**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





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





For
      the
      quarterly period ended March 31, 2007


**OR**





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





For
      the
      transition period from _________ to _________





Commission
      file number 000-32421





**Fusion
      Telecommunications International, Inc.**





(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **58-2342021**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              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
                Filer x




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 May 2, 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**




**Part
                I: Financial Information**
            **Page**Item
                l. Financial Statements
            2Item
                2. Management’s Discussion and Analysis of Financial Condition and
                Results of Operations
            18Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            28Item
                4. Controls and Procedures
            28**Part
                II: Other Information**Item
                1. Legal Proceedings
            29Item
                1A. Risk Factors
            30Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            30Item
                3. Defaults Upon Senior Securities
            30Item
                4. Submission of Matters to a Vote of Security Holders
            30Item
                5. Other Information
            30Item
                6. Exhibits
            30





2




**PART
      1 - FINANCIAL INFORMATION**


**ITEM
      1: FINANCIAL STATEMENTS**




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Balance Sheets**




**March
                  31, 2007**
            
            **December
                  31, 2006****(un-audited)****ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            1,674,880
            
            $
            2,743,155Accounts
                receivable, net of allowance for doubtful accounts of approximately
                $827,000 and $694,000 in March 31, 2007 and December 31, 2006,
                respectively
            
            
            4,053,774
            
            
            6,743,753Restricted
                cash
            
            
            40,000
            
            
            365,000Prepaid
                expenses and other current assets
            
            
            764,923
            
            
            622,207Assets
                held for sale
            
            
            129,231
            
            
            129,231**Total
                current assets**
            
            
            6,662,808
            
            
            10,603,346**Property
                and equipment, net**
            
            
            6,415,852
            
            
            6,422,016**Other
                assets**Security
                deposits
            
            
            141,868
            
            
            141,868Restricted
                cash
            
            
            416,566
            
            
            416,566Goodwill
            
            
            4,971,221
            
            
            4,971,221Intangible
                assets, net
            
            
            4,903,336
            
            
            4,913,360Other
                assets
            
            
            101,991
            
            
            104,923**Total
                other assets**
            
            
            10,534,982
            
            
            10,547,938**TOTAL
                ASSETS**
            
            $
            23,613,642
            
            $
            27,573,300**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Long-term
                debt, current portion
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations, current portion
            
            
            1,117,986
            
            
            1,066,746Accounts
                payable and accrued expenses
            
            
            10,240,330
            
            
            11,461,112Investment
                in Estel
            
            
            487,652
            
            
            554,286Liabilities
                of discontinued operations
            
            
            95,085
            
            
            95,085**Total
                current liabilities**
            
            
            12,091,053
            
            
            13,327,229**Long-term
                liabilities**
            
            
            767,451
            
            
            800,113**Commitments
                and contingencies:****Stockholders’
                Equity**Preferred
                stock, Series A-1, $0.01 par value, 10,000 shares authorized, 3,875
                shares issued and outstanding at March 31, 2007 and December 31,
                2006,
                respectively
            
            
            39
            
            
            39Common
                stock, $0.01 par value, 105,000,000 shares authorized, 26,971,465
                shares
                issued and 26,958,965 shares outstanding in March 31, 2007 and December
                31, 2006, respectively
            
            
            269,590
            
            
            269,590Common
                stock, Class A, $0.01 par value, 21,000,000 shares authorized, 0
                shares
                issued and outstanding in March 31, 2007 and December 31, 2006,
                respectively
            
            
            —
            
            
            —Capital
                in excess of par value
            
            
            114,652,926
            
            
            114,514,725Accumulated
                deficit
            
            
            (104,167,417
            )
            
            (101,338,396
            )**Total
                stockholders’ equity**
            
            
            10,755,138
            
            
            13,445,958**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            23,613,642
            
            $
            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****March
                31,****2007**
            
            **2006****(un-audited)**
            
            **(un-audited)****Revenues**
            
            $
            13,205,954
            
            $
            9,522,158**Operating
                expenses:**Cost
                of revenues, exclusive of depreciation
              and
                amortization shown separately below
            
            
            12,085,771
            
            
            8,605,303Depreciation
                and amortization
            
            
            392,182
            
            
            230,540Selling,
                general and administrative expenses
            
            
            3,427,369
            
            
            3,653,963Advertising
                and marketing
            
            
            82,215
            
            
            22,992Total
                operating expenses
            
            
            15,987,537
            
            
            12,512,798**Operating
                loss**
            
            
            (2,781,583
            )
            
            (2,990,640
            )**Other
                income (expense):**Interest
                income
            
            
            20,710
            
            
            133,461Interest
                expense
            
            
            (23,148
            )
            
            (30,000
            )Loss
                from investment in Estel
            
            
            (45,000
            )
            
            (37,558
            )Other
            
            
            —
            
            
            (10,447
            )Minority
                interests
            
            
            —
            
            
            6,292Total other income (expense)
            
            
            (47,438
            )
            
            61,748**Loss
                from continuing operations**
            
            
            (2,829,021
            )
            
            (2,928,892
            )**Discontinued
                operations:**Income
                from discontinued operations
            
            
            —-
            
            
            (25,168
            )**Net
                loss**
            
            $
            (2,829,021
            )
            $
            (2,954,060
            )**Basic
                and diluted net loss per common share:**Loss
                from continuing operations
            
            $
            (0.10
            )
            $
            (0.11
            )Income
                from discontinued operations
            
            
            —
            
            
            —Net
                loss per common share
            
            $
            (0.10
            )
            $
            (0.11
            )**Weighted
                average shares outstanding**Basic and
                diluted weighted average shares outstanding
            
            
            26,958,965
            
            
            26,195,614





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





4


**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Cash Flows**




**Three
                months ended March 31,****2007**
            
            **2006****(un-audited)**
            
            **(un-audited)****Cash
                flows from operating activities:**Net
                loss
            
            $
            (2,829,021
            )
            $
            (2,954,060
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Loss
                from disposal of fixed assets
            
            
            —
            
            
            7,455Depreciation
                and amortization
            
            
            392,182
            
            
            230,890Bad
                debt expense, net
            
            
            27,404
            
            
            (38,250
            )Stock
                based compensation
            
            
            171,326
            
            
            216,732Loss
                from investment in Estel
            
            
            45,000
            
            
            37,558Minority
                interests
            
            
            —
            
            
            (6,292
            )**Increase
                (decrease) in cash attributable to changes in operating assets and
                liabilities:**Accounts
                receivable
            
            
            2,557,576
            
            
            (181,698
            )Prepaid
                expenses and other current assets
            
            
            (142,716
            )
            
            52,938Other
                assets
            
            
            2,931
            
            
            4,982Accounts
                payable and accrued expenses
            
            
            (1,451,849
            )
            
            (54,398
            )Liabilities
                of discontinued operations
            
            
            —
            
            
            (384,271
            )Other
                long-term liabilities
            
            
            (32,662
            )
            
            —**Net
                cash used in operating activities**
            
            
            (1,259,829
            )
            
            (3,068,414
            )**Cash
                flows from investing activities**Purchase
                of property and equipment
            
            
            (285,545
            )
            
            (327,909
            )Advances
                to Estel
            
            
            (14,773
            )
            
            (32,302
            )Payments
                from Estel
            
            
            8,139
            
            
            20,137Returns
                of (payments for) security deposits
            
            
            —
            
            
            (3,000
            )Repayments
                of (payments for) restricted cash
            
            
            325,000
            
            
            (238,390
            )**Net
                cash provided by (used in) investing activities**
            
            
            32,821
            
            
            (581,464
            )**Cash
                flows from financing activities**Proceeds
                from exercise of warrants
            
            
            —
            
            
            500Proceeds
                from advance subscriptions
            
            
            200,000
            
            
            —Payments
                of long-term debt and capital lease/equipment financing
                obligations
            
            
            (41,267
            )
            
            (305,394
            )**Net
                cash provided by (used in) financing activities**
            
            
            158,733
            
            
            (304,894
            )**Net
                increase (decrease) in cash and cash equivalents**
            
            
            (1,068,275
            )
            
            (3,954,772
            )**Cash
                and cash equivalents, beginning of period**
            
            
            2,743,155
            
            
            14,790,504**Cash
                and cash equivalents, end of period**
            
            $
            1,674,880
            
            $
            10,835,732





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




5


**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





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




**Three
                months ended March 31,****2007**
            
            **2006****(un-audited)**
            
            **(un-audited)****Supplemental
                disclosure of cash flow information:**Cash
                paid during the period for interest
            
            $
            5,471
            
            $
            22,980**Supplemental
                disclosure of noncash investing and financing
                activities:**Acquisition
                of capital leases/equipment financing obligations
            
            $
            92,507
            
            $
            —Release
                of Efonica shares from escrow
            
            $
            —
            
            $
            4,357,497Issuance
                of restricted stock for consulting services
            
            $
            —
            
            $
            66,250Liability
                for acquisition of Intellectual Property Transfer
                Agreement
            
            $
            —
            
            $
            165,000


****


**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 year.





During
      the three months ended March 31, 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 3,936,235 and 2,673,046 shares of the Company’s common
      stock as of March 31, 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 8,948,709 and 7,808,149 shares of the Company’s common
      stock as of March 31, 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.


****


***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 March
      31, 2007 and 2006, was $138,201 and $204,232, respectively, which is included
      in
      selling, general and administrative expenses.





During
      the three months ended March 31, 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. However, the Plan will
      not
      be amended until the shareholders approve the increase at the next annual
      shareholders meeting scheduled to be held on July 12, 2007.





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 three months ended
      March 31, 2007:





**Activity**
            
            **Number of**
              **Options**
            
            **Weighted
                Average**
              **Exercise Price**
            
            **Weighted
                Average**
              **Remaining****Life**
            
            **Aggregate**
              **Intrinsic****Value**Outstanding
                at January 1, 2007
            
            
            2,832,546
            
            $
            3.54Granted
            
            
            1,139,850
            
            
            0.69Cancelled
                or expired
            
            
            (36,161
            )
            
            2.46Outstanding
                at March 31, 2007
            
            
            3,936,235
            
            
            2.72
            
            
            6.48
            
            $
            22,587Exercisable
                at March 31, 2007
            
            
            1,977,524
            
            $
            4.01
            
            
            4.48
            
            $
            -





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:





**Three
                Months Ended****March 31,****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
      March 31, 2007, there was approximately $1,280,000 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 2.52 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.





***Reclassifications***





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





8


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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





At
      March
      31, 2007, the Company had a working capital deficit of approximately $5,428,000
      and an accumulated deficit of approximately $104,167,000. The Company has
      continued to sustain losses from operations, and for the three months ended
      March 31, 2007 and 2006 has incurred net losses of approximately $2,829,000
      and
      $2,954,000, respectively. In addition, the Company has not generated positive
      cash flow from operations since inception. The Company is reviewing options
      to
      raise additional capital through debt and/or equity financing. Management is
      aware that its current cash resources are not adequate to fund its operations
      for the remainder of the year. Subsequent to March 31, 2007, the Company raised
      $3.375 million from its second phase 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 closed on its agreement to acquire the remaining
      49.8% minority interest in Efonica from Karamco. This acquisition was completed
      to 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. With 100% control, the
      Company can better leverage the significant experience and relationships of
      Efonica. The operating results for the 49.8% minority interest acquired are
      included in the Consolidated Statement of Operations from the date of
      acquisition.





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**




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.





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




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




**March
                31,****2007**
            
            **December
                31,****2006****(un-audited)**Prepaid
                expenses
            
            $
            562,968
            
            $
            440,028Inventory
            
            
            76,351
            
            
            67,418Notes
                receivables
            
            
            47,763
            
            
            47,313Other
            
            
            77,841
            
            
            67,448$
            764,923
            
            $
            622,207





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





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





**March
                31,****2007**
            
            **December
                31,****2006****(un-audited)**Trade
                accounts payable
            
            $
            7,313,939
            
            $
            8,778,068Accrued
                expenses
            
            
            1,906,121
            
            
            1,713,482Interest
                payable
            
            
            416,444
            
            
            398,768Deferred
                revenue
            
            
            164,653
            
            
            239,511Short-term
                financing agreement
            
            
            125,675
            
            
            172,863Other
            
            
            313,498
            
            
            158,420$
            10,240,330
            
            $
            11,461,112





10


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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




**March
                31,****2007**
            
            **December
                31,****2006****(un-audited)**Promissory
                notes payable
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations
            
            
            1,117,986
            
            
            1,066,746Total
                long-term debt and capital lease/equipment obligations
            
            
            1,267,986
            
            
            1,216,746Less
                current portion
            
            
            (1,267,986
            )
            
            (1,216,746
            )$
            —
            
            $
            —





***Promissory
      note payable***





During
      February 2004, the Company entered into a settlement agreement for $600,000.
      In
      the same month, the Company paid $450,000 and agreed to make 12 monthly payments
      for the remaining $150,000. The promissory note has not been repaid as of March
      31, 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
      March
      31, 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 March 31, 2007 are as
      follows:





Total
                minimum payments due during the period ended March 31,
                2007
            
            $
            1,682,510Less
                amount representing interest
            
            
            (414,524
            )Present
                value of minimum payments
            
            
            1,267,986Less
                current portion
            
            
            (1,267,986
            )$
            —





11


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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




As
      of
      December 31, 2006, the Company has authorized 10,000,000 shares of its Preferred
      Stock. The Company has 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”).  As
        of
        March 31, 2007, there were 0 shares issued and outstanding for both Series
        A
        Preferred Stock and Series B Preferred Stock.  In addition, during December
        2006, the Company designated 10,000 shares of Series A-1 Cumulative Convertible
        Preferred Stock (“Series A-1 Preferred Stock”).




In
      December 2006, the Company completed the first phase of a private placement
      for
      the purpose of raising working capital for 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, Series A-1 Preferred Stock at
      $1,000 per share. The total number of shares of Preferred Stock Series A-1
      Preferred Stock issued in this private placement was 3,875 shares, for which
      approximately $3.8 million were received, net of expenses of approximately
      $67,000 and are 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. The terms of 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 three months ended March 31, 2007, the Company started its second phase
      of
      the private placement for the purpose of raising working capital for the
      Company’s operations. As of March 31, 2007, the second phase of the private
      placement was not completed, however, the Company collected $220,000 as of
      March
      31, 2007 and is included in accrued expenses as of March 31, 2007. In addition,
      the Company collected $3.155 million subsequent to March 31, 2007. The second
      phase of the private placement was subsequently concluded on May 9 th ,
      2007.  The
      Company issue 3,375 shares of Series A-Z cumulative convertible Preferred Stock
      (See Note 2 below for further discussion).





**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 will be released in 2007, as the agreement has not been terminated,
      pursuant to the Company’s right to terminate. In addition, the remaining expense
      balance of $33,125 was amortized during the three months ended March 31, 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 March 31, 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 March
      31,
      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.





12


**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 have filed an appeal of the motion,
      which is still pending as of the date of this filing.




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. The Company's legal counsel has
      advised that, at this stage, they cannot accurately predict the likelihood
      of an
      unfavorable outcome or quantify the amount or range of potential loss, if any.
      Accordingly, with the exception of amounts previously accrued by the
      Company under the capital lease arrangement, no adjustment that may result
      from resolution of these uncertainties has been made in the accompanying
      financial statements.





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, which has not yet been concluded, and may result in an
      indeterminate amount of tax liability, not previously accrued for.





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.




13




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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**








***Restricted
      Cash***





As
      of
      March 31, 2007 and December 31, 2006, the Company had approximately
      $457,000 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.





14




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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**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 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 Maker currently reviews these segments as one, the segment
      disclosures for the three months ended March 31, 2006 have been presented in
      a
      consistent manner.




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.





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.





15




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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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




Operating
      segment information for the three months ended March 31, 2007 and 2006 is
      summarized as follows:





**Three
                months ended March 31, 2007****Voice
                to**
              **Carriers**
            
            **Consumers,
                Corporations and Other**
            
            **Corporate
                &**
              **Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            12,758,680
            
            $
            447,274
            
            $
            —
            
            $
            13,205,954Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (11,777,140
            )
            $
            (308,631
            )
            $
            —
            
            $
            (12,085,771
            )Depreciation
                and amortization
            
            $
            (313,863
            )
            $
            (78,319
            )
            $
            —
            
            $
            (392,182
            )Selling,
                general and administrative
            
            $
            (2,098,273
            )
            $
            (1,324,600
            )
            $
            (4,496
            )
            $
            (3,427,369
            )Advertising
                and marketing
            
            
            (15,927
            )
            
            (66,288
            )
            
            —
            
            
            (82,215
            )Total
                Other income (expense)
            
            $
            (46,460
            )
            $
            (978
            )
            $
            —
            
            $
            (47,438
            )Net
                income (loss) from continuing operations
            
            $
            (1,492,983
            )
            $
            (1,331,542
            )
            $
            (4,496
            )
            $
            (2,829,021
            )Income
                (Loss) from discontinued operations
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                Income (Loss)
            
            
            (1,492,983
            )
            
            (1,331,542
            )
            
            (4,496
            )
            
            (2,829,021
            )Capital
                Expenditures
            
            $
            217,498
            
            $
            68,047
            
            $
            —
            
            $
            285,545





**Three
                months ended March 31, 2006****Voice
                to**
              **Carriers**
            
            **Consumers,
                Corporations and Other**
            
            **Corporate
                &**
              **Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            8,334,572
            
            $
            1,187,586
            
            $
            —
            
            $
            9,522,158Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (7,785,276
            )
            $
            (820,027
            )
            $
            —
            
            $
            (8,605,303
            )Depreciation
                and amortization
            
            $
            (214,934
            )
            $
            (15,606
            )
            $
            —
            
            $
            (230,540
            )Selling,
                general and administrative
            
            $
            (2,135,015
            )
            $
            (1,350,705
            )
            $
            (168,243
            )
            $
            (3,653,963
            )Advertising
                and marketing
            
            
            (11,251
            )
            
            (11,741
            )
            
            —
            
            
            (22,992
            )Total
                Other income (expense)
            
            $
            24,814
            
            $
            36,934
            
            $
            —
            
            $
            61,748Net
                income (loss) from continuing operations
            
            $
            (1,787,090
            )
            $
            (973,559
            )
            $
            (168,243
            )
            $
            (2,928,892
            )Income
                (Loss) from discontinued operations
            
            
            —
            
            
            (25,168
            )
            
            —
            
            
            (25,168
            )Net
                Income (Loss)
            
            
            (1,787,090
            )
            
            (998,727
            )
            
            (168,243
            )
            
            (2,954,060
            )Capital
                Expenditures
            
            $
            70,301
            
            $
            144,523
            
            $
            113,085
            
            $
            327,909




AssetsMarch
                31, 2007
            
            $
            9,065,137
            
            $
            12,840,027
            
            $
            1,708,478
            
            $
            23,613,642December
                31,2006
            
            $
            11,664,585
            
            $
            13,129,701
            
            $
            2,779,014
            
            $
            27,573,300




16




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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**12.**
            **Subsequent
                Events**





On
      May
      9 ,
      2007,
      the Company completed the second round of its private placement financing.
      The
      Company issued 3,375 shares of Series A-2 cumulative convertible Preferred
      Stock
      for which $3.375 million was received, $0.22 million during the three months
      ended March 31, 2007 and $3.155 million subsequent to March 31, 2007. In
      addition, the Company issued warrants to purchase 2,033,133 shares of common
      stock exercisable at $.83 per share. The preferred stock will pay dividends
      at
      8% per annum and will be convertible into Fusion’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. Investors will also receive warrants equal to 50% of the shares
      to
      be issued upon conversion. The warrants will have a fixed exercise price of
      $0.83.





In
      addition, the Company exercised it’s option to sell an additional $3 million of
      Units (30 Units), upon the same terms and conditions as set forth in the Private
      Placement Subscription Agreement, and accordingly, extended the Offering Period
      up to and including June 8, 2007. Subsequent to March 31, 2007 the Company
      received an additional $0.7 million toward that over-allotment option from
      a
      strategic investor.





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. Mr. Karam will be entitled to a
      consulting fee of $250,000 per year, and a bonus of 25% of his consulting fee,
      if the VoIP services to consumers grows at least 15% for each of the next three
      consecutive quarters.




On
      May 15, 2007, the
      Company completed the sale of it 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.





17




**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
      are an
      international communications carrier delivering VoIP to, from, in and between
      emerging markets in Asia, the Middle East, Africa, Latin America, and the
      Caribbean. We also offer on a limited basis, private networks, Internet access,
      and other advanced services. Our corporate strategy focuses our resources on
      customizing VoIP services to meet the demands of international communities
      of
      interest in the emerging markets and around the world. We seek to gain early
      entry in high growth emerging markets, often in partnership with local
      organizations that have strong distribution channels, regulatory experience,
      market intelligence, the ability to deliver local loops and the capability
      of
      providing customer service support. This approach enables us to introduce our
      Internet protocol communications services in these markets, thereby benefiting
      from the time-to-market advantages, expanded geographic reach and reduced
      capital requirements that local partnerships afford. Additionally, we have
      worked over the last 15 months to build a carrier grade retail infrastructure
      to
      expand our VoIP service and feature options and to better support the growth
      of
      our VoIP services to consumers and corporations.





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





**Three
                Months ended****Ended
                March 31,****2007**
            
            **2006**Revenues
            
            $
            13,205,954
            
            $
            9,522,158Operating
                Expenses:Cost
                of Revenues
            
            
            12,085,771
            
            
            8,605,303Depreciation
                and amortization
            
            
            392,182
            
            
            230,540Selling,
                general and administrative expenses
            
            
            3,427,369
            
            
            3,653,963Advertising
                and marketing
            
            
            82,215
            
            
            22,992Total
                other operating expenses
            
            
            15,987,537
            
            
            12,512,798Operating
                loss
            
            
            (2,781,583
            )
            
            (2,990,640
            )Other
                income (expense):Interest
                income
            
            
            20,710
            
            
            133,461Interest
                expense
            
            
            (23,148
            )
            
            (30,000
            )Loss
                from investment in Estel
            
            
            (45,000
            )
            
            (37,558
            )Other
                from investment in Estel
            
            
            —
            
            
            (10,447
            )Minority
                interests
            
            
            —
            
            
            6,292Total
                other income (expense)
            
            
            (47,438
            )
            
            61,748Loss
                from continuing operations
            
            
            (2,829,021
            )
            
            (2,928,892
            )Loss
                from discontinued operations
            
            
            —
            
            
            (25,168
            )Net
                loss
            
            $
            (2,829,021
            )
            $
            (2,954,060
            )




18




The
      following table presents our historical operating results as a percentage of
      revenues for the periods indicated:




**Three
                Months E****nded
                March 31,****2007**
            
            **2006**Revenues
            
            
            100.0
            %
            
            100.0
            %Operating
                expenses:Cost
                of revenues
            
            
            91.5
            %
            
            90.4
            %Depreciation
                and amortization
            
            
            3.0
            %
            
            2.4
            %Selling,
                general and administrative expenses
            
            
            26.0
            %
            
            38.4
            %Advertising
                and marketing
            
            
            0.6
            %
            
            0.2
            %Total
                other operating expenses
            
            
            (121.1
            )%
            
            (131.4
            )%Operating
                loss
            
            
            (21.1
            )%
            
            (31.4
            )%Other
                income (expense):Interest
                income
            
            
            0.2
            %
            
            1.4
            %Interest
                expense
            
            
            (0.2
            )%
            
            (0.3
            )%Loss
                on equity investment
            
            
            (0.3
            )%
            
            (0.4
            )%Other
            
            
            -
            %
            
            (0.1
            )%Minority
                interests
            
            
            -
            %
            
            0.1
            %Total other income (expense)
            
            
            (0.3
            )%
            
            0.7
            %Loss
                from continuing operations
            
            
            (21.4
            )%
            
            (30.7
            )%Loss
                from discontinued operations
            
            
            0.0
            %
            
            (0.3
            )%Net
                loss
            
            
            (21.4
            )%
            
            (31.0
            )%





**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), and market
      them to, or in conjunction with, distribution partners on a direct, co-branded
      or private label basis.





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 closed on the purchase of the 49.8% minority
      interest in Efonica.




19




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.





**Company
      Highlights**




The
      following summary of significant events during the three months ended March
      31,
      2007 and 2006, highlight the accomplishments and events that have influenced
      our
      performance during the respective periods.




***Three
      Months Ended March 31, 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.




20




***Three
      Months Ended March 31, 2006***




·
            *Acquired
                Proprietary Technology*-**Acquired
                Proprietary Directed SIP Peer-to-Peer Technology that will enable
                us to
                enter the free service VoIP market
                segment.




·
            *Completed
                Initial Buildout*-**Completed
                initial infrastructure buildout of the major network elements of
                our new
                retail infrastructure and have Beta customers using VoIP
                service.




·
            *New
                Partnership*-**Announced
                partnership with AnchorFree to market VoIP services to users of large
                wireless Internet access network.




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




**Three
      Months Ended March 31, 2007 Compared with Three Months Ended March 31,
      2006.**





***Revenues***





Consolidated
      revenues were $13.2 million during the three months ended March 31, 2007,
      compared to $9.5 million during the three months ended March 31, 2006, an
      increase of $3.7 million or 38.7%.





Revenues
      for Voice to Carriers increased $4.5 million or 53.1%, to $12.8 million during
      the three months ended March 31, 2007 from $8.3 million during the three months
      ended March 31, 2006. The increase revenues were the result of an increase
      in
      voice traffic as well as an increase in rates compared to the same quarter
      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 $0.8 million or 62.3% to $0.4
      million during the three months ended March 31, 2007, from $1.2 million during
      the three months ended March 31, 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 one customer’s Internet
      circuit. We expect the technical issues with the new retail VoIP platform to
      be
      resolved during this year, and we expect this segment’s revenues to grow
      significantly during the next few years.





***Cost
      of Revenues***





Consolidated
      cost of revenues increased $3.5 million or 40.4% to $12.1 million during the
      three months ended March 31, 2007 from $8.6 million during the three months
      ended March 31, 2006. Approximately $4 million of this increase or 51.3% 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 $0.5 million or 62.4%, which went to $0.3 million during the three
      months ended March 31, 2007 from $0.8 million during the first three months
      ended March 31, 2006, consistent with the revenue decrease.





The
      consolidated gross margin percentage remained fairly consistent with the first
      quarter of 2006; it went to 8.5% during the three months ended March 31, 2007
      from 9.6% during the three months ended March 31, 2006. Gross margin for Voice
      to Carriers increased by $0.4 million, which was partially offset by a decrease
      in the gross margin for Consumers, Corporations and Other of $0.2
      million.





21





***Operating
      Expenses***





***Depreciation
      and Amortization*** .
      Depreciation and amortization increased by $0.2 million or 70.1% to
      $0.4 million during the three months ended March 31, 2007, from
      $0.2 million during the three months ended March 31, 2006. Our depreciation
      expense increased as more assets were acquired to support the retail platform
      during the 2 nd quarter
      of 2006.





***Selling,
      General and Administrative*** *.* Selling,
      general and administrative expenses decreased $0.2 million or 6.2% to
      $3.4 million during the three months ended March 31, 2007, from
      $3.6 million during the three months ended March 31, 2006. This decrease is
      primarily attributed to decreased salaries, benefits and other personnel related
      expenses of approximately $0.5 million as a result of the Company’s increased
      focus on cost containment, partially offset by increased expenditures associated
      with the development of the Company’s new retail products.





***Advertising
      and Marketing*** *.* Advertising
      and marketing expenses increased $59,000 or 257.6% to $82,000 during the three
      months ended March 31, 2007, from $23,000 during the three months ended March
      31, 2006 as we continued our marketing plan for free VoIP services. The
      advertising and marketing campaign of our Efonica product began more
      aggressively during the second quarter of 2006.





***Operating
      Loss*** *.* Our
      operating loss decreased $0.2 million or 7.0% to a loss of $2.8 million during
      the three months ended March 31, 2007, from a loss of $3.0 million during the
      three months ended March 31, 2006. The decrease in operating loss was primarily
      attributable to the increased revenues, the increased gross margin and reduced
      selling, general and administrative expenses.





***Other
      Income (Expense)*** *.* Total
      other income (expense) changed from other income of approximately $0.06 million
      during the three months ended March 31, 2006 to other expense of $0.05 million
      during the three months ended March 31, 2007. During the first quarter of 2006
      the Company recognized interest income of approximately $0.1 million, and in
      the
      first quarter of 2007 the Company recognized interest expense of a minimal
      amount.





***Net
      Loss*** *.* Net loss
      decreased $0.1 million, or 4.2% for the net loss for the three months ended
      March 31, 2007, compared to the first quarter of 2006. The primary factors
      contributing to the improvement were the increase in revenue and gross margin,
      and a decrease in selling and general and administrative 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 March 31,
      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 $5.4 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. Subsequent to March 31, 2007,
      we
      completed the second round of our private placement financing (see note 12).
      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.





22


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




**Three
                months Ended March 31,****2007**
            
            **2006**Cash
                used in operating activities
            
            $
            (1,259,829
            )
            $
            (3,068,414
            )Cash
                provided by (used in) investing activities
            
            
            32,821
            
            
            (581,464
            )Cash
                provided by (used in) financing activities
            
            
            158,733
            
            
            (304,894
            )Increase
                (decrease) in cash and cash equivalents
            
            
            (1,068,275
            )
            
            (3,954,772
            )Cash
                and cash equivalents, beginning of period
            
            
            2,743,155
            
            
            14,790,504Cash
                and cash equivalents, end of period
            
            $
            1,674,880
            
            $
            10,835,732





**Source
      of Liquidity**





As
      of
      March 31, 2007, we had cash and cash equivalents of approximately
      $1.7 million. In addition, as of March 31, 2007, we had approximately
      $0.5 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 March 31, 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 $54.8 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.





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 $0.3 million during both three months
      ended March 31, 2007 and 2006. We expect our cash capital expenditures to be
      approximately $1 million for the next nine months ending December 31, 2007.
      The 2007 estimated capital expenditures primarily consist of the completion
      of
      our retail infrastructure buildout, purchase of additional software for expanded
      product offerings, and international deployment.




Cash
      used
      in operations was approximately $1.3 million and $3.1 million during the
      three months ended March 31, 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.




23




**Debt
      Service Requirements**





At
      March 31, 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, Series A-1 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 terms
      of
      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. Subsequent
      to March 31, 2007, the Company completed the second phase of the private
      placement, with the same terms and conditions (see note 12).





**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.




24




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.




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.





25




**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**.**




·
            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.




26




·
            We
                may be impacted by current litigation 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.




·
            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.




27





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




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




At
      March
      31, 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
      March
      31, 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.





**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 March 31, 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.





28


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




**Part
      II: Other Information**




**Item
      1** . **Legal
      Proceedings**




On
      May 28, 2003, Jack Grynberg, et al., an investor in one of the
      Company's private offerings, filed a complaint with the Denver District
      Court, State of Colorado ( *Jack
      Grynberg, et al v. Fusion Telecommunications International, Inc., et
      al* ,
      03-CV-3912) seeking damages in the amount of $400,000 for the purchase of an
      interest in Fusion’s 1999 private placement offering of subordinated convertible
      notes through Joseph Stevens & Company, Inc., a registered broker dealer.
      This complaint asserted the following claims for relief 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 have filed an appeal of the motion,
      which is still pending as of the date of this filing.




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. The Company's legal counsel has
      advised that, at this stage, they cannot accurately predict the likelihood
      of an
      unfavorable outcome or quantify the amount or range of potential loss, if any.
      Accordingly, with the exception of amounts previously accrued by the
      Company under the capital lease arrangement, no adjustment that may result
      from resolution of these uncertainties has been made in the accompanying
      financial statements.





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, not previously accrued for.




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.




29





**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





In
      December 2006, the Company completed the first phase of a private placement
      for
      the purpose of raising working capital for 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, Series A-1 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 and are being used for working capital. As of December 31, 2006,
      approximately $1.1 million of the net proceeds received by the Company had
      been
      used to fund operations.





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




None.





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





Previously
      reported in the Company’s quarterly report on form 10-Q for the quarter ended
      March 31, 2006.





**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 Company
      last disclosed these procedures.




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





**Exhibit
                No.**
            
            **Description**10.41
            
            Share
                Purchase Agreement, Sale of Estel Communication Pvt Limited, dated
                May 10,
                2007.10.42
            
            Consulting
                agreement with Roger Karam, dated May 10, 2007.31.1
            
            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.




30




**SIGNATURES**




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




**FUSION
                TELECOMMUNICATIONS INTERNATIONAL, INC.**Date:
                May 15, 2007
            By:
            /s/
                Matthew D. RosenMatthew
                D. RosenPresident
                and Chief Executive Officer(Principal
                Executive Officer)


****


Date: May
                15, 2007
            By:
            /s/
                Barbara HughesBarbara
                HughesChief
                Financial Officer(Principal Financial
                Officer)





31