**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 June 30, 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
                Filerx




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




Yes  ̈  No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of capital
      stock as of August 6, 2007 is as follows:




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











Fusion
      Telecommunications International, Inc.
      and Subsidiaries




**INDEX**




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





2


**PART
      1 - FINANCIAL INFORMATION**




**ITEM
      1: FINANCIAL STATEMENTS**




**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Balance Sheets**




**June
                30, 2007**
            
            **December
                31, 2006****(unaudited)****ASSETS****Current
                assets**Cash
                and cash equivalents
            
            $
            1,316,698
            
            $
            2,743,155Accounts
                receivable, net of allowance for doubtful accounts of approximately
                $834,000 and $694,000 inJune
                30, 2007 and December 31, 2006, respectively
            
            
            5,852,841
            
            
            6,743,753Restricted
                cash
            
            
            —
            
            
            365,000Prepaid
                expenses and other current assets
            
            
            687,184
            
            
            622,207Assets
                held for sale
            
            
            129,231
            
            
            129,231**Total
                current assets**
            
            
            7,985,954
            
            
            10,603,346**Property
                and equipment, net**
            
            
            6,281,576
            
            
            6,422,016**Other
                assets**Security
                deposits
            
            
            72,867
            
            
            141,868Restricted
                cash
            
            
            416,566
            
            
            416,566Goodwill
            
            
            4,971,221
            
            
            4,971,221Intangible
                assets, net
            
            
            4,895,427
            
            
            4,913,360Other
                assets
            
            
            98,499
            
            
            104,923**Total
                other assets**
            
            
            10,454,580
            
            
            10,547,938**TOTAL
                ASSETS**
            
            $
            24,722,110
            
            $
            27,573,300**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                liabilities**Long-term
                debt, current portion
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations, current portion
            
            
            1,036,375
            
            
            1,066,746Accounts
                payable and accrued expenses
            
            
            9,733,331
            
            
            11,461,112Investment
                in Estel
            
            
            —
            
            
            554,286Liabilities
                of discontinued operations
            
            
            15,819
            
            
            95,085**Total
                current liabilities**
            
            
            10,935,525
            
            
            13,327,229**Long-term
                liabilities**
            
            
            734,790
            
            
            800,113**Commitments
                and contingencies:****Stockholders’
                Equity**Preferred
                stock, $0.01 par value, 10,000,000 shares authorized, 7,995 and 3,875
                sharesissued
                and outstanding at June 30, 2007 and December 31, 2006,
                respectively
            
            
            80
            
            
            39Common
                stock, $0.01 par value, 105,000,000 shares authorized, 26,971,465
                shares
                issued and 26,958,965 sharesoutstanding
                in June 30, 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 inJune
                30, 2007 and December 31, 2006, respectively
            
            
            —
            
            
            —Capital
                in excess of par value
            
            
            118,729,981
            
            
            114,514,725Accumulated
                deficit
            
            
            (105,947,856
            )
            
            (101,338,396
            )**Total
                stockholders’ equity**
            
            
            13,051,795
            
            
            13,445,958**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            24,722,110
            
            $
            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**
            
            **Six
                months ended****June
                30,**
            
            **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)****Revenues**
            
            $
            13,744,209
            
            **$**
            10,543,112
            
            **$**
            26,950,163
            
            **$**
            20,065,270**Operating
                expenses:**Cost
                of revenues, exclusive of depreciation and amortization shown separately
                below
            
            
            12,751,750
            
            
            9,382,411
            
            
            24,837,521
            
            
            17,987,714Depreciation
                and amortization
            
            
            418,635
            
            
            247,302
            
            
            810,817
            
            
            477,842Selling,
                general and administrative expenses (includes approximately $144,000
                and
                $283,000 for the three months ended June 30, 2007 and June 30, 2006,
                respectively, and approximately $316,000 and $500,000 for the six
                months
                ended June 30, 2007 and June 30, 2006, respectively, of non-cash
                compensation)
            
            
            3,269,297
            
            
            3,960,763
            
            
            6,696,666
            
            
            7,614,724Advertising
                and marketing
            
            
            23,571
            
            
            301,759
            
            
            105,786
            
            
            324,751Total
                operating expenses
            
            
            16,463,253
            
            
            13,892,235
            
            
            32,450,790
            
            
            26,405,031**Operating
                loss**
            
            
            (2,719,044
            )
            
            (3,349,123
            )
            
            (5,500,627
            )
            
            (6,339,761
            )**Other
                income (expense)**Interest
                income
            
            
            30,356
            
            
            102,117
            
            
            51,071
            
            
            235,578Interest
                expense
            
            
            (27,830
            )
            
            (29,514
            )
            
            (50,979
            )
            
            (59,514
            )Gain
                on settlements of debt
            
            
            —
            
            
            465,854
            
            
            —
            
            
            465,854Gain
                on sale from investment in Estel
            
            
            937,578
            
            
            —
            
            
            937,578
            
            
            —Loss
                from investment in Estel
            
            
            (15,000
            )
            
            (33,080
            )
            
            (60,000
            )
            
            (70,638
            )Other
            
            
            13,501
            
            
            48,758
            
            
            13,497
            
            
            38,311Minority
                interests
            
            
            —
            
            
            2,235
            
            
            —
            
            
            8,527Total
                other income (expense)
            
            
            938,605
            
            
            556,370
            
            
            891,167
            
            
            618,118**Loss
                from continuing operations**
            
            
            (1,780,439
            )
            
            (2,792,753
            )
            
            (4,609,460
            )
            
            (5,721,643
            )**Discontinued
                operations:**Loss
                from discontinued operations
            
            
            —
            
            
            (8,938
            )
            
            —
            
            
            (34,108
            )**Net
                loss**
            
            $
            (1,780,439
            )
            **$**
            (2,801,691
            )
            **$**
            (4,609,460
            )
            **$**
            (5,755,751
            )**Basic
                and diluted net loss per common share:**Loss
                from continuing operations
            
            $
            (0.07
            )
            **$**
            (0.10
            )
            **$**
            (0.17
            )
            **$**
            (0.22
            )Loss
                from discontinued operations
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss per common share
            
            $
            (0.07
            )
            **$**
            (0.10
            )
            **$**
            (0.17
            )
            **$**
            (0.22
            )**Weighted
                average shares outstanding**Basic
                and diluted
            
            
            26,958,965
            
            
            26,894,211
            
            
            26,958,965
            
            
            26,546,842





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





4


**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





**Consolidated
      Statements of Cash Flows**




**Six
                months ended June 30,****2007**
            
            **2006****(unaudited)**
            
            **(unaudited)****Cash
                flows from operating activities:**Net
                loss
            
            $
            (4,609,460
            )
            **$**
            (5,755,751
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Gain
                from sale of assets
            
            
            (9,759
            )
            
            (40,683
            )Loss
                on impairment discontinued operations
            
            
            —
            
            
            34,108Depreciation
                and amortization
            
            
            810,817
            
            
            477,842Bad
                debt expense, net
            
            
            35,117
            
            
            (68,250
            )Non-cash
                compensation expense
            
            
            315,742
            
            
            499,665Gain
                on forgiveness of debt
            
            
            —
            
            
            (465,854
            )Gain
                on sale from investment in Estel
            
            
            (937,578
            )
            
            —Loss
                from investment in Estel
            
            
            60,000
            
            
            70,638Minority
                interests
            
            
            —
            
            
            (8,527
            )Increase
                (decrease) in cash attributable to changes in operating assets and
                liabilities:Accounts
                receivable
            
            
            715,796
            
            
            (1,052,503
            )Prepaid
                expenses and other current assets
            
            
            (64,976
            )
            
            (175,175
            )Other
                assets
            
            
            6,424
            
            
            (26,703
            )Accounts
                payable and accrued expenses
            
            
            (1,740,567
            )
            
            708,296Liabilities
                of discontinued operations
            
            
            (7,267
            )
            
            (385,724
            )Other
                long-term liabilities
            
            
            (65,323
            )
            
            —**Net
                cash provided by (used in) operating activities**
            
            
            (5,491,034
            )
            
            (6,188,621
            )**Cash
                flows from investing activities:**Purchase
                of property and equipment
            
            
            (597,642
            )
            
            (2,099,675
            )Proceeds
                from sale of investments in Estel
            
            
            484,985
            
            
            —Advances
                to Estel
            
            
            (15,130
            )
            
            (47,853
            )Payments
                from Estel
            
            
            20,563
            
            
            67,102Return
                of (payments for) security deposits
            
            
            (3,000
            )
            
            146,598Repayments
                of (payments for) restricted cash
            
            
            365,000
            
            
            (238,390
            )Payments
                of legal fees for intellectual property
            
            
            —
            
            
            (34,012
            )Difference
                payment related to purchase of minority interest in Efonica joint
                venture
            
            
            (171,852
            )
            
            —**Net
                cash used in investing activities**
            
            
            82,924
            
            
            (2,206,230
            )**Cash
                flows from financing activities:**Proceeds
                from sale of Preferred Stock, Series A-2, A-3 and A-4, net
            
            
            4,104,532
            
            
            —Proceeds
                from exercise of warrants
            
            
            —
            
            
            500Payments
                of long-term debt and capital lease /equipment financing obligations
            
            
            (122,879
            )
            
            (484,150
            )**Net
                cash provided by (used in) financing activities**
            
            
            3,981,653
            
            
            (483,650
            )**Net
                decrease in cash and cash equivalents**
            
            
            (1,426,457
            )
            
            (8,878,501
            )**Cash
                and cash equivalents, beginning of period**
            
            
            2,743,155
            
            
            14,790,504**Cash
                and cash equivalents, end of period**
            
            $
            1,316,698
            
            **$**
            5,912,003





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




5


**FUSION
      TELECOMMUNICATIONS INTERNATIONAL, INC.**


**AND
      SUBSIDIARIES**





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




**Six
                months ended June 30,****2007**
            
            **2006****(unaudited)**
            
            **(unaudited)**Supplemental
                disclosure of cash flow information:Cash
                paid during the period for interest
            
            $
            14,582
            
            $
            31,669Supplemental
                disclosure of non-cash investing and financing activities:Acquisition
                of capital lease/equipment financing obligations
            
            $
            92,500
            
            $
            228,800Acquisition
                of short term financing agreement
            
            $
            —
            
            $
            492,964Release
                of Efonica shares from escrow
            
            $
            —
            
            $
            4,357,497Issuance
                of restricted stock for consulting services
            
            $
            —
            
            $
            66,250Liability
                for acquisition of Intellectual Property Transfer
                Agreement
            
            $
            —
            
            $
            120,000


****


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





***Earnings
      Per Share***





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





Unexercised
      stock options to purchase 3,849,371 and 2,852,033 shares of the Company’s common
      stock as of June 30, 2007 and 2006, respectively, were not included in the
      computation of diluted earnings per share because the exercise of the stock
      options would be anti-dilutive to earnings per share.





Unexercised
      warrants to purchase 11,432,029  and
      7,802,791 shares of the Company’s common stock as of June 30, 2007 and 2006,
      respectively, were not included in the computation of diluted earnings per
      share
      because the exercise of the warrants would be anti-dilutive to earnings per
      share.


****


***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 June
      30, 2007 and 2006, was $144,415 and $245,639, respectively, and for the six
      months ended June 30, 2007 and 2006, was $282,616 and $449,871, respectively,
      which is included in selling, general and administrative expenses in the
      Consolidated Statements of Operations.





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





7


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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





The
      following table summarizes stock option activity for the six months ended June
      30, 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
            
            
            1,141,851
            
            
            0.69Cancelled
                or expired
            
            
            (125,026
            )
            
            2.87Outstanding
                at June 30, 2007
            
            
            3,849,371
            
            $
            2.71
            
            
            6.19
            
            $
            -Exercisable
                at June 30, 2007
            
            
            1,997,938
            
            $
            3.94
            
            
            4.44
            
            $
            -





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:





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





As
      of
      June 30, 2007 there was approximately $791,000 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 2.26 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
      June
      30, 2007, the Company had a working capital deficit of approximately $2,950,000
      and an accumulated deficit of approximately $105,948,000. The Company has
      continued to sustain losses from operations, and for the six months ended June
      30, 2007 and 2006 has incurred net losses of approximately $4,609,000 and
      $5,756,000, respectively. In addition, the Company has not generated positive
      cash flow from operations since inception. Management is aware that its current
      cash resources are not adequate to fund its operations for the remainder of
      the
      year. During the six months ended June 30, 2007, the Company raised $4.1 million
      from its second phase and over-allotment of the private placement. The Company’s
      long-term liquidity is partially dependent on its ability to successfully
      complete the rollout of its full suite of retail VoIP paid services and
      effectively market its paid services, in order to attain profitable operations
      in the future. The Company cannot make any guarantees if and when it will be
      able to attain profitability. These conditions, among others, raise substantial
      doubt about the Company’s ability to continue operations as a going concern. No
      adjustment has been made in the consolidated financial statements to the amounts
      and classification of assets and liabilities which could result, should the
      Company be unable to continue as a going concern.





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





***Efonica***





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





During
      February 2005, the Company 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.





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.




9





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





***Estel***





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





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




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




**June
                30, 2007**
            
            **December
                31, 2006****(unaudited)**Prepaid
                expenses
            
            $
            487,778
            
            $
            440,028Inventory
            
            
            79,968
            
            
            67,418Notes
                receivables
            
            
            48,212
            
            
            47,313Other
            
            
            71,226
            
            
            67,448$
            687,184
            
            $
            622,207





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





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





**June
                30, 2007**
            
            **December
                31, 2006****(unaudited)**Trade
                accounts payable
            
            $
            6,534,300
            
            $
            8,778,068Accrued
                expenses
            
            
            832,454
            
            
            725,287Accrued
                Payroll and Vacation
            
            
            225,852
            
            
            255,792Cost
                Accrual
            
            
            1,183,291
            
            
            732,403Interest
                payable
            
            
            435,164
            
            
            398,768Deferred
                revenue
            
            
            199,175
            
            
            239,511Short-term
                financing agreement
            
            
            164,653
            
            
            172,863Other
            
            
            158,442
            
            
            158,420$
            9,733,331
            
            $
            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
      June
      30, 2007 and December 31, 2006, components of long-term debt and capital
      lease/equipment financing obligations of the Company are comprised of the
      following:




**June
                30, 2007**
            
            **December
                31, 2006****(unaudited)**Promissory
                notes payable
            
            $
            150,000
            
            $
            150,000Capital
                lease/equipment financing obligations
            
            
            1,036,375
            
            
            1,066,746Total
                long-term debt and capital lease/equipment obligations
            
            
            1,186,375
            
            
            1,216,746Less
                current portion
            
            
            (1,186,375
            )
            
            (1,216,746
            )$
            —
            
            $
            —





***Promissory
      note payable***





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





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





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





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





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





Total
                minimum payments due during the period ended June 30, 2007
            
            $
            1,624,716Less
                amount representing interest
            
            
            (438,341
            )Present
                value of minimum payments
            
            
            1,186,375Less
                current portion
            
            
            (1,186,375
            )$
            —





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




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




11




In
      addition, during December 2006, the Company designated 10,000 shares of
      Cumulative Convertible Preferred Stock at $1,000 per share to be sold via
      private placement for the purpose of raising working capital for the Company’s
      operations. If the Company exceeded 7,000 shares, it could exercise an
      over-allotment option and sell the remaining 3,000 shares.




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





On
      May 9,
      2007, the Company completed the second phase of the private placement, and
      issued a total of 3,375 shares of Preferred Stock designated Series A-2
      Preferred Stock, for which approximately $3.375 million was received net of
      expenses of approximately $15,000, and is being used for working capital. In
      addition, the Company issued warrants to purchase 2,033,151 shares of common
      stock exercisable at $0.83 per share. The terms of the Series A-1 Preferred
      Stock will pay dividends at 8% and are convertible into the Company’s common
      stock at a fixed conversion price of $0.83 per share, which represent a 20%
      premium over the average price of the common stock for the three trading days
      prior to the closing date of the transaction. 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 its option to sell the remaining shares, 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.





On
      May 9,
      2007, the Company also completed the first round of the over-allotment portion
      of the private placement financing. The Company issued 700 shares of Preferred
      Stock, Series A-3 for which $.7 million was received, and is being used for
      working capital. In addition, the Company issued warrants to purchase 421,687
      shares of common stock exercisable at $0.83 per share. The Series A-3 Preferred
      Stock will pay dividends at 8% per annum and will be convertible into the
      Company’s common stock at a fixed price of $0.83 per share, which represent a
      20% premium over the average price of the common stock for the three trading
      days prior to the closing date of the transaction. 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.





On
      June
      8, 2007, the Company completed the second and final round of the over-allotment
      portion of the private placement financing. The Company issued 45 shares of
      Preferred Stock, Series A-4 for which $.045 million was received, and is being
      used for working capital. In addition, the Company issued warrants to purchase
      28,482 shares of common stock exercisable at $0.79 per share. The Series A-4
      Preferred Stock will pay dividends at 8% per annum and will be convertible
      into the Company's common stock at a fixed price of $0.83 per share,
      which represent a 20% premium over the average price of the common stock for
      the
      three trading days prior to the closing date of the transaction. 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 $0.79.




12





**Dividends**





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





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





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





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




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





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





13


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





**10.**
            **Commitments
                and Contingencies**




***Legal
      Matters*** ****





On
      May 28, 2003, Jack Grynberg, et al., an investor in one of the
      Company's private offerings, filed a complaint with the Denver District
      Court, State of Colorado ( *Jack
      Grynberg, et al v. Fusion Telecommunications International, Inc., et
      al* ,
      03-CV-3912) seeking damages in the amount of $400,000 for the purchase of an
      interest in Fusion’s 1999 private placement offering of subordinated convertible
      notes through Joseph Stevens & Company, Inc., a registered broker dealer.
      This complaint asserted the following claims for relief against the Company:
      Breach of Fiduciary Duty, Civil Theft, Deceptive Trade Practices, Negligent
      Misrepresentation, Deceit Based on Fraud, Conversion, Exemplary Damages and
      Prejudgment Interest. On June 25, 2004, the Company filed with
      the Court a Motion to Dismiss, which was granted. The Company was awarded
      attorneys’ fees by the court. A written order of Judgment in favor of the
      Company and against the plaintiffs in the amount of approximately $40,000 was
      recorded on January 24, 2006. The plaintiffs filed an appeal of the motion,
      which the courts dismissed and awarded the Company attorney fees.




On
      March 30, 2006, a financing company affiliated with an equipment vendor
      filed a complaint with the Circuit Court in Broward County, State of Florida
      seeking damages in the amount of approximately $1,380,000 allegedly due on
      two
      promissory notes plus accrued interest through March 1, 2006 and attorney’s
      fees and costs. The Company asserted a counterclaim against the vendor which
      was
      settled subsequent to the year ended 2006, resulting in the amendment of an
      existing contract with the vendor. 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, and unemployment taxes, which have not yet been concluded
      and may result in an indeterminate amount of tax liability.




14





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.





***Restricted
      Cash***





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




15




**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 and six months ended June 30, 2006 have been presented
      in a manner consistent with the three and six months ended June 30,
      2007.




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




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




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





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.




16


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





**CONDENSED
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**





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




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





**Three
                months ended June 30, 2007****Voice
                to**
              **Carriers**
            
            **Consumers,
                Corporations and Other**
            
            **Corporate
                & Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            13,342,954
            
            $
            401,255
            
            $
            —
            
            $
            13,744,209Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (12,415,774
            )
            $
            (335,976
            )
            $
            —
            
            $
            (12,751,750
            )Depreciation
                and amortization
            
            $
            (342,380
            )
            $
            (75,846
            )
            $
            (409
            )
            $
            (418,635
            )Selling,
                general and administrative
            
            $
            (2,084,314
            )
            $
            (1,141,151
            )
            $
            (43,832
            )
            $
            (3,269,297
            )Advertising
                and marketing
            
            $
            (13,987
            )
            $
            (9,584
            )
            $
            —
            
            $
            (23,571
            )Total
                Other income (expense)
            
            $
            931,449
            
            $
            7,156
            
            $
            —
            
            $
            938,605Net
                income (loss) from continuing operations
            
            $
            (582,052
            )
            $
            (1,154,146
            )
            $
            (44,241
            )
            $
            (1,780,439
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Net
                Income (Loss)
            
            $
            (582,052
            )
            $
            (1,154,146
            )
            $
            (44,241
            )
            $
            (1,780,439
            )Capital
                Expenditures
            
            $
            139,282
            
            $
            172,815
            
            $
            —
            
            $
            312,097





**Three
                months ended June 30, 2006****Voice
                to Carriers**
            
            **Consumers,**
              **Corporations
                and Other**
            
            **Corporate
                & Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            9,574,317
            
            $
            968,795
            
            $
            —
            
            $
            10,543,112Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (8,755,496
            )
            $
            (626,915
            )
            $
            —
            
            $
            (9,382,411
            )Depreciation
                and amortization
            
            $
            (234,246
            )
            $
            (13,056
            )
            $
            —
            
            $
            (247,302
            )Selling,
                general and administrative
            
            $
            (2,234,023
            )
            $
            (1,577,240
            )
            $
            (149,500
            )
            $
            (3,960,763
            )Advertising
                and marketing
            
            $
            (24,769
            )
            $
            (276,990
            )
            $
            —
            
            $
            (301,759
            )Total
                Other income (expense)
            
            $
            321,687
            
            $
            234,683
            
            $
            —
            
            $
            556,370Net
                income (loss) from continuing operations
            
            $
            (1,352,530
            )
            $
            (1,290,723
            )
            $
            (149,500
            )
            $
            (2,792,753
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            (8,938
            )
            $
            —
            
            $
            (8,938
            )Net
                Income (Loss)
            
            $
            (1,352,530
            )
            $
            (1,299,661
            )
            $
            (149,500
            )
            $
            (2,801,691
            )Capital
                Expenditures
            
            $
            70,301
            
            $
            839,565
            
            $
            861,900
            
            $
            1,771,766




17




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




**Six
                months ended June 30, 2007****Voice
                to Carriers**
            
            **Consumers,**
              **Corporations
                and Other**
            
            **Corporate
                &Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            26,101,633
            
            $
            848,530
            
            $
            —
            
            $
            26,950,163Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (24,192,914
            )
            $
            (644,607
            )
            $
            —
            
            $
            (24,837,521
            )Depreciation
                and amortization
            
            $
            (656,244
            )
            $
            (154,164
            )
            $
            (409
            )
            $
            (810,817
            )Selling,
                general and administrative
            
            $
            (4,182,587
            )
            $
            (2,465,751
            )
            $
            (48,328
            )
            $
            (6,696,666
            )Advertising
                and marketing
            
            $
            (29,913
            )
            $
            (75,873
            )
            $
            —
            
            $
            (105,786
            )Total
                Other income (expense)
            
            $
            884,989
            
            $
            6,178
            
            $
            —
            
            $
            891,167Net
                income (loss) from continuing operations
            
            $
            (2,075,036
            )
            $
            (2,485,687
            )
            $
            (48,737
            )
            $
            (4,609,460
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Net
                Income (Loss)
            
            $
            (2,075,036
            )
            $
            (2,485,687
            )
            $
            (48,737
            )
            $
            (4,609,460
            )Capital
                Expenditures
            
            $
            356,780
            
            $
            240,862
            
            $
            —
            
            $
            597,642





**Six
                months ended June 30, 2006****Voice
                to Carriers**
            
            **Consumers,**
              **Corporations
                and Other**
            
            **Corporate
                & Unallocated**
            
            **Consolidated**Net
                revenues
            
            $
            17,908,889
            
            $
            2,156,381
            
            $
            —
            
            $
            20,065,270Cost
                of revenues (exclusive of depreciation and
                amortization)
            
            $
            (16,540,772
            )
            $
            (1,446,942
            )
            $
            —
            
            $
            (17,987,714
            )Depreciation
                and amortization
            
            $
            (449,180
            )
            $
            (28,662
            )
            $
            —
            
            $
            (477,842
            )Selling,
                general and administrative
            
            $
            (4,369,036
            )
            $
            (2,927,945
            )
            $
            (317,743
            )
            $
            (7,614,724
            )Advertising
                and marketing
            
            $
            (36,020
            )
            $
            (288,731
            )
            $
            —
            
            $
            (324,751
            )Total
                Other income (expense)
            
            $
            346,499
            
            $
            271,619
            
            $
            —
            
            $
            618,118Net
                income (loss) from continuing operations
            
            $
            (3,139,620
            )
            $
            (2,264,280
            )
            $
            (317,743
            )
            $
            (5,721,643
            )Income
                (Loss) from discontinued operations
            
            $
            —
            
            $
            (34,108
            )
            $
            —
            
            $
            (34,108
            )Net
                Income (Loss)
            
            $
            (3,139,620
            )
            $
            (2,298,388
            )
            $
            (317,743
            )
            $
            (5,755,751
            )Capital
                Expenditures
            
            $
            140,602
            
            $
            984,088
            
            $
            974,985
            
            $
            2,099,675





AssetsJune
                30, 2007
            
            $
            10,694,624
            
            $
            12,712,870
            
            $
            1,314,616
            
            $
            24,722,110December
                31,2006
            
            $
            11,664,585
            
            $
            13,129,701
            
            $
            2,779,014
            
            $
            27,573,300





18





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




*The
      following discussion of our financial condition and results of operations should
      be read together with our consolidated financial statements and the related
      notes thereto included in another part of this Quarterly Report on Form 10-Q.
      This discussion contains certain forward-looking statements; within the meaning
      of the Private Securities Litigation Reform Act of 1995, that involve
      substantial risks and uncertainties. When used in this report the words
“anticipate,” “believe,” “estimate,” “expect” and similar expressions as they
      relate to our management or us are intended to identify such forward-looking
      statements. Our actual results, performance or achievements could differ
      materially from those expressed in, or implied by, these forward-looking
      statements. Historical operating results are not necessarily indicative of
      the
      trends in operating results for any future period.*




We
      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
      built
      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 June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            ******2006**
            
            **2007**
            
            ******2006**Revenues
            
            $
            13,744,209
            
            $
            10,543,112
            
            $
            26,950,163
            
            $
            20,065,270Operating
                expenses:Cost
                of revenues
            
            
            12,751,750
            
            
            9,382,411
            
            
            24,837,521
            
            
            17,987,714Depreciation
                and amortization
            
            
            418,635
            
            
            247,302
            
            
            810,817
            
            
            477,842Selling,
                general and administrative
            
            
            3,269,297
            
            
            3,960,763
            
            
            6,696,666
            
            
            7,614,724Advertising
                and marketing
            
            
            23,571
            
            
            301,759
            
            
            105,786
            
            
            324,751Total
                operating expenses
            
            
            16,463,253
            
            
            13,892,235
            
            
            32,450,790
            
            
            26,405,031Operating
                Loss
            
            
            (2,719,044
            )
            
            (3,349,123
            )
            
            (5,500,627
            )
            
            (6,339,761
            )Other
                income (expense):Interest
                income
            
            
            30,356
            
            
            102,117
            
            
            51,071
            
            
            235,578Interest
                expense
            
            
            (27,830
            )
            
            (29,514
            )
            
            (50,979
            )
            
            (59,514
            )Gain
                on settlement of debt
            
            
            —
            
            
            465,854
            
            
            —
            
            
            465,854Gain
                on sale of investment in Estel
            
            
            937,578
            
            
            —
            
            
            937,578
            
            
            —Loss
                from investment in Estel
            
            
            (15,000
            )
            
            (33,080
            )
            
            (60,000
            )
            
            (70,638
            )Other
            
            
            13,501
            
            
            48,758
            
            
            13,497
            
            
            38,311Minority
                interests
            
            
            —
            
            
            2,235
            
            
            —
            
            
            8,527Total
                other income (expense)
            
            
            938,605
            
            
            556,370
            
            
            891,167
            
            
            618,118Loss
                from continuing operations
            
            
            (1,780,439
            )
            
            (2,792,753
            )
            
            (4,609,460
            )
            
            (5,721,643
            )Income
                from discontinued operations
            
            
            —
            
            
            (8,938
            )
            
            —
            
            
            (34,108
            )Net
                loss
            
            $
            (1,780,439
            )
            $
            (2,801,691
            )
            $
            (4,609,460
            )
            $
            (5,755,751
            )




19




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




**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Revenues
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            100
            %Operating
                expenses:Cost
                of revenues
            
            
            92.8
            %
            
            89.0
            %
            
            92.2
            %
            
            89.7
            %Depreciation
                and amortization
            
            
            3.0
            %
            
            2.3
            %
            
            3.0
            %
            
            2.4
            %Selling,
                general and administrative
            
            
            23.8
            %
            
            37.6
            %
            
            24.8
            %
            
            37.9
            %Advertising
                and marketing
            
            
            0.2
            %
            
            2.9
            %
            
            0.4
            %
            
            1.6
            %Total
                operating expenses
            
            
            119.8
            %
            
            131.8
            %
            
            120.4
            %
            
            131.6
            %Operating
                loss
            
            
            (19.8
            %)
            
            (31.8
            %)
            
            (20.4
            %)
            
            (31.6
            %)Other
                income (expense)Interest
                income
            
            
            0.2
            %
            
            1.0
            %
            
            0.2
            %
            
            1.2
            %Interest
                expense
            
            
            (0.2
            %)
            
            (0.3
            %)
            
            (0.2
            %)
            
            (0.3
            %)Gain
                on settlement of debt
            
            
            0.0
            %
            
            4.4
            %
            
            0.0
            %
            
            2.3
            %Gain
                on sale of investment in Estel
            
            
            6.8
            %
            
            0.0
            %
            
            3.5
            %
            
            0.0
            %Loss
                from investment in Estel
            
            
            (0.1
            %)
            
            (0.3
            %)
            
            (0.2
            %)
            
            (0.3
            %)Other
            
            
            0.1
            %
            
            0.5
            %
            
            0.0
            %
            
            0.2
            %Minority
                interests
            
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %
            
            0.0
            %Total
                other income (expense)
            
            
            6.8
            %
            
            5.3
            %
            
            3.3
            %
            
            3.1
            %Loss
                from continuing operations
            
            
            (13.0
            %)
            
            (26.5
            %)
            
            (17.1
            %)
            
            (28.5
            %)Income
                from discontinued operations
            
            
            0.0
            %
            
            (0.1
            %)
            
            0.0
            %
            
            (0.2
            %)Net
                loss
            
            
            (13.0
            %)
            
            (26.6
            %)
            
            (17.1
            %)
            
            (28.7
            %)





**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.




20





In
      an
      effort to further increase margins, expand our retail customer base, and develop
      more stable revenue streams, we have begun to focus significant effort and
      resources to build our VoIP business to consumers and corporations. While this
      does not yet represent a significant portion of our revenue base, we expect
      to
      continue to increase our emphasis in this area. We believe that this will
      complement our carrier business with a higher margin and more stable customer
      base.





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





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





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





**Operating
      Expenses**





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




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





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





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





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




21





**Company
      Highlights**




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




***Six
      Months Ended June 30, 2007***





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





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




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





***Six
      Months Ended June 30, 2006***




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




22




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





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





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





***Revenues***





Consolidated
      revenues were $13.7 million during the three months ended June 30, 2007,
      compared to $10.5 million during the three months ended June 30, 2006, an
      increase of $3.2 million or 30.4%.





Revenues
      for Voice to Carriers increased $3.8 million or 39.4%, to $13.4 million during
      the three months ended June 30, 2007 from $9.6 million during the three months
      ended June 30, 2006. The increase revenues were the result of an increase in
      voice traffic as well as an increase in rates compared to the three months
      ended
      June 30, 2006. We expect the revenue from our Voice to Carriers segment to
      continue to increase in future quarters.





Revenues
      for Consumers, Corporations and Other decreased $0.6 million or 58.6% to $0.4
      million during the three months ended June 30, 2007, from $1 million during
      the
      three months ended June 30, 2006. This decrease was mainly due to technical
      difficulties encountered in the development of our Efonica retail services
      platform, which held back the growth in this service and due to the cancellation
      during late 2006 of a government contract and the loss of a high speed internet
      access arrangement for a foreign carrier. We have largely resolved the technical
      issues and expect this segment’s revenues to grow significantly during the next
      few years.





***Cost
      of Revenues***





Consolidated
      cost of revenues increased $3.4 million or 35.9% to $12.8 million during the
      three months ended June 30, 2007 from $9.4 million during the three months
      ended
      June 30, 2006. Approximately $3.7 million of this increase or 41.8% 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 $0.3 million or 46.4%, which went to $0.3 million during the three
      months ended June 30, 2007 from $0.6 million during the three months ended
      June
      30, 2006, consistent with the revenue decrease.





The
      consolidated gross margin percentage decreased to 7.2% during the three months
      ended June 30, 2007 from 11% during the three months ended June 30, 2006. This
      decrease relates primarily to the Consumers, Corporation and Other due to
      difficulties encountered in the development of our Efonica retail service
      platform, cancellation of a government contract and the loss of a high speed
      internet access arrangement for a foreign carrier.





23





**Operating
      Expenses**





***Depreciation
      and Amortization*** .
      Depreciation and amortization increased by $0.2 million or 69.3% to
      $0.4 million during the three months ended June 30, 2007, from
      $0.2 million during the three months ended June 30, 2006. Our depreciation
      expense increased as more assets were acquired to support the retail platform
      during the three months ended June 30, 2006.





***Selling,
      General and Administrative*** *.* Selling,
      general and administrative expenses decreased $0.7 million or 17.5% to
      $3.3 million during the three months ended June 30, 2007, from
      $4 million during the three months ended June 30, 2006. This decrease is
      primarily attributed to decreased salaries, benefits and other personnel related
      expenses as a result of the Company’s increased focus on cost
      containment.





***Advertising
      and Marketing*** *.* Advertising
      and marketing expenses decreased $278,000 or 92.2% to $24,000 during the three
      months ended June 30, 2007, from $302,000 during the three months ended June
      30,
      2006. The decrease is a result of a more aggressive marketing campaign during
      the three months ended June 30, 2006.





***Operating
      Loss*** *.* Our
      operating loss decreased $0.6 million or 18.8% to a loss of $2.7 million during
      the three months ended June 30, 2007, from a loss of $3.3 million during the
      three months ended June 30, 2006. The decrease in operating loss was primarily
      attributable to the increased revenues and reduced selling, general and
      administrative expenses.





***Other
      Income (Expense)*** *.* Total
      other income (expense) changed from other income of approximately $0.6 million
      during the three months ended June 30, 2006 to other income of $0.9 million
      during the three months ended June 30, 2007. During the three months ended
      June
      30, 2006, the Company recognized a gain on settlement of debt of approximately
      $0.5 million and during the three months ended June 30, 2007, the Company
      recognized a gain on sale from investment in Estel of approximately $0.9
      million.





***Net
      Loss*** *.* Net loss
      decreased $1 million, or 36.5% for the three months ended June 30, 2007,
      compared to the three months ended June 30, 2006. The primary factors
      contributing to the improvement were the increase in revenue, a decrease in
      selling and general and administrative and gain on sale from investment in
      Estel, mentioned above.




**Six
      Months Ended June 30, 2007, Compared with Six Months Ended June 30, 2006.**





***Revenues***





Consolidated
      revenues were $27 million during the six months ended June 30, 2007, compared
      to
      $20.1 million during the six months ended June 30, 2006, an increase of $6.9
      million or 34.3%.





Revenues
      for Voice to Carriers increased $8.2 million or 45.7%, to $26.1 million during
      the six months ended June 30, 2007 from $17.9 million during the six months
      ended June 30, 2006. The increase revenues were the result of an increase in
      voice traffic as well as an increase in rates compared to the same period of
      2006. We expect the revenue from our Voice to Carriers segment to continue
      to
      increase in future quarters.





Revenues
      for Consumers, Corporations and Other decreased $1.3 million or 60.7% to $0.9
      million during the six months ended June 30, 2007, from $2.2 million during
      the
      six months ended June 30, 2006. This decrease was mainly due to technical
      difficulties encountered in the development of our Efonica retail services
      platform, which held back the growth in this service and also due to the
      cancellation of a government contract and the loss of a high speed internet
      access arrangement for a foreign carrier. We have largely resolved the technical
      issues and expect this segment’s revenues to grow significantly during the next
      few years.




24





***Cost
      of Revenues***





Consolidated
      cost of revenues increased $6.8 million or 38.1% to $24.8 million during the
      six
      months ended June 30, 2007 from $18 million during the six months ended June
      30,
      2006. Approximately $7.7 million of this increase or 46.3% 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 $0.8
      million or 55.5%, which went to $0.6 million during the six months ended June
      30, 2007 from $1.4 million during the first six months ended June 30, 2006,
      consistent with the revenue decrease.





The
      consolidated gross margin percentage decreased to 7.8% during the six months
      ended June 30, 2007 from 10.4% during the six months ended June 30, 2006. This
      decrease relates primarily to the Consumers, Corporation and Other due to
      difficulties encountered in the development of our Efonica retail service
      platform, cancellation of a government contract and the loss of a high speed
      internet access arrangement for a foreign carrier.





***Operating
      Expenses***





***Depreciation
      and Amortization*** .
      Depreciation and amortization increased by $0.3 million or 69.7% to
      $0.8 million during the six months ended June 30, 2007, from
      $0.5 million during the six months ended June 30, 2006. 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 $0.9 million or 12.1% to
      $6.7 million during the six months ended June 30, 2007, from
      $7.6 million during the six months ended June 30, 2006. This decrease is
      primarily attributed to decreased salaries, benefits and other personnel related
      expenses as a result of the Company’s increased focus on cost
      containment.





***Advertising
      and Marketing*** *.* Advertising
      and marketing expenses decreased $0.2 million or 67.4% to $0.1 million during
      the six months ended June 30, 2007, from $0.3 million during the six months
      ended June 30, 2006. The decrease is a result of a more aggressive marketing
      campaign during the six months ended June 30, 2006.





***Operating
      Loss*** *.* Our
      operating loss decreased $0.8 million or 13.2% to a loss of $5.5 million during
      the six months ended June 30, 2007, from a loss of $6.3 million during the
      six
      months ended June 30, 2006. The decrease in operating loss was primarily
      attributable to the increased revenues and reduced selling, general and
      administrative expenses





***Other
      Income (Expense)*** *.* Total
      other income (expense) changed from other income of approximately $0.6 million
      during the six months ended June 30, 2006 to other income of $0.9 million during
      the six months ended June 30, 2007.





Interest
      income decreased $185,000 or 78.3% to $51,000 during the six months ended June
      30, 2007 from $236,000 during the six month ended June 30, 2006. The reduction
      is primarily due to cash used in operating activities.





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





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





***Net
      Loss*** *.* Net loss
      decreased $1.1 million, or 19.9% for the six months ended June 30, 2007,
      compared to the six months ended June 30, 2006. The primary factors contributing
      to the improvement were the increase in revenue, a decrease in selling and
      general and administrative and a gain on sale from investment in Estel,
      mentioned above.




25




**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 June 30, 2007,
      we had stockholders’ equity of approximately $13.1 million as compared to
      $13.4 million at December 31, 2006, and a working capital deficit of
      approximately $2.9 million as compared to $2.7 million at December 31,
      2006. The proceeds have been and will continue to be used for working capital
      and general corporate purposes, international deployment, and to fund the
      development of our retail service offerings. During the six months ended June
      30, 2007, we completed the second phase and over allotment of our private
      placement financing (See Note 7 to the consolidated financial statements
      contained in this quarterly report on Form 10-Q). We may seek further financing
      through the sale of debt or equity securities, although we have no commitments
      to do so.





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





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




**Six
                months Ended June 30,****2007**
            
            **2006**Cash
                used in operating activities
            
            $
            (5,491,034
            )
            $
            (6,188,621
            )Cash
                provided by (used in) investing activities
            
            
            82,924
            
            
            (2,206,230
            )Cash
                provided by (used in) financing activities
            
            
            3,981,653
            
            
            (483,650
            )Decrease
                in cash and cash equivalents
            
            
            (1,426,457
            )
            
            (8,878,501
            )Cash
                and cash equivalents, beginning of period
            
            
            2,743,155
            
            
            14,790,504Cash
                and cash equivalents, end of period
            
            $
            1,316,698
            
            $
            5,912,003





**Source
      of Liquidity**





As
      of
      June 30, 2007, we had cash and cash equivalents of approximately
      $1.3 million. In addition, as of June 30, 2007, we had approximately
      $0.4 million of cash restricted from withdrawal and held by banks as
      certificates of deposits securing letters of credit (equal to the amount of
      the
      certificates of deposit).





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





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.




26




Our
      cash
      capital expenditures were approximately $0.6 million and $2.1 million for the
      six months ended June 30, 2007 and 2006, respectively. We expect our cash
      capital expenditures to be approximately $.7 million for the next six months
      ending December 31, 2007. The 2007 estimated capital expenditures primarily
      consist of additional retail infrastructure development, purchase of additional
      software for expanded product offerings, and international
      deployment.




Cash
      used
      in operations was approximately $5.5 million and $6.2 million during the
      six months ended June 30, 2007 and 2006, respectively. The cash used in our
      operations has historically been a function of our net losses, expenses for
      property and equipment, and changes in working capital as a result of the timing
      of receipts and disbursements. Our net cash used in operating activities
      decreased significantly during 2007, primarily due to the completion of the
      majority of the expenses associated with the buildout of our retail
      infrastructure. As we transition our existing customers to our new
      infrastructure and continue to build that revenue base, we expect our net cash
      used in operating activities to improve during future periods.





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





**Debt
      Service Requirements**





At
      June
      30, 2007, we had approximately $1.2 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 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 six months ended June 30, 2007, the Company completed the second phase
      and
      over-allotment of the private placement. During the second phase, the Company
      issued 3,375 shares of Preferred Stock, Series A-2 for net proceeds of
      approximately $3.375 million. In addition, the Company issued warrants to
      purchase 2,033,151 shares of common stock exercisable at $0.83 per share. The
      Company received an additional $0.745 million towards the over-allotment and
      issued 700 shares of Preferred Stock, Series A-3 and 45 shares of Preferred
      Stock, Series A-4 and Warrants to purchase 421,687 and 28,482 shares of common
      stock at a fixed exercise price of $0.83.and $0.79, respectively (See Note
      7 to
      the consolidated financial statements contained in this quarterly report on
      Form
      10-Q).




**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.




27





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





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





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





Additionally,
      the majority of our VoIP services to consumers and corporations are prepaid.
      The
      revenue received from the prepayments that is related to VoIP termination
      services in the current month is booked to the current month’s revenue, and the
      remainder of the prepayments is booked to deferred revenue, until usage
      occurs.





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





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





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).




28





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





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





**Recently
      Issued Accounting Pronouncements**




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





**FORWARD-LOOKING
      STATEMENTS**





Certain
      statements contained herein may constitute forward-looking statements within
      the
      meaning of the Private Securities Litigation Reform Act of 1995. Because such
      statements include risks and uncertainties, actual results may differ materially
      from those expressed or implied by such forward-looking statements. Factors
      that
      could cause actual results to differ materially include, but are not limited
      to,
      risks associated with the integration of businesses following an acquisition,
      concentration of revenue from one source, competitors with broader product
      lines
      and greater resources, emergence into new markets, the termination of any of
      the
      Company’s significant contracts or partnerships, the Company’s inability to
      maintain working capital requirements to fund future operations or the Company’s
      inability to attract and retain highly qualified management, technical and
      sales
      personnel **.** All
      forward-looking statements included in this document are made as of the date
      hereof, based on information available to us as of the date thereof, and we
      assume no obligation to update any forward-looking statements.





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




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




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




29




·
            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.




·
            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.




30




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




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




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





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




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




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




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




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




At
      June
      30, 2007, the majority of our cash balances were held primarily in the form
      of
      short-term highly liquid investment grade money market funds held in major
      financial institutions. Due to the short-term nature of our investments, we
      believe that we are not subject to any material interest or market rate
      risks.




At
      June
      30, 2007, all of our outstanding debt has fixed interest rates. As such, we
      are
      not subject to interest rate risk on any of our debt. Consequently, we currently
      believe that our interest rate risk is very low.




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





**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.




31





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





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




**PART
        II: OTHER INFORMATION**
  **ITEM
        1** . **LEGAL
        PROCEEDINGS**




On
      May 28, 2003, Jack Grynberg, et al., an investor in one of the
      Company's private offerings, filed a complaint with the Denver District
      Court, State of Colorado ( *Jack
      Grynberg, et al v. Fusion Telecommunications International, Inc., et
      al* ,
      03-CV-3912) seeking damages in the amount of $400,000 for the purchase of an
      interest in Fusion’s 1999 private placement offering of subordinated convertible
      notes through Joseph Stevens & Company, Inc., a registered broker dealer.
      This complaint asserted the following claims for relief against the Company:
      Breach of Fiduciary Duty, Civil Theft, Deceptive Trade Practices, Negligent
      Misrepresentation, Deceit Based on Fraud, Conversion, Exemplary Damages and
      Prejudgment Interest. On June 25, 2004, the Company filed with
      the Court a Motion to Dismiss, which was granted. The Company was awarded
      attorneys’ fees by the court. A written order of Judgment in favor of the
      Company and against the plaintiff in the amount of approximately $40,000 was
      recorded on January 24, 2006. The plaintiffs filed an appeal of the motion,
      which the courts dismissed and awarded the Company attorney fees.




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.




32





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




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




**ITEM
      1A. RISK FACTORS**





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




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





(a)
            Unregistered
                Sales of Securities





None.





(b)
            Use
                of Proceeds





None





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




None.





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





None





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





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





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




33




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





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




34


**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:
                August 14, 2007
            By:
            /s/
                Matthew D. RosenMatthew
                D. RosenPresident
                and Chief Executive Officer(Principal
                Executive Officer)


****


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





35
 
 **INDEX
          TO EXHIBITS**


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