**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 SECURITIESEXCHANGE ACT OF
      1934**





For
      the
      quarterly period ended September 30, 2007


**OR**





**o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE
      ACT OF 1934**





For
      the
      transition period from _________ to _________





Commission
      file number 001-32421





**Fusion
      Telecommunications International, Inc.**





(Exact
      name of registrant as specified in its charter)





**Delaware**
            **58-2342021**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer
              Identification
                No.)**420
                Lexington Avenue, Suite 1718, New York,**
              **New
                York**
            **10170**(Address
                of principal executive offices)
            (Zip
                Code)




**(212)
      201-2400**


Registrant’s
      telephone number, including area code




Indicate
      by check mark whether the 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 a large accelerated filer, accelerated
      filer, or non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the Exchange Act.




Large
                Accelerated Filer ̈
            Accelerated
                Filer ̈
            Non-Accelerated
                Filerx




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




Yes  ̈ No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of capital
      stock as of November 9, 2007 is as follows:




Title
                of each Class
            Number
                of Shares OutstandingCommon
                Stock, $0.01 par value
            26,971,465Redeemable
                Common Stock Purchase Warrants
            7,641,838










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




**INDEX**




**Page****Part
                I: Financial Information**Item
                l. Financial Statements
            
            
            3Item
                2. Management’s Discussion and Analysis of Financial Condition and
                Results of Operations
            
            
            19Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            
            
            31Item
                4. Controls and Procedures
            
            
            31**Part
                II: Other Information**Item
                1. Legal Proceedings
            
            
            32Item
                1A. Risk Factors
            
            
            33Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            
            33Item
                3. Defaults Upon Senior Securities
            
            
            33Item
                4. Submission of Matters to a Vote of Security Holders
            
            
            34Item
                5. Other Information
            
            
            34Item
                6. Exhibits
            
            
            35




2





**PART
      1 - FINANCIAL INFORMATION**




**ITEM
      1: FINANCIAL STATEMENTS**




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Balance Sheets**




**September**
              **30, 2007**
            
            **December
                31,**
              **2006****(unaudited)****ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            1,465,712
            
            $
            2,743,155Accounts
                receivable, net of allowance for doubtful accounts of approximately
                $834,000 and $694,000 in September 30, 2007 and December 31, 2006,
                respectively
            
            
            3,854,465
            
            
            6,743,753Restricted
                cash
            
            
            —
            
            
            365,000Prepaid
                expenses and other current assets
            
            
            594,375
            
            
            622,207Assets
                held for sale
            
            
            129,231
            
            
            129,231**Total
                current assets**
            
            
            6,043,783
            
            
            10,603,346**Property
                and equipment, net**
            
            
            5,993,946
            
            
            6,422,016**Other
                assets**Security
                deposits
            
            
            72,868
            
            
            141,868Restricted
                cash
            
            
            416,566
            
            
            416,566Goodwill
            
            
            4,971,221
            
            
            4,971,221Intangible
                assets, net
            
            
            4,898,256
            
            
            4,913,360Other
                assets
            
            
            98,895
            
            
            104,923**Total
                other assets**
            
            
            10,457,806
            
            
            10,547,938**TOTAL
                ASSETS**
            
            $
            22,495,535
            
            $
            27,573,300**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Long-term
                debt, current portion
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations, current portion
            
            
            982,853
            
            
            1,066,746Accounts
                payable and accrued expenses
            
            
            9,783,932
            
            
            11,461,112Investment
                in Estel
            
            
            —
            
            
            554,286Liabilities
                of discontinued operations
            
            
            15,819
            
            
            95,085**Total
                current liabilities**
            
            
            10,932,604
            
            
            13,327,229**Long-term
                liabilities**
            
            
            718,889
            
            
            800,113**Commitments
                and contingencies****Stockholders’
                Equity**Preferred
                stock, $0.01 par value, 10,000,000 shares authorized, 7,995 and 3,875
                shares issued and outstanding at September 30, 2007 and December
                31, 2006,
                respectively
            
            
            80
            
            
            39Common
                stock, $0.01 par value, 105,000,000 shares authorized, 26,971,465
                shares
                issued and outstanding in September 30, 2007 and 26,971,465 shares
                issued
                and 26,958,965 shares outstanding in December 31, 2006
            
            
            269,715
            
            
            269,590Common
                stock, Class A, $0.01 par value, 21,000,000 shares authorized, 0
                shares
                issued and outstanding in September 30, 2007 and December 31, 2006,
                respectively
            
            
            —
            
            
            —Capital
                in excess of par value
            
            
            118,893,091
            
            
            114,514,725Accumulated
                deficit
            
            
            (108,318,844
            )
            
            (101,338,396
            )**Total
                stockholders’ equity**
            
            
            10,844,042
            
            
            13,445,958**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            22,495,535
            
            $
            27,573,300





**See
      accompanying condensed notes to consolidated financial
      statements.**


3




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Operations**




**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)****Revenues**
            
            $
            13,356,679
            
            $
            11,728,524
            
            $
            40,306,842
            
            $
            31,793,793**Operating
                expenses:**Cost
                of revenues, exclusive of depreciation and amortization shown separately
                below
            
            
            12,355,657
            
            
            10,635,840
            
            
            37,193,178
            
            
            28,623,555Depreciation
                and amortization
            
            
            437,920
            
            
            386,702
            
            
            1,248,737
            
            
            864,544Loss
                on impairment
            
            
            —
            
            
            147,419
            
            
            —
            
            
            147,419Selling,
                general and administrative expenses (includes approximately $140,000
                and
                $134,000 for the three months ended September 30, 2007 and September
                30,
                2006, respectively, and approximately $456,000 and $634,000 for the
                nine
                months ended September 30, 2007 and September 30, 2006, respectively,
                of
                non-cash compensation)
            
            
            2,895,913
            
            
            3,630,624
            
            
            9,592,579
            
            
            11,245,347Advertising
                and marketing
            
            
            35,363
            
            
            683,392
            
            
            141,149
            
            
            1,008,142Total
                operating expenses
            
            
            15,724,853
            
            
            15,483,977
            
            
            48,175,643
            
            
            41,889,007**Operating
                loss**
            
            
            (2,368,174
            )
            
            (3,755,453
            )
            
            (7,868,801
            )
            
            (10,095,214
            )**Other
                income (expense)**Interest
                income
            
            
            17,180
            
            
            58,694
            
            
            68,251
            
            
            294,272Interest
                expense
            
            
            (27,573
            )
            
            (30,972
            )
            
            (78,552
            )
            
            (90,486
            )Gain
                on settlements of debt
            
            
            —
            
            
            —
            
            
            —
            
            
            465,854Gain
                on sale from investment in Estel
            
            
            —
            
            
            —
            
            
            937,578
            
            
            —Loss
                from investment in Estel
            
            
            —
            
            
            (48,128
            )
            
            (60,000
            )
            
            (118,766
            )Other
            
            
            7,579
            
            
            25,305
            
            
            21,076
            
            
            63,616Minority
                interests
            
            
            —
            
            
            58,498
            
            
            —
            
            
            67,025Total
                other income (expense)
            
            
            (2,814
            )
            
            63,397
            
            
            888,353
            
            
            681,515**Loss
                from continuing operations**
            
            
            (2,370,988
            )
            
            (3,692,056
            )
            
            (6,980,448
            )
            
            (9,413,699
            )**Discontinued
                operations:**Loss
                from discontinued operations
            
            
            —
            
            
            (233,993
            )
            
            —
            
            
            (268,101
            )**Net
                loss**
            
            $
            (2,370,988
            )
            $
            (3,926,049
            )
            $
            (6,980,448
            )
            $
            (9,681,800
            )**Basic
                and diluted net loss per common share:**Loss
                from continuing operations
            
            $
            (0.09
            )
            $
            (0.14
            )
            $
            (0.27
            )
            $
            (0.35
            )Loss
                from discontinued operations
            
            
            —
            
            
            (0.01
            )
            
            —
            
            
            (0.01
            )Net
                loss per common share
            
            $
            (0.09
            )
            $
            (0.15
            )
            $
            (0.27
            )
            $
            (0.36
            )**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            26,967,117
            
            
            26,894,779
            
            
            26,961,712
            
            
            26,664,096




**See
      accompanying condensed notes to consolidated financial
      statements.**


4





**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Cash Flows**




**Nine
                months endedSeptember 30,****2007**
            
            **2006****(unaudited)**
            
            **(unaudited)****Cash
                flows from operating activities:**Net
                loss
            
            $
            (6,980,448
            )
            **$**
            (9,681,800
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Gain
                from sale of assets
            
            
            (9,759
            )
            
            (40,980
            )Loss
                on impairment - continued operations
            
            
            —
            
            
            147,419Loss
                on impairment - discontinued operations
            
            
            —
            
            
            211,426Depreciation
                and amortization
            
            
            1,248,737
            
            
            864,544Bad
                debt expense, net
            
            
            35,117
            
            
            (60,250
            )Non-cash
                compensation expense
            
            
            455,767
            
            
            633,976Gain
                on forgiveness of debt
            
            
            —
            
            
            (465,854
            )Gain
                on sale from investment in Estel
            
            
            (937,578
            )
            
            —Loss
                from investment in Estel
            
            
            60,000
            
            
            118,766Minority
                interests
            
            
            —
            
            
            (67,025
            )Increase
                (decrease) in cash attributable to changes in operating assets and
                liabilities:Accounts
                receivable
            
            
            2,714,173
            
            
            (1,319,173
            )Prepaid
                expenses and other current assets
            
            
            27,832
            
            
            173,735Other
                assets
            
            
            6,028
            
            
            21,652Accounts
                payable and accrued expenses
            
            
            (1,667,637
            )
            
            1,511,396Liabilities
                of discontinued operations
            
            
            (7,267
            )
            
            (385,724
            )Other
                long-term liabilities
            
            
            (99,685
            )
            
            —**Net
                cash used in operating activities**
            
            
            (5,154,720
            )
            
            (8,337,892
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (694,475
            )
            
            (2,901,243
            )Proceeds
                from sale of investments in Estel
            
            
            484,985
            
            
            —Advances
                to Estel
            
            
            (15,130
            )
            
            (58,696
            )Payments
                from Estel
            
            
            20,563
            
            
            83,759Return
                of (payments for) security deposits
            
            
            (3,000
            )
            
            158,523Repayments
                of (payments for) restricted cash
            
            
            365,000
            
            
            (563,390
            )Payments
                for legal fees for other intangible assets
            
            
            —
            
            
            (84,497
            )Difference
                payment related to purchase of minority interest in Efonica joint
                venture
            
            
            (171,852
            )
            
            —**Net
                cash used in investing activities**
            
            
            (13,909
            )
            
            (3,365,544
            )**Cash
                flows from financing activities:**Proceeds
                from sale of Preferred Stock, Series A-2, A-3 and A-4, net
            
            
            4,094,617
            
            
            —Proceeds
                from exercise of warrants
            
            
            —
            
            
            500Payments
                of long-term debt and capital lease /equipment financing obligations
            
            
            (203,431
            )
            
            (677,091
            )**Net
                cash provided by (used in) financing activities**
            
            
            3,891,186
            
            
            (676,591
            )**Net
                decrease in cash and cash equivalents**
            
            
            (1,277,443
            )
            
            (12,380,027
            )**Cash
                and cash equivalents, beginning of period**
            
            
            2,743,155
            
            
            14,790,504**Cash
                and cash equivalents, end of period**
            
            $
            1,465,712
            
            **$**
            2,410,477





**See
      accompanying condensed notes to consolidated financial
      statements.**




5





**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Cash Flows (continued)**




**Nine
                months endedSeptember 30,****2007**
            
            **2006****(unaudited)**
            
            **(unaudited)**Supplemental
                disclosure of cash flow information:Cash
                paid during the period for interest
            
            $
            23,056
            
            $
            47,121Supplemental
                disclosure of non-cash investing and financing activities:Acquisition
                of capital lease/equipment financing obligations
            
            $
            138,000
            
            $
            228,800Acquisition
                of short term financing agreement
            
            $
            —
            
            $
            553,888Release
                of Efonica shares from escrow
            
            $
            —
            
            $
            4,357,497Issuance
                of restricted stock for consulting services
            
            $
            —
            
            $
            66,250Issuance
                of Common Stock for attainment of certain earn outs in intellectual
                Property Transfer Agreement
            
            
            
            
            
            90,000Liability
                for acquisition of Intellectual Property Transfer
                Agreement
            
            $
            —
            
            $
            30,000


****


**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 condensed notes to consolidated financial statements should be
      read
      in conjunction with the Annual Report on Form 10-K for the fiscal year ended
      December 31, 2006 for Fusion Telecommunications International, Inc. and its
      Subsidiaries (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 entire year.





During
      the nine months ended September 30, 2007 and 2006, comprehensive loss was equal
      to the net loss amounts presented for the respective periods in the accompanying
      Consolidated Statements of Operations.





***Earnings
      Per Share***





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





Unexercised
      stock options to purchase 3,174,312 and 2,791,479 shares of the Company’s common
      stock as of September 30, 2007 and 2006, 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 11,432,029 and 8,148,505 shares of the Company’s common
      stock as of September 30, 2007 and 2006, 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.





Net
      loss
      per common share calculations include provisions for Preferred Stock dividend
      in
      the amount of approximately $160,000 for the three months ended September 30,
      2007 and approximately $411,000 for the nine months ended September 30, 2007.
      However, no dividend had been declared by the Board of Directors.


****


***Stock-Based
      Compensation*** ****




The
      company accounts for stock-based compensation under the provisions of Statement
      of Financial Accounting Standard No. 123 (revised 2004), “Share-Based
      Payment” (SFAS No. 123R). The impact on the Company’s results of operations
      of recording stock-based compensation expense for the three-months ended
      September 30, 2007 and 2006, was $140,026 and $101,186, respectively, and for
      the nine months ended September 30, 2007 and 2006, was $422,642 and $534,404,
      respectively, which is included in selling, general and administrative expenses
      in the Consolidated Statements of Operations.





In
      May
      2007, the Board of Directors voted to amend its 1998 Stock Option Plan (“Plan”)
      to increase the number of shares of Common Stock available under the Plan from
      4,000,000 to 7,000,000. On July 12, 2007, the stockholders approved the
      amendment to the Plan at the annual stockholders meeting.


7





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**1.**
            **Basis
                of Presentation
                (continued)**





The
      following table summarizes stock option activity for the nine months ended
      September 30, 2007:





**Activity**
            
            **Number of**
              **Options**
            
            **WeightedAverage**
              **Exercise Price**
            
            **WeightedAverage**
              **RemainingLife**
            
            **Aggregate**
              **IntrinsicValue**Outstanding
                at January 1, 2007
            
            
            2,832,546
            
            $
            3.54Granted
            
            
            1,188,650
            
            
            0.70Cancelled
                or expired
            
            
            (846,884
            )
            
            3.57Outstanding
                at September 30, 2007
            
            
            3,174,312
            
            $
            2.47
            
            
            7.30
            
            $
            -Exercisable
                at September 30, 2007
            
            
            1,608,926
            
            $
            3.52
            
            
            5.54
            
            $
            -





The
      Company calculated the fair value of each common stock option grant on the
      date
      of grant using the Black-Scholes option pricing model method with the following
      assumptions:





**Nine Months EndedSeptember 30,****2007**
            
            **2006**Dividend
                yield
            
            
            0.0
            %
            
            0.0
            %Stock
                volatility
            
            
            81.7
            %
            
            82
            %Average
                Risk-free interest rate
            
            
            4.52
            %
            
            4.6
            %Average
                option term
            
            
            4
            
            
            4





As
      of
      September 30, 2007 there was approximately $593,000 of total unrecognized
      compensation cost, net of estimated forfeitures, related to stock options
      granted under our stock incentive plans, which is expected to be recognized
      over
      a weighted-average period of 2.35 years.





***Use
      of Estimates***





The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the period. Actual results
      could differ from those estimates.


8





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





***Reclassifications***





Certain
      reclassifications have been made to the 2006 amounts to conform to the 2007
      presentation.




**2.**
            **Going
                Concern**





At
      September 30, 2007, the Company had a working capital deficit of approximately
      $4,889,000 and an accumulated deficit of approximately $108,319,000. The Company
      has continued to sustain losses from operations, and for the nine months ended
      September 30, 2007 and 2006 has incurred net losses of approximately $6,980,000
      and $9,682,000, respectively. In addition, the Company has not generated
      positive cash flow from operations since inception. Management is aware that
      its
      current cash resources are not adequate to fund its operations for the remainder
      of the year. During the nine months ended September 30, 2007, the Company raised
      $4.1 million from its second phase and over-allotment of the private placement.
      The Company’s long-term liquidity is partially dependent on its ability to
      successfully complete the rollout of its full suite of retail VoIP paid services
      and effectively market its paid services, in order to attain profitable
      operations in the future. The Company cannot make any guarantees if and when
      it
      will be able to attain profitability. These conditions, among others, raise
      substantial doubt about the Company’s ability to continue operations as a going
      concern. No adjustment has been made in the consolidated financial statements
      to
      the amounts and classification of assets and liabilities which could result,
      should the Company be unable to continue as a going concern.





**3.**
            **Acquisitions
                and Joint Ventures**





***Efonica***





In
      December 2002, the Company acquired a 50.2% equity interest in a joint
      venture with Karamco, Inc. (“Karamco”) to provide various VoIP services
      throughout the emerging markets. Operations of the joint venture began during
      2003.





During
      February 2005, the Company completed its acquisition of the remaining 49.8%
      minority interest in Efonica from Karamco. This acquisition was completed to
      (a)
      better enable Efonica to serve as the retail VoIP services division of the
      Company, offering a full suite of VoIP solutions to customers in Asia, the
      Middle East, Africa, Latin America and the Caribbean and (b) better enable
      the
      Company to 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.





Under
      its
      original terms, the purchase price ranged between a minimum of $5.4 million
      and a maximum of $14.3 million. At closing, Karamco received cash of
      $500,000 and shares equal to the Base Purchase Price determined by the initial
      price of common stock at the date of the Company’s IPO. The Base Purchase Price
      was equal to 49.8% of the initial estimated valuation of Karamco, or
      approximately $9.8 million. At the date of the IPO, approximately 1.44
      million of shares were issued under this agreement, of which Karamco received
      approximately 765,000 shares, and approximately 676,000 shares were held in
      escrow. During 2005, approval was given to release the shares then being held
      in
      escrow. Consequently, the value of these shares of approximately
      $4.4 million was reflected as goodwill and as a long-term liability in the
      December 31, 2005 Consolidated Balance Sheet. In March 2006, under an
      amendment to the Efonica Purchase Agreement, the escrowed shares were released,
      subject to a lock-up period until February 15, 2007. The release of the 675,581
      shares in escrow resulted in an increase to stockholders’ equity of
      approximately $4.4 million and a reduction to the recorded long-term
      liability.


9





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




***Efonica
      (continued)***





Of
      the
      shares issued to Karamco, the Company agreed to register for resale 150,000
      shares of common stock in a registration statement. Karamco was restricted
      from
      selling in excess of $1 million worth of common stock during the one-year
      period following the Company’s IPO Prospectus Date. If the sale of the 150,000
      shares registered results in less than $1 million of gross proceeds, the
      Company is required to pay Karamco the difference between the aggregate gross
      proceeds of Karamco’s sale of the registered shares and $1 million (the
“Difference Payment”). Through December 31, 2006, the Company had paid Karamco
      $430,000 towards the Difference Payment which is reflected as capital in excess
      of par value in the consolidated financial statements. The remainder of the
      Difference Payment was paid on May 9, 2007 in the amount of
      $171,852.




On
      May
      10, 2007, Mr. Roger Karam, CEO of Efonica FZ-LLC, wholly-owned subsidiary of
      the
      Company, and President of the Company’s VoIP division, resigned from his
      position and entered into a consulting agreement with the Company. As a
      consultant, Mr. Karam will work with the Company’s CEO to develop sales
      opportunities and business development opportunities. The consulting agreement
      is for a period of one year and will automatically renew on a three-month basis
      after the expiration of the initial term. The consulting agreement provides
      for
      an annual consulting fee of $250,000 and a discretionary bonus of 25% of his
      consulting fee, based on the achievement of certain goals as set forth in the
      consulting agreement.





***Estel***





On
      May
      15, 2007, the Company completed the sale of its 49% equity ownership of Estel
      Communications Pvt. Ltd. (“Estel”) to Karuturi Networks Limited.  Estel is
      organized under the laws of India, and has its offices in New Delhi,
      India.  As consideration, the Company received approximately $485,000 in
      proceeds from the transaction and recorded a gain on sale of approximately
      $938,000 for the nine months ended September 30, 2007.





**4.**
            **Prepaid
                expenses and other current
                assets**




Prepaid
      expenses and other current assets consist of the following at September 30,
      2007
      and December 31, 2006:




**September30, 2007**
            
            **December31, 2006****(unaudited)**Prepaid
                expenses
            
            $
            464,440
            
            $
            440,028Inventory
            
            
            67,614
            
            
            67,418Notes
                receivables
            
            
            48,663
            
            
            47,313Other
            
            
            13,658
            
            
            67,448$
            594,375
            
            $
            622,207




10





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




**5.**
            **Accounts
                payable and accrued
                expenses**





Accounts
      payable and accrued expenses consist of the following at September 30, 2007
      and
      December 31, 2006:





**September30,
                2007**
            
            **December31,
                2006****(unaudited)**Trade
                accounts payable
            
            $
            7,034,434
            
            $
            8,778,068Accrued
                expenses
            
            
            888,705
            
            
            725,287Accrued
                payroll and vacation
            
            
            209,171
            
            
            255,792Cost
                accrual
            
            
            688,685
            
            
            732,403Interest
                payable
            
            
            454,263
            
            
            398,768Deferred
                revenue
            
            
            211,059
            
            
            239,511Short-term
                financing agreement
            
            
            147,780
            
            
            172,863Other
            
            
            149,835
            
            
            158,420$
            9,783,932
            
            $
            11,461,112





**6.**
            **Long-term
                debt and capital lease/equipment financing
                obligations**




At
      September 30, 2007 and December 31, 2006, components of long-term debt and
      capital lease/equipment financing obligations of the Company are comprised
      of
      the following:




**September30, 2007**
            
            **December31, 2006****(unaudited)**Promissory
                notes payable
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations
            
            
            982,853
            
            
            1,066,746Total
                long-term debt and capital lease/equipment obligations
            
            
            1,132,853
            
            
            1,216,746Less
                current portion
            
            
            (1,132,853
            )
            
            (1,216,746
            )$
            —
            
            $
            —




11





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





***Promissory
      note payable***





During
      February 2004, the Company entered into a settlement agreement with a vendor
      for
      $600,000. In the same month, the Company paid $450,000 and agreed to make 12
      monthly payments for the remaining $150,000. The promissory note has not been
      repaid as of September 30, 2007, as the other party to the settlement agreement
      has not complied with the terms of the agreement.





***Capital
      lease/equipment financing obligations***





On
      March
      6, 2007, the Company entered into an agreement to purchase certain hardware,
      software and software support for approximately $251,000. The Company paid
      approximately $158,000 in cash and financed the remaining balance. The interest
      rate is 10% and payments are due on a monthly basis over a 10-month period.





At
      September 30, 2007 and December 31, 2006, approximately $720,000 of the capital
      lease obligations were in default and accordingly have been classified as
      currently due. See Legal Matters section of Note 10 below for further
      discussion.





Future
      aggregate principal payments as of for the Company’s debt and capital
      lease/equipment financing obligations as of September 30, 2007 are as
      follows:





Total
                minimum payments due during the period ended September 30,
                2007
            
            $
            1,590,720Less
                amount representing interest
            
            
            (457,867
            )Present
                value of minimum payments
            
            
            1,132,853Less
                current portion
            
            
            (1,132,853
            )$
            —





**7.**
            **Preferred
                Stock**




As
      of
      December 31, 2006, the Company had authorized 10,000,000 shares of its Preferred
      Stock. The Company had designated 1,100,000, 1,500,000 and 110,000 shares of
      $10
      Series A Convertible Redeemable Preferred Stock (“Series A Preferred Stock”),
      $10 Series B Convertible Redeemable Preferred Stock (“Series B Preferred Stock”)
      and $90 Series C Convertible Redeemable Preferred Stock (“Series C Preferred
      Stock”), respectively. As of September 30, 2007, there were 0 shares issued and
      outstanding for Series A, B and C Preferred Stock.




In
      addition, during December 2006, the Company designated 10,000 shares of
      Cumulative Convertible Preferred Stock at $1,000 per share to be sold via
      private placement for the purpose of raising working capital for the Company’s
      operations. If the Company sold in excess of 7,000 shares, it could exercise
      an
      over-allotment option and sell the remaining 3,000 shares. As described below,
      the Cumulative Convertible Preferred Stock is designated as Series A-1 Preferred
      Stock through Series A-4 Preferred Stock, inclusive.


12





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**7.**
            **Preferred
                Stock (continued)**




In
      December 2006, the Company completed the first phase of the private placement,
      and issued a total of 3,875 shares of Preferred Stock designated Series A-1
      Preferred Stock, for which approximately $3.8 million was received net of
      expenses of approximately $67,000, and is being used for working capital. In
      addition, the Company issued warrants to purchase 1,160,204 shares of common
      stock exercisable at $1.67 per share, which equals 50% of the shares issuable
      upon conversion of the Series A-1 Preferred Stock. Each share of Series A-1
      Preferred Stock is entitled to dividends at rate of 8% per annum and is
      convertible into the Company’s common stock at a fixed conversion price of $1.67
      per share, which represent a 20% premium over the average price of the common
      stock for the three trading days prior to the closing date of the transaction.





On
      May 9,
      2007, the Company completed the second phase of the private placement, and
      issued a total of 3,375 shares of Preferred Stock designated Series A-2
      Preferred Stock, for which approximately $3.375 million was received net of
      expenses of approximately $15,000, and is being used for working capital. In
      addition, the Company issued warrants to purchase 2,033,151 shares of common
      stock exercisable at $0.83 per share, which equals 50% of the shares issuable
      upon conversion of Series A-2 Preferred Stock. Each share of Series A-2
      Preferred Stock is entitled to dividends at a rate of 8% per annum and is
      convertible into the Company’s common stock at a fixed conversion price of $0.83
      per share, which represent a 20% premium over the average price of the common
      stock for the three trading days prior to the closing date of the transaction.





In
      addition, inasmuch as in excess of 7,000 shares of Cumulative Convertible
      Preferred Stock were sold, the Company exercised its over-allotment option
      to
      sell the remaining 3,000 shares, upon the same terms and conditions as set
      forth
      in the Private Placement Subscription Agreement, and accordingly, the Company
      extended the Offering Period up to and including June 8, 2007.





On
      May 9,
      2007, the Company sold 700 over-allotment shares of Preferred Stock, Series
      A-3
      for which $.7 million was received, and is being used for working capital.
      In
      addition, the Company issued warrants to purchase 421,687 shares of common
      stock
      exercisable at $0.83 per share, which equals 50% of the shares issuable upon
      conversion of the Series A-3 Preferred Stock. Each share of Series A-3 Preferred
      Stock is entitled to dividends at a rate of 8% per annum and is convertible
      into
      the Company’s common stock at a fixed price of $0.83 per share, which represent
      a 20% premium over the average price of the common stock for the three trading
      days prior to the closing date of the transaction.





On
      June
      8, 2007, the Company sold 45 over-allotment shares of Preferred Stock, Series
      A-4 for which $.045 million was received, and is being used for working capital.
      In addition, the Company issued warrants to purchase 28,482 shares of common
      stock exercisable at $0.79 per share, which equals 50% of the shares issuable
      upon conversion of the Series A-4 Preferred Stock. Each share of Series A-4
      Preferred Stock is entitled to dividends at the rate of 8% per annum and is
      convertible into the Company's common stock at a fixed price of $0.83
      per share, which represent a 20% premium over the average price of the common
      stock for the three trading days prior to the closing date of the
      transaction.


13





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**Dividends**





The
      holders of the Series A-1, A-2, A-3 and A-4 Preferred Stock are entitled to
      receive cumulative dividends of 8% per annum payable in arrears, when as
      declared by the Company’s Board of Directors, on January 1 of each year,
      commencing on January 1, 2008.





**8.**
            **Equity
                Transactions**





On
      March
      28, 2006, the Company entered into a consulting service agreement. In connection
      with the agreement, the Company issued 50,000 shares of restricted common stock.
      Of these shares, 25,000 shares were given to the consultant upon the signing
      of
      the agreement. The other 25,000 shares were held in escrow until the sixth
      (6 th )
      month
      anniversary at which time 12,500 shares were released. The remaining 12,500
      shares were released on August 1, 2007. In addition, the remaining expense
      balance of $33,125 was amortized during the nine months ended September 30,
      2007.





**9.**
            **New
                Accounting Pronouncements**




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities including an amendment of FASB
      Statement No. 115” (“SFAS 159”). This Statement allows all entities a one-time
      election to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value (the “fair
      value option”). SFAS 159 is effective for fiscal years beginning after November
      15, 2007. The Company is currently evaluating the impact of SFAS 159 on its
      consolidated results of operations and financial condition.





Effective
      January 1, 2007, the Company adopted the provisions of the Financial
      Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109”
(“FIN 48”). There were no unrecognized tax benefits as of January 1, 2007 and as
      of September 30, 2007.  FIN 48 prescribes a recognition threshold and a
      measurement attribute for the financial statement recognition and measurement
      of
      tax positions taken or expected to be taken in a tax return.  For those
      benefits to be recognized, a tax position must be more-likely-than-not to be
      sustained upon examination by taxing authorities.  The Company recognizes
      accrued interest and penalties related to unrecognized tax benefits as income
      tax expense.  No amounts were accrued for the payment of interest and
      penalties at January 1, 2007. There was no change to this balance at September
      30, 2007.  Management is currently unaware of any issues under review that
      could result in significant payments, accruals or material deviations from
      its
      position. The adoption of the provisions of FIN 48 did not have a material
      impact on the Company’s financial position, results of operations and cash
      flows.


14




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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**10.**  **Commitments
      and 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 against the Company:
      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 Company was awarded
      attorneys’ fees by the court. A written order of Judgment in favor of the
      Company and against the plaintiffs in the amount of approximately $40,000 was
      recorded on January 24, 2006. The plaintiffs filed an appeal of the motion,
      which the courts dismissed and awarded the Company attorney fees.




On
      March 30, 2006, a financing company affiliated with an equipment vendor
      filed a complaint with the Circuit Court in Broward County, State of Florida
      seeking damages in the amount of approximately $1,380,000 allegedly due on
      two
      promissory notes plus accrued interest through March 1, 2006 and attorney’s
      fees and costs. The Company asserted a counterclaim against the vendor which
      was
      settled subsequent to the year ended 2006, resulting in the amendment of an
      existing contract with the vendor. On November 2, 2007, the Company entered
      into a settlement agreement with the financing company for $540,000 payable
      within 30 days from the date of the settlement agreement. As a result of the
      settlement agreement, a gain on settlement of approximately $625,000 will be
      recorded subsequent to September 30, 2007.





On
      or
      about February 9, 2007, the Company filed a complaint against Patrick
      S. Dallas, InfoTel Holdings, Ltd., Phil Walton and John Does 1-5 in the Supreme
      Court of the State of New York ( *Fusion
      Telecommunications International, Inc. vs. Patrick S. Dallas, et al.,* Index
      No.
      2007001836) seeking damages associated with Mr. Dallas’ sale of Convergent
      Technologies Ltd. Stock to us and InfoTel’s breach of its October 2006 agreement
      to purchase Fusion Jamaica Limited’s equipment in Jamaica and assume the real
      property lease in Jamaica. The Company believes Mr. Dallas owns or
      controls InfoTel. This complaint asserted the following claims for relief:
      Breach of Contract (the Stock Purchase Agreement); Breach of Mr. Dallas’
Employment Agreement; Breach of Mr. Dallas’ Non-Solicitation and Non-Compete
      Agreement; Breach of Contract (the InfoTel Agreement); Diversion and Waste
      of
      Corporate Assets; Conversion: Scheme to Defraud and Deceive and Demand for
      Accounting; Fraudulent Misconduct with Intent to Defraud (the Stock Purchase
      Agreement); Fraudulent Misconduct with Intent to Defraud (the InfoTel
      Agreement); Indemnification (the Stock Purchase Agreement); and Indemnification
      (the InfoTel Agreement). The Company's legal counsel has advised that, at
      this state, they cannot accurately predict the likelihood of an unfavorable
      outcome, or quantify the amount or range of damages the Company would be
      entitled to receive if the Company was to prevail.




The
      Company is currently undergoing an audit by New York State for franchise
      and excise taxes, and unemployment taxes, which have not yet been concluded
      and may result in an indeterminate amount of tax liability.




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 Company’s operations or financial condition.


15





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





***Restricted
      Cash***





As
      of
      September 30, 2007 and December 31, 2006, the Company had approximately
      $417,000 and $782,000, respectively, of cash restricted from withdrawal and
      held
      by banks as certificates of deposit securing letters of credit. This restricted
      cash is required as security deposits for certain of the Company’s
      non-cancelable operating leases for office facilities and to secure a license
      to
      do business in Turkey. The letter of credit related to the Turkey business
      license, which amounted to $325,000 was cancelled in January 2007 and the full
      amount was returned in February 2007.




**11.**  **Segment
      Information**




The
      Company adopted SFAS No. 131, “Disclosures about Segments of an Enterprise and
      Related Information”. SFAS No. 131 requires disclosures of segment information
      on the basis that is used internally for evaluating segment performance and
      deciding how to allocate resources to segments.




The
      Company has two reportable segments that it operates and manages which are
      organized by products and services. The Company measures and evaluates its
      reportable segments based on revenues and cost of revenues. This segment income
      excludes unallocated corporate 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 respective Company’s Chief Operating Decision Maker.
      In previous years, the Company had three reportable segments with Consumers,
      Corporations and Other broken out into two separate segments. Since the
      Company’s Chief Operating Decision Makers currently review these segments as
      one, the segment disclosures for the three and nine months ended September
      30,
      2006 have been presented in a manner consistent with the three and nine months
      ended September 30, 2007.




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




***Voice
      to Carriers*** - Voice
      to Carriers includes VoIP to carriers, which is the termination of voice
      telephony minutes by the Internet rather than older circuit-switched technology.
      VoIP permits a less costly and more rapid interconnection between our network
      and international telecommunications carriers. This segment also includes
      Traditional Voice (the termination of voice telephony minutes from or to the
      countries we serve, utilizing traditional Time Division Multiplexing (TDM)
      or
“circuit-switched” technology. Typically, this will include interconnection with
      traditional telecommunications carriers either located internationally or those
      carriers that interconnect with us at their U.S. Points of Presence (POP) and
      provide service to other destinations. These minutes are sold to carriers on
      a
      wholesale basis.




***Consumers,
      Corporations and Other*** - We
      provide VoIP services targeted to consumers and corporations. We offer services
      that permit our customers to originate calls via IP telephones or telephone
      systems and use the Internet to complete those calls to standard telephone
      lines
      anywhere in the world. We also provide PC-to-Phone services that allow consumers
      to use their personal computers to place calls to the telephone of the called
      party. For corporate customers, we offer fully hosted IP-PBX services, as well
      as IP trunking solutions and Internet access. In addition, we selectively offer
      point-to-point private lines, virtual private networking, and call center
      services to certain customers within our target markets.


16





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**11.**  **Segment
        Information (continued)**




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




Operating
      segment information for the three months ended September 30, 2007 and 2006
      is
      summarized as follows:





**Three
                  months ended September 30, 2007**
            
            **Voice
                to**
              **Carriers**
            
            **Consumers,
                Corporations and Other**
            
            **Corporate**
              **&**
              **Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            12,907,791
            
            $
            448,888
            
            $
            —
            
            $
            13,356,679Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (11,988,045
            )
            $
            (367,612
            )
            $
            —
            
            $
            (12,355,657
            )Depreciation
                and amortization
            
            $
            (343,390
            )
            $
            (94,530
            )
            $
            —
            
            $
            (437,920
            )Selling,
                general and administrative
            
            $
            (1,829,768
            )
            $
            (1,014,930
            )
            $
            (51,215
            )
            $
            (2,895,913
            )Advertising
                and marketing
            
            $
            4,285
            
            $
            (39,648
            )
            $
            —
            
            $
            (35,363
            )Total
                Other income (expense)
            
            $
            (1,689
            )
            $
            (1,125
            )
            $
            —
            
            $
            (2,814
            )Net
                income (loss) from continuing operations
            
            $
            (1,250,816
            )
            $
            (1,068,957
            )
            $
            (51,215
            )
            $
            (2,370,988
            )Income
                (Loss) from discontinued operations
            
            $
            
            
            $
            
            
            $
            —
            
            $Net
                Income (Loss)
            
            $
            (1,250,816
            )
            $
            (1,068,957
            )
            $
            (51,215
            )
            $
            (2,370,988
            )Capital
                Expenditures
            
            $
            1,396
            
            $
            94,150
            
            $
            1,286
            
            $
            96,832




**Three
                    months ended September 30, 2006**
              
              **Voice
                  to Carriers**
              
              **Consumers,**
                **Corporations
                  and Other**
              
              **Corporate**
                **&**
                **Unallocated**
              
              **Consolidated**Net
                  revenues
              
              $
              10,942,103
              
              $
              786,421
              
              $
              —
              
              $
              11,728,524Cost
                  of revenues (exclusive of depreciation and
                  amortization)
              
              $
              (10,053,528
              )
              $
              (582,312
              )
              $
              —
              
              $
              (10,635,840
              )Depreciation
                  and amortization
              
              $
              (372,946
              )
              $
              (13,756
              )
              $
              —
              
              $
              (386,702
              )Loss
                  on impairment
              
              $
              —
              
              
              (147,419
              )
              
              —
              
              
              (147,419
              )Selling,
                  general and administrative
              
              $
              (2,067,807
              )
              $
              (1,550,848
              )
              $
              (11,969
              )
              $
              (3,630,624
              )Advertising
                  and marketing
              
              $
              (11,372
              )
              $
              (672,020
              )
              $
              —
              
              $
              (683,392
              )Total
                  Other income (expense)
              
              $
              42,294
              
              
              21,103
              
              
              —
              
              
              63,397Net
                  income (loss) from continuing operations
              
              $
              (1,521,256
              )
              $
              (2,158,831
              )
              $
              (11,969
              )
              $
              (3,692,056
              )Income
                  (Loss) from discontinued operations
              
              $
              
              
              $
              (233,993
              )
              $
              —
              
              $
              (233,993
              )Net
                  Income (Loss)
              
              $
              (1,521,256
              )
              $
              (2,392,824
              )
              $
              (11,969
              )
              $
              (3,926,049
              )Capital
                  Expenditures
              
              $
              —
              
              $
              217,781
              
              $
              90,987
              
              $
              308,768


Operating
        segment information for the nine months ended September 30, 2007 and 2006
        is
        summarized as follows:


17





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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**




**11.**  **Segment
        Information (continued)**




**Nine
                  months ended September 30, 2007**
            
            **Voice
                to Carriers**
            
            **Consumers,**
              **Corporations
                and Other**
            
            **Corporate**
              **&**
              **Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            39,009,425
            
            $
            1,297,417
            
            $
            —
            
            $
            40,306,842Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (36,180,959
            )
            $
            (1,012,219
            )
            $
            —
            
            $
            (37,193,178
            )Depreciation
                and amortization
            
            $
            (999,633
            )
            $
            (248,695
            )
            $
            (409
            )
            $
            (1,248,737
            )Selling,
                general and administrative
            
            $
            (6,012,355
            )
            $
            (3,480,681
            )
            $
            (99,543
            )
            $
            (9,592,579
            )Advertising
                and marketing
            
            $
            (25,629
            )
            $
            (115,520
            )
            $
            —
            
            $
            (141,149
            )Total
                Other income (expense)
            
            $
            883,300
            
            $
            5,053
            
            $
            —
            
            $
            888,353Net
                income (loss) from continuing operations
            
            $
            (3,325,851
            )
            $
            (3,554,645
            )
            $
            (99,952
            )
            $
            (6,980,448
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Net
                Income (Loss)
            
            $
            (3,325,851
            )
            $
            (3,554,645
            )
            $
            (99,952
            )
            $
            (6,980,448
            )Capital
                Expenditures
            
            $
            358,176
            
            $
            335,012
            
            $
            1,287
            
            $
            694,475




**Nine
                months ended September 30, 2006**
            
            **Voice
                to**
              **Carriers**
            
            **Consumers,****Corporations**
              **and
                Other**
            
            **Corporate**
              **&**
              **Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            28,850,992
            
            $
            2,942,801
            
            $
            —
            
            $
            31,793,793Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (26,594,300
            )
            $
            (2,029,255
            )
            $
            —
            
            $
            (28,623,555
            )Depreciation
                and amortization
            
            $
            (822,126
            )
            $
            (42,418
            )
            $
            —
            
            $
            (864,544
            )Loss
                on impairment
            
            $
            —
            
            
            (147,419
            )
            
            —
            
            
            (147,419
            )Selling,
                general and administrative
            
            $
            (6,436,845
            )
            
            (4,478,790
            )
            
            (329,712
            )
            
            (11,245,347
            )Advertising
                and marketing
            
            $
            (47,392
            )
            
            (960,750
            )
            
            —
            
            
            (1,008,142
            )Total
                Other income (expense)
            
            $
            388,795
            
            $
            292,720
            
            $
            —
            
            $
            681,515Net
                income (loss) from continuing operations
            
            $
            (4,660,876
            )
            $
            (4,423,111
            )
            $
            (329,712
            )
            $
            (9,413,699
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            (268,101
            )
            $
            —
            
            $
            (268,101
            )Net
                Income (Loss)
            
            $
            (4,660,876
            )
            $
            (4,691,212
            )
            $
            (329,712
            )
            $
            (9,681,800
            )Capital
                Expenditures
            
            $
            140,602
            
            $
            1,694,669
            
            $
            1,065,972
            
            $
            2,901,243AssetsSeptember
                30, 2007
            
            $
            8,295,419
            
            $
            12,744,419
            
            $
            1,455,697
            
            $
            22,495,535December
                31,2006
            
            $
            11,664,585
            
            $
            13,129,701
            
            $
            2,779,014
            
            $
            27,573,300


18




**ITEM
        2.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  *The
        following discussion of our financial condition and results of operations
        should
        be read together with our consolidated financial statements and the related
        notes thereto included in another part of this Quarterly Report on Form 10-Q.
        This discussion contains certain forward-looking statements; within the meaning
        of the Private Securities Litigation Reform Act of 1995, 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.*
 
 We
        seeks
        to become a leading provider of Voice over Internet Protocol (VoIP) video
        and
        other advanced Internet services to, from, in and between the developed markets
        of North America and Europe and emerging markets in Asia, the Middle East,
        Africa, Latin America and the Caribbean. Our strategy is to provide a full
        suite
        of VoIP video and other Internet based services to consumers and corporations
        in
        the emerging markets and their communities of interest around the world.
        We seek
        to create local partnerships to facilitate distribution of our services within
        our target countries. We also seek to create global partnerships to facilitate
        broader distribution of our services. We have spent approximately
        $40 million on the
        development and maintenance of our infrastructure and service offerings,
        and
        believe that our VoIP network is one of the best, most advanced next generation
        networks of any major telecommunications carrier. We currently market VoIP
        services to consumers, corporations, government entities, Internet service
        providers, distribution partners and telecommunications carriers seeking
        to
        communicate internationally. We target markets that we believe have: (i)
        barriers to entry, (ii) substantial growth prospects, (iii) an increasing
        number
        of corporations operating within them, (iv) high cost of traditional
        telecommunications services, and (v) a substantial quantity of voice and
        data
        traffic between the developed world of the United States and Europe and emerging
        countries within our target markets. We currently have operating agreements
        with
        over 200 carriers and provide services to customers in over 100
        countries.
 
 The
        following table summarizes our results of operations for the periods indicated:
 
 **Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Revenues
              
              $
              13,356,679
              
              $
              11,728,524
              
              $
              40,306,842
              
              $
              31,793,793Operating
                  expenses:Cost
                  of revenues
              
              
              12,355,657
              
              
              10,635,840
              
              
              37,193,178
              
              
              28,623,555Depreciation
                  and amortization
              
              
              437,920
              
              
              386,702
              
              
              1,248,737
              
              
              864,544Loss
                  on impairment
              
              
              
              
              
              147,419
              
              
              
              
              
              147,419Selling,
                  general and administrative
              
              
              2,895,913
              
              
              3,630,624
              
              
              9,592,579
              
              
              11,245,347Advertising
                  and marketing
              
              
              35,363
              
              
              683,392
              
              
              141,149
              
              
              1,008,142Total
                  operating expenses
              
              
              15,724,853
              
              
              15,483,977
              
              
              48,175,643
              
              
              41,889,007Operating
                  Loss
              
              
              (2,368,174
              )
              
              (3,755,453
              )
              
              (7,868,801
              )
              
              (10,095,214
              )Other
                  income (expense):Interest
                  income
              
              
              17,180
              
              
              58,694
              
              
              68,251
              
              
              294,272Interest
                  expense
              
              
              (27,573
              )
              
              (30,972
              )
              
              (78,552
              )
              
              (90,486
              )Gain
                  on settlement of debt
              
              
              
              
              
              
              
              
              
              
              
              465,854Gain
                  on sale of investment in Estel
              
              
              
              
              
              
              
              
              937,578Loss
                  from investment in Estel
              
              
              
              
              
              (48,128
              )
              
              (60,000
              )
              
              (118,766
              )Other
              
              
              7,579
              
              
              25,305
              
              
              21,076
              
              
              63,616Minority
                  interests
              
              
              
              
              
              58,498
              
              
              
              
              
              67,025Total
                  other income (expense)
              
              
              (2,814
              )
              
              63,397
              
              
              888,353
              
              
              681,515Loss
                  from continuing operations
              
              
              (2,370,988
              )
              
              (3,692,056
              )
              
              (6,980,448
              )
              
              (9,413,699
              )Income
                  from discontinued operations
              
              
              
              
              
              (233,993
              )
              
              
              
              
              (268,101
              )Net
                  loss
              
              $
              (2,370,988
              )
              $
              (3,926,049
              )
              $
              (6,980,448
              )
              $
              (9,681,800
              )


19




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,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Operating
                expenses:Cost
                of revenues
            
            
            92.5
            %
            
            90.7
            %
            
            92.3
            %
            
            90.0
            %Depreciation
                and amortization
            
            
            3.3
            %
            
            3.2
            %
            
            3.1
            %
            
            2.7
            %Loss
                on Impairment
            
            
            
            
            
            1.3
            %
            
            
            
            
            0.5
            %Selling,
                general and administrative
            
            
            21.7
            %
            
            31.0
            %
            
            23.8
            %
            
            35.4
            %Advertising
                and marketing
            
            
            0.3
            %
            
            5.8
            %
            
            0.4
            %
            
            3.2
            %Total
                operating expenses
            
            
            117.8
            %
            
            132.0
            %
            
            119.6
            %
            
            131.8
            %Operating
                loss
            
            
            (17.8
            )%
            
            (32.0
            )%
            
            (19.6
            )%
            
            (31.8
            )%Other
                income (expense)Interest
                income
            
            
            0.1
            %
            
            0.5
            %
            
            0.2
            %
            
            0.9
            %Interest
                expense
            
            
            (0.2
            )%
            
            (0.3
            )%
            
            (0.2
            )%
            
            (0.3
            )%Gain
                on settlement of debt
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            1.5
            %Gain
                on sale of investment in Estel
            
            
            0.0
            %
            
            0.0
            %
            
            2.3
            %
            
            0.0
            %Loss
                from investment in Estel
            
            
            0.0
            %
            
            (0.4
            )%
            
            (0.1
            )%
            
            (0.4
            )%Other
            
            
            0.1
            %
            
            0.2
            %
            
            0.1
            %
            
            0.2
            %Minority
                interests
            
            
            0.0
            %
            
            0.5
            %
            
            0.0
            %
            
            0.2
            %Total
                other income (expense)
            
            
            0.0
            %
            
            0.5
            %
            
            2.3
            %
            
            2.1
            %Loss
                from continuing operations
            
            
            (17.8
            )%
            
            (31.5
            )%
            
            (17.3
            )%
            
            (29.7
            )%Income
                from discontinued operations
            
            
            0.0
            %
            
            (2.0
            )%
            
            0.0
            %
            
            (0.8
            )%Net
                loss
            
            
            (17.8
            )%
            
            (33.5
            )%
            
            (17.3
            )%
            
            (30.5
            )%





Revenues




Historically,
      we have generated the majority of our revenues from voice traffic sold to other
      carriers, with a primary focus in the last several years on VoIP terminations
      to
      the emerging markets. We focus on growing our existing customer base, which
      is
      primarily U.S based, as well as the addition of new customers, and the
      establishment of direct VoIP terminating arrangements with telecommunication
      carriers in emerging markets and around the world. Although we believe that
      this
      business continues to be of value to our strategy, ongoing competitive and
      pricing pressures have caused us to increase our focus on higher margin,
      value-added services (primarily VoIP to consumers and corporations which
      includes VOIP video and other advanced internet services), and market them
      to,
      or in conjunction with, distribution partners on a direct, co-branded or private
      label basis.


20





In
      an
      effort to further increase margins, expand our retail customer base, and develop
      more stable revenue streams, we have begun to focus significant effort and
      resources to build our VoIP business to consumers and corporations. 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 will enhance this value-added
      offering. In February 2005, we completed our acquisition of the 49.8%
      minority interest in Efonica, and following such acquisition, we own 100% of
      Efonica.





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 from us.





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 within their market segment, i.e. carrier, and are not separately
      hired to support individual product segments. For segment reporting purposes,
      all expenses below cost of revenues are allocated based on percentage
      of utilization of resources unless the items can be specifically
      identified to one of the product segments.





**Operating
      Expenses**





Our
      operating expenses 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. It also includes amortization of the Efonica customer
      list.





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





Advertising
      and marketing expense includes cost for promotional materials for the marketing
      of our retail products and services, as well as for public
      relations.


21





**Company
      Highlights**




The
      following summary of significant events during the nine months ended September
      30, 2007 and 2006, highlight the accomplishments and events that have influenced
      our performance during the respective periods.




*Nine
      Months Ended September 30, 2007*





·
            *Efonica
                VoIP products at CeBIT*-**Showcasing
                Efonica VoIP services, including retail and corporate focused VoIP
                solution to CeBIT (the world’s largest trade fair showcasing digital IT
                and telecommunications solutions for home and work environments);





·
            *Efonica
                subscribers exceed 1,000,000 -*Since
                launching our new Efonica VoIP service on June 19, 2006, we have
                registered more than one million subscribers;




·
            *Consummation
                of Private Placement -*In**May
                2007, the Company entered into subscription agreements with 28 individual
                investors for an offering of $3.375 million in consideration for
                3,375
                shares of Series A-2 Cumulative Convertible Preferred Stock, (the
                "Series
                A-2 Preferred Stock");·
            *Strategic
                Investment -*A
                global communications service provider, DigitalFX International,
                Inc. has
                made a $700,000 strategic investment in the Company;·
            *Sale
                of its Equity Interest in Indian Joint Venture -*The
                Company completed the sale of its 49% equity share of Estel Communications
                Pvt., LTD, an Internet service provider in India;·
            *Interview
                with strategic investor-*DigitalFX
                International, Inc.'s President Amy Black and President and CEO Matthew
                Rosen of Fusion interviewed in a live web cast on MN1, the world's
                premier
                web-based business news outlet to discuss their agreement and other
                current events;·
            *VoIP
                World Conference in Dubai-*On
                June 18th2007, CEO, Mathew Rosen, delivered a keynote address to VoIP World
                Middle
                East 2007 conference in Dubai, UAE;





·
            *Launches
                Efonica Mobilink Service in Jordan –*the
                Companyannounced that it has already expanded its network capacity in Jordan
                to
                meet growing customer demand;





·
            *Internet
                Café Solution –*This
                new product targets a growing segment of the international calling
                marketplace, expanding Fusion's current reach into corporate, consumer
                and
                carrier markets worldwide.





·
            *Acquires
                Telecommunications License in Dominican Republic –*Initiates
                Plan to Launch Comprehensive Suite of Voice and Video Solutions





*Nine
      Months Ended September 30, 2006*




·
            *Acquired
                Proprietary Technology*-
                Acquired Proprietary Directed SIP Peer-to-Peer Technology That Avoids
                Routing Internet Phone Calls Through Network Of Users’
                Computers;·
            *New
                Partnership*-
                Announced Partnership With AnchorFree To Market VoIP Services To
                Users Of
                Large WI-FI Network;·
            *Licensed
                Market-Leading Technology*-
                Licensed Global IP Sound’s Market-Leading Technology to Power its VoIP
                Softphone;·
            *Filed
                Patent Application*-
                Filed Patent Application for our Proprietary VoIP Technology for
                SIP
                Peer-To-Peer VoIP Communication;·
            *Completion
                of Softphone Development*-
                Completed Development of Our Proprietary PC-based VoIP Softphone,
                Which
                Allows Us to Differentiate Our Efonica® VoIP
                Offering;




·
            *Launched
                Free Internet Service*-
                Launched New Free Internet Phone Service, Which Allows Efonica®
                Subscribers Worldwide to Make Free Calls Without Computers. We Also
                Created the Internet Area CodeTM which allows subscribers to use their
                existing telephone numbers preceded by a “10”;·
            *Worldwide
                Internet Area Code Patent*-
                Filed Patent Application For Worldwide Internet Area CodeTM;
                and·
            *Introduction
                of EFO Out*-
                Introduced One of Our New Paid Services, EFO Out, Which Allows Users
                to
                Call Any Landline or Mobile Telephone Number In The World At Extremely
                Competitive Prices.




·
            Jinti
                Partnership - Entered into a strategic partnership with Jinti, a
                rapidly
                growing Chinese community services site that currently attracts in
                excess
                of 3 million unique visitors from China each
                month;





·
            Marketing
                Alliance with MasterCard worldwide - We entered into a retail marketing
                alliance with MasterCard Worldwide to offer our suite of premium
                paid VoIP
                communication services to MasterCard
                cardholders;





·
            Efonica
                subscribers exceed 750,000 - Since launching our new Efonica VoIP
                service
                on June 19, 2005, we have registered more than 750,000 subscribers
                and
                currently have more than 10,000 paid subscribers;
                and




·
            Efonica
                Services in Jordan - Introduction of our Efonica VoIP services in
                Jordan
                to allow us to continue to connect communities worldwide, due to
                our
                securing exclusive rights to a Jordanian Telecommunications
                License.





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


22





**Three
      Months Ended September 30, 2007 Compared with Three Months Ended September
      30,
      2006.**





***Revenues***





Consolidated
      revenues were $13.4 million during the three months ended September 30, 2007,
      compared to $11.7 million during the three months ended September 30, 2006,
      an
      increase of $1.6 million or 13.9%.





Revenues
      for Voice to Carriers increased $2 million or 18%, to $12.9 million during
      the
      three months ended September 30, 2007 from $10.9 million during the three months
      ended September 30, 2006. The increase revenues were the result of an increase
      in voice traffic as well as an increase in rates compared to the three months
      ended September 30, 2006. We expect the revenue from our Voice to Carriers
      segment to continue to increase in future quarters.





Revenues
      for Consumers, Corporations and Other decreased $0.3 million or 42.9% to $0.4
      million during the three months ended September 30, 2007, from $0.8 million
      during the three months ended September 30, 2006. This decrease was mainly
      due
      to technical difficulties encountered in the development of our Efonica retail
      services platform, which held back the growth in this service and due to the
      cancellation during late 2006 of a government contract and the loss of a high
      speed internet access arrangement for a foreign carrier. We have largely
      resolved the technical issues and expect this segment’s revenues to grow
      significantly during the next few years.





***Cost
      of Revenues***





Consolidated
      cost of revenues increased $1.7 million or 16.2% to $12.4 million during the
      three months ended September 30, 2007 from $10.6 million during the three months
      ended September 30, 2006. Approximately $1.9 million of this increase or 19.2%
      was attributable to an increase in Voice to Carriers. This increase was
      partially offset by a decrease in the cost of revenues for Consumers,
      Corporations and Other by $0.2 million or 36.9%, which went to $0.4 million
      during the three months ended September 30, 2007 from $0.6 million during the
      three months ended September 30, 2006, consistent with the revenue
      decrease.





The
      consolidated gross margin percentage decreased to 7% during the three months
      ended September 30, 2007 from 9% during the three months ended September 30,
      2006. This decrease relates primarily to the Consumers, Corporation and Other
      due to difficulties encountered in the development of our Efonica retail service
      platform, cancellation of a government contract and the loss of a high speed
      internet access arrangement for a foreign carrier.





**Operating
      Expenses**





***Depreciation
      and Amortization*** .
      Depreciation and amortization increased by $51,000 or 13.2% to $438,000 during
      the three months ended September 30, 2007, from $387,000 during the three months
      ended September 30, 2006. Our depreciation expense increased as more assets
      were
      acquired to support the retail platform during the three months ended September
      30, 2006.





***Loss
      on Impairment.*** Loss on
      impairment during the three months ended September 30, 2006, relates to a $0.1
      million write-off of goodwill recorded in connection with our Jamaican joint
      venture. This write-off resulted from changes in our business plans for that
      entity including the future sale of switching equipment and a future lease
      assignment.


23





***Selling,
      General and Administrative*** *.* Selling,
      general and administrative expenses decreased $0.7 million or 20.2% to
      $2.9 million during the three months ended September 30, 2007, from
      $3.6 million during the three months ended September 30, 2006. This
      decrease is primarily attributed to decreased salaries, benefits and other
      personnel related expenses as a result of the Company’s increased focus on cost
      containment.





***Advertising
      and Marketing*** *.* Advertising
      and marketing expenses decreased $648,000 or 94.8% to $35,000 during the three
      months ended September 30, 2007, from $683,000 during the three months ended
      September 30, 2006. The decrease is a result of a more aggressive marketing
      campaign during the three months ended September 30, 2006.





***Operating
      Loss*** *.* Our
      operating loss decreased $1.4 million or 36.9% to a loss of $2.4 million during
      the three months ended September 30, 2007, from a loss of $3.8 million during
      the three months ended September 30, 2006. The decrease in operating loss was
      primarily attributable to the increased revenues and reduced selling, general
      and administrative expenses.





***Other
      Income (Expense)*** *.* Total
      other income (expense) changed from other income of approximately $63,000 during
      the three months ended September 30, 2006 to other expenses of 3,000 during
      the
      three months ended September 30, 2007. The decrease is primarily attributable
      to
      the decrease in interest income as a result of the cash being used for operating
      activities.





***Discontinued
      Operations.*** During
      the three months ended September 30, 2006, the Company incurred $0.2 million
      in
      loss from discontinued operations with its Turkey subsidiary.





***Net
      Loss*** *.* Net loss
      decreased $1.6 million, or 39.6% for the three months ended September 30, 2007,
      compared to the three months ended September 30, 2006. The primary factors
      contributing to the improvement were the increase in revenue and a decrease
      in
      selling and general and administrative.




**Nine
      Months Ended September 30, 2007, Compared with Nine Months Ended September
      30,
      2006.**





***Revenues***





Consolidated
      revenues were $40.3 million during the nine months ended September 30, 2007,
      compared to $31.8 million during the nine months ended September 30, 2006,
      an
      increase of $8.5 million or 26.8%.





Revenues
      for Voice to Carriers increased $10.2 million or 35.2%, to $39 million during
      the nine months ended September 30, 2007 from $28.9 million during the nine
      months ended September 30, 2006. The increase revenues were the result of an
      increase in voice traffic as well as an increase in rates compared to the same
      period of 2006. We expect the revenue from our Voice to Carriers segment to
      continue to increase in future quarters.





Revenues
      for Consumers, Corporations and Other decreased $1.6 million or 55.9% to $1.3
      million during the nine months ended September 30, 2007, from $2.9 million
      during the nine months ended September 30, 2006. This decrease was mainly due
      to
      technical difficulties encountered in the development of our Efonica retail
      services platform, which held back the growth in this service and also due
      to
      the cancellation of a government contract and the loss of a high speed internet
      access arrangement for a foreign carrier. We have largely resolved the technical
      issues and expect this segment’s revenues to grow significantly during the next
      few years.


24





***Cost
      of Revenues***





Consolidated
      cost of revenues increased $8.6 million or 29.9% to $37.2 million during the
      nine months ended September 30, 2007 from $28.6 million during the nine months
      ended September 30, 2006. Approximately $9.6 million of this increase or 36%
      was
      attributable to an increase in Voice to Carriers. This increase was partially
      offset by a decrease in the cost of revenues for Consumers, Corporations and
      Other by $1 million or 50.1%, which went to $1 million during the nine months
      ended September 30, 2007 from $2 million during the first nine months ended
      September 30, 2006, consistent with the revenue decrease.





The
      consolidated gross margin percentage decreased to 8% during the nine months
      ended September 30, 2007 from 10% during the nine months ended September 30,
      2006. This decrease relates primarily to the Consumers, Corporation and Other
      due to difficulties encountered in the development of our Efonica retail service
      platform, cancellation of a government contract and the loss of a high speed
      internet access arrangement for a foreign carrier.





***Operating
      Expenses***





***Depreciation
      and Amortization*** .
      Depreciation and amortization increased by $0.4 million or 44.4% to
      $1.2 million during the nine months ended September 30, 2007, from
      $0.9 million during the nine months ended September 30, 2006. Depreciation
      expense increased as more assets were acquired to support the retail platform
      during the 2 nd quarter
      of 2006.





***Loss
      on Impairment.*** Loss on
      impairment during the nine months ended September 30, 2006, relates to a $0.1
      million write-off of goodwill recorded in connection with our Jamaican joint
      venture. This write-off resulted from changes in our business plans for that
      entity including the future sale of switching equipment and a future lease
      assignment.





***Selling,
      General and Administrative*** *.* Selling,
      general and administrative expenses decreased $1.7 million or 14.7% to
      $9.6 million during the nine months ended September 30, 2007, from
      $11.2 million during the nine months ended September 30, 2006. This
      decrease is primarily attributed to decreased salaries, benefits and other
      personnel related expenses as a result of the Company’s increased focus on cost
      containment.





***Advertising
      and Marketing*** *.* Advertising
      and marketing expenses decreased $0.9 million or 86% to $0.1 million during
      the
      nine months ended September 30, 2007, from $1 million during the nine months
      ended September 30, 2006. The decrease is a result of a more aggressive
      marketing campaign during the nine months ended September 30, 2006.





***Operating
      Loss*** *.* Our
      operating loss decreased $2.2 million or 22.1% to a loss of $7.9 million during
      the nine months ended September 30, 2007, from a loss of $10.1 million during
      the nine months ended September 30, 2006. The decrease in operating loss was
      primarily attributable to the increased revenues and reduced selling, general
      and administrative expenses





***Other
      Income (Expense)*** *.* Total
      other income (expense) changed from other income of approximately $0.7 million
      during the nine months ended September 30, 2006 to other income of $0.9 million
      during the nine months ended September 30, 2007.





Interest
      income decreased $226,000 or 76.8% to $68,000 during the nine months ended
      September 30, 2007 from $294,000 during the nine month ended September 30,
      2006.
      The reduction is primarily due to cash used in operating
      activities.





During
      the nine months ended September 30, 2007, the Company sold its 49% equity
      ownership of Estel and recognized a gain on sale from investments of
      approximately $0.9 million.





25





During
      the nine months ended September 30, 2006, the Company recognized a gain on
      settlement of debt of approximately $0.5 million as a result of a settlement
      agreement with a vendor, which cancelled the service agreement and released
      the
      Company from all indebtedness.





***Net
      Loss*** *.* Net loss
      decreased $2.7 million, or 27.9% for the nine months ended September 30, 2007,
      compared to the nine months ended September 30, 2006. The primary factors
      contributing to the improvement were the increase in revenue, a decrease in
      selling and general and administrative and a gain on sale from investment in
      Estel, mentioned above.





Liquidity
      and Capital Resources





Since
      our
      inception, we have incurred significant operating and net losses. In addition,
      we are not generating positive cash flows from operations. As of September
      30,
      2007, we had stockholders’ equity of approximately $10.8 million as
      compared to $13.4 million at December 31, 2006, and a working capital
      deficit of approximately $4.9 million as compared to $2.7 million at
      December 31, 2006. The proceeds have been and will continue to be used for
      working capital and general corporate purposes, international deployment, and
      to
      fund the development of our retail service offerings. During the nine months
      ended September 30, 2007, we completed the second phase and over allotment
      of
      our private placement financing (See Note 7 to the consolidated financial
      statements contained in this quarterly report on Form 10-Q). We may seek further
      financing through the sale of debt or equity securities, although we have no
      commitments to do so.





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,****2007**
              
              **2006**Cash
                  used in operating activities
              
              $
              (5,154,720
              )
              $
              (8,337,892
              )Cash
                  used in investing activities
              
              
              (13,909
              )
              
              (3,365,544
              )Cash
                  provided by (used in) financing activities
              
              
              3,891,186
              
              
              (676,591
              )Decrease
                  in cash and cash equivalents
              
              
              (1,277,443
              )
              
              (12,380,027
              )Cash
                  and cash equivalents, beginning of period
              
              
              2,743,155
              
              
              14,790,504Cash
                  and cash equivalents, end of period
              
              $
              1,465,712
              
              $
              2,410,477




**Source
      of Liquidity**





As
      of
      September 30, 2007, we had cash and cash equivalents of approximately
      $1.5 million. In addition, as of September 30, 2007, we had approximately
      $0.4 million of cash restricted from withdrawal and held by banks as
      certificates of deposits securing letters of credit (equal to the amount of
      the
      certificates of deposit).





From
      our
      inception through September 30, 2007, we financed our operations from cash
      provided from financing activities. These activities were primarily through
      net
      proceeds of approximately $23.3 million from our IPO, and the private
      placement of approximately $58.98 million of equity securities,
      $1.6 million from the exercise of stock options and warrants, and
      $22 million from the issuance of notes. In addition, since inception we
      have financed the acquisition of $8.2 million of fixed assets through
      capital leases.


26





Our
      long-term liquidity is dependent on our ability to attain future profitable
      operations. We cannot predict if and when we will be able to attain future
      profitability.





**Uses
      of Liquidity**





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




Our
      cash
      capital expenditures were approximately $0.7 million and $2.9 million for the
      nine months ended September 30, 2007 and 2006, respectively. We expect our
      cash
      capital expenditures to be approximately $0.7 million for the next three months
      ending December 31, 2007. The 2007 estimated capital expenditures primarily
      consist of additional retail infrastructure development, purchase of additional
      software for expanded product offerings, and international
      deployment.




Cash
      used
      in operations was approximately $5.2 million and $8.3 million during the
      nine months ended September 30, 2007 and 2006, respectively. The cash used
      in
      our operations has historically been a function of our net losses, expenses
      for
      property and equipment, and changes in working capital as a result of the timing
      of receipts and disbursements. Our net cash used in operating activities
      decreased significantly during 2007, primarily due to the completion of the
      majority of the expenses associated with the buildout of our retail
      infrastructure. As we transition our existing customers to our new
      infrastructure and continue to build that revenue base, we expect our net cash
      used in operating activities to improve during future periods.





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





**Debt
      Service Requirements**





At
      September 30, 2007, we had approximately $1.1 million of current debt,
      which relates primarily to our capital lease/equipment financing obligations.





**Capital
      Instruments**





In
      December 2006, the Company completed the first phase of a private placement
      for
      the purpose of raising working capital to fund the Company’s operations. The
      private placement provided for the issuance of a maximum of 10,000 shares of
      the
      Company’s newly designated Preferred Stock at $1,000 per share. The total number
      of shares of Preferred Stock Series A-1 issued in this private placement
      was 3,875 shares, for which net proceeds of approximately $3.8 million were
      received. In addition, the Company issued warrants to purchase 1,160,204 shares
      of common stock exercisable at $1.67 per share. The Series A-1 Preferred Stock
      will pay dividends at 8% and are convertible into Fusion’s common stock at a
      fixed conversion price of $1.67 per share.





During
      the second quarter ended June 30, 2007, the Company completed the second phase
      and over-allotment of the private placement. During the second phase, the
      Company issued 3,375 shares of Preferred Stock, Series A-2 for net proceeds
      of
      approximately $3.375 million. In addition, the Company issued warrants to
      purchase 2,033,151 shares of common stock exercisable at $0.83 per share. The
      Company received an additional $0.745 million towards the over-allotment and
      issued 700 shares of Preferred Stock, Series A-3 and 45 shares of Preferred
      Stock, Series A-4 and Warrants to purchase 421,687 and 28,482 shares of common
      stock at a fixed exercise price of $0.83.and $0.79, respectively (See Note
      7 to
      the consolidated financial statements contained in this quarterly report on
      Form
      10-Q).


27





**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, 2006, included in our Annual Report on Form 10-K.
      Our preparation of our consolidated financial statements requires us to make
      estimates and assumptions that affect the reported amount of assets and
      liabilities, disclosure of contingent assets and liabilities at the date of
      our
      consolidated financial statements, and the reported amounts of revenue and
      expenses during the reporting periods. Management bases its estimates on
      historical experience and on various other assumptions that are believed to
      be
      reasonable under the circumstances. There can be no assurance that actual
      results will not differ from those estimates and such differences could be
      significant.




***Revenue
      Recognition*** - Our
      revenue is primarily derived from fees charged to terminate voice services
      over
      our network, retail VoIP sales to consumers and corporations, and from monthly
      recurring charges associated with Internet and private line
      services.





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





Fixed
      revenue is earned from monthly recurring services provided to the customer
      that
      are fixed and recurring in nature, and are contracted for over a specified
      period of time. The initial start of revenue recognition is after the
      provisioning, testing and acceptance of the service by the customer. The charges
      continue to bill until the expiration of the contract, or until cancellation
      of
      the service by the customer.





Additionally,
      the majority of our VoIP services to consumers and corporations 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 is 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 communications carriers to originate, transport and terminate
      calls. The majority of our cost of revenue is variable, based upon the number
      of
      minutes of use, with transmission and termination costs being the most
      significant expense. Call activity is tracked and analyzed with customized
      software that analyzes the traffic flowing through our network switches. Each
      period the activity is analyzed and an accrual is recorded for minutes not
      invoiced. This cost accrual is calculated using minutes from the system and
      the
      variable cost of revenue based upon predetermined contractual
      rates.


28





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




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





***Income
      Taxes*** - 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
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities including an amendment of FASB
      Statement No. 115” (“SFAS 159”). This Statement allows all entities a one-time
      election to measure many financial instruments and certain other items at fair
      value that are not currently required to be measured at fair value (the “fair
      value option”). SFAS 159 is effective for fiscal years beginning after November
      15, 2007. The Company is currently evaluating the impact of SFAS 159 on its
      consolidated results of operations and financial condition.





**FORWARD-LOOKING
      STATEMENTS**





Certain
      statements contained herein may constitute forward-looking statements within
      the
      meaning of the Private Securities Litigation Reform Act of 1995. 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,
      risks associated with the integration of businesses following an acquisition,
      concentration of revenue from one source, competitors with broader product
      lines
      and greater resources, emergence into new markets, the termination of any of
      the
      Company’s significant contracts or partnerships, the Company’s inability to
      maintain working capital requirements to fund future operations or the Company’s
      inability to attract and retain highly qualified management, technical and
      sales
      personnel **.** All
      forward-looking statements included in this document are made as of the date
      hereof, based on information available to us as of the date thereof, and we
      assume no obligation to update any forward-looking statements.





Factors
      and risks, including certain of those described in greater detail herein, that
      could cause actual results or circumstances to differ materially from those
      set
      forth or contemplated in forward-looking statements include, without
      limitation:




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




29




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





·
            The
                success of our planned expansion is dependent upon market developments
                and
                traffic patterns, which may lead us to make expenditures that may
                not
                result in increased revenues.




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




·
            We
                are pursuing new lines of business, and introducing new services.
                In some
                cases, the technology for these services and/or the market for those
                services are untested. Thus, there can be no assurance of our ability
                to
                introduce these services on a timely basis or our ability to derive
                significant revenues from them.




·
            Our
                new services are dependent upon multiple service platforms, network
                elements, and back-office systems, as well as the successful integration
                of these items. There can be no assurance of the success of this
                development and integration**.**




·
            There
                can be no assurance that the planned migration of existing VoIP service
                customers onto our new infrastructure will be
                successful.




·
            If
                our information and processing systems for billing and client service
                are
                not properly implemented, it could have a negative affect on our
                ability
                to collect revenues.




·
            Some
                of our new services depend on proprietary technology. There can be
                no
                assurance that others will not develop similar or competing technology,
                or
                that we will be successful in protecting our intellectual property
                rights.




·
            If
                we do not utilize our new Softswitch technology effectively, many
                of the
                potential benefits of the new technology may not be
                realized.




·
            If
                the Company becomes a party to legal proceeding regarding patent
                infringement.





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




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




·
            The
                communications services industry is highly competitive and many of
                our
                competitors have more resources available to them, accordingly we
                may be
                unable to compete effectively.




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




30




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





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




·
            We
                are dependent on third-party equipment providers who may not be able
                to
                provide us the equipment necessary to deliver the services that we
                seek to
                provide.




·
            If
                we are unable to develop and maintain successful relationships with
                our
                joint venture partners, it could hinder our operations in an important
                market.




·
            Service
                interruptions could result in a loss of revenue and harm our reputation.




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





·
            The
                success of our business depends on the acceptance of the Internet
                in
                emerging markets that may be slowed by limited bandwidth, high bandwidth
                costs, and other technical
                obstacles.




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




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




**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, 2007, the majority of our cash balances were held primarily in
      the
      form of short-term highly liquid investment grade money market funds held 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, 2007, all of our outstanding debt has fixed interest rates. As
      such, we are not subject to interest rate risk on any of our debt. Consequently,
      we currently believe that our interest rate risk is very low.




We
      currently do not conduct any significant amount of business in currencies other
      than the United States dollar. The reporting and functional currency for our
      Dubai international subsidiary is the United States dollar. Our Jamaican and
      Turkey subsidiaries currently do not have any significant operations that would
      provide foreign currency risk. However, in the future, we likely will conduct
      a
      larger percentage of our business in foreign currencies that could have an
      adverse impact on our future results of operations.


31





**ITEM
      4. CONTROLS AND PROCEDURES**





(a) ***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 Chief
      Financial Officer, 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 Chief Financial Officer
      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.





(b) ***Changes
      in Internal Controls*** .
      There
      were no changes in our internal control over financial reporting, that occurred
      during the quarter ended September 30, 2007, that has materially affected,
      or is
      reasonably likely to materially affect, our internal control over financial
      reporting.





(c) ***Limitations*** .
      A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurances that the control system’s objectives will
      be met. Further, the design of a control system must reflect the fact that
      there
      are resource constraints, and the benefits of controls must be considered
      relative to their costs. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that all
      control issues and instances of fraud, if any, within the Company have been
      detected. These inherent limitations include the realities that judgments in
      decision-making can be faulty, and that breakdowns can occur because of simple
      errors or mistakes. Controls can also be circumvented by the individual acts
      of
      some persons, by collusion of two or more people, or by management override
      of
      the controls. The design of any system of controls is based in part upon certain
      assumptions about the likelihood of future events, and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions. Over time, controls may become inadequate because of changes
      in conditions or deterioration in the degree of compliance with its policies
      or
      procedures. Because of the inherent limitations in a cost-effective control
      system, misstatements due to error or fraud may occur and not be detected.
      We
      periodically evaluate our internal controls and make changes to improve
      them.




**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 against the Company:
      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 Company was awarded
      attorneys’ fees by the court. A written order of Judgment in favor of the
      Company and against the plaintiff in the amount of approximately $40,000 was
      recorded on January 24, 2006. The plaintiffs filed an appeal of the motion,
      which the courts dismissed and awarded the Company attorney
      fees.


32





On
      March 30, 2006, a financing company affiliated with an equipment vendor
      filed a complaint with the Circuit Court in Broward County, State of Florida
      seeking damages in the amount of approximately $1,380,000 allegedly due on
      two
      promissory notes plus accrued interest through March 1, 2006 and attorney’s
      fees and costs. The Company asserted a counterclaim against the vendor which
      was
      settled subsequent to the year ended 2006, resulting in the amendment of an
      existing contract with the vendor. On November 2, 2007, the Company entered
      into a settlement agreement with the financing company for $540,000 payable
      within 30 days from the date of the settlement agreement. As a result of the
      settlement agreement, a gain on settlement of approximately $625,000 will be
      recorded subsequent to September 30, 2007.




On
      or about February 9, 2007, we filed a complaint against Patrick S. Dallas,
      InfoTel Holdings, Ltd., Phil Walton and John Does 1-5 in the Supreme Court
      of
      the State of New York ( *Fusion
      Telecommunications International, Inc. vs. Patrick S. Dallas, et al.,* Index
      No.
      2007001836) seeking damages associated with Mr. Dallas’ sale of Convergent
      Technologies Ltd. Stock to us and InfoTel’s breach of its October 2006 agreement
      to purchase Fusion Jamaica Limited’s equipment in Jamaica and assume the real
      property lease in Jamaica. We believe Mr. Dallas owns or controls InfoTel.
      This
      complaint asserted the following claims for relief: Breach of Contract (the
      Stock Purchase Agreement); Breach of Mr. Dallas’ Employment Agreement; Breach of
      Mr. Dallas’ Non-Solicitation and Non-Compete Agreement; Breach of Contract (the
      InfoTel Agreement); Diversion and Waste of Corporate Assets; Conversion: Scheme
      to Defraud and Deceive and Demand for Accounting; Fraudulent Misconduct with
      Intent to Defraud (the Stock Purchase Agreement); Fraudulent Misconduct with
      Intent to Defraud (the InfoTel Agreement); Indemnification (the Stock Purchase
      Agreement); and Indemnification (the InfoTel Agreement). Our legal counsel
      has
      advised that, at this state, they cannot accurately predict the likelihood
      of an
      unfavorable outcome, or quantify the amount or range of damages we would be
      entitled to receive if we prevail.




The
      Company is currently undergoing an audit by New York State for franchise
      and excise taxes, which has not yet been concluded and may result in an
      indeterminate amount of tax liability.




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 Company’s operations or financial condition.




**ITEM
      1A. RISK FACTORS**





There
      were no material changes to the risk factors last disclosed in the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as
      filed
      with the SEC.




**ITEM
      2** . **UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





(a)
            Unregistered
                Sales of Securities





None.





(b)
            Use
                of Proceeds





None





**ITEM
      3** . **DEFAULTS
      UPON SENIOR SECURITIES**




None.




33


**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





We
      held
      our Annual Meeting of Stockholders on July 12, 2007. At this meeting, the
      stockholders voted in favor of the following items listed in the Proxy Statement
      dated April 30, 2007.





(1)
            Increase
                in the number of shares available for the 1998 option plan to
                7,000,000:





**For**
            
            **Against**
            
            **Abstain**12,321,411
            
            252,347
            
            9,120,635





(2)
              Election
                  of Directors:





**Nominee**
            
            **For**
            
            **Withheld**Marvin
                S. Rosen
            
            
            21,943,418
            
            
            131,717Matthew
                D. Rosen
            
            
            21,954,218
            
            
            120,917Philip
                D. Turits
            
            
            21,951,768
            
            
            123,367E.
                Alan Brumberger
            
            
            21,955,268
            
            
            119,867Michael
                J. Del Giudice
            
            
            21,916,468
            
            
            158,667Julius
                Erving
            
            
            21,895,254
            
            
            179,881Evelyn
                Langlieb Greer
            
            
            21,682,024
            
            
            393,111Fred
                Hochberg
            
            
            21,709,418
            
            
            365,717Raymond
                E. Mabus
            
            
            21,895,254
            
            
            179,881Dennis
                Mehiel
            
            
            21,673,368
            
            
            401,767Paul
                C. O’Brien
            
            
            21,709,468
            
            
            365,667





(3)
            The
                ratification of the appointment of Rothstein, Kass & Company, P.C., as
                independent public accountants for the year ending December 31,
                2007:





**For**
            
            **Against**
            
            **Abstain**21,917,853
            
            86,281
            
            71,001





**ITEM
      5** . **OTHER
      INFORMATION**





There
      were no matters required to be disclosed in a Current Report on Form 8-K during
      the fiscal quarter covered by this report that were not so disclosed.





There
      were no changes to the procedures by which security holders may recommend
      nominees to the Company’s Board of Directors since the Company last disclosed
      these procedures.


34





**ITEM
      6.**  **EXHIBITS**





**Exhibit No.**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32
            
            Certification
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.





**SIGNATURES**




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




**FUSION
                TELECOMMUNICATIONS INTERNATIONAL, INC.**Date:
                November 14, 2007
            By:
            /s/
                Matthew D. RosenMatthew
                D. RosenPresident and Chief Executive Officer(Principal Executive Officer)


****


Date: November
                14, 2007
            By:
            /s/
                Barbara HughesBarbara
                HughesChief Financial Officer(Principal Financial Officer)




35





**INDEX
      TO EXHIBITS**




**Exhibit
                No.**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32
            
            Certification
                of the Chief Executive Officer and Chief Financial Officer pursuant
                to Section 906 of the Sarbanes-Oxley Act of
                2002.