 | % | 22.3 | % |
| Advertising and marketing                                                                                                                                                                                                                                                                                           |  ̄                              | %      | 0.1                                | %      |  ̄ | % | 0.1 | % |
| Total operating expenses                                                                                                                                                                                                                                                                                            | 113.5                               | %      | 114.8                              | %      | 120.5 | % | 119.8 | % |
| Operating loss                                                                                                                                                                                                                                                                                                      | (13.5)                              | %      | (14.8)                             | %      | (20.5) | % | (19.8) | % |
| Other income (expenses):                                                                                                                                                                                                                                                                                            |                                |   |                               |   |   |   |   |   |
| Interest income                                                                                                                                                                                                                                                                                                     |  ̄                              | %      | 0.1                                | %      |  ̄ | % |  ̄ | % |
| Interest expense                                                                                                                                                                                                                                                                                                    | (1.0)                               | %      | (0.9)                              | %      | (1.1) | % | (0.6) | % |
| Gain on settlement of debt                                                                                                                                                                                                                                                                                          |  ̄                              | %      | 0.2                                | %      |  ̄ | % | 1.8 | % |
| Other                                                                                                                                                                                                                                                                                                               |  ̄                              | %      |  ̄                             | %      |  ̄ | % | (0.2) | % |
| Total other income (expenses)                                                                                                                                                                                                                                                                                       | (1.0)                               | %      | (0.6)                              | %      | (1.1) | % | 1.0 | % |
| Income (loss) from continuing operations                                                                                                                                                                                                                                                                            | (14.5)                              | %      | (15.4)                             | %      | (21.6) | % | (18.8) | % |
| Discontinued operations:                                                                                                                                                                                                                                                                                            |                                |   |                               |   |   |   |   |   |
| Income (loss) from discontinued operations                                                                                                                                                                                                                                                                          | (0.9)                               | %      | (2.6)                              | %      | (5.0) | % | (2.7) | % |
| Net loss                                                                                                                                                                                                                                                                                                            | (15.4)                              | %      | (18.0)                             | %      | (26.6) | % | (21.5) | % |

**Revenues**

    Historically, we have generated the majority of our revenues from voice traffic sold to other carriers, with a primary focus in the last several years on VoIP terminations to the emerging markets. We focus on growing our existing customer base, which is primarily US based, as well as the addition of new customers, and the establishment of direct            VoIP terminating arrangements with telecommunication carriers in emerging markets and around the world. Although we believe that this business continues to be of value to our strategy, ongoing competitive and pricing pressures have caused us to increase our focus on higher margin VoIP services to corporations, and to market those services directly or via distribution partners.                 The Company completed its exit from the Consumer segment in the second quarter of 2009 that had been initiated in the first quarter of 2009. The Consumer revenues that have historically been reported with that segment have now been reclassified to discontinued operations.                 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 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 utilization of resources unless the items can be specifically identified to one of the product segments.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Operating Expenses**

    Our operating expenses are categorized as cost of revenues, depreciation and amortization, and selling, general, and administrative expenses.                 Costs of revenues include 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 primarily include salaries and benefits, insurance, occupancy costs, marketing and advertising, professional fees, and other administrative expenses.                 Advertising and marketing expense includes cost for promotional materials for the marketing of our retail products and services, as well as for public relations.                 The information in our period-to-period comparisons below represents only our results from continuing operations. 

**THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2008.**

**Revenues**

    Consolidated revenues were $11.8 million during the three months ended September 30, 2009, compared to $14.3 million during the three months ended September 30, 2008, a decrease of $2.5 million or 17.1%. Revenues for Carriers were $11.5 million during the three months ended September 30, 2009, compared to $14.2 million during the three months            ended September 30, 2008, a decrease of $2.6 million or 18.7%. This decrease was primarily caused by a decrease in the blended rate per minute and a decrease in the number of minutes.                  Revenues for Corporate Services and Other increased $199 thousand or 170%, to $315 thousand during the three months ended September 30, 2009 from $116 thousand during the three months ended September 30, 2008. The increase was primarily caused by an increase in our retail business due to a larger customer base.

**Cost of Revenues**

     Consolidated cost of revenues was $10.9 million during the three months ended September 30, 2009, compared to $13.4 million during the three months ended September 30, 2008, a decrease of $2.5 million or 19%. Cost of Revenues for Carriers was $10.6 million during the three months ended September 30, 2009, compared to $13.3 million during the            three months ended September 30, 2008. The decrease of $2.7 million or 20.1% was the result of a decrease in the number of minutes consistent with the decrease in revenues.                 Cost of revenues for Corporate Services and Other during the three months ended September 30, 2009 was $196 thousand, compared with $59 thousand during the three months ended September 30, 2008, an increase of $137 thousand or (228.4%). This increase is primarily due to an increase in our retail business, as we had a larger customer base during the second quarter of 2009 compared to the same period of 2008.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Operating Expenses**

**Depreciation and Amortization**

    Depreciation and amortization decreased $150 thousand or 33.1% to $304 thousand during the three months ended September 30, 2009, from $454 thousand during the three months ended September 30, 2008. The depreciation expense decreased as more assets were fully depreciated than were placed into service during the first nine months of 2009 compared            to the same period of 2008.

**Selling, General and Administrative**

     Selling, general, and administrative expenses decreased $245 thousand or 9.7% during the three months ended September 30, 2009. This decrease is primarily attributable to a further reduction in personnel, and decreases in the areas of salaries, communication, occupancy, consulting and travel and entertainment as the Company completed its            exit from the Consumer business and continued to focus on cost containment.

**Operating Loss**

    Operating Loss decreased $0.5 million or 24% to a loss of ($1.6 million) during the three months ended September 30, 2009, from a loss of ($2.1 million) during the three months ended September 30, 2008. The decrease in operating loss was primarily attributable to the Company’s completion of its exit from the Consumer business, as well as its            continued focus on cost reduction.

**Loss from Discontinued Operations**

    Loss from discontinued operations decreased by approximately $265 thousand, or 72% to ($102 thousand) during the three months ended September 30, 2009, from ($367 thousand) during the three months ended September 30, 2008. The main factor contributing to this decrease is that there were no costs associated with our former Dubai subsidiary in the            third quarter of 2009.

**Net Loss**

    Net loss decreased $0.7 million, or 29.6% to ($1.8 million) during the three months ended September 30, 2009, from ($2.5 million) during the three months ended September 30, 2008. The main factors contributing to this decrease were decreased operating expenses, and the reduction of losses attributable to discontinued operations. 

**NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2008.**

**Revenues**

    Consolidated revenues were $29.5 million during the nine months ended September 30, 2009, compared to $36.6 million during the nine months ended September 30, 2008, a decrease of $7.1 million or 19.5%. Revenues for Carriers were $28.7 million during the nine months ended September 30, 2009, compared to $36.3 million during the nine months ended            September 30, 2008, a decrease of $7.6 million or 20.9%. The decrease was primarily caused by a decrease in the blended rate per minute and a decrease in the number of minutes                 Revenues for Voice to Corporations and Other increased $0.4 million or 171.5%, to $733 thousand during the nine months ended September 30, 2009 from $270 thousand during the nine months ended September 30, 2008. The increase was primarily caused by an increase in our retail business due to a larger customer base.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Cost of Revenues**

                Consolidated cost of revenues was $27.3 million during the nine months ended September 30, 2009, compared to $34.3 million during the nine months ended September 30, 2008, a decrease of $7.0 million or 20.6%. Cost of Revenues for Carriers was $26.8 million during the nine months ended September 30, 2009, compared to $34.2 million during the nine months ended September 30, 2008. The decrease of $7.4 million or 21.5% was the result of a decrease            in the number of minutes consistent with the decrease in revenues.                 Cost of revenues for VoIP to Corporations and Other during the nine months ended September 30, 2009 was $442 thousand, compared with $137 thousand during the nine months ended September 30, 2008, an increase of $305 thousand or 221.8%. This increase is primarily due to an increase in our retail business, as we had to support a larger customer base during the third quarter of 2009 compared to the same period of 2008.

**Operating Expenses**

**Depreciation and Amortization**

    Depreciation and amortization decreased $0.3 million or 24.2 % to $1.0 million during the nine months ended September 30, 2009, from $1.3 million during the nine months ended September 30, 2008. The depreciation expense decreased as more assets were fully depreciated than were placed into service during the first nine months of 2009 compared to            the same period of 2008.

**Selling, General and Administrative**

    Selling, general, and administrative expenses decreased $1.2 million or 14.4% during the nine months ended September 30, 2009. This decrease is primarily attributable to a further reduction in personnel, and decreases in the areas of salaries, communication, occupancy, consulting and travel and entertainment as the Company completed its exit from            the Consumer business and continued to focus on cost containment.

**Operating Loss**

    Operating Loss decreased $1.2 million or 16.3% to a loss of ($6.0 million) during the nine months ended September 30, 2009, from a loss of ($7.2 million) during the nine months ended September 30, 2008. The decrease in operating loss was primarily attributable to the completion of the Company’s exit from the Consumer business, as well as its            continued focus on cost reduction.

**Other Income (Expense)**

    Total other income (expense) changed by $0.7 million from income of $0.4 million during the nine months ended September 30, 2008 to expense of ($0.3 million) for the nine months ended September 30, 2009. The primary reason for this change was due to a gain of $0.6 million associated with the extinguishment of debt with a foreign vendor during the            quarter ended March 31, 2008, which did not recur in 2009. In addition, during the nine months ended September 30, 2009, interest expense increased over the same period of the prior year due to increased loans outstanding.

**Loss from Discontinued Operations**

    Loss from discontinued operations increased by approximately $0.4 million or 46.6% to ($1.4 million) during the nine months ended September 30, 2009, from ($ 1.0 million) during the nine months ended September 30, 2008. The main factors contributing to this increase were the write-off of assets associated with the discontinued operations of the            Consumer segment and the results associated with our Dubai subsidiary.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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Net Loss

    Net loss increased $15 thousand, or 0.2% to ($7.843 million) during the nine months ended September 30, 2009, from ($7.828 million) during the nine months ended September 30, 2008. The main factors contributing to this decrease were decreased gross margin, increased interest expenses, and the loss in discontinued operations experienced during the first half of 2009. In addition, during the first quarter of 2008, the Company recorded a gain            associated with the settlement of a debt that did not recur in 2009.

**Liquidity and Capital Resources**

    Since our inception, we have incurred significant operating and net losses. In addition, we are not generating positive cash flow from operations. As of September 30, 2009, we had Stockholders’ deficit of approximately ($6.5 million) as compared to ($4.8 million) at December 31, 2008, and a working capital deficit of approximately ($9.2            million) as compared to ($8.6 million) at December 31, 2008. During the nine months ended September 30, 2009, we raised approximately $2.5 million from the sale of its securities through private placement financing (See Note 8 to the Condensed Consolidated Interim Financial Statements contained in this quarterly report on Form 10-Q). The Company uses the proceeds from these transactions primarily for general corporate purposes.. We may seek further financing through the sale of debt            or equity securities, although we have no commitments from any prospective purchaser of our securities.                 Below is a summary of our cash flow 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:
|                                                                                         |   | **Nine Months Ended September 30,** |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------|
|                                                                                         |   | **2009**                            |   | **2008** |
|                                                                                         |   | **(unaudited)**                     |   | **(unaudited)** |
| **Cash from continuing operations:**                                                         |   |                                |   |   |
| Cash used in operating activities                                                            | $      | (5,245,858)                         | $ | (2,813,759) |
| Cash provided by (used in) investing activities                                              |   | (32,801)                            |   | (321,730) |
| Cash provided by financing activities                                                        |   | 5,041,078                           |   | 3,381,798 |
| Increase(decrease) in cash and cash equivalents from continuing operations                   |   | (237,581)                           |   | 246,309 |
| **Cash from discontinued operations:**                                                       |   |                                |   |   |
| Cash provided by operating activities of discontinued operations                             |   | 186,398                             |   | 84,249 |
| Cash provided by investing activities from discontinued operations                           |   |  ̄                              |   | 22,410 |
| Net increase in cash and cash equivalents from discontinued operations                       |   | 186,398                             |   | 106,659 |
| Net increase (decrease) in cash and equivalents from continuing and discontinuing operations |   | (51,183)                            |   | 352,968 |
| Cash and cash equivalents, beginning of period                                               |   | 427,433                             |   | 70,883 |
| Cash and cash equivalents, end of period                                                     | $      | 376,250                             | $ | 423,851 |

**Sources of Liquidity**

    As of September 30, 2009, we had cash and cash equivalents of approximately $376 thousand, and Accounts Receivable of approximately $2.3 million. In addition, as of September 30, 2009 we had approximately $0.4 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).

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     From our inception through September 30, 2009, we financed our operations from operating revenues and cash provided from financing activities. These activities provided net proceeds of approximately $23.3 million from our initial public offering (IPO), the private placement of approximately $66.7 million of equity securities, $1.6 million            from the exercise of Stock Options and Warrants, and $28.6 million from loans evidenced by the issuance of promissory notes. In addition, since inception we have financed the acquisition of $8.2million of fixed assets through capital leases.                 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 principal and interest payments related to our capital lease/equipment financing obligations, capital expenditures, and 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 $38 thousand and $329 thousand for the nine months ended September 30, 2009 and 2008, respectively. We expect our cash capital expenditures to be approximately $50 thousand for the next three months ending December 31, 2009. The 2009 estimated capital expenditures primarily consist of additional wholesale, corporate services and other infrastructure development.                 Cash used in operations was approximately $5.2 million and $2.8 million during the nine months ended September 30, 2009 and 2008, respectively. The cash used in our operations has historically been a function of our net losses, expenses for property and equipment, and changes in working capital as a result of the timing of receipts and disbursements As we focus in our corporate and carrier sales, we expect our net cash used in operating activities to            improve during future periods.                 In some situations, we may be required to guarantee payment or performance under agreements, and in these circumstances, we may be required to secure letters of credit or bonds to do so.

**Debt Service Requirements**

    At September 30, 2009, we had approximately $2.6 million of current and long-term debt. This balance relates to notes payable and our capital leases. Of this amount, the portion of debt collateralized by a security interest in accounts receivable is $2.5 million.

**Capital Instruments**

    In January 2009, the Company entered into subscription agreements with ten (10) accredited investors, including two (2) Directors, Marvin S. Rosen and Philip D. Turits for the sale of an aggregate 2,106,213 shares of Common Stock and five–year Warrants to purchase 842,491 shares of Common Stock, in consideration for an aggregate of $0.4            million. The Warrants are exercisable at prices that range from $0.20 to $0.22 per share, which is equal to the respective closing price of the Company’s Common Stock on the business day before each closing. Following these transactions, the private placement commenced in July 2008 was closed.                  In February 2009, the Company commenced a new private placement to raise working capital for the Company’s operations. This private placement provides for the sale of up to $6.0 million of the Company’s Common Stock and Warrants. As of September 30, 2009, the Company has sold 16,777,584 shares of Common Stock for which proceeds of approximately $2.1 million were received, net of expenses of approximately $6 thousand. In addition, the Company            issued five-year Warrants to purchase 5,248,969 shares of Common Stock at an exercise price of 120% of the closing price of the Company’s Common Stock the business day before closing. Following these transactions, the private placement entered into in February of 2009 was closed. 

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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     In September 2009, the Company commenced a new private placement to raise working capital for the Company’s operations. This private placement provides for the sale of up to $7.0 million of the Company’s Common Stock. Through September 2009, the Company has sold 375,000 shares of Common Stock for which proceeds of approximately $60        thousand were received, net of expenses of approximately $500. In addition, the Company issued five-year Warrants to purchase 75,000 shares of Common Stock at an exercisable price of 120% of the closing price of the Company’s Common Stock the business day before closing. 

**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 U.S., with no need for management 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, 2008, included in our Annual Report on Form 10-K. Our preparation of our Condensed Consolidated Interim 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 Condensed Consolidated Interim 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, retail VoIP sales to corporations 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.

**Accounts Receivable and Allowance for Doubtful Accounts**

 

    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.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Cost of Revenues and Cost of Revenues Accrual**

     Cost of revenues is comprised primarily of costs incurred from other domestic and international communications 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 is associated with the network backbone connectivity to our switch facilities. These expenses 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        the Company’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).

**Intangible Assets and Goodwill Impairment Testing**

    Absent any circumstances that warrant testing at another time, we test for goodwill and non-amortizing intangible asset impairment as part of our year-end closing process. Impairment losses are recorded when indicators of impairment are present based primarily upon estimated future cash flows.

**Income Taxes**

    The Company accounts for income taxes in accordance with the requirements under U.S. GAAP which 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 Condensed Consolidated Interim Financial Statements. Deferred tax liabilities and assets are        determined based on the temporary differences between the Condensed Consolidated Interim 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 April 2009, the FASB issued revised guidance related to the, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies”, to amend and clarify the initial recognition and measurement, subsequent measurement and accounting, and related disclosures arising from contingencies in a        business combination under the previously provided guidance on, “Business Combinations”. Under the revised guidance, assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. The FSP is        effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of the revised guidance did not to have a material impact on the Company’s Condensed Consolidated Interim Financial Statements.             In April 2009, the FASB issued new guidance related to the, “Interim Disclosures about Fair Value of Financial Instruments” (“the FSP”). The FSP requires disclosures about fair value of financial instruments whenever summarized financial information for interim reporting periods is presented. Entities shall disclose the methods and significant assumptions used to estimate the fair value of financial instruments and shall describe        changes in methods and significant assumptions, if any, during the period. Companies should also provide qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company is evaluating the impact that the adoption of the new guidance, if any,        will have on its Condensed Consolidated Interim Financial Statements.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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    In April 2009, the FASB issued guidance related to the, "Recognition and Presentation of Other-Than-Temporary Impairments", which along with FSP clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has        the intent to sell the security, or (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing        another-than-temporary impairment. Companies must follow the guidelines established by FSP to determine if another-than-temporary impairment of a debt security has occurred. The guidance is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company is evaluating the impact that the adoption of the guidance, if any, will have on its Condensed Consolidated Interim Financial Statements.             In April 2009, the FASB issued guidance related to the, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly", which provides guidance as to, how to determine fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what previously issued guidance had provided as to the objective        of fair value measurement-to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, the guidance reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The guidance became effective for interim and annual reporting periods ending        after June 15, 2009, and shall be applied prospectively. The Company is evaluating the impact that the adoption of the guidance, if any, will have on its Condensed Consolidated Interim Financial Statements.             In May 2009, the FASB issued guidance related to the, “Subsequent Events”, which provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential        recognition or disclosure in the financial statements. The guidance also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. Furthermore, this guidance identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted the guidance during the second quarter of 2009, as required, and evaluated subsequent events        through the filing date of this quarterly report.             In June 2009, the FASB issued guidance related to improving the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The FASB undertook this project to        address (1) practices that have developed since the issuance of previously issued guidance related to the, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, that are not consistent with the original intent and key requirements of that statement, and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial        statements of the transferors. This new guidance must be applied as of January 1, 2010, the beginning of our first annual reporting period after November 15, 2009. Earlier application of this guidance is prohibited and must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective, the concept of a qualifying SPE is no longer relevant for accounting purposes. Therefore, a formerly qualifying SPE should be evaluated for consolidation by        reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The disclosure provisions of the guidance should be applied to transfers that occurred both before and after the effective date of this statement. The adoption of the new guidance is not currently        expected to have a material effect on our financial statements.             In June 2009, the FASB, issued revised guidance related to the previously amended guidance, which improves financial reporting by enterprises involved with variable interest entities by addressing (1) the effects on certain provisions of the guidance, “Consolidation of Variable Interest Entities”, as a result of eliminating the qualifying special-purpose entity (“SPE”) concept in FAS the guidance related to, “Accounting for        Transfers of Financial Assets”, an amendment to previously issued guidance, and (2) constituent concerns about the application of certain key provisions of that guidance, including those in which the accounting and The revised guidance shall be effective as of January 1, 2010, our first annual reporting period beginning after November 15, 2009. Earlier application is prohibited. The adoption of the revised guidance is not currently expected to have a material effect on our        financial statements.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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    In June 2009, the FASB, issued replacement guidance related to the, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles”, which confirmed that the FASB Accounting Standards Codification (the “Codification”) will become the single official source of authoritative        U.S. GAAP (other than guidance issued by the SEC), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and related literature. After that date, only one level of authoritative U.S. GAAP will exist. All other literature will be considered non-authoritative. The Codification does not change U.S. GAAP; instead, it introduces a new structure that is organized in an easily accessible, user-friendly        online research system. The Codification, which changes the referencing of financial standards, becomes effective for interim and annual periods ending on or after September 15, 2009. We will apply the Codification beginning in the third quarter of fiscal 2009. The adoption of SFAS 168 is not expected to have any substantive impact on our condensed consolidated financial statements or related footnotes.             In January 2009, the FASB issued guidance related to the, "Amendments to the Impairment Guidance of EITF Issue No. 99-20", the guidance amends the impairment guidance in the issued guidance on, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether any        other-than-temporary impairment (OTTI) has occurred. The FSP eliminates the requirement that a holder’s best estimate of cash flows be based upon those that “a market participant” would use, instead, the FSP requires that another-than-temporary impairment (OTTI) be recognized as a realized loss through earnings as a realized loss when it is “probable” there has been an adverse change in the holder’s estimated cash flows from the cash flows previously        projected. The FSP is effective for interim and annual reporting periods ending after December 15, 2008, and shall be applied prospectively. Retrospective application to a prior interim or annual reporting period is not permitted. The adoption of the guidance did not to have a material impact on the Company’s Condensed Consolidated Interim Financial Statements.

**Forward–Looking Statements**

    The discussion in this quarterly report regarding our business and operations includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology        such as “may,” “expect,” “anticipate,” “intend,” “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. This disclosure highlights some        of the important risks regarding our business. The number one risk of the Company is its ability to attract fresh and continued capital to execute its comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of the Company’s significant contracts or        partnerships, the Company’s inability to maintain working capital requirements to fund future operations or the Company’s inability to attract and retain highly qualified management, technical and sales personnel,  and the other factors identified by us from time to time in our filings with the SEC. However, the risks included should not be assumed to be the only things that could affect future performance. We may also be subject to disruptions, delays in collections,        or facilities closures caused by potential or actual acts of terrorism or government security concerns.             All forward-looking statements 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 statements.

**Item 3.           Quantitative and Qualitative Disclosures About Market Risk.**

    Disclosure under this section is not required for a smaller reporting company.

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**Item 4T.         Controls and Procedures.**

    We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the "Exchange Act") that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified        in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.             Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.             Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected        all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.             There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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**PART II — OTHER INFORMATION**

**Item 1.     Legal Proceedings.**

     In July 2009, the Company received a notice of a complaint filed with the SEC regarding the Company’s failure to issue certain stock that was to be granted for payment of services that were to have been provided, but those services were not received. The Company has responded to the SEC, advising that the issue is one of a contractual        dispute, and requested that the matter be referred to the court system.             In August 2009, Global IP Solutions, Inc. (“GIPS”), a vendor associated with the Company’s discontinued operations, filed an action requesting an injunction and a temporary restraining order in the Southern District of New York, Case No. 09-CV-6981, asserting infringement of copyrighted software. The Company is no longer using the software, but is taking measures to ensure that there is not any copyright infringement by any of its former        customers or distributors that may have been previously granted access to the software.

     On or about September 10, 2009, a landlord over premises leased by the Company commenced a proceeding entitled “Nonpayment Notice of Petition” in the Civil Court of the State of New York, County of New York (Index No. 084795 09), in which the landlord is seeking a judgment of eviction and damages in the amount of approximately        $246,000.  The Company and the landlord have agreed in principle to settle the proceeding under a stipulation of settlement that provides, among other things, that Fusion consent to entry of a judgment for $246,035  and a warrant of eviction; and the parties have agreed that execution on the judgment is to be stayed pending Fusion’s payment of rent for November and December 2009 by the first of each of those months, and its paying the        landlord  the $246,035  by December 2, 2009.   The Company has a ten day grace period to cure should the December 2nd payment date not be met. The Company has executed the stipulation of settlement and delivered the signed stipulation to the landlord, however, the landlord has not yet returned a fully signed copy of the stipulation to the Company.  The settlement will not become effective unless and until it is executed by the landlord,        however, the landlord has worked with the Company in the past regarding payment issues, and the Company expects their continued cooperation.   In the absence of settlement, the Company is required to respond to the Notice of Petition by November 20,2009. 

                 The Company is from time to time involved in claims and legal actions arising in the ordinary course of business. Management does not expect that the outcome of these cases will have a material effect on the Company’s financial position.             Due to the regulatory nature of the industry, the Company periodically receives and responds to various correspondence and inquiries from state and federal regulatory agencies. Management does not expect the outcome on these inquiries to have a material impact on our operations or financial condition.

**Item 1A.     Risk Factors.**

**Risk Associated with Recent Voluntary Delisting of our Securities from the NYSE Amex LLC**

    On June 18, 2009, the voluntary withdrawal of our securities from listing on the NYSE Amex Exchange became effective. The Company’s Common Stock is currently trading on the Over-the-Counter Bulletin Board, (the “OTCBB”) under the symbol FSNN.             Although there have been no significant negative consequences experienced since the date of delisting, delisting of our Securities from the NYSE Amex may ultimately have certain adverse consequences, including but not limited to:

 

| •                         | potential decrease in the Company’s liquidity,                                                                                                                                                                                                                      |  |  |
|--------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| •                         | potential decrease in amount and availability of external sources of capital,                                                                                                                                                                                             |  |
| •                    | the possibility that our common stock will be considered a “penny stock” under Rule 3a55-1 of the Securities Exchange Act of 1934, which imposes stringent requirements on brokers and dealers when effecting transactions in “penny stocks,” and |
|  •    | potential increase in cost of debt.                                                                                                                                                                                                                                       |  |  |  |

**Risks Related to Continued Losses**

    We have a history of operating losses and, prior to our IPO, a working capital deficit and Stockholders’ deficit. There can be no assurance that we will ever achieve profitability or have sufficient funds to execute our business strategy.

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    There can be no assurance that any of our business strategies will be successful or that we will ever achieve profitability. At September 30, 2009, we had a working capital deficit of approximately ($9.2) million and Stockholders’ deficit of approximately ($6.4) million. We have continued to sustain losses from operations and for the years ended        December 31, 2008, 2007, and 2006; we have incurred a net loss applicable to Common Stockholders of approximately $16.2 million, $13.2 million, and $13.6 million, respectively. In addition, we have not generated positive cash flow from operations for the years ended December 31, 2008, 2007, and 2006. We may not be able to generate future profits and may not be able to support our operations, or otherwise establish a return on invested capital. In addition, we may not have sufficient        funds to execute our business strategy, requiring us to raise funds from capital markets, consequently, diluting our common stock.

**If we are unable to manage our growth or implement our expansion strategy, we may increase our costs without maximizing our revenues.**

    We may not be able to expand our product offerings, our client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational, and financial resources and may increase our costs. If we are unable to        successfully manage our future growth, establish, and continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, we may not be able to maximize revenues or profitability.

**The success of our continued growth is dependent upon market developments and traffic patterns, which will lead us to make expenditures that may not result in increased revenues.**

    Our purchase of network equipment and software will be based in part on our expectations concerning future revenue growth and market developments. As we expand our network, we will be required to make significant capital expenditures, including the purchase of additional network equipment and software, and to add additional employees. To a lesser        extent our fixed costs will also increase from the ownership and maintenance of a greater amount of network equipment including our Softswitch, gateways, routers, and other related systems. If our traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of our network, our costs as a percentage of revenues would increase significantly.

**We may be unable to adapt to rapid technology trends and evolving industry standards, which could lead to our products becoming obsolete.**

    The communications industry is subject to rapid and significant changes due to technology innovation, evolving industry standards, and frequent new service and product introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. We will need to use technologies        effectively, continue to develop our technical expertise and enhance our existing products and services in a timely manner to compete successfully in this industry. We may not be successful in using new technologies effectively, developing new products, or enhancing existing products and services in a timely manner or that any new technologies or enhancements used by us or offered to our customers will achieve market acceptance.

**Some of our services are dependent upon multiple service platforms, network elements, and back-office systems that are reliant on third party providers.**

     We have deployed back-office systems and services platforms that enable us to offer our customers a wide-array of services and features. Sophisticated back office information and processing systems are vital to our growth and our ability to monitor costs, bill clients, provision client orders, and achieve operating efficiencies. Some of these        systems are dependent upon license agreements with third party vendors. These third party vendors may cancel or refuse to renew some of these agreements, and the cancellation or non-renewal of these agreements may harm our ability to bill and provide services efficiently.

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**We may be impacted by recent litigation regarding patent infringement to which we were not a party.**

    On March 8, 2007, a jury in the U.S. District Court for the Eastern District of Virginia ruled that Vonage Holdings had infringed on three patents held by Verizon Communications, and ordered Vonage to pay Verizon $58 million plus possible future royalties. The patents related in part to technologies used to connect Internet telephone use to the        traditional telephone network. Vonage appealed the decision. At this point, Vonage has lost that appeal. However, it is unclear what may be the future impact, if any, to other VoIP service providers, including us. If we were restricted from using certain VoIP technologies, it could increase our cost of service or preclude us from offering certain current or future services.

**Breaches in our network security systems may hurt our ability to deliver services and our reputation, and result in liability.**

    We could lose clients and expose ourselves to liability if there are any breaches to our network security systems, which could jeopardize the security of confidential information stored in our computer systems. In the last four years, we experienced two known breaches of network security, which resulted in a temporary failure of network operations.        Any network failure could harm our ability to deliver certain services, our reputation and subject us to liability.

**Our growth is dependent upon our ability to build new distribution relationships, and to bring on new customers, of which there can be no assurance.**

    Our ability to grow through quick and cost effective deployment of our VoIP services is in part dependent upon our ability to identify and contract with local entities that will assist in the distribution of our services. This will include local sales agents that sell our corporate services. If we are unable to identify or contract for such        distribution relationships, we may not generate the customers or revenues currently envisioned.

**Our entry into new overseas markets may rely upon our ability to obtain licenses to operate in those countries, and our ability to establish good working relationships with postal telephone and telegraph companies in order to interconnect to the telephone networks. There can be no assurance of our ability to accomplish either.**

    The rapid growth of our network may be dependent upon our ability to apply for and receive licenses to operate in the foreign markets we intend to enter. They are also dependent upon our ability to establish positive working relationships with foreign postal telephone and telegraph companies, and other licensed carriers, and to negotiate and execute        the agreements necessary for us to interconnect with their local networks. While we will diligently pursue these relationships, we might not be able to obtain the necessary licenses and interconnections within the time frame envisioned or not at all.

**The communications services industry is highly competitive and we may be unable to compete effectively.**

    The communications industry, including Internet and data services, is highly competitive, rapidly evolving, and subject to constant technological change and intense marketing by providers with similar products and services. We expect that new competitors, as well as gray market operators (operators who arrange call termination in a manner that        bypasses the postal telephone and telegraph company, resulting in high margins for the gray market operator and substantially lower revenues for the postal telephone and telegraph company), are likely to join existing competitors in the communications industry, including the market for VoIP, Internet and data services. Many of our current competitors are significantly larger and have substantially greater market presence as well as greater financial, technical, operational, marketing,        and other resources and experience than we do. In the event that such a competitor expends significant sales and marketing resources in one or several markets, we may not be able to compete successfully in such markets. We believe that competition will continue to increase, placing downward pressure on prices. Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with such price reductions. In addition, the pace of technological        change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us. If our competitors were to provide better and more cost effective services than ours, we may not be able to increase our revenues or capture any significant market share.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Industry consolidation could make it more difficult for us to compete.**

    Companies offering Internet, data and communications services are, in some circumstances, consolidating. We may not be able to compete successfully with businesses that have combined, or will combine, to produce companies with substantially greater financial, sales, and marketing resources, larger client bases, extended networks and infrastructures        and more established relationships with vendors, distributors and partners than we have. With these heightened competitive pressures, there is a risk that our revenues may not grow as expected and the value of our common stock could decline.

**Our ability to provide services is often dependent on our suppliers and other service providers who may not prove to be effective.**

     A majority of the voice calls made by our clients are connected through other communication carriers, which provide us with transmission capacity through a variety of arrangements. Our ability to terminate voice traffic in our targeted markets is an essential component of our ongoing operations. If we do not secure or maintain operating and        termination arrangements, our ability to increase services to our existing markets, and gain entry into new markets, will be limited. Therefore, our ability to maintain and expand our business is dependent, in part, upon our ability to maintain satisfactory relationships with incumbent and other licensed carriers, Internet service providers, international exchange carriers, satellite providers, fiber optic cable providers and other service providers, many of which are our competitors,        and upon our ability to obtain their services on a cost effective basis, as well as the ability of such carriers to carry the traffic we route to their networks or provide network capacity. If a carrier does not carry traffic routed to it, or provide required capacity, we may be forced to route our traffic to, or buy capacity from, a different carrier on less advantageous terms, which could reduce our profit margins or degrade our network service quality. In the event network service is        degraded, it may result in a loss of customers. To the extent that any of these carriers raise their rates, change their pricing structure, or reduce the amount of capacity they will make available to us, our revenues and profitability may be adversely affected.

**We rely on third party equipment suppliers who may not be able to provide us the equipment necessary to deliver the services that we seek to provide.**

    We are dependent on third party equipment suppliers for equipment, software, and hardware components, including Cisco, Genband f/k/a Nextone, BroadSoft, and Veraz. If these suppliers fail to continue product development and research and development or fail to deliver quality products or support services on a timely basis, or we are unable to develop        alternative sources, if and as required, it could result in our inability to deliver the services that we currently and intend to provide.

**We rely on the cooperation of postal telephone and telegraph companies who may hinder our operations in certain markets.**

    In some cases, we will require the cooperation of the postal telephone and telegraph company or another carrier in order to provide services under a license or partnership agreement. In the event the postal telephone and Telegraph Company or another carrier does not cooperate, our service rollout may be delayed, or the services we offer could be        negatively affected. If we acquire a license for a market and the postal telephone and Telegraph Company or incumbent carrier desires to negatively affect our business in the area, they may be in a position to significantly delay our ability to provide services in that market and ultimately make it not worth pursuing.

**If we are unable to develop and maintain successful relationships with our joint venture partners, we could fail in an important market.**

    We have been in the past and may be in the future engaged in certain joint ventures where we share control or management with a joint venture partner. If we are unable to maintain a successful relationship with a joint venture partner, the joint venture’s ability to move quickly and respond to changes in market conditions or respond to financial        issues can erode and reduce the potential for value creation and return on investment. Further, the joint ventures may restrict or delay our ability to make important financial decisions, such as repatriating cash to us from such joint ventures. This uncertainty with our joint ventures could result in a failure in an important market.

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**Service interruptions due to disputes could result in a loss of revenues and harm our reputation.**

    Portions of our terminating network may be shut down from time to time as a result of disputes with vendors or other issues. Any future network shut downs can have a significant negative impact on revenue and cash flows, as well as hurting our reputation. In addition, there is no assurance that we will be able to quickly resolve disputes, if ever,        which could result in a permanent loss of revenues.

**Because we do business on an international level, we are subject to an increased risk of tariffs, sanctions and other uncertainties that may hurt our revenues.**

    There are certain risks inherent in doing business internationally, especially in emerging markets, such as unexpected changes in regulatory requirements, the imposition of tariffs or sanctions, licenses, customs, duties, other trade barriers, political risks, currency devaluations, high inflation, corporate law requirements, and even civil unrest.        Many of the economies of these emerging markets are weak and volatile. We may not be able to mitigate the effect of inflation on our operations in these countries by price increases, even over the long-term. Further, expropriation of private businesses in such jurisdictions remains a possibility, whether by outright seizure by a foreign government or by confiscatory tax or other policies. Deregulation of the communications markets in developing countries may not continue. Incumbent        providers, trade unions and others may resist legislation directed toward deregulation and may resist allowing us to interconnect to their network switches. The legal systems in emerging markets frequently have insufficient experience with commercial transactions between private parties. Consequently, we may not be able to protect or enforce our rights in any emerging market countries. Governments and regulations may change resulting in availability of licenses and/or cancellations or        suspensions of operating licenses, confiscation of equipment and/or rate increases. The instability of the laws and regulations applicable to our businesses and their interpretation and enforcement in these markets could materially and adversely affect our business, financial condition, or results of operations.             Regulatory treatment of VoIP outside the U.S. varies from country to country. Some countries are considering subjecting VoIP services to the regulations applied to traditional telephone companies and they may assert that we are required to register as a telecommunications carrier in that country or impose other regulations. In such cases, our failure to register could subject us to fines, penalties, or forfeiture. Regulatory developments such as these could        have a material adverse effect on our international operations.

**Additional taxation and government regulations of the communications industry may slow our growth, resulting in decreased demand for our products and services and increased costs of doing business.**

     We could have to pay additional taxes because our operations are subject to various taxes. We structure our operations based on assumptions about various tax laws, U.S. and international tax treaty developments, international currency exchange, capital repatriation laws, and other relevant laws by a variety of non-U.S. jurisdictions. Taxation or        other authorities might not reach the same conclusions we reach. We could suffer adverse tax and other financial consequences if our assumptions about these matters are incorrect or the relevant laws are changed or modified.             Generally, in the U.S., our services are subject to varying degrees of federal, state, and local regulation, including regulation by the Federal Communications Commission (FCC) and various state public utility commissions. We may also be subject to similar regulation by foreign governments and their telecommunications/regulatory agencies. While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control        over our services and pricing. However, they do require the filing of various reports, compliance with public safety and consumer protection standards, and the payment of certain regulatory fees and assessments.

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                 We cannot assure that the applicable U.S. and foreign regulatory agencies will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate, or will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority. Similarly, if our pricing, and/or terms or conditions of service, are not properly filed or updated with the        applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees, or other costs. We have been delinquent in certain filing and reporting obligations in the past, including, but not limited to, filings with the FCC and Universal Service Fund (USF) reports and payments. We        are currently working with various federal and state regulatory agencies to complete any outstanding filings.

**In addition to new regulations being adopted, existing laws may be applied to the Internet, which could hamper our growth.**

     New and existing laws may cover issues that include: sales and other taxes; user privacy; pricing controls; characteristics and quality of products and services; consumer protection; cross-border commerce; copyright, trademark and patent infringement; and other claims based on the nature and content of Internet materials. This could delay growth        in demand for our products and services and limit the growth of our revenue.

**A large percentage of our current revenues are related to a small group of customers and loss of any of those customers could negatively impact our revenues.**

    A large percentage of our carrier services revenue is provided by a small group of customers. The terms of the customer’s agreement do not bind the customer contractually to continue using our services and if our business with this customer were to significantly decrease or stop, it could have a negative impact on our revenues and cash flow. 

**Risks Related to Our Common Stock**

**Voting Control by Principal Stockholders**

    As of October 15, 2009, our Executive Officers and Directors collectively controlled approximately 26.6% of our outstanding common stock and are, therefore, able to significantly influence the vote on matters requiring stockholder approval, including the election of directors.             We Do Not Intend to Pay Dividends on Common Stock.                          We have never declared or paid any cash dividends on our Common Stock. We intend to retain any future earnings to finance our operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future. Holders of our outstanding Preferred Stock are entitled to receive dividends prior to the payment of any dividends on our Common Stock. The payment of dividends is also subject to provisions of Delaware law        prohibiting the payment of dividends except out of surplus and certain other limitations.

**Going Concern**

    At September 30, 2009, the Company had a working capital deficit of approximately ($9.2) million and an accumulated deficit of approximately ($137.5) million. The Company has continued to sustain losses from operations. In addition, the Company has not generated positive cash flow from operations since inception. Management is aware that its current        cash resources are not adequate to fund its operations for the remainder of the year. During the nine months ended September 30, 2009, the Company raised approximately    $2.5 million net of expenses from sale of its securities through private placement. The Company cannot make any guarantees if and when it will be able to attain profitability. These conditions, among others, raise substantial doubt about the Company’s ability to continue operations as a going        concern. No adjustment has been made in the Condensed Consolidated Interim Financial Statements to the amounts and classification of assets and liabilities, which could result, should the Company be unable to continue as a going concern.

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**Other Risks**

    Other risks are identified from time-to-time in our filings with the SEC, including but not limited to in our Annual Report on Form 10-K for the year ended December 31, 2008

**Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds.**

    (a) Unregistered Sales of Securities                   From May 5, 2009 through June 29, 2009, the Company entered into subscription agreements with various accredited investors, including three (3) Directors of the Company, Marvin S. Rosen, Philip D. Turits, and E. Alan Brumberger, for the sale of an aggregate 6,327,069 shares of Common Stock, for an aggregate consideration of $823 thousand. In addition, the Company issued five-year Warrants to purchase 1,900,030 shares of        Common Stock at exercise prices equal to 120% of the closing price of the Company’s Common Stock the business day before the respective closing.             (b) Use of Proceeds                  The proceeds of the offering(s) are or will be used primarily for general corporate purposes.

**Item 3.     Defaults Upon Senior Securities.**

    None

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

     None

**Item 5.     Other Information.**

     The Company previously disclosed that it had issued Common Stock for $75,000 to a vendor for the settlement of a debt. Inasmuch as the vendor has failed to preform its obligations under the settlement agreeement, the Company had not yet isued the shares, however,  as of the date of this filing, the Company continues to reserve the shares for issuance in the event that a settlement or other agreement or determination        eventually requires the issuance of the shares.

**Item 6.           Exhibits.**

| **Exhibit No.**               | **Description**                                                                                                                                   |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|      31.1 | Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
|      31.2 | Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
|      32.1 | Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                             |

 

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**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**.                                                         |
|-------------------------------|-----------------------------------------------------------------------------------------------------------|
|                          | By: /s/**MATTHEW D. ROSEN**                                                                               |
|                          |            Matthew D. Rosen                        |
|  November 16, 2009       |            Chief Executive Officer       |
|                          |
|                          | BY: /s/**BARBARA HUGHES**                                                                                 |
|                          |             Barbara Hughes                    |
|   November 16, 2009 |             Chief Financial Officer |

 

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**FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBDIARIES**

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**INDEX TO EXHIBITS**

| **EXHIBIT NO.** | **DESCRIPTION**                                                                                                                          |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1            | Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
| 31.2            | Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                 |
| 32.1            | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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