**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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





**For
      the quarterly period ended September 30, 2005**





**OR**





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





**For
      the transition period from _________ to _________**





**Commission
      file number 000 -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 id****entification
                No.)********420
                Lexington Avenue, Suite 518, New York, New
                York**
            **10170****(Address
                of principal executive offices)**
            **(Zip
                Code)********(212)
                972-2000****Registrant’s
                telephone number, including area
                code**








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





Yes
      |X|       No |_|





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





Yes
      |_|       No |X|





Indicate
      by a check mark whether the registrant is a shell company as defined in Rule
      12b-2 of the Exchange Act. (Pursuant to rule 33-8587)





Yes
      |_|       No |X|








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





**Title
                of each Class**
            **Number
                of Shares****Outstanding**Class
                A Common Stock, $0.01 par value
            15,749,963Common
                Stock, $0.01 par value
            11,104,962Redeemable
                Common Stock Purchase Warrants
            7,281,838
















**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**INDEX**








Part
                I. Financial Information
            PageItem
                l. Financial Statements
            3Item 2. Management’s Discussion and Analysis of Financial Condition and
                Results of Operations
            17Item 3. Quantitative and Qualitative Disclosures About Market
                Risk
            25Item 4. Controls and Procedures
            26Part
                II. Other Information
            27Item 1. Legal Proceedings
            27Item 2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            27Item 3. Defaults Upon Senior Securities
            27Item 4. Submission of Matters to a Vote of Security
                Holders
            27Item 5. Other Information
            27Item 6. Exhibits
            28











**Item
      1. FINANCIAL STATEMENTS**


**PART
      1 - FINANCIAL INFORMATION**


**ITEM
      1: FINANCIAL STATEMENTS**





**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Balance Sheets**


**September
                    30,**
                ****
                **December
                    31,**
                ********
                ****
                **2005**
                ****
                **2004**
                ********
                ****
                **(unaudited)**
                ******ASSETS**
                
                ****
                
                ******Current
                    assets**
                
                ****
                
                ****Cash
                    and cash equivalents
                
                $
                17,509,129
                
                $
                4,368,726Accounts
                    receivable, net of allowance for doubtful accounts of approximately
                    $445,000 and $414,000, in 2005 and 2004, respectively
                
                
                2,689,781
                
                
                3,145,535Restricted
                    cash
                
                
                25,000
                
                
                145,000Prepaid
                    expenses and other current assets
                
                
                730,297
                
                
                889,761**Total
                    current assets**
                
                
                20,954,207
                
                
                8,549,022**Property
                    and equipment, net**
                
                
                4,404,488
                
                
                3,271,474**Other
                    assets**Security
                    deposits
                
                
                745,892
                
                
                902,028Restricted
                    cash
                
                
                218,176
                
                
                235,276Goodwill
                
                
                761,143
                
                
                —Intangible
                    assets, net
                
                
                4,868,632
                
                
                —Other
                
                
                678,694
                
                
                704,317**Total
                    other assets**
                
                
                7,272,537
                
                
                1,841,621$
                32,631,232
                
                $
                13,662,117**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY (DEFICIT)****Current
                    liabilities**Long-term
                    debt, related parties, current portion
                
                $
                -
                
                $
                1,739,025Long-term
                    debt, current portion
                
                
                150,000
                
                
                2,660,281Capital
                    lease obligations, current portion
                
                
                1,377,571
                
                
                1,131,830Accounts
                    payable and accrued expenses
                
                
                8,544,996
                
                
                10,274,688Investment
                    in Estel
                
                
                715,595
                
                
                140,821Liabilities
                    of discontinued operations
                
                
                782,719
                
                
                1,116,090**Total
                    current liabilities**
                
                
                11,570,881
                
                
                17,062,735**Long-term
                    liabilities**Capital
                    lease obligations, net of current portion
                
                
                102,446
                
                
                156,495Preferred
                    stock, Series C, subject to mandatory redemption (liquidation
                    preference
                    in the aggregate of approximately $10,932,000 in 2004)
                
                
                —
                
                
                9,716,026**Total
                    long-term liabilities**
                
                
                102,446
                
                
                9,872,521**Minority
                    interests**
                
                
                123,891
                
                
                16,890**Commitments
                    and contingencies****Stockholders’
                    equity (deficit)**Common
                    stock, $0.01 par value, 105,000,000 shares authorized, 11,104,962
                    and 0
                    shares issued, and 10,429,381 and 0 shares outstanding in 2005
                    and 2004,
                    respectively
                
                
                104,294
                
                
                —Common
                    stock, Class A $0.01 par value, 21,000,000 shares authorized,
                    15,749,963
                    and 17,479,993 shares issued and outstanding in 2005 and 2004,
                    respectively
                
                
                157,500
                
                
                174,800Capital
                    in excess of par value
                
                
                105,871,952
                
                
                65,127,291Accumulated
                    deficit
                
                
                (85,299,732
                )
                
                (78,592,120
                )**Total
                    stockholders’ equity (deficit)**
                
                
                20,834,014
                
                
                (13,290,029
                )$
                32,631,232
                
                $
                13,662,117




See
      accompanying condensed notes to consolidated financial statements.




3




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Operations**




**Three
                    months ended**
                  **September
                    30,**
              
              **Nine
                  months ended**
                **September
                  30,****2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004****(unaudited)**
              
              
              **(unaudited)**
              
              
              **(unaudited)**
              
              
              **(unaudited)****Revenues**
              $
              9,123,742
              
              $
              13,023,371
              
              $
              40,312,685
              
              $
              39,328,800**Operating
                  expenses:**Cost
                    of revenues, exclusive of depreciation and amortization
                    shown  separately below
              
              8,280,078
              
              
              11,087,267
              
              
              36,981,492
              
              
              33,797,571Depreciation
                  and amortization
              
              358,669
              
              
              455,583
              
              
              1,228,080
              
              
              1,334,979Selling,
                  general and administrative expenses
              
              2,854,067
              
              
              2,392,271
              
              
              8,589,154
              
              
              6,848,362Total
                  operating expenses
              
              11,492,814
              
              
              13,935,121
              
              
              46,798,726
              
              
              41,980,912**Operating
                  loss**
              
              (2,369,072
              )
              
              (911,750
              )
              
              (6,486,041
              )
              
              (2,652,112
              )**Other
                  income (expense)**Interest
                  income (expense), net
              
              107,276
              
              
              (552,739
              )
              
              (77,147
              )
              
              (1,376,259
              )Forgiveness
                  of debt
              
              52,539
              
              
              197,934
              
              
              57,879
              
              
              2,174,530Loss
                  from investment in Estel
              
              (192,566
              )
              
              (53,420
              )
              
              (492,026
              )
              
              (372,330
              )Other
              
              (10,390
              )
              
              22,350
              
              
              (4,434
              )
              
              40,099Minority
                  interests
              
              71,073
              
              
              (72,124
              )
              
              119,157
              
              
              (40,743
              )Total
                  other income (expense)
              
              27,932
              
              
              (457,999
              )
              
              (396,571
              )
              
              425,297(2,341,140
              )
              
              (1,369,749
              )
              
              (6,882,612
              )
              
              (2,226,815
              )**Loss
                  from continuing operations****Discontinued
                  operations:**Income
                  from discontinued operations
              
              **—**
              
              
              —
              
              
              175,000
              
              
              —**Net
                  loss**
              $
              (2,341,140
              )
              $
              (1,369,749
              )
              $
              (6,707,612
              )
              $
              (2,226,815
              )**Losses
                  applicable to common stockholders:**Loss
                  from continuing operations
              $
              (2,341,140
              )
              $
              (1,369,749
              )
              $
              (6,882,612
              )
              $
              (2,226,815
              )Preferred
                  stock dividends
              
              —
              
              
              —
              
              
              —
              
              
              (385,918
              )**Net
                  loss applicable to common stockholders from continuing operations**
              
              (2,341,140
              )
              
              (1,369,749
              )
              
              (6,882,612
              )
              
              (2,612,733
              )Income
                  from discontinued operations
              
              —
              
              
              —
              
              
              175,000
              
              
              —**Net
                  loss applicable to common stockholders**
              $
              (2,341,140
              )
              $
              (1,369,749
              )
              $
              (6,707,612
              )
              $
              (2,612,733
              )**Basic
                  and diluted net loss per common share:**Loss
                  from continuing operations
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.28
              )
              $
              (0.16
              )Income
                  from discontinued operations
              
              —
              
              
              —
              
              
              0.01
              
              
              —**Net
                  loss applicable to common stockholders**
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.27
              )
              $
              (0.16
              )**Weighted
                  average shares outstanding**Basic
                  and diluted
              
              26,179,151
              
              
              17,399,768
              
              
              24,555,878
              
              
              16,444,858





See
      accompanying condensed notes to consolidated financial statements.




4









**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Cash Flows**




**Nine
                  months ended September
                  30,****2005**
              
              
              **2004****(unaudited)**
              
              
              **(unaudited)****Cash
                  flows from operating activities**Net
                  loss
              
              **$**
              (6,707,612
              )
              **$**
              (2,226,815
              )Adjustments
                  to reconcile net loss to net cash used in operating activities:Gain
                  from sale of assets
              
              
              —
              
              
              (19,230
              )Depreciation
                  and amortization
              
              
              1,228,080
              
              
              1,334,979Bad
                  debt expense
              
              
              226,000
              
              
              204,989Gain
                  on forgiveness of debt
              
              
              (57,879
              )
              
              (2,174,530
              )Gain
                  on discontinued operations
              
              
              (175,000
              )
              
              —Accretion
                  of Series C Preferred Stock
              
              
              287,115
              
              
              1,180,730Loss
                  from investment in Estel
              
              
              492,026
              
              
              372,330Minority
                  interests
              
              
              (119,156
              )
              
              40,743Increase
                  (decrease) in cash attributable to changes in operating assets
                  and
                  liabilities:Accounts
                  receivable
              
              
              425,471
              
              
              (1,863,700
              )Prepaid
                  expenses and other current assets
              
              
              339,831
              
              
              (24,876
              )Other
                  assets
              
              
              (275,181
              )
              
              14,909Accounts
                  payable and accrued expenses
              
              
              (1,408,683
              )
              
              (442,684
              )Liabilities
                  of discontinued operations
              
              
              (158,371
              )
              
              (32,966
              )**Net
                  cash used in operating activities**
              
              
              (5,903,359
              )
              
              (3,636,121
              )**Cash
                  flows from investing activities:**Purchase
                  of property and equipment
              
              
              (1,531,828
              )
              
              (563,036
              )Advances
                  to Estel
              
              
              (164,547
              )
              
              (171,566
              )Payments
                  from Estel
              
              
              116,287
              
              
              —Purchase
                  of Jamaican joint venture, net of cash acquired
              
              
              (146,486
              )
              
              —Purchase
                  of minority interest in Efonica joint venture, net of cash acquired
              
              
              (480,555
              )
              
              —Purchase
                  of Turkey joint venture, net of cash acquired
              
              
              (92,971
              )
              
              —Return
                  of security deposits
              
              
              156,136
              
              
              303,988Repayments
                  of restricted cash
              
              
              137,100
              
              
              356,350**Net
                  cash used in investing activities**
              
              
              (2,006,864
              )
              
              (74,264
              )**Cash
                  flows from financing activities**Proceeds
                  from sale of common stock and warrants, net
              
              
              23,884,533
              
              
              1,277,070Proceeds
                  from sale of Series C preferred stock, net
              
              
              —
              
              
              4,630,803Proceeds
                  from exercise of stock options
              
              
              50,250
              
              
              —Proceeds
                  from exercise of warrants
              
              
              85,144
              
              
              —Repayments
                  of escrow advances
              
              
              —
              
              
              (73,060
              )Payment
                  of dividends on Series C preferred stock
              
              
              (664,634
              )
              
              —Payments
                  of long-term debt and capital lease obligations
              
              
              (2,286,706
              )
              
              (738,185
              )Contributions
                  to minority stockholders of joint ventures
              
              
              (17,961
              )
              
              (9,297
              )**Net
                  cash provided by financing activities**
              
              
              21,050,626
              
              
              5,087,331**Net
                  increase in cash and cash equivalents**
              
              
              13,140,403
              
              
              1,376,946**Cash
                  and cash equivalents, beginning of period**
              
              
              4,368,726
              
              
              3,205,645**Cash
                  and cash equivalents, end of period**
              
              **$**
              17,509,129
              
              **$**
              4,582,591





See
      accompanying condensed notes to consolidated financial statements.





5




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





Consolidated
      Statements of Cash Flows (continued)




**Nine
                    months ended September 30,****2005**
                
                
                **2004****(unaudited)**
                
                
                **(unaudited)****Supplemental
                    disclosure of cash flow information:**Cash
                    paid during the period for interest
                **$**
                608,839
                
                $
                102,438**Supplemental
                    disclosure of noncash investing and financing activities:**Acquisition
                    of capital leases
                **$**
                737,425
                
                $
                760,417Conversion
                    of accounts payable to common stock
                **$**
                —
                
                $
                2,070Note
                    issued in settlement agreement
                **$**
                —
                
                $
                150,000Credits
                    received from sale of property and equipment
                **$**
                —
                
                $
                9,250Conversion
                    of convertible notes payable and related debt offering costs
                **$**
                2,444,395
                
                $
                —Conversion
                    of Series C preferred stock to common stock
                **$**
                10,003,141
                
                $
                —Conversion
                    of prepaid offering costs to additional paid in capital
                **$**
                614,008
                
                $
                —Conversion
                    of long-term debt to Series C preferred stock
                **$**
                —
                
                $
                585,360Issuance
                    of restricted stock for consulting services
                **$**
                50,000
                
                $
                —Conversion
                    of escrow advances to Series C preferred stock
                **$**
                —
                
                $
                176,620Stock
                    dividends issued
                **$**
                —
                
                $
                939,156Stock
                    dividends declared
                **$**
                —
                
                $
                385,918**Supplemental
                    disclosure of joint venture acquisition activities:**Fair
                    value of tangible assets, net of cash acquired
                **$**
                654,791
                
                $
                —Fair
                    value of identifiable intangible assets
                
                4,877,900
                
                
                —Goodwill
                    acquired
                
                761,143
                
                
                —Liabilities
                    acquired
                
                (401,504)
                
                
                —Minority
                    interest acquired
                
                (244,118)
                
                
                —Common stock
                    issued excluding shares in escrow
                
                (4,928,200)
                
                
                —Cash
                    paid for acquisition of joint ventures, net of cash acquired
                **$**
                720,012
                
                **$**
                **—**





See
      accompanying condensed notes to consolidated financial
      statements.





6




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





**1.
      Basis of Presentation**





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





***Goodwill
      and Other Intangible Assets***





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





***Earnings
      Per Share***





SFAS
      No.
      128, “Earnings Per Share,” requires dual presentation of basic and diluted
      income per share for all periods presented. Basic income per share excludes
      dilution and is computed by dividing loss available to common stockholders
      by
      the weighted-average number of common 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 loss of the Company.





Basic
      and
      diluted loss per share and weighted average shares are the same for the three
      and nine months ended September 30, 2005 and 2004, as all securities are
      anti-dilutive.





Unexercised
      stock options to purchase 1,602,426 and 1,696,706 shares of the Company’s common
      stock as of September 30, 2005 and 2004, respectively, were not included in
      the
      computation of diluted earnings per share because the exercise of the stock
      options would be anti-dilutive to earnings per share.





Unexercised
      warrants to purchase 7,436,172 and 286,567 shares of the Company’s common stock
      as of September 30, 2005 and 2004, respectively, were not included in
      the
      computation of diluted earnings per share because the exercise of the warrants
      would be anti-dilutive to earnings per share.





Non-converted
      debt to purchase 8,929 shares of the Company’s common stock as of September 30,
      2004, was not included in the computation of diluted earnings per share because
      the conversion of the debt would be anti-dilutive to earnings per share. Had
      the
      debt been converted, interest expense would have been reduced by approximately
      $15,000 during the nine months ended September 30, 2004. As of September 30,
      2005, the Company did not have any outstanding convertible debt.





***Stock-Based
      Compensation***





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




7





**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





If
      compensation expense for the Company’s stock option incentive plan had been
      determined based on the fair value at the grant dates as calculated in
      accordance with SFAS No. 123, the Company’s net loss attributable to common
      stockholders and net loss per common share would approximate the pro forma
      amounts below:





**For
                  the Three Months Ended
                  September 30,**
              
              
              **For
                  the Nine Months**
                **Ended
                  September 30,****2005**
              
              
              **2004**
              
              
              **2005**
              
              
              **2004**Net
                  loss applicable to common stockholders, as reported
              
              $
              (2,341,140
              )
              $
              (1,369,749
              )
              $
              (6,707,612
              )
              $
              (2,612,733
              )Deduct:
                  total stock-based compensation expense under fair value method
                  for awards,
                  net of related tax effect
              
              
              (162,122
              )
              
              (190,179
              )
              
              (446,186
              )
              
              (559,344
              )Net
                  loss applicable to common stockholders, pro forma
              
              $
              (2,503,262
              )
              $
              (1,559,928
              )
              $
              (7,153,798
              )
              $
              (3,172,077
              )Loss
                  per share:Basic
                  and diluted loss applicable to common stockholders, as reported
              
              $
              (0.09
              )
              $
              (0.08
              )
              $
              (0.27
              )
              $
              (0.16
              )Basic
                  and diluted loss applicable to common stockholders, pro forma
              
              $
              (0.10
              )
              $
              (0.09
              )
              $
              (0.29
              )
              $
              (0.19
              )





When
      the
      Company adopts SFAS 123(R), currently scheduled for the beginning of 2006,
      the
      Company will include the expense associated with share-based payments issued
      to
      employees in its Consolidated Statements of Operations. The Company has not
      yet
      completed its assessment of which valuation model or transition option to
      select. See further discussion of SFAS 123 (R) in Note 9.





**2.
      Acquisitions**





***Jamaica***





On
      December 16, 2004, the Company entered into an agreement to acquire 51% of
      the
      common stock of a Jamaican company for $150,000. This acquisition was completed
      to establish the Company as a licensed carrier operation in Jamaica providing
      the Company an entrance into this emerging market. The Jamaican joint venture
      did not have any results of operations until the second quarter of 2005. The
      closing of this acquisition took place on January 11, 2005. The following table
      summarizes the estimated fair values of the assets acquired and the minority
      interest on January 11, 2005:





Cash
            
            $
            3,514Prepaid
                expenses and other current assets
            
            
            17,385Property
                and equipment, net
            
            
            25,800Other
                assets
            
            
            100,000Goodwill
            
            
            147,419Minority
                interest
            
            
            (144,118
            )Total
                cash paid
            
            $
            150,000




8




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





The
      initial purchase price allocations may be adjusted within one year of the
      purchase date for changes in estimates of the fair value of the assets acquired.
      The excess of the purchase price over the fair values of the assets acquired
      was
      allocated to goodwill.





***Efonica***





During
      February 2005, the Company closed on its agreement to acquire the 49.8% minority
      interest in one of its joint ventures, Efonica from Karamco, Inc. This
      acquisition was completed to better enable Efonica to serve as the retail VoIP
      services division of Fusion, offering a full suite of VoIP solutions to
      customers in Asia, the Middle East, Africa, Latin America and the Caribbean.
      With 100% control, the Company can better leverage the significant experience
      and relationships of Efonica. The operating results for the 49.8% minority
      interest acquired are included in the consolidated statement of operations
      from
      the date of acquisition. The proforma effect of this acquisition on the
      statements of operations for the nine months ended September 30, 2005, is not
      material. The proforma effect for the nine months ended September 30, 2004,
      results in a reduction to minority interest of approximately $12,000 and
      consequently, a decrease in net loss of approximately $12,000. The purchase
      price will be a minimum of $5,500,000 and a maximum of $14,300,000, as adjusted
      for the approximate $196,000 representing Karamco’s portion of Efonica’s debt
      owed to the Company as of the closing date and the $500,000 which was paid
      in
      cash during February 2005, based upon a multiple of earnings achieved by Efonica
      during the 12-month period ending February 28, 2006 (4.5 x Efonica’s net income
      as adjusted for certain intracompany and other expenses). Karamco received
      cash
      of $500,000, with the balance paid in shares of common stock. The number of
      shares issued to Karamco was determined by the $6.45 per share initial price
      of
      the common stock at the date of the Company’s IPO. On the date of the
      transaction, approximately $4,400,000 worth of such shares of common stock
      (675,581 shares) were issued to Karamco and are being held in escrow until
      the
      final valuation of the joint venture is determined after the year ending
      February 28, 2006. In the event that the purchase price would be lower (based
      upon Efonica’s net income for that one year period) than $10,000,000, the excess
      of the common shares in escrow will be returned to the Company for cancellation.
      In the event that the purchase price would be higher than the $10,000,000 (based
      upon Efonica’s net income), the Company will issue Karamco additional shares of
      our common stock (based on the IPO price of $6.45 per share), subject to the
      $14,300,000 maximum.





Out
      of
      the shares issued to Karamco in June 2005, the Company registered for resale
      150,000 shares of common stock. The Company was obligated to repurchase the
      shares from Karamco at the higher of the IPO price or the average five (5)
      day
      bid price prior to the sixtieth day after February 11, 2005 (“IPO Prospectus
      Date”). Karamco may not sell more than $1,000,000 worth of stock during the
      one-year period following the IPO Prospectus Date. If the sale of the 150,000
      shares that are to be registered results in less than $1,000,000 of gross
      proceeds the Company must pay Karamco the difference between the aggregate
      gross
      proceeds of Karamco’s sale of the registered shares and $1,000,000 (the
“Difference Payment”). The Company has paid Karamco $325,000 towards the
      Difference Payment, which is included in other assets in the September 30,
      2005,
      Consolidated Balance Sheet. Subsequent to September 30, 2005, the Company agreed
      to pay Karamco an additional Difference Payment of $105,000. In the event the
      Difference Payment owed is less than $430,000, Karamco shall immediately
      reimburse the Company for such excess. Karamco’s obligation to reimburse the
      Company for any excess is secured by an escrow of 50,387 shares of the Company’s
      common stock owned by Karamco. Karamco is owned by Roger Karam, who became
      the
      CEO of Efonica and the Company’s President of VoIP Services upon the effective
      date.





The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed, including $20,316 of related acquisition costs:


Cash
              
              $
              39,581Accounts
                  receivable
              
              
              64,709Prepaid
                  expenses and other current assets
              
              
              175,040Property
                  and equipment, net
              
              
              50,651Intangible
                  assets
              
              
              4,877,900Goodwill
              
              
              613,724Accounts
                  payable, accrued expenses and other
              
              
              (373,269
              )Common
                  stock issued
              
              
              (4,928,200
              )Total
                  cash paid
              
              $
              520,136





The
      initial purchase price allocations were based upon an independent appraisal.
      The
      intangible assets acquired were allocated $4,579,100 to the Efonica trade name
      and trademarks and $298,800 was allocated to the customer list. In determining
      the purchase price allocation, the trademark was determined based upon the
      income approach through the application of the relief from royalties method
      and
      the customer list was determined based upon the income approach through the
      application of the excess earnings method. The rate used to discount the net
      cash flows to present values was based upon a weighted average cost of capital
      of approximately 28%. The excess of the purchase price over the fair values
      of
      the assets acquired and liabilities assumed was allocated to
      goodwill.





9




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





***Turkey***





On
      March
      8, 2005, a new wholly owned subsidiary of the Company, Fusion Turkey, LLC
      entered into a Stock Purchase Agreement to acquire 75% of the shares of LDTS
      Uzak Mesafe Telekomikasyon ve Iletism Hizmetleri San. Tic. A.S. (“LDTS”), from
      the existing shareholders. LDTS possesses a telecommunications license approved
      by the Turkish Telecom Authority. This license will permit the Company to
      offer VoIP services under its Efonica brand and other Internet services
      to
      corporations and consumers in Turkey.





The
      closing of the acquisition took place on May 6, 2005. The following table
      summarized the estimated fair value of the assets and liabilities acquired
      and
      the minority interest on May 6, 2005:





Cash
            
            $
            997Prepaid
                expense and other current assets
            
            
            1,880Other
                assets
            
            
            219,326Accounts
                payable and accrued liabilities
            
            
            (28,235
            )Minority
                interest
            
            
            (100,000
            )$
            93,968




The
      primary net asset acquired was the license (included in other assets), which
      was
      issued on March 17, 2004, and is valid for 15 years. Consequently, the license
      is being amortized over the remaining term. As the transaction closed on May
      6,
      2005, the Consolidated Statements of Operations for the three and nine months
      ended September 30, 2005, include activity related to this subsidiary. The
      proforma effect of this acquisition is not materially different than its
      presentation in the Consolidated Statements of Operations.





**3.
      Discontinued operations**





During
      2001, management of the Company decided to cease the operations of its domestic
      retail telecommunication services business lines. In connection with this
      decision, a liability at December 31, 2004, of approximately $984,000 remained
      which related to trade payables and accrued expenses. During the nine months
      ended September 30, 2005, the Company determined that one of the accrued
      liabilities is expected to be settled for $175,000 less than the amount that
      was
      accrued at December 31, 2004, which resulted in a gain on discontinued
      operations of $175,000.





**4.
      Goodwill and identifiable intangible assets**





The
      changes in the amount of goodwill for the nine months ended September
      30,
      2005, by reporting segment are as follows:





VoIP
                to Consumers andCorporations
            
            
            Internet,
                Managed Private Networksand
                Other
            
            
            TotalBalance
                as of December 31, 2004
            
            $
            —
            
            $
            —
            
            $
            —Goodwill
                for Jamaican acquisition
            
            
            —
            
            
            147,419
            
            
            147,419Goodwill
                for purchase of Efonica minority interest
            
            
            613,724
            
            
            —
            
            
            613,724Balance
                as of September 30, 2005
            
            $
            613,724
            
            $
            147,419
            
            $
            761,143





Identifiable
      intangible assets, net, as of September 30, 2005, are composed of:





Trademarks
            
            $
            4,584,782Customer
                list
            
            
            283,850$
            4,868,632





10




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





These
      identifiable intangible assets were acquired in connection with the Company's
      purchase of the 49.8% minority interest in its Efonica joint venture. The
      trademarks are not subject to amortization as they have an indefinite life.
      Amortization on the customer list during the three and nine months ended
      September 30, 2005, was $7,470 and $14,950, respectively. There was no customer
      list amortization during 2004. The following table presents estimated
      amortization expense for the remaining three months of 2005, and each of the
      succeeding calendar years.


2005
              
              $
              7,4602006
              
              
              29,8802007
              
              
              29,8802008
              
              
              29,8802009
              
              
              29,880Thereafter
              
              
              156,870$
              283,850





**5.
      Accounts payable and accrued expenses**





Accounts
      payable and accrued expenses consist of the following at September 30, 2005,
      and
      December 31, 2004:





**September
                30,****2005**
            
            
            **December
                31,****2004**Trade
                accounts payable
            
            $
            5,525,437
            
            $
            5,662,058Accrued
                expenses
            
            
            1,668,476
            
            
            2,050,175Interest
                payable
            
            
            312,985
            
            
            814,262Dividends
                payable on Series C Preferred Stock
            
            
            —
            
            
            664,635Deferred
                revenue
            
            
            786,199
            
            
            971,456Other
            
            
            251,899
            
            
            112,102$
            8,544,996
            
            $
            10,274,688





**6.
      Long-term debt and capital lease obligations**





At
      September 30, 2005, and December 31, 2004, components of long-term debt and
      capital lease obligations of the Company are comprised of the following:





**September
                30,****2005**
            
            
            **December
                31,****2004**Convertible
                notes payable
            
            
            (a
            )
            $
            —
            
            $
            250,000Demand
                notes payable
            
            
            (b
            )
            
            —
            
            
            898,931Promissory
                notes payable
            
            
            (c
            )
            
            150,000
            
            
            150,000Demand
                notes payable
            
            
            (d
            )
            
            —
            
            
            81,790Promissory
                notes payable
            
            
            (e
            )
            
            —
            
            
            150,000Promissory
                notes payable
            
            
            (f
            )
            
            —
            
            
            25,000Promissory
                notes payable
            
            
            (g
            )
            
            —
            
            
            102,000Promissory
                notes payable
            
            
            (h
            )
            
            —
            
            
            233,252Convertible
                notes payable
            
            
            (i
            )
            
            —
            
            
            2,508,333Capital
                lease obligation
            
            
            (j
            )
            
            1,480,017
            
            
            1,288,325Total
                long-term debt and capital lease obligations
            
            
            
            
            
            1,630,017
            
            
            5,687,631Less
                current portion
            
            
            
            
            
            1,527,571
            
            
            5,531,136$
            102,446
            
            $
            156,495





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





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





11




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





(c)  During
      February 2004, the Company entered into a settlement agreement for $600,000.
      In
      the same month, the Company paid $450,000 and agreed to make 12 monthly payments
      for the remaining $150,000. The debt has not been repaid as of September 30,
      2005, as the other party to the settlement agreement has not complied with
      the
      terms of the agreement.





(d)  Balance
      at December 31, 2004, represented promissory notes to three stockholders. The
      interest rates ranged from 4.75%-12.00% per annum and were due on demand. During
      February 2005, these notes were paid in full upon completion of the Company’s
      IPO.





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





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





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





(h)  The
      balance at December 31, 2004, relates to promissory notes to various
      stockholders for the purpose of resolving the Company’s capital lease debt
      service contract with the lessor of the equipment under lease. The notes accrued
      interest at 8% per annum. The balance also related to an equipment lease with
      a
      non-related party. These notes were all repaid during the nine months ended
      September 30, 2005.





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





(j)  During
      the nine months ended September 30, 2005, the Company entered into several
      equipment financing agreements totaling approximately $737,000. Other than
      a
      $45,000 agreement paid monthly, all are payable every 90 days over a 12-18
      month
      period. The Company has imputed an interest rate of 10.0% related to these
      agreements. The outstanding balance of these financing agreements entered into
      during 2005 is approximately $480,000 at September 30, 2005. At September 30,
      2005 and December 31, 2004, approximately $720,000 of the capital lease
      obligations were in default and accordingly have been classified as currently
      due.





**7.
      Series C Preferred Stock**





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





**8.
      Equity Transactions**





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





Subsequent
      to the IPO, the Company has two classes of outstanding common stock. The holders
      of the Class A Common Stock have identical rights and privileges as the regular
      common stock, except that they will not be able to transfer shares of Class
      A
      Common Stock until the first anniversary of the date of the prospectus, which
      was February 11, 2005. After the date of the IPO, the Class A Common Stock
      may
      be converted at the option of the holder, without the consent of the
      underwriters, if the holder executes and delivers a lock up agreement preventing
      the public sale of the common stock until the first anniversary of the date
      of
      the IPO. The Class A common stock will automatically convert into the regular
      common stock on the first anniversary of the date of the IPO.




12





**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**





Upon
      completion of the IPO, $2.5 million of convertible debt was converted into
      651,515 shares of common stock. In addition, 1,439,643 shares of common stock
      were issued (of which 675,581 shares are held in escrow) in connection with
      the
      Company’s acquisition of the 49.8% minority interest in Efonica (see Note 2 for
      further discussion). In accordance with SFAS No. 141, since 675,581 of these
      shares are held in escrow and this consideration is contingent on specified
      events in the future, these shares are not reflected as outstanding as
      of September 30, 2005. In addition, as discussed in Note 7, all outstanding
      Series C preferred stock was converted into common stock.





During
      the second quarter of 2005, a director exercised stock options which resulted
      in
      the issuance of 21,429 shares of common stock and two individuals exercised
      warrants, which resulted in the issuance of 28,572 shares of Class A common
      stock.





On
      April
      19, 2005, the Company entered into a consulting service agreement. In connection
      with this agreement, the Company issued 11,363 shares of restricted common
      stock
      based upon a price of $4.40 per share. During the second quarter of 2005, the
      restricted shares have been released in accordance with the agreement. The
      $50,000 expense associated with these shares is being amortized over the
      one-year term of the agreement.





**9.
      Current Accounting Pronouncements**





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections.” SFAS No. 154 is a replacement of APB
      No. 20 and FASB Statement No. 3 SFAS No. 154 provides guidance on the accounting
      for and reporting of accounting changes and error corrections. It establishes
      retrospective application as the required method for reporting a change in
      accounting principle. SFAS No. 154 provides guidance for determining whether
      retrospective application is impractical. The reporting of a correction of
      an
      error, by restating previously issued financial statements, is also addressed
      by
      SFAS No. 154. SFAS No. 154 is effective for accounting changes and corrections
      of errors made in fiscal years beginning after December 15, 2005. The Company
      will adopt this pronouncement at the beginning of fiscal year 2006.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”). This Statement requires companies to expense the
      estimated fair value of stock options and similar equity instruments issued
      to
      employees. Currently, companies are required to calculate the estimated fair
      value of these share-based payments and can elect to either include the
      estimated cost in earnings or disclose the pro forma effect in the footnotes
      to
      their financial statements. The Company has chosen to disclose the pro forma
      effect. The fair value concepts were not changed significantly in SFAS 123(R);
      however, in adopting this Standard, companies must choose among alternative
      valuation models and amortization assumptions. The valuation model the Company
      has used continues to be available, but the Company has not yet completed its
      assessment of the alternatives. In April 2005, the SEC announced a deferral
      of
      the effective date of SFAS 123(R) for calendar year companies until the
      beginning of 2006.





**10.
      Contingencies**





***Legal
      Matters***





On
      May
      28, 2003, Jack Grynberg, *et
      al.,* an
      investor in one of the Company’s private offerings, filed a complaint with the
      Denver District Court, State of Colorado ( *Jack
      Grynberg, et al v. Fusion Telecommunications International, Inc., et al,* 03-CV-3912)
      seeking damages in the amount of $400,000 for the purchase of an interest in
      Fusion's 1999 private placement offering of subordinated convertible notes
      through Joseph Stevens & Company, Inc., a registered broker dealer. This
      complaint asserted the following claims for relief: Breach of Fiduciary Duty,
      Civil Theft, Deceptive Trade Practices, Negligent Misrepresentation, Deceit
      Based on Fraud, Conversion, Exemplary Damages and Prejudgment Interest. On
      June
      25, 2004, the Company filed with the Court a Motion to dismiss, which was
      granted. The plaintiffs have filed an appeal of the motion. In October 2005,
      the
      Court of Appeals denied plaintiff’s appeal without prejudice and the Company is
      engaging in efforts to collect upon the Company’s judgment for attorneys’
      fees.




Due
      to
      the regulatory nature of the industry, the Company is periodically involved
      in
      various correspondence and inquiries from state and federal regulatory agencies.
      Management does not expect the outcome of these inquiries to have a material
      impact on the operations or the financial condition of the Company.




13




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Condensed
      Notes to Consolidated Financial Statements**


**11.
      Segment Information**





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





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





Voice
      to
      Carriers — This segment includes Traditional Voice (the termination of voice
      telephony minutes from or to the countries served by the Company utilizing
      traditional Time Division Multiplexing (TDM) and “circuit-switched” technology).
      Typically, this will include interconnection with traditional telecommunications
      carriers either located internationally or those carriers that interconnect
      with
      the Company at its U.S. Points of Presence (POP) and provide service to other
      destinations. Voice to Carriers also includes VoIP (Voice over Internet
      Protocol) to Carriers, which is the termination of voice telephony minutes
      by
      the Internet rather than older circuit-switched technology. This permits far
      less costly and more rapid interconnection between the Company and international
      telecommunications carriers.





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





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




Operating
      segment information for the three months ended September 30, 2005 and 2004,
      is
      summarized as follows:








**September
                  30, 2005**
              
              **Voice
                  to Carriers**
              
              **VoIP
                  to Consumers and Corporations**
              
              **Internet,
                  Managed Private Networks**
                **&
                  Other**
              
              **Corporate**
                **&**
                **Unallocated**
              
              **Consolidated**Net
                  revenues
              
              $
              7,855,850
              
              $
              813,365
              
              $
              454,527
              
              $
              —
              
              $
              9,123,742Cost
                  of revenues (exclusive of depreciation and amortization)
              
              $
              (7,442,721
              )
              $
              (572,973
              )
              $
              (264,384
              )
              $
              —
              
              $
              (8,280,078
              )Depreciation
                  and amortization
              
              $
              (295,560
              )
              $
              (17,379
              )
              $
              (14,427
              )
              $
              (31,303
              )
              $
              (358,669
              )Selling,
                  general and administrative
              
              $
              (1,104,801
              )
              $
              (473,267
              )
              $
              (148,786
              )
              $
              (1,127,213
              )
              $
              (2,854,067
              )Other
                  income (expense)
              
              $
              (58,031
              )
              $
              (5,410
              )
              $
              (4,289
              )
              $
              95,662
              
              $
              27,932Net
                  income (loss)
              
              $
              (1,045,263
              )
              $
              (255,664
              )
              $
              22,641
              
              $
              (1,062,854
              )
              $
              (2,341,140
              )Capital
                  expenditures
              
              $
              365,606
              
              $
              35,396
              
              $
              19,301
              
              $
              46,700
              
              $
              467,003








14




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





Condensed
      Notes to Consolidated Financial Statements


**September
                  30, 2004**
              
              **Voice
                  to Carriers**
              
              **VoIP
                  to Consumers and Corporations**
              
              **Internet,
                  Managed Private Networks**
                **&
                  Other**
              
              **Corporate**
                **&**
                **Unallocated**
              
              **Consolidated**Net
                  revenues
              
              $
              11,526,907
              
              $
              962,975
              
              $
              533,489
              
              $
              —
              
              $
              13,023,371Cost
                  of revenues (exclusive of depreciation and amortization)
              
              $
              (9,996,448
              )
              $
              (743,711
              )
              $
              (347,108
              )
              $
              —
              
              $
              (11,087,267
              )Depreciation
                  and amortization
              
              $
              (361,461
              )
              $
              (2,460
              )
              $
              (39,180
              )
              $
              (52,482
              )
              $
              (455,583
              )Selling,
                  general and administrative
              
              $
              (1,326,646
              )
              $
              (152,858
              )
              $
              (98,231
              )
              $
              (814,536
              )
              $
              (2,392,271
              )Other
                  income (expense)
              
              $
              1,135,967
              
              $
              (9,457
              )
              $
              62,029
              
              $
              (1,646,538
              )
              $
              (457,999
              )Net
                  income (loss)
              
              $
              978,319
              
              $
              54,489
              
              $
              110,999
              
              $
              (2,513,556
              )
              $
              (1,369,749
              )Capital
                  Expenditures
              
              $
              (153,769
              )
              $
              (761
              )
              $
              (4,269
              )
              $
              (17,644
              )
              $
              (176,443
              )


Operating
      segment information for the nine months ended September 30, 2005 and 2004,
      is
      summarized as follows:


**September
                  30, 2005**
              
              **Voice
                  to Carriers**
              
              **VoIP
                  to Consumers and Corporations**
              
              **Internet,
                  Managed Private Networks**
                **&
                  Other**
              
              **Corporate**
                **&**
                **Unallocated**
              
              **Consolidated**Net
                  revenues
              
              $
              35,779,479
              
              $
              2,996,626
              
              $
              1,536,580
              
              $
              —
              
              $
              40,312,685Cost
                  of revenues (exclusive of depreciation and amortization)
              
              $
              (33,858,805
              )
              $
              (2,225,558
              )
              $
              (897,129
              )
              $
              —
              
              $
              (36,981,492
              )Depreciation
                  and amortization
              
              $
              (1,034,788
              )
              $
              (41,605
              )
              $
              (41,609
              )
              $
              (110,078
              )
              $
              (1,228,080
              )Selling,
                  general and administrative
              
              $
              (3,937,588
              )
              $
              (1,127,333
              )
              $
              (432,980
              )
              $
              (3,091,253
              )
              $
              (8,589,154
              )Other
                  income (expense)
              
              $
              (473,955
              )
              $
              (20,346
              )
              $
              (21,587
              )
              $
              119,317
              
              $
              (396,571
              )Income
                  (loss) from continuing operations
              
              $
              (3,525,657
              )
              $
              (418,216
              )
              $
              143,275
              
              $
              (3,082,014
              )
              $
              (6,882,612
              )Income
                  from discontinued operations
              
              $
              175,000
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              175,000Net
                  income (loss)
              
              $
              (3,350,657
              )
              $
              (418,216
              )
              $
              143,275
              
              $
              (3,082,014
              )
              $
              (6,707,612
              )Capital
                  Expenditures
              
              $
              1,223,615
              
              $
              102,481
              
              $
              52,549
              
              $
              153,183
              
              $
              1,531,828




**September
                  30, 2004**
              
              **Voice
                  to Carriers**
              
              **VoIP
                  to Consumers and Corporations**
              
              **Internet,
                  Managed Private Networks**
                **&
                  Other**
              
              **Corporate**
                **&**
                **Unallocated**
              
              **Consolidated**Net
                  revenues
              
              $
              35,870,799
              
              $
              1,798,978
              
              $
              1,659,023
              
              $
              —
              
              $
              39,328,800Cost
                  of revenues (exclusive of depreciation and amortization)
              
              $
              (31,351,424
              )
              $
              (1,332,343
              )
              $
              (1,113,804
              )
              $
              —
              
              $
              (33,797,571
              )Depreciation
                  and amortization
              
              $
              (1,107,015
              )
              $
              (14,738
              )
              $
              (79,728
              )
              $
              (133,498
              )
              $
              (1,334,979
              )Selling,
                  general and administrative
              
              $
              (3,951,922
              )
              $
              (395,196
              )
              $
              (243,357
              )
              $
              (2,257,887
              )
              $
              (6,848,362
              )Other
                  income (expense)
              
              $
              1,901,399
              
              $
              (11,892
              )
              $
              4,638
              
              $
              (1,468,848
              )
              $
              425,297Net
                  income (loss)
              
              $
              1,361,837
              
              $
              44,809
              
              $
              226,772
              
              $
              (3,860,233
              )
              $
              (2,226,815
              )Capital
                  Expenditures
              
              $
              462,135
              
              $
              20,390
              
              $
              24,207
              
              $
              56,304
              
              $
              563,036


15




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


**Voice
                  to Carriers**
              
              
              **VoIP
                  to Consumers and Corporations**
              
              
              **Internet,
                  Managed Private Networks**
                **&
                  Other**
              
              
              **Corporate**
                **&**
                **Unallocated**
              
              
              **Consolidated****Assets**September
                  30, 2005
              
              $
              7,048,593
              
              $
              6,219,993
              
              $
              291,241
              
              $
              19,071,405
              
              $
              32,631,232December
                  31, 2004
              
              $
              6,638,539
              
              $
              547,588
              
              $
              433,707
              
              $
              6,042,283
              
              $
              13,662,117


The
      Company employs engineering and operations resources that service across
      multiple product lines. Depreciation and indirect operating expenses were
      allocated to each product line based upon their respective revenues. The amounts
      reflected as Corporate and unallocated represent those expenses that were not
      appropriate to allocate to each product line.






**12.
      Subsequent Event**




During November 2005, the Company entered into an agreement
      to
      acquire the assets of iFreedom Communications International Holdings Limited
      ("iFreedom"), which markets monthly recurring International VoIP service plans
      geared to meet the needs of consumers and businesses in the emerging markets.
      iFreedom currently has approximately 9,000 customers in over 15 countries.
      The
      purchase price will be $500,000 in cash which will go towards retiring certain
      liabilities of iFreedom and 1,100,000 shares of stock, of which 750,000 shares
      will be held in escrow and subject to a performance based earn out. The
      transaction is anticipated to close prior to the end of the first quarter of
      2006, subject to certain conditions. The allocation of the purchase price has
      not yet been determined.





16




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





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





**Overview**





We
      are an
      international communications carrier delivering VoIP, private networks, Internet
      access, Internet protocol video conferencing and other advanced services to,
      from, in and between emerging markets in Asia, the Middle East, Africa, the
      Caribbean and Latin America. Our
      corporate strategy focuses our resources on VoIP and the emerging international
      markets. We seek to gain early entry in high growth emerging markets, often
      in
      partnership with local organizations that have strong distribution channels,
      regulatory experience, market intelligence, the ability to deliver local loops
      and the capability of providing customer service support. This approach enables
      us to introduce our Internet protocol communications services in these markets,
      thereby benefiting from the time-to-market advantages, expanded geographic
      reach
      and reduced capital requirements that local partnerships afford. Our network
      utilizes the most currently available Softswitch technology, relieving us of
      the
      burden of costly, inefficient legacy systems and allowing more rapid and
      cost-effective deployment and expansion of services worldwide. Additionally,
      we
      are currently in the process of expanding our infrastructure to better support
      the growth of our VoIP services to consumers and corporations.





The
      following table summarizes our results of operations for the periods indicated:


Three
                    Months
                
                Nine
                    MonthsEnded
                    September 30,
                
                Ended
                    September 30,2005
                
                2004
                
                2005
                
                2004Revenues
                
                $
                9,123,742
                
                $
                13,023,371
                
                $
                40,312,685
                
                $
                39,328,800Operating
                    expenses:Cost
                    of revenues
                
                
                8,280,078
                
                
                11,087,267
                
                
                36,981,492
                
                
                33,797,571Depreciation
                    and amortization
                
                
                358,669
                
                
                455,583
                
                
                1,228,080
                
                
                1,334,979Selling,
                    general and administrative
                
                
                2,854,067
                
                
                2,392,271
                
                
                8,589,154
                
                
                6,848,362Total
                    operating expenses
                
                
                11,492,814
                
                
                13,935,121
                
                
                46,798,726
                
                
                41,980,912Operating
                    Loss
                
                
                (2,369,072
                )
                
                (911,750
                )
                
                (6,486,041
                )
                
                (2,652,112
                )Other
                    income (expense):Interest
                    income (expense), net
                
                
                107,276
                
                
                (552,739
                )
                
                (77,147
                )
                
                (1,376,259
                )Forgiveness
                    of debt
                
                
                52,539
                
                
                197,934
                
                
                57,879
                
                
                2,174,530Loss
                    from investment in Estel
                
                
                (192,566
                )
                
                (53,420
                )
                
                (492,026
                )
                
                (372,330
                )Other
                
                
                (10,390
                )
                
                (22,350
                )
                
                (4,434
                )
                
                40,099Minority
                    interests
                
                
                71,073
                
                
                (72,124
                )
                
                119,157
                
                
                (40,743
                )Total
                    other income (expense)
                
                
                27,932
                
                
                (457,999
                )
                
                (396,571
                )
                
                425,297Loss
                    from continuing operations
                
                
                (2,341,140
                )
                
                (1,369,749
                )
                
                (6,882,612
                )
                
                (2,226,815
                )Income
                    from discontinued operations
                
                
                —
                
                
                —
                
                
                175,000
                
                
                —Net
                    loss
                
                $
                (2,341,140
                )
                $
                (1,369,749
                )
                $
                (6,707,612
                )
                $
                (2,226,815
                )





17




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 30,2005
            
            
            2004
            
            
            2005
            
            
            2004Revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Operating
                expenses:Cost
                of revenues
            
            
            90.8
            %
            
            85.1
            %
            
            91.7
            %
            
            85.9
            %Depreciation
                and amortization
            
            
            3.9
            %
            
            3.5
            %
            
            3.0
            %
            
            3.4
            %Selling,
                general and administrative
            
            
            31.3
            %
            
            18.4
            %
            
            21.3
            %
            
            17.4
            %Total
                operating expenses
            
            
            126.0
            %
            
            107.0
            %
            
            116.0
            %
            
            106.7
            %Operating
                loss
            
            
            -26.0
            %
            
            -7.0
            %
            
            -16.0
            %
            
            -6.7
            %Other
                income (expense)Interest
                income (expense), net
            
            
            1.2
            %
            
            -4.2
            %
            
            -0.2
            %
            
            -3.5
            %Forgiveness
                of debt
            
            
            0.6
            %
            
            1.5
            %
            
            0.1
            %
            
            5.5
            %Loss
                from investment in Estel
            
            
            -2.1
            %
            
            -0.4
            %
            
            -1.2
            %
            
            -0.9
            %Other
            
            
            -0.1
            %
            
            0.2
            %
            
            0.0
            %
            
            0.1
            %Minority
                interests
            
            
            0.8
            %
            
            -0.6
            %
            
            0.3
            %
            
            -0.1
            %Total
                other income (expense)
            
            
            0.4
            %
            
            -3.5
            %
            
            -1.0
            %
            
            1.1
            %Loss
                from continuing operations
            
            
            -25.6
            %
            
            -10.5
            %
            
            -17.0
            %
            
            -5.6
            %Income
                from discontinued operations
            
            
            0.0
            %
            
            0.0
            %
            
            0.0.
            %
            
            0.0
            %Net
                loss
            
            
            -25.6
            %
            
            -10.5
            %
            
            -17.0
            %
            
            -5.6
            %





**Revenues**





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





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





In
      2002,
      we established Efonica F-Z, LLC, as a retail services company marketing VoIP
      products to consumer and corporate customers in emerging markets. Beginning
      in
      the Middle East, Asia and Africa, then extending into Latin America, Efonica’s
      services are primarily sold through distribution channels on a pre-paid basis.
      Efonica’s customers can place calls from anywhere in the world to any
      destination using a personal computer, Internet protocol telephone or regular
      telephone when accompanied by a hardware device that may be purchased through
      Efonica. We believe that the introduction of advanced features such as
      voicemail, call waiting and call forwarding enhance this value-added offering.
      We expect to add these features by the first quarter of 2006. In February
      2005, we closed on the purchase of the 49.8% minority interest in
      Efonica.





Our
      increased focus on VoIP services to enterprise customers resulted in a growing
      upward trend for this product segment. During the first nine months of 2005,
      VoIP services to consumers and corporations accounted for 7.4% of our total
      consolidated revenue compared to 4.6% in the first nine months of
      2004.




18




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





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





**OPERATING
      EXPENSES**





Our
      operating expenses during the nine months ended September 30, 2005 and 2004,
      are
      categorized as cost of revenues, depreciation and amortization, and selling,
      general and administrative expenses.





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





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





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











**COMPANY
      HIGHLIGHTS**





The
      following summary of significant events during the nine months ended September
      30, 2005, highlights the accomplishments and events that have influenced our
      performance during that time period.





•
            
            Capital
                fund-raising — In February 2005, we closed on our initial public offering
                of securities of 3,600,000 shares of common stock at a price of $6.45
                per
                share and 3,600,000 redeemable common stock purchase warrants at
                $.05 per
                warrant. Net proceeds of the offering were approximately $20.4 million.
                On
                March 30, 2005, our underwriters exercised their over-allotment option
                and
                purchased an additional 480,000 shares of common stock and 540,000
                purchase warrants. We received an additional $2.9 million in net
                proceeds
                from the closing on the over-allotment option.•
            
            Debt
                Reduction — Upon completion of our IPO we repaid approximately $1.5
                million in outstanding debt. In addition, $2.5 million of convertible
                debt
                was converted into 651,515 shares of common stock. During May 2005,
                we
                repaid an additional $0.2 million of debt.•
            
            Conversion
                of Series C preferred stock - The $10.0 million liability
                related
                to the 109,962 shares of outstanding Series C preferred stock
                was
                converted into equity (3,141,838 shares of common stock).•
            
            VoIP
                to Consumers and Corporations Revenue Growth — Revenue in our VoIP to
                consumers and corporations segment grew 66.6% in the first nine months
                of
                2005 over the first nine months of 2004.•
            
            Purchase
                of a Jamaica Entity — In January 2005, we concluded the purchase of a
                51.0% interest in Convergent Technologies, which has international
                and
                domestic license agreements with the Jamaican government.•
            
            Purchase
                of Efonica — In February 2005, we acquired the remaining 49.8% interest in
                our Efonica joint venture.•
            
            Turkey
                Purchase Agreement — In May 2005, we closed on the stock purchase
                agreement with an entity in Turkey to acquire 75% of the shares from
                the
                existing Shareholders. This subsidiary will enable us to provide
                VoIP
                services under our Efonica brand and other Internet Services to
                corporation and consumers in Turkey.•
            
            Manufacturing
                and Distribution Agreement — In August 2005, we signed an agreement
                to partner with a leading manufacturer of VoIP and communication
                technology hardware devices. This partnership will focus on the
                development and manufacturing of a complete line of branded VoIP
                hardware
                devices that will enable consumers and corporations to access our
                service
                suite from anywhere in the world.





The
      information in our period-to-period comparisons below represents only our
      results from continuing operations.





19





**Three
      Months Ended September 30, 2005, Compared with Three Months Ended September
      30,
      2004.**





**Revenues**





Consolidated
      revenues were $9.1 million in the three months ended September 30, 2005,
      compared to $13.0 million in the three months ended September 30, 2004, a
      decrease of $3.9 million or 29.9%.





Revenues
      for VoIP services to consumers and corporations represented $0.2 million or
      3.8%
      of the consolidated revenue reduction, decreasing from $1.0 million in the
      third
      quarter 2004, to $0.8 million in the third quarter 2005. As we have focused
      on
      upgrading our retail infrastructure, we have scaled back some existing customers
      and made a strategic decision to service a broader spectrum of customers once
      our infrastructure is completed. Although it will take us through the fourth
      quarter to complete the upgrade and fully recover on the retail services
      segment, once the recovery is complete, we expect to quickly ramp up the retail
      VoIP service revenue.





Voice
      services sold to carriers decreased $3.6 million or 31.8% in the third quarter
      of 2005, versus the third quarter of 2004. This was primarily due to decreases
      between the second and third quarter of some high revenue and margin traffic,
      which is characteristic of the significant peaks and valleys of the carrier
      business segment. Additionally, planned upgrades for both the Softswitch and
      IP
      Backbone resulted in some periods of network downtime, which impacted the
      carrier business. These upgrades, which were required in part to support and
      sustain the introduction of an enhanced suite of retail products and services,
      are anticipated to be completed in the fourth quarter.





Revenues
      from our Internet, Private Network & Other Services decreased $0.1 million
      or 14.8% from $0.5 million in the third quarter 2004, to $0.4 million in the
      third quarter 2005 due to the cancellation of a government
      contract.





**Cost
      of Revenues**





Consolidated
      cost of revenues decreased $2.8 million or 25.3% to $8.3 million in the third
      quarter of 2005 from $11.1 million in the third quarter of 2004. Approximately
      $2.6 million of this decrease or 91.0% was attributable to a decrease in voice
      services to carriers.





The
      cost
      of revenues for VoIP services to consumers and corporations decreased $0.2
      million in the third quarter 2005, from $0.8 million in the third quarter of
      2004 to $0.6 million in the third quarter 2005, due to the reduction in volume
      mentioned above. Cost of revenues for Internet, Private Network & Other
      decreased $0.1 million from $0.3 million with the third quarter of 2004 to
      $0.2
      million in the third quarter of 2005.





Consolidated
      gross margin decreased $1.1 million or 56.4% for the third quarter 2005 over
      the
      third quarter 2004. Gross margin for total Voice Services to Carriers accounted
      for virtually all of the decrease. The decline in gross margin for Voice
      Services to Carriers was caused primarily by price pressure sensitivity
      associated with the volatility of the carrier market.





**Operating
      Expenses**





***Depreciation
      and Amortization.*** Depreciation
      and amortization decreased $0.1 million or 21.3% to $0.4 million during the
      three months ended September 30, 2005, from $0.5 million during the three months
      ended September 30, 2004.





***Selling,
      General and Administrative.*** Selling,
      general and administrative expenses increased $0.5 million or 19.3% to $2.9
      million during the three months ended September 30, 2005, from $2.4 million
      during the three months ended September 30, 2004. This increase is primarily
      attributed to increased salaries and benefits, as more personnel have
      been
      required to support our growth and expansion of our infrastructure. In addition,
      also increasing as a result of growth and our becoming a public company in
      February 2005, have been our legal and professional fees, insurance expense,
      and
      advertising/marketing expenses. As a percentage of revenues, selling, general
      and administrative expenses increased from 18.4% during 2004 to 31.3% during
      2005. We believe that as we execute our business strategies, selling, general
      and administrative expenses as a percentage of revenue will begin to
      decline.





***Operating
      Loss.*** Our
      operating loss increased $1.5 million or 159.8% to a loss of $2.4 million during
      the three months ended September 30, 2005, from a loss of $0.9 million during
      the three months ended September 30, 2004. The increase in operating loss was
      primarily attributable to both the decrease in gross margin associated with
      the
      volatility of the carrier market described above and the increase in selling,
      general and administrative expenses associated with infrastructure growth and
      public company compliance requirements.





***Other
      Income (Expense).*** Total
      other income (expense) changed from other expense of approximately $0.5 million
      during the three months ended September 30, 2004, to other income of
      approximately $28,000 during the three months ended September 30, 2005. During
      the three months ended September 30, 2005, we had interest income of $0.1
      million in contrast to interest expense of $0.6 million during the three months
      ended September 30, 2004. The 2004 period included accretion of $0.5 million
      (in
      accordance with SFAS 150) related to our then outstanding Series C preferred
      stock. There was no accretion during the three months ended September 30, 2005,
      due to this preferred stock converting to common stock in connection with our
      IPO. In addition, interest expense was higher during the three months ended
      September 30, 2004, as the Company had significant outstanding debt during
      this
      quarter (balance at September 30, 2004, was approximately $4.3 million) of
      which
      a significant portion was repaid during February 2005, in connection with our
      IPO (balance at September 30, 2005, was approximately $1.6 million). We also
      had
      an increase in interest income during the three months ended September 2005
      versus the three months ended September 2004, as a result of our investment
      of
      the IPO proceeds. Gain on debt forgiveness decreased by $0.1 million to $0.1
      million in 2005 from $0.2 million in 2004. The 2005 gain relates primarily
      to
      the settlement of general obligations where as the 2004 gain related to the
      settlement of network obligations, (approximately $138,000) and general
      obligations (approximately $60,000). The loss from investment in Estel increased
      $0.1 million to $0.2 million during the three months ended September 30, 2005
      from $0.1 million in 2004. Minority interest changed from $(0.1) million during
      2004 to $0.1 million during 2005.




20




***Net
      Loss.*** The
      primary factors impacting our net loss for the three months ended September
      30,
      2005, were a decrease in gross margin, an increase in selling, general and
      administrative, an increase in loss from our investment in Estel, the reduction
      in forgiveness of debt, net with an improvement in interest income (expense)
      net.




**Nine
      Months Ended September 30, 2005, Compared with Nine Months Ended September
      30,
      2004.**





**Revenues**





Consolidated
      revenues increased $1.0 million or 2.5% to approximately $40.3 million in the
      nine months ended September 30, 2005, compared to $39.3 million in the nine
      months ended September 30, 2004. Revenues for VoIP services to consumers and
      corporations represented $1.2 million or 121.7% of the consolidated revenue
      growth, increasing from $1.8 million in the nine months ended September 30,
      2004, to $3.0 million in the nine months ended September 30, 2005, mainly due
      to
      the growth of Efonica.





Revenues
      for Voice services sold to carriers decreased $0.1 million or .25% in the nine
      months ended September 30, 2005, versus the nine months ended September 30,
      2004. This decrease represented 9.3% of the consolidated revenue growth for
      the
      quarter. During the nine months ended September 30, 2005, growth in revenues
      for
      Voice services sold to carriers was impacted by a combination of technical
      difficulties associated with the migration to the new Softswitch, and the peaks
      and valleys of the carrier business. Additionally, the time and effort spent
      in
      upgrading the infrastructure impacted the productivity of the carrier
      business.





Revenues
      from our Internet, Private Network & Other Services decreased $0.1 million
      from 1.6 million in the first nine months in 2004 to $1.5 million in the first
      nine months of 2005, due to the cancellation of a government
      contract.





**Cost
      of Revenues**





Consolidated
      cost of revenues increased $3.2 million or 9.4% to $37.0 million in the nine
      months ended September 30, **** 2005,
      from $33.8 million in the nine months ended September 30 **,** 2004.
      Approximately $2.5 million of this increase was attributable to an increase
      in
      voice services to carriers.





The
      cost
      of revenues for VoIP services to consumers and corporations grew $0.9 million
      in
      the nine months ended September 30, 2005, from $1.3 million to $2.2 million,
      due
      primarily to the rapid growth in that revenue base. Cost of revenues for
      Internet, Private Network & Other decreased $0.2 million or 19.5% to $0.9
      million for the nine months ended September 30, 2005 from $1.1 million for
      the
      nine months ended September 30, 2004, due to negotiated cost reductions for
      government contracts.





Consolidated
      gross margin decreased $2.2 million for the nine months ended September 2005
      over 2004. Gross margin for total Voice services to carriers decreased by $2.6
      million, which was partially offset by an improvement in the gross margin for
      VoIP services to consumers and corporations of $0.3 million. In addition, we
      had
      a decrease in gross margin for Internet, Private Networks and Other of $0.1
      million.





The
      decline in gross margin for Voice services to carriers was primarily related
      to
      the technical difficulties associated with the migration to the Softswitch
      technology, which adversely impacted our ability to route traffic to the least
      cost provider, specifically for the first quarter of 2005, as well as impact
      of
      peaks and valleys of the carrier business.





**Operating
      Expenses**





***Depreciation
      and Amortization.*** Depreciation
      and amortization decreased by $ 0.1 million or 8.0 % to $ 1.2 million during
      the
      nine months ended September 30, 2005, from $1.3 million during the nine months
      ended September 30, 2004. Although our fixed assets increased as a result of
      assets added during 2004 and the first nine months of 2005, including the new
      Softswitch, our depreciation decreased as a result of certain assets becoming
      fully depreciated during 2004 and the first three quarters of 2005.





***Selling,
      General and Administrative.*** Selling,
      general and administrative expenses increased $1.7 million or 25.4 % to $8.6
      million during the nine months ended September 30, 2005, from $6.8 million
      during the nine months ended September 30, 2004. This increase is primarily
      attributed to increased salaries and benefits, as more personnel have
      been
      required to support the growth and expansion of our infrastructure. In addition,
      also increasing as a result of growth and our becoming a public company in
      February 2005, have been our legal and professional fees, advertising/marketing
      expenses, and insurance expense. As a percentage of revenues, selling, general
      and administrative expenses increased from 17.4 % during 2004, to 21.3 % during
      2005. We believe that as we execute our business strategies, selling, general
      and administrative expenses as a percentage of revenue will begin to
      decline.





***Operating
      Loss.*** Our
      operating loss increased $3.8 million or 144.6 % to a loss of $6.5 million
      during the nine months ended September 30, 2005, from a loss of $2.7 million
      during the nine months ended September 30, 2004. The increase in operating
      loss
      was primarily attributable to both the decrease in gross margin and the increase
      in selling, general and administrative expenses associated with infrastructure
      growth and public company compliance requirements.




21





***Other
      Income (Expense).*** Total
      other income (expense) changed from other income of approximately $0.4 million
      during the nine months ended September 30, 2004, to other expense of $0.4
      million during the nine months ended September 30, 2005. During the nine months
      ended September 30, 2005, we had interest expense of $0.1million in contrast
      to
      interest expense of $1.4 million during the nine months ended September 30,
      2004. The $1.4 million interest expense, net for the nine months ended September
      30, 2004, included accretion of $1.2 million (in accordance with SFAS 150)
      related to the then outstanding Series C preferred stock. The $0.1 million
      interest expense, net for the nine months ended September 30, 2005, included
      only $0.3 million of accretion since all Series C preferred stock was converted
      to common stock in connection with our February 2005 IPO. Consequently,
      accretion ceased and only includes accretion for the period between January
      1,
      2005 and February 17, 2005. In addition, interest expense was higher during
      the
      nine months ended September 30, 2004, as the Company had a significant
      outstanding debt during 2004 (balance at September 30, 2004, was approximately
      $4.3 million) of which a significant portion was repaid (balance at September
      30, 2005, was approximately $1.6 million) during February 2005 in connection
      with the IPO. We also had increased interest income during the nine months
      ended
      September 30, 2005 versus 2004, as a result of our investment of the IPO
      proceeds. Gain on debt forgiveness decreased in 2005 by $2.1 million to $0.1
      million from $2.2 million during 2004. The 2004 gain on debt forgiveness was
      attributed to $0.2 million of settlements of capital lease obligations, $0.4
      million of settlement of general obligations and $1.6 million of settlements
      of
      network obligations. The loss from investment in Estel increased $0.1 million
      to
      $0.5 million during the nine months ended September 30, 2005, from $0.4 million
      during the nine months ended September 30, 2004. Minority interest increased
      approximately $160,000 to $119,000 during the nine months ended September 30,
      2005, from $(41,000) during the nine months ended September 30, 2004.





***Net
      Loss.*** The
      primary factors impacting our net loss for the nine months ended September
      30,
      2005, were a decrease in gross margin, an increase in selling, general and
      administrative, and the reduction in forgiveness of debt net with a decrease
      in
      interest expense and an increase in interest income.





**Liquidity
      and Capital Resources**





Since
      our
      inception, we have incurred significant operating and net losses. In addition,
      we have not generated positive cash flows from operations. As of September
      30,
      2005, we had an accumulated deficit of approximately $85.3 million. During
      February 2005, we closed on our initial public offering of securities of
      3,600,000 shares of common stock at a price of $6.45 per share and 3,600,000
      redeemable common stock purchase warrants at $0.05 per warrant. Net proceeds
      of
      the offering were approximately $20.4 million. On March 30, 2005, our
      underwriters exercised their over-allotment option and purchased an additional
      480,000 shares of common stock and 540,000 purchase warrants. We received an
      additional $2.9 million in net proceeds from the closing on the over-allotment
      option. As a result of an IPO offering, we have total stockholders’ equity at
      September 30, 2005, of approximately $20.8 million. In addition, as a result
      of
      our offering, we converted $2.5 million of convertible debt into 651,515 shares
      of common stock and we repaid approximately $1.5 million in outstanding debt
      and
      $0.6 million of accrued interest. In addition, 109,962 shares of outstanding
      Series C preferred stock were converted into 3,141,838 shares of common stock.





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





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




**Nine
                  months ended September 30,********2005**
              
              
              ******2004**Cash
                  used in operating activities
              
              $
              (5,903,359
              )
              $
              (3,636,121
              )Cash
                  used in investing activities
              
              
              (2,006,864
              )
              
              (74,264
              )Cash
                  provided by financing activities
              
              
              21,050,626
              
              
              5,087,331Increase
                  in cash and cash equivalents
              
              
              13,140,403
              
              
              1,376,946Cash
                  and cash equivalents, beginning of period
              
              
              4,368,726
              
              
              3,205,645Cash
                  and cash equivalents, end of period
              
              $
              17,509,129
              
              $
              4,582,591





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





**Source
      of Liquidity**





As
      of
      September 30, 2005, as a result of our first quarter IPO, we had cash and cash
      equivalents of approximately $17.5 million. In addition, as of September 30,
      2005, we had approximately $0.2 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).




22





From
      our
      inception through September 30, 2005, we financed our operations from cash
      provided from financing activities. These activities were primarily through
      net
      proceeds of approximately $23.3 million from our February 2005 IPO and prior
      to
      2005, the private placement of approximately $52.2 million of equity securities
      and $21.6 million from the issuance of notes. In addition, since inception
      we
      have financed the acquisition of $7.5 million of fixed assets through capital
      leases.





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





**Uses
      of Liquidity**





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





Our
      cash
      capital expenditures were approximately $1.5 million and $0.6 million during
      the
      nine months ended September 30, 2005 and 2004, respectively. We expect our
      cash
      capital expenditures to be approximately $0.5 million for the three months
      ending December 31, 2005. The 2005 capital expenditures include network
      expansion, purchase of additional software for expanded product offerings,
      new
      international deployments and customer premise equipment.





We
      also
      spent approximately $1.0 million during the nine months ended September 30,
      2005
      on our international acquisitions (includes the $325,000 Difference Payment
      discussed in Note 2 to the consolidated financial statements). Cash used in
      operations was approximately $5.9 million and $3.6 million during the nine
      months ended September 30, 2005 and 2004, respectively. The cash used in our
      operations has historically been a function of our net losses, gains on
      forgiveness of debt, and changes in working capital as a result of the timing
      of
      receipts and disbursements. The increase in cash used in operations during
      the
      nine months ended September 30, 2005 is primarily attributed to the increase
      in
      net loss. The transition to the Softswitch has contributed to the net loss
      during the nine months ended September 30, 2005. We believe the transition
      issues are largely behind us and expect improved financial results in the future
      resulting from expected growth in our retail VoIP service revenues during the
      next few months.





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





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





**Debt
      Service Requirements**





As
      a
      result of our IPO, we repaid a majority of our outstanding debt and converted
      $2.5 million in convertible notes payable to common stock. In addition,
      approximately $10.0 million of our Series C preferred stock was converted into
      common stock. As a result, at September 30, 2005, our debt balance decreased
      significantly to approximately $1.6 million comprised primarily of $1.5 million
      in capital leases. All of this debt, other than approximately $0.1 million
      is
      due during the 12 months ending June 30, 2006. Our interest expense has
      decreased significantly and will continue to be less than prior years due to
      the
      following factors:





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





**Capital
      Instruments**





As
      of
      September 30, 2005, the only outstanding stock we had is our two classes of
      Common Stock.





**Critical
      Accounting Policies and Estimates**





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




23





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





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





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





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





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





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





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





**Recently
      Issued Accounting Pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and error Corrections.”
      SFAS No. 154 is a replacement of APB No. 20 and FASB Statement No. 3 SFAS No.
      154 provides guidance on the accounting for and reporting of accounting changes
      and error corrections. It establishes retrospective application as the required
      method for reporting a change in accounting principle. SFAS No. 154 provided
      guidance for determining whether retrospective application is impractical.
      The
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed by SFAS No. 154. SFAS No. 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. We will adopt this pronouncement at the beginning
      of
      fiscal year 2006.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”). This Statement requires companies to expense the
      estimated fair value of stock options and similar equity instruments issued
      to
      employees. Currently, companies are required to calculate the estimated fair
      value of these share-based payments and can elect to either include the
      estimated cost in earnings or disclose the pro forma effect in the footnotes
      to
      their financial statements. We have chosen to disclose the pro forma effect.
      The
      fair value concepts were not changed significantly in FAS 123(R); however,
      in
      adopting this Standard, companies must choose among alternative valuation models
      and amortization assumptions. The valuation model we have used continues to
      be
      available, but we have not yet completed our assessment of the alternatives.
      In
      April 2005, the SEC announced a deferral of the effective date of FAS 123(R)
      for
      calendar year companies until the beginning of 2006.




24





**Inflation**





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





**FORWARD-LOOKING
      STATEMENTS**





Certain
      statements discussed in this Report under the heading "Management's Discussion
      and Analysis of Financial Condition and Results of Operation - Liquidity and
      Capital Resources" may constitute forward-looking statements within the meaning
      of the Private Securities Litigation Reform Act of 1995. The words or phrases
      "would be," "will allow," "intends to," "will likely result," "are expected
      to,"
      "will continue," "is anticipated," "estimate," "project," or similar expressions
      are intended to identify "forward-looking statements". Because such statements
      include risks and uncertainties, actual results may differ materially from
      those
      expressed or implied by such forward-looking statements. Factors that could
      cause actual results to differ materially include, but are not limited to,
      the
      competitive environment for Internet telephony, our limited operating history,
      changes of rates of all related telecommunications services, the level and
      rate
      of customer acceptance of new products and services, legislation that may affect
      the Internet telephony industry, rapid technological changes, risks associated
      with the integration of businesses following an acquisition, competitors with
      broader product lines and greater resources, emergence into new markets, the
      termination of any of the Company's significant contracts, 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, as well as other risks referenced from time
      to
      time in our filings with the Securities and Exchange Commission. Statements
      made
      herein are as of the date of the filing of this Form 10-Q with the Securities
      and Exchange Commission and should not be relied upon as of any subsequent
      date.
      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 hereof, and we
      assume no obligation to update any forward-looking statement to reflect
      occurrences, developments, unanticipated events or circumstances after the
      date
      of such statement.





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





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





At
      September 30, 2005, the majority of our cash balances were held primarily in
      the
      form of short-term highly liquid investment grade money market funds in major
      financial institutions. Due to the short-term nature of our investments, we
      believe that we are not subject to any material interest or market rate
      risks.





At
      September 30, 2005, we were not subject to interest rate risk as all of our
      current debt at September 30, 2005 is at fixed interest rates. During the nine
      months ended September 30, 2005, we conducted substantially all of our business
      in the United States dollar. The reporting currency for our financial statements
      has been the United States dollar and the functional currency for our
      subsidiaries has been the U.S. dollar. However, in connection with our Joint
      Ventures in Jamaica and Turkey, we likely will be conducting a percentage of
      our
      business in other foreign currencies in the future that could have an adverse
      impact on our future results of operations. In addition, we might enter into
      other foreign joint ventures in the future, which might conduct business in
      other foreign currencies that could have an adverse impact on our future results
      of operations.





25


**ITEM
      4. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





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





**Changes
      in Internal Controls over Financial Reporting**





There
      was
      no change in our internal control over financial reporting that occurred during
      the quarter ended September 30, 2005, that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.





26





**Fusion
      Telecommunications International, Inc. and Subsidiaries**





**Part
      II: Other Information**





**Item
      1. Legal Proceedings**





On
      May
      28, 2003, Jack Grynberg, *et
      al.,* an
      investor in one of the Company’s private offerings; filed a complaint with the
      Denver District Court, State of Colorado (Jack *Grynberg, et al v. Fusion Telecommunications International, Inc., et al,* 03-CV-3912)
      seeking damages in the amount of $400,000 for the purchase of an interest in
      Fusion's 1999 private placement offering of subordinated convertible notes
      through Joseph Stevens & Company, Inc., a registered broker dealer. This
      complaint asserted the following claims for relief: Breach of Fiduciary Duty,
      Civil Theft, Deceptive Trade Practices, Negligent Misrepresentation, Deceit
      Based on Fraud, Conversion, Exemplary Damages and Prejudgment Interest. On
      June
      25, 2004, the Company filed with the Court a Motion to dismiss, which was
      granted. The plaintiffs have filed an appeal of the motion. In October 2005,
      the
      Court of Appeals denied plaintiff’s appeal without prejudice and the Company is
      engaging in efforts to collect upon the Company’s judgment for attorneys’
      fees.




Due
      to
      the regulatory nature of the industry, the Company is periodically involved
      in
      various correspondence and inquiries from state and federal regulatory agencies.
      Management does not expect the outcome of these inquiries to have a material
      impact on the operations or the financial condition of the company.




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





(a)  Unregistered
      Sales of Securities





None.





(b)  Use
      of
      Proceeds





The
      Company’s Registration Statement filed with the Securities and Exchange
      Commission (333-120412) on Form S-1 to register 3,600,000 shares of common
      stock
      and 3,600,000 redeemable common stock purchase warrants convertible into shares
      of common stock was declared effective on February 8, 2005. The offering
      commenced on January 18, 2005, and terminated on February 12, 2005. Upon
      completion, the underwriters managed by Kirlin Securities, Inc., successfully
      sold 3,600,000 shares of common stock and 3,600,000 redeemable common stock
      purchase warrants at $6.45 and $0.05, respectively, for an aggregate offering
      price of $6.50. On March 30, 2005, the underwriters exercised their
      over-allotment and purchased an additional 480,000 shares of common stock and
      540,000 purchase warrants. The net proceeds of the offering, including the
      over-allotment, totaled $23,300,000 and is being utilized by the Company for
      the
      purchase of additional equipment for expanded capacity and service offerings,
      international deployment, marketing and advertising and working
      capital.





The
      Registration Statement also registered 3,141,838 redeemable common stock
      purchase warrants to be offered for sale by certain selling security holders.
      The Company will not receive any proceeds from the sales of such
      warrants.





As
      of
      September 30, 2005, approximately $2.0 million of the net proceeds received
      by
      the Company was used to repay outstanding debt and capital leases, and $0.6
      million was used to repay accrued interest. Approximately $1.5 million was
      used
      to purchase property and equipment and $0.9 million was used in connection
      with
      the Company’s purchase of the minority interest in its Efonica joint venture and
      the Company’s investment in a Turkey joint venture.





Of
      these
      payments, principal and accrued interest in respect of indebtedness to the
      Company was repaid as follows: approximately $1.1 million to Marvin S. Rosen,
      Chairman of the Board and Chief Executive Officer, $0.8 million to Philip
      Turits, Secretary, Treasurer and Director, $0.2 million to Evelyn Langlieb
      Greer, Director.





Karamco,
      Inc., a corporation of which Roger Karam, our President of VoIP Division, is
      the
      sole shareholder, received $825,000 with respect to the Company’s purchase of
      the minority interest in Efonica.





**Item
      3. Defaults Upon Senior Securities**





None.





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





Previously
      reported in the Company’s quarterly report on form 10-Q for the quarter ended
      March 31, 2005.




**Item
      5. Other Information**





None.




27





**Item
      6. Exhibits**





**Exhibit
                No.**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Principal Accounting Officer, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.32
            
            Certification
                of the Chief Executive Officer and Principal Accounting Officer pursuant
                to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.




28





**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
      TELECOMMUNICATION INTERNATIONAL, INC.**






Dated:
              November 14, 2005
            
            By: /s/
              Marvin S. RosenMarvin
              S. RosenChairman
              of the Board and Chief Executive OfficerDated:
               November 14, 2005
            
            By: /s/
              Barbara HughesBarbara
              HughesVice
              President of Financeand
              Principal Accounting and Financial
              Officer






29