UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549



 

FORM 10K/A
(Amendment No. 1)



 

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

For The Fiscal Year Ended December 31, 2007

 
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 001-32421

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

(Exact Name of Registrant As Specified in Charter)

 
Delaware   58-2342021
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS 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)

Securities registered pursuant to Section 12(b) of the Act:

 
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share   American Stock Exchange
Redeemable Common Stock Purchase Warrants   American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

Indicate by a 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 o

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

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

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

The aggregate market value of the voting common stock held by non-affiliates of the registrant based upon the closing price of the common stock as reported by the American Stock Exchange on March 24, 2008, was $9,982,003. Solely for purposes of this calculation, shares beneficially owned by directors and officers of the registrant and persons owning 5% or more of the registrant’s common stock have been excluded, in that such persons may be deemed to be affiliates of the registrant. Such exclusion should not be deemed a determination or admission by the registrant that such individuals or entities are, in fact, affiliates of the registrant.

The number of shares outstanding of the registrant’s common stock as of March 24, 2008, is as follows:

 
Title of Each Class   Number of Shares Outstanding
Common Stock, $0.01 par value   35,762,962

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to 424(b) or (c) under the Securities Act of 1933.

NONE

 

 


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EXPLANATORY NOTE:  On March 31, 2008, the registrant filed its annual report on Form 10-K for the year ended December 31, 2007. The annual report incorporated the information required by Part III of Form 10-K by reference to the registrant’s proxy statement for the 2008 annual meeting of stockholders, to be filed prior to April 30, 2008. This amendment to Form 10-K is filed pursuant to General Instruction G(3) in order to provide the information required by Part III of Form 10-K. The following amends and restates our annual report on Form 10-K in its entirety.

2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 
  Page
PART I
        

Item 1.

Business

    1  

Item 1A.

Risk Factors

    12  

Item 1B.

Unresolved Staff Comments

    18  

Item 2.

Properties

    18  

Item 3.

Legal Proceedings

    19  

Item 4.

Submission of Matters to a Vote of Security Holders

    19  
PART II
        

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

    20  

Item 6.

Selected Financial Data

    22  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of
  Operations

    23  

Item 7A.

Quantitative and Qualitative Disclosures About Market Risks

    34  

Item 8.

Consolidated Financial Statements and Supplementary Data

    34  

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
  Disclosure

    34  

Item 9A(T).

Controls and Procedure

    35  
PART III
        

Item 10.

Directors, Executive Officers and Corporate Governance

    36  

Item 11.

Compensation of Directors and Executives

    41  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related   Stockholder Matters

    45  

Item 13.

Certain Relationships, Related Transactions, and Director Independence

    47  

Item 14.

Principal Accounting Fees and Services

    48  
PART IV
        

Item 15.

Exhibits, Financial Statement Schedules

    49  

 

Index to Consolidated Financial Statements

    F-1  


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2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

PART 1

Item 1 Business

Overview

Fusion Telecommunications International, Inc. (the terms “Company”, “us”, and/or “we” and other similar terms as used herein refer collectively to the Company together with its principal operating subsidiaries) provides voice services over the Internet (Voice over Internet Protocol or VoIP) to corporations, consumers and carriers worldwide, focusing on international calling.

Through our key assets of market knowledge, technical expertise and strategic relationships, we believe we are poised to:

Capitalize upon the growth in VoIP telecommunications, a market that Booz Allen Hamilton expects to exceed the market for traditional circuit-switched telecommunications in 2011, and expand our international penetration of VoIP applications to consumers and corporations;
Deliver customized VoIP services designed to meet the needs of the emerging markets and communities of interest worldwide;
Deliver a complete suite of VoIP service offerings for corporations and consumers;
Establish our company as a global telecommunications service provider;
Continue to expand the number of partnerships globally to facilitate the distribution of our VoIP services; and
Bridge the migration from traditional telephony to VoIP through the introduction of simple, easy to use services that can be accessed from a landline, PC or mobile phone.

We target markets that we believe have: (i) barriers to entry, (ii) substantial growth prospects, (iii) an increasing number of corporations operating within them, (iv) high cost of telecommunications services, and (v) a substantial quantity of voice and data traffic between the developed world (e.g., the United States and United Kingdom) and other countries within our target markets. In select emerging markets, we will deploy network facilities in order to connect that country to the United States.

We currently provide services to customers in over 100 countries. We believe that by using local partners in select markets, we can best distribute our services while providing a high level of local customer support.

Services

To date, we derive a significant portion of our revenues primarily from U.S.-based carriers requiring VoIP connectivity to emerging markets. As we continue to execute our strategy, we anticipate a larger number of non-U.S. based customers. We are currently seeking to expand our retail VoIP revenue stream to consumers and corporations by focusing on providing our services in emerging markets, which to date, has not generated material revenues for us. We deliver our VoIP services directly to end-users and through partnerships with companies that distribute and support our services locally. We also deliver our services through joint ventures.

We have service contracts with our customers, including carriers, corporations and consumers. Our contracts with carriers typically have a one-year renewable term, with no minimum volume per month, and allow the customer to terminate without penalty. Our contracts with corporate customers are typically for a one-year term, and have an early cancellation penalty. For the years ended December 31, 2007, 2006, and 2005, the Telco Group accounted for 9.6%, 16.2% and 11.3%, respectively, of our total revenues. In addition, for the years ended December 31, 2007 and 2006, Qwest accounted for 40% and 23.2% of our total revenues, respectively.

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Our voice services to carriers accounted for the majority of our revenues in 2007 and 2006. Our retail VoIP service enables customers, typically for a lower cost than traditional telephony, to place voice calls anywhere in the world using their personal computers, Internet protocol phones or regular telephones when accompanied by a hardware device. VoIP services utilize the Internet as opposed to circuit switching (traditional telephony technology), thereby offering cost savings to customers. These services are primarily offered under our retail brand Efonica directly to consumers, corporations, distribution partners, or Internet Service Providers around the world. In select cases, we will also provide co-branded and private label solutions. Our services are offered to customers located in Asia, the Middle East, Africa, and Latin America.

Additionally, we enter into interconnection agreements with telecommunications carriers worldwide. These agreements enable us to terminate traffic into a country and in some cases receive traffic from that country. We use the capacity obtained through these interconnection agreements to carry our own retail traffic in addition to selling capacity to other carriers desiring voice termination to those destinations. As we grow, we expect to use an increasing percentage of our capacity for higher margin retail traffic. We offer facility co-location services to other communication service providers, enabling them to co-locate their equipment within our facility, or lease a portion of our equipment. Often, we provide wholesale services to the parties who co-locate with us.

In the second quarter of 2007, we began marketing Corporate Retail Services within the United States. We now offer hosted IP-PBX services for those companies wishing to outsource the management of their telecommunications facilities. We also offer IP trunking solutions for companies wishing to retain their existing telecommunications infrastructures, but still reap the benefits of VoIP telephony. We also offer our corporate customers Internet access, toll free services, conference calling, and a premium version of our Mobilink service. On a selective basis, we offer corporate customers certain advanced solutions, including virtual private networks, private line services, and managed network services.

Our segments and their principal activities consist of the following:

Voice Services to Carriers

Voice services to carriers include 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.

Growth Strategy

Strategy

Our strategy is to provide a full suite of VoIP services to consumers and corporations in the emerging markets and to the international communities of interest around the world. We look to create local partnerships to facilitate distribution of our services within our target countries. We also look to create global partnerships to facilitate global distribution of our services.

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The details of our strategy include:

Market Customized VoIP Calling Plans to Consumers and Corporations

Our key service offering is VoIP, which allows us to offer feature-rich, prepaid and monthly subscription Internet-based telephone services at competitive prices to any consumer or business with broadband or dial-up Internet access. Quality levels, which had once been a significant issue, are fast approaching those associated with traditional voice transmission. We typically market our VoIP services to corporations and consumers through an in-country distribution partner. Many of our target markets have different cultures, calling patterns, and payment options requirements. Our marketing strategy focuses on delivering customized VoIP calling plans, feature packages and payment option to meet the needs of the target market and communities of interest around the world. We intend to build upon our market position in the international VoIP business to selectively market our VoIP services to the enterprise market. We believe that the ability to deliver global Internet access and managed private networks and other Internet-based services to multinational businesses are important capabilities in allowing us to address this market segment.

Establish Local Partners for In-Country Distribution and Support

We believe that working with strong partners allows us to best distribute services and attract, retain and support customers. We seek to develop partnership arrangements in each of our markets. Local partners offer advantages since their existing infrastructure, sales distribution channels, and technical support can be utilized, while simultaneously reducing capital needed to enter the market. We seek to partner with companies that have access to a customer base, whether online or otherwise, such as Internet service providers, wireless Internet access providers, licensed carriers, online retailers, electronics outlets, and hardware manufacturers. We intend to work with our partners to enable them to distribute and support our products and services. In select cases, we offer a co-branded or private label option. Our private label alternative enables our partners to market our products, technology platform and global reach under their own brand. This alternative is ideal for partners that do not have the capital, expertise and technology platform required to deliver our services but want to build their own brand. Local partners also offer critical insights into the regulatory environment and are familiar with the specific cultural nuances of their region. Additionally, we anticipate that prior to the rollout of any new services, our partners will work with us in contributing market intelligence to ensure a successful introduction of new products.

Deploy a Carrier Grade Network Infrastructure

We have built a highly scalable network and back office infrastructure to deliver our services. We utilize the latest Softswitch technology for routing VoIP and TDM calls to off-net customers.

We are developing and deploying back-office systems and service platforms that will enable us to offer our customers a wide array of services and features, including comprehensive feature packages, pre-paid subscription-based calling plans, and free on-net calling. The development of this extensive scalable back office will also serve to reduce our dependence on other communication carriers. We believe our focus on being a carrier grade VoIP service provider enables us to deliver the quality of service required by our customers.

Develop International Interconnections to Carriers

We seek to enter into relationships with in-country carriers to transport voice traffic to and/or from that country. We believe that we have established our presence in the voice markets due to (i) direct interconnections to postal telephone and telegraph companies and other licensed carriers, which typically provide higher quality transmission than the services offered by “gray market” operators, and (ii) competitive pricing. We believe that carriers seeking to access these markets will increasingly want to work with companies that have established relationships with postal telephone and telegraph companies and other licensed carriers, as opposed to quasi-legal operators who divert long distance traffic and revenue from those carriers. We believe gray market operators generally provide poorer quality and reliability. In several markets, we receive inbound traffic from the postal telephone and telegraph company and other licensed carriers that tend to produce higher margins than our outbound carrier voice services. We believe this inbound traffic from postal telephone and telegraph companies and other licensed carriers, strengthens our ability to ensure favorable contractual arrangements. We will use capacity on our international voice networks to carry our own retail traffic in addition to selling capacity to other carriers desiring termination to those specific destinations. Although there are significant peaks and valleys in

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the carrier revenue stream, we believe it is important to our success in the retail market to keep our cost basis low and our quality high. As we progress in the execution of our business plan, we intend to use a greater percentage of our network capacity to carry higher margin retail traffic.

Exploit Communication Patterns Among and Between Our Markets

We look to provide connectivity to emerging markets. We seek to create international interconnections with global carriers to carry our international traffic. We are targeting customers in synergistic markets to leverage the communities of interest by providing customized calling and feature service plans designed to meet the needs of ethnic communities around the world. Our regional marketing plan is focused on the emerging market communities of interest around the world. We are also seeing demand from business customers for multi-country connectivity such as a U.S. corporation seeking connectivity to India, China, and the Philippines from one provider. We also believe that traffic among emerging markets is less susceptible to price and margin erosion than traffic among developed countries.

Marketing

Our VoIP marketing strategy focuses on delivering customized calling plans, feature packages and payment options to meet the needs of emerging markets and ethnic communities around the world. Our VoIP service works with a broadband or a dial-up connection to the Internet; a capability that we believe has been ignored by many VoIP service providers. We believe this service delivery flexibility is very important, since approximately 70% of the world’s Internet users still connect through dial-up.

We market VoIP services to consumers, corporations, Internet Service Providers and carriers through direct sales or distribution partners. Internet access and private network solutions are marketed through direct and alternate distribution channels.

We market our services via a variety of distribution channels, including:

Direct Sales and Regional Management

We have a direct sales force that sells our products and services to corporations and carriers. We also have regional sales management that focuses on Latin America, Asia, Africa, the Middle East and the Caribbean. The regional executives manage and grow existing revenue streams from partners and defined strategic accounts, identify and develop new partnerships, develop strategies for market penetration, identify new market opportunities, and coordinate internal support activities.

Agents

We use independent sales agents to sell our services. Our sales agents are compensated on a commission-based structure. We typically control the product, pricing, branding, technical and secondary level customer support, billing and collections. In select instances we will provide Private Label services.

Partnerships

We seek to develop partnership arrangements in each of our markets with companies that are able to distribute and support our services. These partners can be ISPs, retail store chains, carriers, cable operators and other distribution companies. In addition to local distribution and support, our partners may provide or arrange for last mile connectivity required for the delivery of local Internet access and private networks. We also focus on the development of global partnerships that have multi-country distribution capabilities.

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Strategic Ventures

We enter into agreements with other companies to market and distribute each other’s products and services to the customer and prospect base of the other. The providing party usually will support and bill its own products. Depending on the strategic venture, we may pay or receive a commission or share revenue and/or profits with each other.

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. Efonica F-Z. LLC, the joint venture company, was incorporated in the Technology, Electronic Commerce and Media Free Zone in Dubai, United Arab Emirates, and operations of the joint venture began during 2003.

In January 2005, we entered into an agreement to acquire the remaining 49.8% minority interest in Efonica from Karamco, Inc., which was contingent upon the successful completion of our initial public offering by March 1, 2005. As our IPO was completed by this date, the Efonica transaction closed on February 18, 2005. The purchase price was $9,785,700 representing Karamco’s portion of Efonica’s debt owed to us as of the closing date and the $500,000, which was paid in cash in February 2005 to Karamco with the balance paid in shares of common stock. The number of shares issued to Karamco was determined by the $6.45 per share initial price of the common stock at the date of the IPO.

Approximately $4.4 million worth of such common stock (675,581 shares) issued to Karamco was being held in escrow (the “Escrow Shares”). In March 2006, the Escrow Shares were released to Karamco subject to a lock-up period until February 15, 2007.

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.

Efonica F-Z, LLC is presently integrated with the rest of our organization and Efonica is presently serving as our consumer services brand.

Joint Ventures and Strategic Partners

We enter into formal joint venture agreements and strategic partnerships with certain partners to market and provide our services.

The terms of each non-joint venture partnership or distribution agreement are different by partner but in general provide for a revenue or profit sharing arrangement.

Jordan

In March 2007, the Company entered into an exclusive partnership agreement with a licensed service provider to begin offering its Efonica services in Jordan. In July 2007, the Company launched its Mobilink service in Jordan, the first of several planned service offerings in that country. Since the launch, capacity has been expanded to accommodate growing customer demand in a country that has seen nearly 400% growth in internet users during the past few years, and represents a strong market opportunity for Fusion.

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Dominican Republic

On September 24, 2007, the Company acquired a license to sell communication services in the Dominican Republic. The Company plans to provide a comprehensive suite of advanced voice, data, and video products to consumers and businesses.

DigitalFX International, Inc.

In May 2007, the Company secured a strategic investment from DigitalFX International, Inc. (“DigitalFX”). DigitalFX is a leading video and content management company that combines cutting edge communications and storage tools into one versatile, easy to use digital platform. The Company plans to combine Fusion’s consumer and corporate VoIP solutions with Digital’s streaming video and content management capabilities and offer an integrated package to Fusion’s and DigitalFX’s existing and future customers.

Network Strategy

Our network strategy incorporates a packet switched platform capable of interfacing with Internet protocols and other platforms including Time Division Multiplexing (“TDM”). This is key to providing the flexibility needed to accommodate the many protocols used to transport voice and data today. We continually evaluate, and where appropriate, deploy additional communications technologies such as Multi-Protocol Label Switching (“MPLS”) and Any Transport over MPLS (“ATOM”), which handle information transport in a more efficient fashion than other earlier technologies such as frame relay and ATM.

The core of our network design is a packet-based switching system that accommodates VoIP and traditional voice, Internet, data and video services. Packet-based networking is considerably more efficient than circuit-switched systems because it can disperse packets (information) in many directions and then reassemble them at the destination. This makes much more efficient use of available facilities when compared to circuit-based systems. We believe that this design offers an extensible platform to support envisioned growth. The network design is intended to embrace emerging technologies as they become available. The network architecture is highly distributable and supports geographical expansion outside of the United States and, if necessary, can deliver packet technology to every part of the network.

We are currently using a Veraz “Softswitch”, Cisco and Nuera Orca media gateways, and carrier class Cisco routers and switches on a fiber-based gigabit Ethernet backbone to transport voice and data traffic. Softswitch is a generic term that refers to a new generation of telecommunications switching equipment that is entirely computerized and based on software processes that execute entirely on off-the-shelf servers. This provides us with call control and routing capabilities to further enhance service and performance available to our clients.

We have deployed back-office systems and services platforms that will enable us to offer our customers a wide-array of VoIP services and features, including subscription-based calling plans, free on-net calling, advanced feature packages, conferencing, and unified messaging. This development of an extensive scalable back-office will also serve to reduce our dependence on other communication carriers.

Benefits of the Fusion Distributed Network Architecture

Historically, most large international communications networks required investment and implementation of self-contained switching hardware that, in turn, could then be connected with other comparable equipment nodes via leased lines or other forms of networking. Examples of these would include equipment such as large traditional carrier switching equipment. All of the intelligence and functionality had to be replicated in each major location.

We, however, have implemented an environment that we believe is far more flexible, adaptable, and less costly than the legacy systems in use by some of our competition. Our Softswitch environment permits us to centrally control our network and service offerings from one location yet deploy gateways that interface with customers and vendors in remote locations. Each remote gateway is able to deliver our service suite even though the intelligence is centrally located in our New York facility. Instead of needing duplicative and expensive infrastructure in every location, we economize by allowing multiple disparate network equipment to be centrally managed. We believe that we can capitalize on market opportunities that would previously have been unadvisable due to the expense of deployment and associated marketplace risks.

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Capacity

In traditional telecommunications systems, capacity is a function of equipment and software. Because of its modular architecture, Softswitch capacity is much less dependent on hardware. We believe that our Softswitch environment will enable us to expand our capacity to handle traffic and our geographic reach with greater ease in the future.

Ease of Modular Service Creation

Traditional telecommunications switching systems are not easily modified to incorporate new features and functionality. Because our Softswitch environment is entirely computer driven, our systems are flexible and designed for the addition of features. We intend to expand our service offerings by integrating additional hardware and software systems.

Our distributed architecture and flexible technology platform allows us to roll out new services in a shorter period of time than many traditional telecommunication companies.

Ease of Deployment

As we continue to penetrate emerging retail markets, or as we establish interconnect agreements with additional foreign carriers, we will seek to establish regional points of presence that are connected back to our New York switching center. These regional points of presence will enable our VoIP services to be offered and delivered from remote locations, while the network intelligence and management of the services reside in our New York facility. This modular approach will also allow us to quickly respond to new market opportunities and deploy our new services rapidly.

Competition

The international telecommunications industry is highly competitive and significantly affected by regulatory changes, technology evolution, marketing strategies, and pricing decisions of the larger industry participants. In addition, companies offering Internet, data and communications services are, in some circumstances, consolidating. We believe that service providers compete on the basis of price, customer service, product quality, brand recognition and breadth of services offered. Additionally, carriers may compete on the basis of technology. Recently, we have seen carriers competing on their ability to carry VoIP. As technology evolves and legacy systems become an encumbrance, we expect carriers to compete on the basis of technological agility, their ability to adapt to, and adopt, new technologies.

In the area of VoIP we compete with companies such as Vonage, 8X8, Deltathree, Net2Phone, Skype and Mediaring. This business segment is marketing-intensive and does not have high barriers to entry. While we believe our distribution relationships and marketing skills provide us with a competitive advantage, our competitors generally have more resources and more widely recognized brand names.

We compete with several emerging international carriers, many of whom are in or entering the VoIP market, among which are Primus Telecommunications Group, VSNL, and IDT Corporation. We also compete with non-U.S. based emerging carriers. For example, in India, we compete with Bharti Tele-Ventures, Reliance Telecom and Data Access, all of which are larger, better capitalized and have broader name recognition than Fusion. Many of these competitors are becoming increasingly focused on emerging markets, as they seek to find higher margin opportunities. Many of these carriers are also focused on voice carriage, but may become increasingly focused on providing private networks and other Internet protocol services.

We also compete within the “Free Service” segment of the VoIP market, which is also a rapidly growing market segment. The current market leader in this segment is Skype. Other major players moving into this segment include Yahoo, Google, and MSN. Each of these companies offers an instant messenger (IM) service that incorporates the ability to make free computer-to-computer voice calls between registered users. By comparison, we are targeting individuals who are more focused on telephony applications than enhanced IM applications, and will offer the ability to make calls between any combination of computer, IP phones, and analog phones connected to an ATA device. In fact, there is no need to have a computer turned on, or even own a computer, to use our free service. We believe that this service will not only generate significant interest among users, but that it will also generate customers interested in upgrading to enhanced capabilities (e.g. voice mail or off-net calling) or to our subscription service offerings.

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In each country where we operate, there are numerous competitors, including VoIP service providers, wireline, wireless, and cable competitors. We believe that as international telecommunications markets continue to deregulate, competition in these markets will increase, similar to the competitive environment that has developed in the United States following the AT&T divestiture in 1984 and the Telecommunications Act of 1996. Prices for long distance voice calls in the markets in which we compete have been declining and are likely to continue to decrease. In addition, many of our competitors are significantly larger, control larger networks, and have substantially greater financial, technical and marketing resources.

We compete with business-oriented Internet access providers, including AT&T, Verizon, Qwest, and Cable & Wireless. These providers may offer both wholesale and retail Internet connectivity and are considerably larger than us and have greater brand recognition.

We have been unable to identify any direct and comprehensive competitors that deliver the same suite of services to the same markets with the same marketing strategy as we do. We compete with many different providers in various aspects of our Business Plan, but have found none that directly offer the same breadth of services focused on emerging markets. Some of our competitive advantages include:

A full suite of services that complement our VoIP service offerings as opposed to a single offering;
The ability to offer prepaid, monthly recurring service plans and free service to customers using broadband or dial-up Internet access;
Connectivity with over 200 carriers worldwide;
A bundled product offering VoIP service and Internet access to corporate users;
Our focus on emerging markets in Latin America, Asia, the Middle East, Africa, and the Caribbean;
the ability to make calls between any combination of computers, Internet connected telephones, wireless devices, and other SIP-enabled hardware;
an international partnership and distribution model, which provides for faster service deployment, reduced capital requirements and cost-efficient service delivery; and
a strategy of using local partners to enable us to access new markets, secure or obtain communication licenses, enhance distribution and provide local customer support.

At this time, we are unable to provide quantified disclosure regarding our market share in the markets in which we operate. As is common with emerging markets, the aggregate market for our products and services is usually not known until feasibility studies containing a wide range of demographic variables are conducted. We are not aware of any studies that presently exist which provide sufficient data for us to determine our market share.

Government Regulation

Generally, in the United States, we are subject to varying degrees of federal, state and local regulation and licensing, including that of the Federal Communications Commission. Internationally we also encounter similar regulations from foreign governments and their telecommunications/regulatory agencies. At each of these levels, there are significant regulations, fees and taxes imposed on the provision of telecommunications services.

We cannot assure that the applicable U.S. and foreign regulatory agencies will grant required authority or refrain from taking action against us if we are found to have provided services without obtaining the necessary authorizations or pursuant to applicable regulations. If authority is not obtained or if our pricing, and/or terms or conditions of service, or required filings are not filed, or are not updated, or otherwise do not fully comply with the rules of these agencies, third parties or regulators could challenge these actions and we could be subject to forfeiture of our license, penalties, fines, fees and/or costs.

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The U.S. Federal Government and state authorities have the power to revoke our regulatory approval to operate internationally, interstate, or intrastate, or to impose financial penalties, statutory interest and require us to pay back taxes or fees if we fail to pay, or are delinquent in paying, telecommunications taxes or regulatory fees or fail to file necessary tariffs or mandatory reports. We have been delinquent in such financial, filing and reporting obligations and required filings in the past including, but not limited to, Federal Communications Commission and Universal Service Fund reports and payments.

During July 2004, the United States Senate continued to consider how it might apply regulations to VoIP. The VoIP Regulatory Freedom Act of 2004 exempts VoIP service from state taxes and regulations and defines it as a lightly regulated information service for U.S. government regulators. This does not, however, remove the uncertainty of regulatory impact within the United States. For example, the bill reserves the ability for states to require VoIP to provide 911 services, to require VoIP providers to contribute to state universal service programs, and to pay intrastate access charges to other telecom providers.

On April 24, 2004, the FCC rendered a decision on the AT&T Petition for Declaratory Ruling (WC Docket No. 02-361) pending before them. The FCC determined that where 1+ calls were made from regular telephones, converted into an Internet protocol format, transported over the AT&T Internet backbone, and then converted back from IP format and delivered to the called party through the local exchange carriers’ local business lines (not Feature Group D trunks), the service was a “telecommunications service” for which terminating access charges were due the local exchange carrier. In its decision, the Commission stated that, under the current rules, the service provided by AT&T is a “telecommunications service” upon which interstate access charges may be assessed against AT&T. The FCC limited its decision to the specific facts of the AT&T case where the type of service involved ordinary Customer Premise Equipment (CPE) with no enhanced functionality, the calls originated and terminated on the public switched telephone network, and the calls underwent no net protocol conversion and provided no enhanced functionality to the end user due to the provider’s use of Internet protocol technology. In fact, in the AT&T case the customer was completely unaware of AT&T’s use of IP technology in transporting the call.

Although the FCC determined the services provided by AT&T to be a telecommunications service subject to interstate access charges rather than information services not subject to such charges, they did not make a determination regarding the regulatory status of phone-to-phone VoIP or its exposure to Universal Service Fund (USF), 911, Communications Assistance for Law Enforcement Act (CALEA) or any other public policy issues. The FCC further qualified the decision by stating that they “in no way intend to preclude the Commission from adopting a different approach when it resolves the IP-Enabled Services rulemaking proceeding or the Intercarrier Compensation rule making proceeding.” (Developing a Unified Intercarrier Compensation Regime, CC Docket No. 01-92, Notice of Proposed Rulemaking, 16 FCC Rcd 9610 (2001) (Intercarrier Compensation)).

In June 2005, the FCC imposed 911 obligations on providers of “interconnected” VoIP services.

In addition, the FCC requires interconnected VoIP providers to register with the FCC, comply with the Communications Assistance for Law Enforcement Act of 1994 (CALEA) and to contribute to the Universal Service Fund.

We do not believe that we are an “interconnected” VoIP service provider under the FCC definition and, therefore, do not fall under the regulatory requirements set forth above. If the FCC determines we are an “interconnected” VoIP service provider and have not registered as such, or are not compliant under the regulations, third parties or regulators could challenge these actions and we could be subject to penalties, fines, fees and/or costs. In addition, emerging technology could cause us to change our product and service configuration or the FCC definition could be changed, and we may become an “interconnected” VoIP provider under the FCC definition in the future. Should this occur, we will be required to comply with the regulations set forth above.

Some states have tried to directly regulate VoIP services on an intrastate basis, but these attempts have, so far, not held up to court challenges. Many states are holding forums to research the issues surrounding VoIP. Some are encouraging or even requesting that VoIP providers subject themselves to public service commission jurisdiction and obtain certification as telephone companies. Most are hesitant to act until a final determination is made by the FCC, but some have voluntarily done so.

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We believe VoIP may be subject to additional regulation in the future, it is uncertain when or how the effects of such regulation would affect us, nor is it understood if other countries will seek to follow suit. If additional regulation does occur, the FCC, any state or any country may impose surcharges, taxes or additional regulations upon providers of VoIP. The imposition of any such additional fees, charges, taxes and regulations on Internet protocol service providers could materially increase our costs and may limit or eliminate the competitive pricing we currently enjoy.

Intellectual Property and Trademarks

We have several trademarks and service marks, all of which are of material importance to us.

The following trademarks and service marks are registered with the United States Patent Trademark Office, however, they are not registered at the international level:

Fusion Telecommunications International
Diamond / Block Logo
Diamond Logo
Fusion
Fusion Telecom
efonica (logo)
Efonica

The following trademarks and service marks are filed with the United States Patent Trademark Office and are currently in registration process:

Fusion (logo)
Hear the Difference
Efo in
Efonicall
Efo out
Worldwide Internet Area Code
Internet Area Code
Fusion Softphone
Efonica Softphone
Callgate
Enumber
Ecash
Fusion Tel
Enumber
Estore

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The following trademark applications were abandoned by the company because it was no longer used in commerce.

FTI
Efocash
Efostore
Efofax
Efobridge
Efolink
Efogate
Efonicash
Efonifax
Efonica (softphone design)
The Area Code of the Internet
Efo
IC (design only 2 squares)
Freefonica
Internet Phone Number
Invite a Friend
Efonica Software
LL
Members Area

The telecommunications and VoIP markets have been characterized by substantial litigation regarding patent and other intellectual property rights. Litigation, which could result in substantial cost to and diversion of our efforts, may be necessary to enforce trademarks issued to us or to determine the enforceability, scope and validity of the proprietary rights of others. Adverse determinations in any litigation or interference proceeding could subject us to costs related to changing names and a loss of established brand recognition. Recently, a competitor of ours, Vonage, was sued by Verizon, for a violation of a number of VoIP related patents. Verizon was awarded substantial monetary damages.

Employees

As of December 31, 2007, we had 68 full time employees in Fusion Telecommunications International, Inc., and none of our employees are represented by a labor union. We consider our employee relations to be good, and we have never experienced a work stoppage.

Confidentiality Agreements

All our employees have signed confidentiality agreements, and it is our standard practice to require newly hired employees and, when appropriate, independent consultants, to execute confidentiality agreements. These agreements provide that the employee or consultant may not use or disclose confidential information except in the performance of his or her duties for the company, or in other limited circumstances. The steps taken by us may not, however, be adequate to prevent the misappropriation of our proprietary rights or technology.

Revenues and Assets by Geographic Area

During the years ended December 31, 2007 and 2006, 91.1% and 90.4%, respectively, of our revenue was derived from customers in the United States and 8.9% and 9.6%, respectively, from international customers. As of December 31, 2007 and 2006, 2.0% of our long-lived assets were located outside of the United States. For

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more information concerning our geographic concentration, see Note 18 of the Notes to Consolidated Financial Statements included elsewhere in this report.

Available Information

We are subject to the informational requirements of the Securities Exchange Commission and in accordance with those requirements file reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy the reports, proxy statements and other information that we file with the Commission under the informational requirements of the Securities Exchange Act at the Commission’s Public Reference Room at 450 Fifth Street N.W., Washington, DC 20549. Please call 1-800-SEC-0339 for information about the Commission’s Public Reference Room. The Commission also maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the commission’s web site is http://www.sec.gov. Our web site is http://www.fusiontel.com. We make available through our web site, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q. Current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. Information contained on our web site is not a part of this report.

Item 1A. Risk Factors

The discussion in this annual report regarding our business and operations includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “intend,” “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. This disclosure highlights some of the important risks regarding our business. The number one risk of the Company is its ability to attract fresh and continued capital to execute its comprehensive business strategy. In addition, the risks included should not be assumed to be the only things that could affect future performance. Additional risks and uncertainties include the potential loss of contractual relationships, changes in the reimbursement rates for those services as well as uncertainty about the ability to collect the appropriate fees for services provided by us. Also, the Company faces challenges in technology development and use. We may also be subject to disruptions, delays in collections, or facilities closures caused by potential or actual acts of terrorism or government security concerns.

Risks Related to Business

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.

There can be no assurance that any of our business strategies will be successful or that we will ever achieve profitability. At December 31, 2007, we had a working capital deficit of approximately ($4.2) million and stockholders’ equity of approximately $6.7 million. We have continued to sustain losses from operations and for the years ended December 31, 2007, 2006 and 2005, we have incurred a net loss applicable to common stockholders of approximately $13.2 million, $13.4 million and $9.4 million, respectively. In addition, we have not generated positive cash flow from operations for the years ended December 31, 2007, 2006 and 2005. We may not be able to generate future profits and may not be able to support our operations, or otherwise establish a return on invested capital. In addition, we may not have sufficient funds to execute our business strategy, requiring us to raise funds from capital markets, consequently, diluting our common stock.

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

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

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

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

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

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

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. There can be no assurance of our ability to introduce future services on a timely basis or our ability to derive significant revenues from them.

Our ability to deploy new products and services may be hampered by technical and operational issues which could delay our ability to derive profitable revenue from these service offerings. Additionally, our ability to market these services may prove more difficult than anticipated, including factors such as our ability to competitively price such services. There can be no assurance that we will be able to introduce our planned future services, or that we will be able to derive significant revenue 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.

We have completed the initial infrastructure build out of our major network elements and are currently integrating and testing our new services. We cannot ensure that these services will perform as expected. Our ability to effectuate our business plan is dependent on the successful rollout of our services.

We are also developing and deploying back-office systems and services platforms that will enable us to offer our customers a wide-array of new services and features including subscription-based calling plans, conferencing, and unified messaging. There can be no assurance that these developmental efforts will be completed on time or produce the desire results.

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

We will be moving existing VoIP service customers onto our new infrastructure. We cannot ensure that we will be successful in moving these customers to the new infrastructure. The failure to successfully transition

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these customers onto our new infrastructure could result in the loss of those existing customers and negatively impact our ability to acquire new customers.

If our information and processing systems for billing and client service are not properly implemented, it could harm our ability to bill and provide services effectively.

Sophisticated back office information and processing systems are vital to our growth and our ability to monitor costs, bill clients, provision client orders, and achieve operating efficiencies. Our plans for the development and implementation of these systems rely, for the most part, on having the capital to purchase and maintain required software, choosing products and services offered by third party vendors, and integrating such products and services with existing systems. We also may require customized systems in order to meet our requirements, which may delay implementation and increase expenses. These systems must also integrate with our network infrastructure. In the event that these systems do not integrate with our network infrastructure, our ability to manage our operational or financial systems will be inhibited. We cannot ensure that they will be implemented at all, or that, once implemented, they will perform as expected. Furthermore, our right to use some of these systems is dependent upon license agreements with third party vendors.

These third-party vendors may cancel or refuse to renew some of these agreements, and the cancellation or non-renewal of these agreements may harm our ability to bill and provide services efficiently.

We may be impacted by current litigation regarding patent infringement.

On March 8, 2007, a jury in the U.S. District Court for the Eastern District of Virginia ruled that Vonage Holdings had infringed on three patents held by Verizon Communications, and ordered Vonage to pay Verizon $58 million plus possible future royalties. The details of the patent infringement are not yet clear, however, the patents related in part to technologies used to connect Internet telephone use to the traditional telephone network. Vonage has appealed the decision. At this point, it is not known what will happen on appeal, or whether there may be a future impact to other VoIP service providers, including us. If we were restricted from using certain VoIP technologies, it could increase our cost of service or preclude us from offering certain current or future services

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

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

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

Our ability to grow through quick and cost effective deployment of our VoIP services is dependent upon our ability to identify and contract with local entities that will assist in the distribution of our products. This will include local sales agents that sell our retail, Efonica-branded services, resellers that private label and sell our wholesale VoIP services, and referral entities such as web portals that refer potential customers to us. If we are unable to identify or contract for such distribution relationships, we may not generate the customers or revenues currently envisioned.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Regulatory treatment of VoIP outside the United States varies from country to country. Some countries including the U.S. are considering subjecting VoIP services to the regulations applied to traditional telephone companies and they may assert that we are required to register as a telecommunications carrier in that country or impose other regulations. In such cases, our failure to register could subject us to fines, penalties, or forfeiture. Regulatory developments such as these could have a material adverse effect on our international operations.

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.

The ratio of telephone lines per population, or teledensity, in most emerging countries is low when compared to developed countries. Bandwidth, the measurement of the volume of data capable of being transported in a communications system in a given amount of time, remains very expensive in these regions, especially when compared to bandwidth costs in the United States. Prices for bandwidth capacity are generally set by the government or incumbent telephone company and remain high due to capacity constraints among other things. While this trend tends to diminish as competitors roll out new bypass services, these rollouts may be slow to occur. Further, constraints in network architecture limit Internet connection speeds on conventional dial-up telephone lines, and are significantly less than the up to 1.5 megabits per second connection speed on direct satellite link or digital subscriber lines and cable modems in the United States. These speed and cost constraints may severely limit the quality and desirability of using the Internet in emerging countries and can be an obstacle to us entering emerging markets.

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

We could have to pay additional taxes because our operations are subject to various taxes. We structure our operations based on assumptions about various tax laws, U.S. and international tax treaty developments, international currency exchange, capital repatriation laws, and other relevant laws by a variety of non-U.S. jurisdictions. Taxation or other authorities might not reach the same conclusions we reach. We could suffer adverse tax and other financial consequences if our assumptions about these matters are incorrect or the relevant laws are changed or modified.

We are subject to varying degrees of international, federal, state, and local regulation. Significant regulations imposed at each of these levels govern the provision of some or all of our services and affect our business. We cannot assure you that our joint venture partners, or we have, or, will receive the international, United States Federal Communications Commission (“FCC”), or state regulatory approvals they or we require. Nor can we provide you with any assurance that international, FCC or state regulatory authorities will not raise material issues with respect to our compliance with applicable regulations or that the cost of our compliance will not have a materially adverse effect on our revenues and profitability.

We do not believe that we are an “interconnected” VoIP service provider under the FCC definition and, therefore, do not fall under the regulatory requirements set forth above. If the FCC determines we are an “interconnected” VoIP service provider and have not registered as such, or are not compliant under the regulations, third parties or regulators could challenge these actions and we could be subject to penalties, fines, fees and/or costs. In addition, emerging technology could cause us to change our product and service configuration or the FCC definition could be changed, and we may become an “interconnected” VoIP provider under the FCC definition in the future. Should this occur, we will be required to comply with the regulations set forth above.

The U.S. Federal Government and state authorities have the power to revoke our regulatory approval to operate internationally, interstate, or intrastate, or to impose financial penalties if we fail to pay, or are delinquent in paying, telecommunications taxes or regulatory fees or fail to file necessary tariffs or mandatory reports. We are currently, and have been, delinquent in such financial obligations and required filings in the past. Furthermore, delays in receiving required regulatory approvals or the enactment of new and adverse legislation, regulations or regulatory requirements could also have a materially adverse affect on our condition. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which we intend to operate, to our detriment.

We cannot assure that the applicable U.S. and foreign regulatory agencies will grant required authority or refrain from taking action against us if we are found to have provided services without obtaining the necessary

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authorizations or pursuant to applicable regulations. If authority is not obtained or if our pricing, and/or terms or conditions of service, or required filings are not filed, or are not updated, or otherwise do not fully comply with the rules of these agencies, third parties or regulators could challenge these actions and we could be subject to forfeiture of our license, penalties, fines, fees and/or costs.

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

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

Risks Related to Our Common Stock

Voting Control by Principal Stockholders

As of March 31, 2008, our executive officers and directors collectively control approximately 18.9% of our outstanding common stock and, therefore are able to significantly influence the vote on matters requiring stockholder approval, including the election of directors.

We Do Not Intend to Pay Dividends on Common Stock.

We have never declared or paid any cash dividends on our common stock. We intend to retain any future earnings to finance our operations and to expand our business and, therefore, do not expect to pay any cash dividends in the foreseeable future.

Item 1B. Unresolved Staff Comments

Not applicable to a smaller reporting company.

Item 2. Properties

We are headquartered in New York, New York and lease offices and space in a number of locations. Below is a list of our leased offices and space as of March 31, 2008.

       
Location   Lease Expiration   Annual Rent   Purpose   Approx. Sq. Ft
420 Lexington Avenue,
Suite 1718
New York, New York 10170
    October 2015     $ 452,000 (1)       Lease of principal
executive offices
      9,000  
75 Broad Street
New York, New York 10007
    March 2010     $ 658,000 (2)       Lease of network
facilities
      15,000  
1475 W. Cypress Creek Road
Suite 204
Fort Lauderdale, Florida 33309
    May 2014     $ 174,000 (3)       Lease of network
facilities and
office space
      13,100  
Premises GO2- GO3
Building No. 9
Dubai Internet City
Dubai, United Arab Emirates
    December 2008     $ 87,000       Lease of office
space
      1,300  

(1) This lease is subject to gradual increase to $509,000 from years 2008 to 2015.
(2) This lease is subject to gradual increase to $673,000 from years 2008 to 2010.
(3) This lease is subject to gradual increase to $215,000 from years 2008 to 2014

We believe that our leased facilities are adequate to meet our current needs and that additional facilities are available to meet our development and expansion needs in existing and projected target markets.

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Item 3. Legal Proceedings

On May 28, 2003, Jack Grynberg, et al., an investor in one of the Company's private offerings, filed a complaint with the Denver District Court, State of Colorado (Jack Grynberg, et al v. Fusion Telecommunications International, Inc., et al, 03-CV-3912) seeking damages in the amount of $400,000 for the purchase of an interest in Fusion’s 1999 private placement offering of subordinated convertible notes through Joseph Stevens & Company, Inc., a registered broker dealer. This complaint asserted the following claims for relief against the Company: Breach of Fiduciary Duty, Civil Theft, Deceptive Trade Practices, Negligent Misrepresentation, Deceit Based on Fraud, Conversion, Exemplary Damages and Prejudgment Interest. On June 25, 2004, the Company filed with the Court a Motion to Dismiss, which was granted. The Company was awarded attorneys’ fees by the court. A written order of Judgment in favor of the Company and against the plaintiff in the amount of approximately $40,000 was recorded on January 24, 2006. The plaintiffs have filed an appeal of the motion, which 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 March 2007, resulting in the amendment of an existing contract with the vendor. On November 2, 2007, the Company entered into a settlement agreement with the financing company for $540,000 payable within 30 days from the date of the settlement agreement. As a result of the settlement agreement, the Company recorded a gain on settlement of approximately $619,000.

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 a regulatory agency, which has not yet been concluded. Should the audit result in an unfavorable outcome, the Company estimates that the liability would be within the range of $14,000 to $100,000. However, the liability range is just an estimate and could differ from the actual result.

The Company is involved in other claims and legal actions arising in the normal course of business. Management does not expect that the outcome of these cases will have a material effect on the Company’s financial position.

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

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

There were no matters submitted to a vote of security holders in the fourth quarter of the fiscal year ended December 31, 2007.

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2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is currently listed on the American Stock Exchange under the symbol “FSN”, and our redeemable common stock purchase warrants are listed on the American Stock Exchange under the symbol “FSN.WS”.

Prior to February 15, 2005, there was no established trading market for our common stock and redeemable common stock warrants. The following tables list the high and low sales prices for our common stock and redeemable common stock warrants for each fiscal quarter during the two preceding fiscal years.

Common Stock

   
Year Ended December 31, 2007   High   Low
First Quarter   $ 1.29     $ 0.55  
Second Quarter   $ 0.80     $ 0.49  
Third Quarter   $ 0.98     $ 0.29  
Fourth Quarter   $ 0.82     $ 0.14  

   
Year Ended December 31, 2006   High   Low
First Quarter   $ 3.40     $ 2.45  
Second Quarter   $ 3.47     $ 1.99  
Third Quarter   $ 2.52     $ 1.45  
Fourth Quarter   $ 1.90     $ 1.01  

Redeemable Common Stock Purchase Warrants

   
Year Ended December 31, 2007   High   Low
First Quarter   $ 0.14     $ 0.01  
Second Quarter   $ 0.07     $ 0.02  
Third Quarter   $ 0.06     $ 0.01  
Fourth Quarter   $ 0.04     $ 0.01  

   
Year Ended December 31, 2006   High   Low
First Quarter   $ 0.65     $ 0.30  
Second Quarter   $ 0.50     $ 0.22  
Third Quarter   $ 0.41     $ 0.16  
Fourth Quarter   $ 0.35     $ 0.07  

On March 24, 2008, the last reported sale price for our common stock on the American Stock Exchange was $0.34 per share and the last reported sale price for our redeemable common stock purchase warrants was $0.01 per warrant. The market price for our stock and warrants is highly volatile and fluctuates in response to a wide variety of factors.

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Holders

As of March 24, 2008, we had approximately 1,633 holders of record of our common stock and 1,132 holders of record of our redeemable common stock purchase warrants.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain future earnings, if any, to finance our operations and to expand our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our Board of Directors considers appropriate.

The holders of our 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.

Issuer Purchases of Equity Securities

There have been no purchases of equity securities by the Company required to be disclosed herein.

Recent Sales of Unregistered Securities

During the second quarter ended June 30, 2007, the Company completed the second phase and over-allotment of the private placement. During the second phase, the Company issued 3,375 shares of Preferred Stock, Series A-2 for net proceeds of approximately $3.375 million. In addition, the Company issued warrants to purchase 2,033,151 shares of common stock exercisable at $0.83 per share. The Company received an additional $0.745 million towards the over-allotment and issued 700 shares of Preferred Stock, Series A-3 and Series A-4 shares of Preferred Stock, Series A-3 and Series A-4 Warrants to purchase 421,687 and 28,482 shares of common stock at a fixed exercise price of $0.83.and $0.79, respectively.

Also, during November 2007, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the sale of up to $7 million of the Company’s common stock. The Company issued 2,936,321 shares of common stock for which proceeds of approximately $1.46 million were received, net of expenses of approximately $16,000. In addition, the Company issued warrants to purchase 1,468,161 shares of common stock exercisable at 120% of the closing price of the Company’s common stock the day before closing. Also, the warrants have a term of 5 years from the date of closing.

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Item 6. Selected Financial Data

The following table sets forth selected historical financial data as of and for each of the periods ended December 31, 2007, 2006, 2005, 2004 and 2003. The selected financial data are derived from the audited consolidated financial statements of Fusion Telecommunications International, Inc. The consolidated financial statements, and the report thereon, as of December 31, 2007 and 2006, and for the three year period ended December 31, 2007 which are included elsewhere in this Annual Report on Form 10-K. The following financial information should be read in conjunction with “Management’s Discussion and Analysis and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this Annual Report.

         
         
  Years Ended December 31,
     2007   2006   2005   2004   2003
Revenues   $ 55,023,860     $ 47,087,064     $ 49,364,542     $ 49,557,973     $ 32,018,471  
Operating expenses:
                                            
Cost of revenues     50,797,354       42,463,724       45,048,917       42,927,994       27,855,508  
Depreciation and amortization     1,709,040       1,397,094       1,510,172       1,804,184       1,981,805  
Loss on impairment     4,006,664       867,212                   375,000  
Selling, general and administrative expenses     12,484,485       14,803,062       11,633,713       9,722,719       8,543,664  
Advertising and marketing     146,471       1,335,745       175,725       81,686       32,143  
Total Operating Expenses     69,144,014       60,866,837       58,368,527       54,536,583       38,788,120  
Operating loss     (14,120,154 )      (13,779,773 )      (9,003,985 )      (4,978,610 )      (6,769,649 ) 
Other income (expense):
                                            
Interest income     71,950       318,333       474,109       26,428       12,227  
Interest expense     (88,993 )      (114,006 )      (434,749 )      (2,254,488 )      (859,123 ) 
Gain (loss) on settlements of debt     618,885       465,854       (75,927 )      2,174,530       3,918,295  
Gain on sale of investment in Estel     937,578                          
Loss from investment in Estel     (60,000 )      (185,234 )      (541,876 )      (519,728 )      (746,792 ) 
Other     (27,536 )      44,801       (195,006 )      (15,965 )      (97,766 ) 
Minority interests           67,694       175,353       (7,654 )      157,617  
Total other income (expense)     1,451,884       597,442       (598,096 )      (596,877 )      2,384,458  
Loss from continuing operations     (12,668,270 )      (13,182,331 )      (9,602,081 )      (5,575,487 )      (4,385,191 ) 
Discontinued operations:
                                            
Income (loss) from discontinued operations           (168,871 )      207,007       545,215       208,620  
Net loss   $ (12,668,270 )    $ (13,351,202 )    $ (9,395,074 )    $ (5,030,272 )    $ (4,176,571 ) 
Losses applicable to common stockholders:
                                            
Loss from continuing operations   $ (12,668,270 )    $ (13,182,331 )    $ (9,602,081 )    $ (5,575,487 )    $ (4,385,191 ) 
Preferred stock dividends     (572,087 )                  (385,918 )      (635,254 ) 
Net loss applicable to common stockholders from continuing operations:     (13,240,357 )      (13,182,331 )      (9,602,081 )      (5,961,405 )      (5,020,445 ) 
Income (loss) from discontinued operations           (168,871 )      207,007       545,215       208,620  
Net loss applicable to common stockholders   $ (13,240,357 )    $ (13,351,202 )    $ (9,395,074 )    $ (5,416,190 )    $ (4,811,825 ) 
Basic and diluted net loss per common share:
                                            
Loss from continuing operations   $ (0.48 )    $ (0.49 )    $ (0.39 )    $ (0.35 )    $ (0.37 ) 
Income (loss) from discontinued operations           (0.01 )      0.01       0.03       0.02  
Net loss applicable to common stockholders   $ (0.48 )    $ (0.50 )    $ (0.38 )    $ (0.32 )    $ (0.35 ) 
Weighted average shares outstanding
                                            
Basic and diluted     27,314,196       26,737,083       24,965,080       16,707,114       13,616,803  

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  Years Ended December 31,
     2007   2006   2005   2004   2003
Operating data:
                                            
Capital expenditures   $ (980,694 )    $ (3,299,198 )    $ (1,877,252 )    $ (627,219 )    $ (582,149 ) 
Summary Cash Flow Data:
                                            
Net cash used in operating activities     (7,608,589 )      (11,343,665 )      (7,980,651 )      (4,874,834 )      (4,884,543 ) 
Net cash used in investing activities     (304,615 )      (3,693,097 )      (2,396,445 )      (250,460 )      (744,071 ) 
Net cash provided by financing activities     5,284,866       2,989,413       20,798,874       6,288,375       8,097,832  
Balance Sheet Data (at period end):
                                            
Cash   $ 114,817     $ 2,743,155     $ 14,790,504     $ 4,368,726     $ 3,205,645  
Restricted cash     416,566       781,566       218,176       380,276       736,626  
Property and equipment     13,283,603       14,262,669       12,214,290       11,022,330       10,078,806  
Property and equipment, net     5,425,846       6,422,016       4,270,966       3,271,474       3,743,293  
Total assets     18,128,289       27,573,300       34,385,779       13,662,117       11,681,625  
Total debt     1,094,681       1,216,746       1,577,615       5,687,631       4,644,904  
Redeemable preferred stock                       9,716,026       3,466,538  
Total stockholders’ equity (deficit)   $ 6,695,183     $ 13,445,958     $ 17,721,641     $ (13,290,029 )    $ (9,866,927 ) 

Item 7. 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 Annual Report. 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.

Overview

We are an international telecommunications carrier delivering VoIP services, private network, Internet access, and other advanced services to, from, in and between emerging markets in Asia, the Middle East, Africa, Latin America, and the Caribbean. Our corporate strategy focuses our resources on customizing VoIP services to meet the demands of international communities of interest in emerging markets 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 telecommunications 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.

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

     
  Years Ended December 31,
     2007   2006   2005
Revenues   $ 55,023,860     $ 47,087,064     $ 49,364,542  
Operating expenses:
                          
Cost of revenues     50,797,354       42,463,724       45,048,917  
Depreciation and amortization     1,709,040       1,397,094       1,510,172  
Loss on impairment     4,006,664       867,212        
Selling, general and administrative     12,484,485       14,803,062       11,633,713  
Advertising and marketing     146,471       1,335,745       175,725  
Total operating expenses     69,144,014       60,866,837       58,368,527  
Operating loss     (14,120,154 )      (13,779,773 )      (9,003,985 ) 
Other income (expense):
                          
Interest income     71,950       318,333       474,109  
Interest expense     (88,993 )      (114,006 )      (434,749 ) 
Gain (loss) on settlements of debt     618,885       465,854       (75,927 ) 
Gain on sale of investment in Estel     937,578              
Loss from investment in Estel     (60,000 )      (185,234 )      (541,876 ) 
Other     (27,536 )      44,801       (195,006 ) 
Minority interests           67,694       175,353  
Total other income (expense)     1,451,884       597,442 )      (598,096 ) 
Loss from continuing operations     (12,668,270 )      (13,182,331 )      (9,602,081 ) 
Loss from discontinued operations           (168,871 )      207,007  
Net loss   $ (12,668,270 )    $ (13,351,202 )    $ (9,395,074 ) 

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

     
  Years Ended December 31,
     2007   2006   2005
Revenues     100.0 %       100.0 %       100.0 %  
Operating expenses:
                          
Cost of revenues     92.3 %       90.2 %       91.3 %  
Depreciation and amortization     3.1 %       3.0 %       3.1 %  
Loss on impairment     7.3 %       1.8 %       0.0 %  
Selling, general and administrative     22.7 %       31.4 %       23.6 %  
Advertising and marketing     0.3 %       2.8 %       0.4 %  
Total operating expenses     125.7 %       129.2 %       118.4 %  
Operating loss     (25.7 )%      (29.2 )%      (18.4 )% 
Other income (expense):
                          
Interest income     0.1 %       0.7 %       1.0 %  
Interest expense     (0.2 )%      (0.2 )%      (0.9 )% 
Gain (loss) on settlement of debt     1.2 %       1.0 %       (0.2 )% 
Gain on sale of investment in Estel     1.7 %                    
Loss from investment in Estel     (0.1 )%      (0.4 )%      (1.1 )% 
Other           0.1 %       (0.4 )% 
Minority interests           0.1 %       0.4 %  
Total other income (expense)     2.7 %       1.3 %       (1.2 )% 
Loss from continuing operations     (23 )%      (27.9 )%      (19.6 )% 
Loss from discontinued operations           (0.4 )%      0.4 %  
Net loss     (23 )%      (28.3 )%      (19.2 )% 

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Revenues

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

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

In 2002, we established Efonica F-Z, LLC, as a joint venture retail services company marketing VoIP products to consumer and corporate customers in emerging markets. We initially acquired a 50.9% interest in Efonica. 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, loss on impairment, selling, general and administrative expenses, and advertising and marketing.

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. In 2006, it also includes amortization of the Efonica customer list.

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

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

Company Highlights

The following summary of significant events during the two years ended December 31, 2007, highlights the accomplishments and events that have influenced our performance during that time period.

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);
Consummation of Private Placement — In May 2007, the Company entered into subscription agreements with 28 individual investors for an offering of 3,375 shares of Series A-2 Cumulative Convertible Preferred Stock, in consideration for $3.375 million (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 18th 2007, CEO, Mathew Rosen, delivered a keynote address to VoIP World Middle East 2007 conference in Dubai, UAE;
Launches Efonica Mobilink Service in Jordan – The Company announced that it has already expanded its network capacity in Jordan to meet growing customer demand;
Internet Café Solution — This new product targets a growing segment of the international calling marketplace, expanding Fusion's current reach into corporate, consumer and carrier markets worldwide;
Acquires Telecommunications License in Dominican Republic —  Initiates Plan to Launch Comprehensive Suite of Voice and Video Solutions;
Consummation of Private Placement — In November 2007, the Company entered into subscription agreements with 6 individual investors for an offering of 2,936,821 shares of Common Stock in consideration for. $1.475 million.

2006

Licensed Market-Leading Technology — Licensed Global IP Sound’s market-leading technology to power its VoIP softphone;
Filed Patent Application — Filed patent application for our proprietary VoIP technology for SIP peer-to-peer VoIP communication;
Completion of Softphone Development — Completed development of our proprietary PC-based VoIP softphone, which allows us to differentiate our Efonica® VoIP offering;
Launched Free Internet Service — Launched new free Internet phone service, which allows Efonica® subscribers worldwide to make free calls without computers. We also created the Worldwide Internet Area CodeTM which allows subscribers to use their existing telephone numbers preceded by a “10”;
Filed for Patent for Worldwide Internet Area Code — Filed patent application for Worldwide Internet Area CodeTM;
Introduction of EFO Out — We 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;

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Jinti Partnership — Entered into a strategic partnership with Jinti, a rapidly growing Chinese community services site that currently attracts in excess of 3 million unique visitors from China each month;
Marketing Alliance with MasterCard worldwide — We entered into a retail marketing alliance with MasterCard Worldwide to offer our suite of premium paid VoIP communication services to MasterCard cardholders;
Efonica subscribers exceed 1,000,000 — Since launching our new Efonica VoIP service on June 19, 2006, we have registered more than one million subscribers;
Efonica Services in Jordan — Introduction of our Efonica VoIP services in Jordan to allow us to continue to connect communities worldwide, due to our securing exclusive rights to a Jordanian Telecommunications License;
Introduction of Mobilink — Launched revolutionary new Mobilink Service, which offers U.S. consumers access to VoIP services from their mobile phones, without Internet access or special software; and
Consummation of Private Placement — In December 2006, we consummated a $3.875 million private placement of a newly designated class of convertible preferred stock. Participating were a group of investors including Fusion’s Chairman, its CEO and each of the other nine members of the Board of Directors.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006.

Revenues

Consolidated revenues were $55 million during 2007, compared to $47.1 million during 2006, an increase of $7.9 million or 16.9%.

Revenues for Voice to Carriers increased by $9.6 million or 22.1%, to $53.3 million during 2007 from $43.6 million during 2006. The increase in revenues was the result of an increase in voice traffic as well as an increase in rates compared to 2006.

Revenues for consumers, corporations and other decreased by $1.7 million or 49.2% to $1.7 million during 2007, from $3.4 million during 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 costs of revenues were $50.8 million during 2007, compared to $42.5 million during 2006, an increase of $8.3 million or 19.6%. Approximately $9.4 million of this increase was attributable to an increase in Voice to Carriers. This increase was partially offset by a decrease in the cost of revenues for consumers, corporations and other by $1.1 million or 45.4%, which went to $1.3 million during 2007 from $2.4 million during 2006, consistent with the revenue decrease.

The consolidated gross margin percentage decreased to 8% during 2007 from 10% during 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.

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Operating Expenses

Depreciation and Amortization

Depreciation and amortization increased by $0.3 or 22.3% to $1.7 million during 2007, from $1.4 million during 2006. Our depreciation expense increased as more assets were acquired to support the retail platform during September 2006.

Loss on Impairment

During 2007, the Company commenced its annual impairment testing on its Goodwill and Other Intangible Assets. As a result of the testing, on March 20, 2008, the Company concluded a charge for impairment is required and recorded an impairment loss of approximately $4 million as of December 31, 2007. Also, during 2006, the Company wrote off approximately $277,000 goodwill recorded in connection with our Jamaican joint venture. In addition, the Company recognized approximately $591,000 impairment on its retail infrastructure equipment.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $2.3 million or 15.7% to $12.5 million during 2007, from $14.8 million during 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 $1.2 million or 89% to $0.1 million during 2007, from $1.3 during 2006. The decrease is a result of a more aggressive marketing campaign during the 2006.

Operating Loss

Our operating loss decreased by $0.2 million or 1.7% to a loss of $13.5 million during 2007, from a loss of $13.8 million during 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 increased by $0.9 million or 143% to $1.5 million during 2007, from $0.6 million during 2006. The increase is primarily attributable to $0.9 million from the gain on sale of investment in Estel and $0.2 million from gain on settlement of debt, which resulted due to settlement of vendor obligation. The increase was partially offset by the decrease in interest income due to cash being used for operating activities.

Discontinued Operations

During 2006, the Company incurred $0.2 million in loss from discontinued operations with its Turkey subsidiary.

Net Loss

Net loss decreased by $0.7 million, or 5.1% for 2007, compared to 2006. The primary factors contributing to the improvement were the increase in revenue and a decrease in selling and general and administrative expenses.

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Year Ended December 31, 2006 Compared with Year Ended December 31, 2005

Revenues

Consolidated revenues were $47.1 million for 2006 compared to $49.4 million for 2005, a decrease of 4.6%.

Revenues for voice services sold to carriers remained relatively constant year over year, at $43.6 million for both 2006 and 2005. Although there was no increase in the year over year comparison, there had been an unusually high peak in the second quarter of 2005 that was an anomaly. Carrier revenues have consistently increased quarter over quarter since that peak period.

Revenues for consumers, corporations and other decreased from $5.8 million in 2005 to $3.4 million in 2006. The decrease was mainly due to technical difficulties encountered in the development of our Efonica retail services platform, which held back the growth of this segment, and also due to the cancellations of government contracts. We expect the technical issues with the new retail VoIP platform to be resolved during this year, and we expect this segment’s revenues to grow significantly during the next few years.

Cost of Revenues

Consolidated cost of revenues improved by $2.6 million, or 5.7%, decreasing from $45.0 million in 2005 to $42.5 million in 2006. Approximately $1.0 million of this decrease was attributable to an improvement in efficiencies of route management for voice services to carriers. The remaining decrease in cost of revenues was attributable to a decrease in revenues for consumers, corporations and other.

Consolidated gross margin increased $0.3 million for 2006 over 2005. Gross margin for voice services to carriers increased by $1.1 million, but was partially offset by a decrease in the gross margin for consumers, corporations and other.

Operating Expenses

Depreciation and Amortization. Depreciation and amortization decreased to $1.4 million during the year ended 2006 from $1.5 million, or 7.5%, during the year ended 2005. Our depreciation decreased as a result of many of our assets being fully depreciated during all or a part of 2006.

Selling, General and Administrative

Selling, general and administrative expenses increased $3.2 million or 27.2% to $14.8 million during 2006, from $11.6 million during 2005. This increase is primarily attributed to increased salaries and benefits, as more personnel have been required to support the growth and expansion of our infrastructure. In addition, contributing to the 2006 increase is approximately $0.7 million of compensation expense recorded in connection with our adoption of SFAS 123(R) on January 1, 2006. Our professional fees have also increased as a result of our growth and our becoming a public company in February 2005, including expenses associated with Sarbanes Oxley, travel related expenses, occupancy costs, and insurance expenses. However, we are taking strong measures to reduce our expenses, and believe that as we execute our business strategies, selling, general and administrative expenses as a percentage of revenues will begin to decline.

Advertising and Marketing

Advertising and marketing increased from $0.2 million in 2005 to $1.3 million in 2006, associated with the promotional campaign for the launch of our new retail products and services.

Operating Loss

Our operating loss increased by $4.8 million or 53% to a loss of $13.8 million during 2006, from a loss of $9.0 million during 2005. The increase in operating loss was attributable to the items mentioned above, including the decrease in gross margin, the increase in selling, general and administrative expenses associated with our retail infrastructure growth, the increase in advertising and marketing for our new retail services, and the increased costs associated with regulatory compliance requirements.

Other Income (Expense)

Total other income (expense) changed from a net loss of $0.6 million in 2005 to a net gain of $0.6 million during 2006. During 2006, we had interest expense of $0.1 million in contrast to interest expense of $0.4 million during 2005. The $0.4 million interest expense for 2005 included $0.3 million of accretion since all the

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Series C Preferred Stock was converted to common stock in connection with our February 2005 IPO. Consequently, accretion ceased and 2005 interest expense only includes accretion for the period between January 1, 2005 and February 17, 2005. A significant portion of this debt was repaid during February 2005 in connection with our IPO. We also had decreased interest income during 2006 of $0.3 million versus $0.5 million during 2005, as cash was used in operating activities. Gain (loss) on debt settlements changed from a net loss of $0.1 million in 2005 to a net gain of $0.5 million during 2006. The 2006 gain on debt forgiveness was attributed to the settlements of vendor obligation. The loss from investment in Estel decreased $0.3 million or 65.8%, from $0.5 million in 2005 to $0.2 million during 2006. Minority interest decreased approximately $0.1 million during 2006 from $0.2 million during 2005. The 2005 minority interests balance is attributed to the losses incurred in connection with our Turkey joint venture.

Discontinued Operations

In 2006 Fusion incurred $0.2 million in loss from discontinued operations associated with its Turkey subsidiary. In 2005 the Company had income of $0.2 million associated with the resolution of certain liabilities associated with previous discontinued operations.

Net Loss

The net loss for 2006 was $13.4 million compared to $9.4 million for 2005. The factors noted above that impacted the net operating loss were partially reduced by the positive other income.

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 December 31, 2007, we had stockholders’ equity of approximately $6.7 million in comparison to $13.4 million at December 31, 2006, and a working capital deficit of approximately $4.2 million in comparison to working capital deficit of $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. 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:

     
  Year Ended December 31, 2007   Year Ended December 31, 2006   Year Ended December 31, 2005
Cash used in operating activities   $ (7,608,589 )    $ (11,343,665 )    $ (7,980,651 ) 
Cash used in investing activities     (304,615 )      (3,693,097 )      (2,396,445 ) 
Cash provided by financing activities     5,284,866       2,989,413       20,798,874  
Increase (decrease) in cash and cash equivalents     (2,628,338 )      (12,047,349 )      10,421,778  
Cash and cash equivalents, beginning of period     2,743,155       14,790,504       4,368,726  
Cash and cash equivalents, end of period   $ 114,817     $ 2,743,155     $ 14,790,504  

Source of Liquidity

As of December 31, 2007, we had cash and cash equivalents of approximately $0.1 million. In addition, as of December 31, 2007, we had approximately $0.5 million of cash restricted from withdrawal and held by banks as certificates of deposits securing letters of credit.

From our inception through December 31, 2007, we financed our operations from cash provided from financing activities. These activities were primarily through net proceeds of approximately $23.3 million from our IPO, and the private placement of approximately $60.5 million of equity securities, $1.6 million from the exercise of stock options and warrants, and $22.0 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.

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

Uses of Liquidity

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

Our cash capital expenditures were approximately, $1 million during 2007, $3.3 million during 2006 and $1.9 million in 2005. We expect our cash capital expenditures to be approximately $1.0 million for the year ending December 31, 2008. The 2008 estimated capital expenditures primarily consist of the continued customization of our retail infrastructure, purchase of additional software for expanded product offerings, and international deployment.

Cash used in operations was approximately $7.6 million during 2007, $11.3 million during 2006, and $8.0 million during 2005. The cash used in our operations has historically been a function of our net losses, gains on forgiveness of debt, and changes in working capital as a result of the timing of receipts and disbursements. 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 build-out of our retail infrastructure, as well as a continued focus on general expense reduction. 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 December 31, 2007 we had approximately $1.1 million of current and long-term debt. This balance relates to notes payable and our capital leases.

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 five year warrants to purchase 1,160,204 shares of common stock exercisable at $1.67 per share. The terms of the Series A-1 Preferred Stock will pay dividends at 8% and are convertible into Fusion’s common stock at a fixed conversion price of $1.67 per share.

During the second quarter ended June 30, 2007, the Company completed the second phase and over-allotment of the private placement. During the second phase, the Company issued 3,375 shares of Preferred Stock, Series A-2 for net proceeds of approximately $3.375 million. In addition, the Company issued five year 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 five year Warrants to purchase 421,687 and 28,482 shares of common stock at a fixed exercise price of $0.83.and $0.79, respectively.

In November 2007, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the sale of up to $7 million of the Company’s common stock. The Company issued 2,936,321 shares of common stock for which proceeds of approximately $1.46 million were received, net of expenses of approximately $16,000. In addition, the Company issued five year warrants to purchase 1,468,161 shares of common stock exercisable at 120% of the closing price of the Company’s common stock the day before closing.

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Summary of Contractual Obligations

As of December 31, 2007

         
  Less Than 1 Year   1 – 3 Years   3 – 5 Years   More Than 5 Years   Total
Contractual obligations:
                                            
Debt maturing within one year   $ 566,567     $ 283,433     $     $     $ 850,000,  
Capital leases     233,759       10,922                   244,681  
Operating leases     1,370,043       2,179,183       1,336,483       1,729,033       6,614,742  
Minimum purchase commitments     34,000                         34,000  
Total contractual cash obligations   $ 2,204,369     $ 2,473,538     $ 1,336,483     $ 1,729,033     $ 7,743,423  

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, 2007, included in this Annual Report on Form 10K/A. Our preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

Revenue Recognition

Our revenue is primarily derived from fees charged to terminate voice services over our network, retail sales to consumers and corporations through our Efonica brand, 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.

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

Intangible Assets and Goodwill Impairment Testing

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

Income Taxes

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

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). Among other changes, SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions; and requires the acquirer to disclose to investors and all other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is generally effective for business combinations occurring in the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its future consolidated results of operations, financial position and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements and amendment of ARB No. 51” (“SFAS 160”). Among other items, SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its consolidated results of operations, financial position and cash flows.

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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 does not believe SFAS 159 will have a significant impact on it financial statements.

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 December 31, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties at January 1, 2007. There was no change to this balance at December 31, 2007. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position. The adoption of the provisions of FIN 48 did not have a material impact on the Company’s financial position, results of operations and cash flows.

Inflation

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

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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks

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.

As of December 31, 2007, the majority of our cash balances were held primarily in the form of a short-term highly liquid investment grade money market fund in a major financial institution. 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 December 31, 2007, all of our outstanding debt had fixed interest rates. As such, we are not subject to interest rate risk on any of our debt. As such, 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 other international 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 other foreign currencies that could have an adverse impact on our future results of operations.

Item 8. Consolidated Financial Statements and Supplementary Data

Our Consolidated Financial Statements required by this Item are included in Item 15 of this report on pages F-1 through F-30.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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Item 9A(T). Controls and Procedure

Evaluation of Disclosure Controls and Procedures

Fusion maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also 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. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the Chief Executive Officer and Chief Financial Officer have concluded that Fusion’s disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of Fusion’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on the assessment using those criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2007. This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There was no change in the internal control over financial reporting that occurred during the quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC,
ANNUAL REPORT ON FORM 10-K

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The members of the Company’s Board of Directors and Executive Officers, together with their respective ages ad certain biographical information are set forth below.

   
Name   Age   Position
Matthew D. Rosen   36   Chief Executive Officer and Director
Gordon Hutchins, Jr.   59   President and Chief Operating Officer
Barbara Hughes   54   Chief Financial Officer
Jan Sarro   53   Executive Vice President — Global Sales and Marketing
Charles Whiting   55   Senior Vice President — Technical Operations
Marvin S. Rosen   67   Chairman of the Board
Philip D. Turits   75   Secretary, Treasurer and Director
E. Alan Brumberger   68   Director
Julius Erving   58   Director
Evelyn Langlieb Greer   58   Director
Raymond E. Mabus   59   Director
Dennis Mehiel   66   Director
Paul C. O’Brien   67   Director
Michael J. DelGiudice   64   Director
Fred P. Hochberg   56   Director

EXECUTIVE OFFICERS

Matthew D. Rosen, Chief Executive Officer and Director.  Mr. Rosen served as our President, March 2006 to March 2008 and Chief Operating Officer from August 2003 to March 2006, Executive Vice President and Chief Operating Officer between February 2002 and August 2003, Executive Vice President and President of Global Operations between November 2000 and January 2002 and as President, US Operations between March 2000 and November 2000, and has served as a director since May 2005. From 1998 to 2000, he held various management positions including President of the Northwest and New England Operations for Expanets, a $1.3 billion integrated network communications service provider. From 1996 to 1998 he was Corporate Director of Operations for Oxford Health Plans, a $4 billion health care company, where he worked on developing and executing turnaround strategies. Prior to his role as Corporate Director of Operations, Mr. Rosen held an executive position in a start-up healthcare technology subsidiary of Oxford where he was an integral part in developing strategy and building its sales, finance and operations departments. Prior to Oxford, Mr. Rosen was an investment banker in Merrill Lynch’s corporate finance department. Mr. Rosen is the son of our Chairman of the Board, Marvin Rosen.

Gordon Hutchins, Jr., President and Chief Operating Officer.  Mr. Hutchins has served as President and Chief Operating Officer since March 2008. Mr. Hutchins served as our Executive Vice President —  Operations from December 2005 to March 2008. Prior to his employment with Fusion, Mr. Hutchins served as President and Chief Executive Officer of SwissFone, Inc., a $100 million telecommunications carrier. Prior to SwissFone, Mr. Hutchins was President and Chief Executive Officer of STAR Telecommunications, Inc., an $800 million international telecommunications carrier, where he was hired to lead the company’s restructuring following the filing of its bankruptcy petition. Mr. Hutchins has also served since 1989 as President and CEO of GH Associates, Inc., a management-consulting firm that he founded. In this capacity, he has consulted to over 100 small and large telecommunications companies throughout the world, and has held ten interim CEO/COO roles with client companies. As an entrepreneur, Mr. Hutchins also founded Telecom One, Inc., a nationwide long distance carrier that he sold to Broadwing Communications Inc., and TCO Network Services, Inc., a local wireless services carrier purchased by Winstar Communications, Inc. During his early career, Mr. Hutchins served as President and CEO of LDX NET, Inc., a fiber optic network company, and held positions with MCI, McDonnell Douglas Corporation, and AT&T.

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Barbara Hughes, Chief Financial Officer.  Ms. Hughes has served as our Chief Financial Officer since May 2006. Ms. Hughes served as our Vice President of Finance from June of 2003 to May 2006, Vice President of Operations Finance between December of 2000 and June of 2003, and Finance Director from December 1999 until December of 2000. From 1996 to 1999, Ms. Hughes held various financial management positions within the international telecommunications industry including Director of Finance for TresCom International and Primus Telecommunications. Ms. Hughes also held several management positions at Federal Express Corporation in both U.S. Domestic and International Finance from 1980 to 1996, including Finance Director for the Latin American Division.

Jan Sarro, Executive Vice President — Global Sales and Marketing.  Ms. Sarro has served as Executive Vice President —  Global Sales and Marketing since March 2008. Ms. Sarro served as the Executive Vice President of Carrier Services from April 2005 to March 2008, and as Vice President of Sales and Marketing since March 2002. Prior to joining us, Ms. Sarro was the President of the Americas for Viatel, Inc., a global, facilities-based communications carrier and has over 20 years of experience in developing telecommunications solutions for international businesses and carriers worldwide. At Viatel, Ms. Sarro grew annual carrier revenues from $20 million to $160 million in under two years, and built a $140 million sales organization to market Internet access, corporate networks and international voice services to multinational corporations in the United States and Latin America. Ms. Sarro has also held senior executive marketing and sales management positions at Argo Communications, the international record carriers, FTC Communications and TRT Communications, and WorldCom.

Charles Whiting, Senior Vice President — Technical Operations.  Mr. Whiting has served as Senior Vice President, Operations, Engineering and Information Systems since January 2006. Mr. Whiting joined Fusion in August 2002, as Director, Network Planning and Design. From October 2002 to July 2003, he served as Director of Engineering. From July 2003 to December 2004, he served as Vice President, Engineering. From December 2004 to December 2005, he served as Vice President, Engineering and IT. Mr. Whiting has been involved in the Telecommunications Industry for over 25 years. Prior to joining Fusion, Mr. Whiting was Technical Services Vice President at NetSpeak Corporation, a leading-edge developer of software products for VoIP service providers. At Qwest Communications, he led the Advanced Services Engineering team that designed and implemented Qwest’s first production VoIP network. Mr. Whiting was Senior Consulting Systems Analyst at the Online Computer Library Center, Inc. specializing in Software Development Methods, Quality Assurance, and Quality Control. He was the primary UNIX and C Language instructor/developer at the AT&T Bell System Training Center in Dublin Ohio.

BOARD OF DIRECTORS

Marvin S. Rosen, Chairman of the Board.  Mr. Rosen co-founded the Company in 1997, and has served as our Chief Executive Officer from April 2000 until March, 2006, the Chairman of our Board of Directors since November 2004, the Chairman of our Executive Committee since September 1999, Vice Chairman of the Board of Directors since December 1998 and a member of our Board since March 1998. Since November 1983, Mr. Rosen has been a Shareholder of, and currently serves as “Of Counsel” to, the national law firm of Greenberg Traurig, P.A. where he also served on the Executive Committee until June 2000. Mr. Rosen was Finance Chairman for the Democratic National Committee from September 1995 until January 1997. Currently, he serves on the Board of Directors of the Robert F. Kennedy Memorial and Terremark Worldwide, Inc. and previously was Budget and Finance Chairman for the Summit of the Americas and Chairman of the Florida Housing Finance Agency. Mr. Rosen is also a managing partner with Diamond Edge Capital Partners, L.L.C. Mr. Rosen’s son, Matthew, is our current Chief Executive Officer, and serves on our Board of Directors.

Philip D. Turits, Secretary, Treasurer and Director.  Mr. Turits co-founded the Company and has served as a director since September 1997, Secretary since October 1997, Treasurer since March 1998, and Vice Chairman from March 1998 to December 1998. From September 1991 to February 1996, Mr. Turits served as Treasurer and Chief Operating Officer for Larry Stuart, Ltd., a consumer products company and prior to 1991, he served as President and Chief Executive Officer of Continental Chemical Company.

E. Alan Brumberger, Director.  Mr. Brumberger has served as a director since March 1998. He formerly was a partner in Andersen & Co. and its predecessor firms, from 1997 to 2004. From 1995 through 1997, he was a Managing Director of the Taylor Companies and from 1994 through 1995, a Managing Director of Brenner Securities, Inc. From 1983 through 1990, Mr. Brumberger was a Managing Director of Drexel Burnham

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Lambert and a member of the Underwriting and Commitment Committees. Prior to that, he was a Managing Director of Shearson American Express and a partner at Loeb, Rhoades & Co., a predecessor of Shearson American Express. Mr. Brumberger served for three years as President and Chief Executive Officer of Shearson American Express International Limited, the firm’s international investment banking business in London.

Julius Erving, Director.  Mr. Erving has served as a director since June 2003. Mr. Erving has been President of the Erving Group and Executive Vice President of RDV Sports/Orlando Magic since September 1997. Mr. Erving was employed by the National Broadcasting Company between December 1994 and June 1997, and by the National Basketball Association between 1987 and September 1997. Mr. Erving is a Trustee of the Basketball Hall of Fame and has served on the Board of Directors of Saks Incorporated since 1997.

Evelyn Langlieb Greer, Director.  Ms. Greer has served as a director since January 1999. Ms. Greer is the President of Greer Properties, Inc., a Florida-based real estate development company founded in 1976. She is also a partner in the law firm of Hogan, Greer & Shapiro, P.A. Ms. Greer has been a director of City National Bank of Florida, N.A. since 2000, a member of the Board of Trustees of Barnard College since 1994 and is Vice Chair of the Columbia Law School Board of Visitors. Since 1996, Ms. Greer has served as the elected Mayor of the Village of Pinecrest, Florida.

Raymond E. Mabus, Director.  Mr. Mabus has served as a director since January 1999. Mr. Mabus is Chairman of the Board of Directors of Foamex International and also manages his family timber business. From 1998 to 2002, he served as the President of Frontline Global Resources and since 1996 he has served as Of Counsel to the law firm of Baker, Donelson, Bearman and Caldwell. From 1994 to 1996, he was the United States Ambassador to Saudi Arabia and from 1988 to 1992 he was the Governor of Mississippi.

Dennis Mehiel, Director.  Mr. Mehiel has served as a director since May 2005. From February 1988 he served as the Chairman, CEO and principal shareholder of Sweetheart Cup Company until it was aquired by Solo Cup Company in February 2004. Mr. Mehiel served as Chairman and CEO of Box USA from 1968 to 2000. Mr. Mehiel serves on the Board of Directors of United Refining Company and Westchester Medical Center.

Paul C. O’Brien, Director.  Mr. O’Brien has served as a director since August 1998. Since January 1995, Mr. O’Brien has served as the President of The O’Brien Group, Inc., a consulting and investment firm. From February 1988 until December 1994, he was the President and Chairman of New England Telephone (a subsidiary of NYNEX), a telecommunications company. Mr. O’Brien also serves on the Board of Directors for Cambridge NeuroScience, Inc., Merlot Communications, Renaissance Worldwide, Inc., Mangosoft, Inc., Essential.com, eYak.com, Spike Technologies, and Mind Grow (formerly Interactive Education).

Michael J. DelGiudice, Director.  Mr. DelGiudice has served as a director since November 2004. He is a Senior Managing Director of Millennium Credit Markets LLC and Senior Managing Director of MCM Securities LLC, both of which he co-founded in 1996. Mr. DelGiudice also serves as Chairman and Chief Executive Officer of Rockland Capital Energy Investments LLC, founded in April 2003. Mr. DelGiudice is a Member of the Board of Directors of Consolidated Edison Company of New York, Inc., and is currently Chairman of the Audit Committee and a Member of its Planning and Executive Compensation Committees. He is also a Member of the Board of Directors of Barnes & Noble, Inc., and a Member of the Board of Trustees of the New York Racing Association. He also serves as Chairman of the Governor’s Committee on Scholastic Achievement. Mr. DelGiudice was a General Partner and Managing Director at Lazard Freres & Co. LLC from 1985 to 1995. From 1983 to 1985, Mr. DelGiudice was Chief of Staff to New York Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as Chief of Staff to the Speaker of the Assembly.

Fred P. Hochberg, Director.   Mr. Hochberg has served as a director since November 2004. Mr. Hochberg became Dean of Milano The New School for Management and Urban Policy in January 2004. Milano is a graduate school that trains leaders for the nonprofit, public, and private sectors with a faculty who blends theory with hands-on practice, and progressive thinking with social commitment. Dean Hochberg has more than 30 years of experience in business, government, and philanthropy. From 1998 through 2001, he served as deputy then acting administrator of the Small Business Administration (SBA). Prior to joining the Clinton administration, he was President and Chief Operating Officer of the Lillian Vernon Corporation, where he led the transformation of a small family mail order company into a publicly traded direct marketing corporation, one of the great

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success stories of American entrepreneurship. Dean Hochberg is dedicated to community service and philanthropic involvement in civil rights, education, and the arts. He currently sits on the boards of directors of the Citizens Budget Commission, FINCA International Micro Finance, Fusion Communications, Seedco, and the Howard Gilman Foundation, and is an appointed representative to the NYS Financial Control Board. He is a frequent contributor to the op-ed pages of major newspapers around the country and appears in print, as well as on television and radio as a commentator on a wide spectrum of public policy issues.

Each director’s term of office expires immediately following the annual meeting of stockholders at which directors are elected.

Board of Directors and Committees of the Board

Pursuant to our Bylaws, a resolution of the Board of Directors provides that the number of members of our Board shall be not less than seven (7) and not more than seventeen (17). There are currently eleven directors on the Board. At each annual meeting of stockholders, directors will be elected to hold office for a term of one year until their respective successors are elected and qualified. All of the officers identified above under “Executive Officers” serve at the discretion of our Board.

Board Independence

The Company applies the standards of The American Stock Exchange, the stock exchange upon which the Company’s Common Stock is listed, for determining the independence of the members of its Board of Directors and Board committees.

Board Committees

The Board has established an Advisory Board, a Compensation and Nominating Committee, a Strategic and Investment Banking Committee and an Audit Committee to devote attention to specific subjects and to assist the Board in the discharge of its responsibilities. The functions of these committees and their current members are set forth below.

Compensation and Nominating Committee

Our Compensation and Nominating Committee’s (the “Compensation Committee”) main function is (i) to review and recommend to our Board of Directors, compensation and equity plans, policies and programs and approve executive officer compensation, and (ii) to review and recommend to our Board of Directors the nominees for election as directors of the Company and to review related Board of Directors development issues including succession planning and evaluation. The members of our Compensation and Nominating Committee are Michael DelGiudice — Chairman, Raymond E. Mabus, and Dennis Mehiel, each of whom is a non-employee member of our Board of Directors. Our Board of Directors has determined that each of the directors serving on our Compensation and Nominating Committee is independent within the existing standards of the American Stock Exchange. The charter of our Compensation Committee is available on our website (www.fusiontel.com).

Strategic and Investment Banking Committee

The members of our Strategic and Investment Banking Committee are Marvin S. Rosen — Chairman, Raymond E. Mabus, Michael DelGiudice, Dennis Mehiel and Philip D. Turits. Our Strategic and Investment Banking Committee evaluates and recommends investment strategies with investment banks and brokerage houses and assists in the evaluation of possible acquisitions and mergers.

Audit Committee

Our Audit Committee’s main function is to oversee our accounting and financial reporting processes, internal systems of control, independent accountant relationships, the audits of our financial statements, and our compliance with the Sarbanes-Oxley Act of 2002. This Committee’s responsibilities include, among other things:

annually reviewing and reassessing the adequacy of the Committee’s formal charter;
reviewing our annual audited financial statements with our management and our independent accountants and the adequacy of our internal accounting controls;
reviewing analyses prepared by our management and independent accountants concerning significant financial reporting issues and judgments made in connection with the preparation of our financial statements;

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reviewing the independence of the independent accountants;
reviewing our auditing and accounting principles and practices with the independent accountants and reviewing major changes to our auditing and accounting principles and practices as suggested by the independent accountant or our management;
selecting and recommending the appointment of the independent accountant to the Board of Directors, which firm is ultimately accountable to the Audit Committee and the Board of Directors; and
approving professional services provided by the independent accountant, including the range of audit and nonaudit fees.

The members of our Audit Committee are Paul C. O’Brien — Chairman, Dennis Mehiel, and Michael DelGiudice, each of whom is a non-employee member of our Board of Directors. Michael DelGiudice will be our Audit Committee Financial Expert as currently defined under SEC Rules. Our Board has determined that each of the directors serving on our Audit Committee is independent within the meaning of the Rules of the SEC and the listing standards of the American Stock Exchange. Our Audit Committee’s charter is available on our website.

Audit Committee Financial Expert

In general, an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K, is an individual member of the Audit Committee who:

understands generally accepted accounting principles and financial statements,
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements or has experience actively supervising one or more persons engaged in such activities,
understands internal controls over financial reporting, and
understands audit committee functions.

An “audit committee financial expert”: may acquire the foregoing attributes through:

education and experience as a principal financial officer, principal accounting officer, controller, public accountant, auditor or person serving similar functions;
experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person serving similar functions; experience overseeing or assessing the performance of companies or public accounts with respect to the preparation, auditing or evaluation of financial statements; or
other relevant experience.

Our Board of Directors has determined that Michael DelGiudice is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K, and that Mr. DelGiudice is independent within the meaning of the Rules of the SEC and the listing standards of the American Stock Exchange.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership of Common Stock. Directors, officers and greater than 10% stockholders are required by SEC regulations to furnish us with all Section 16(a) forms they file.

To our knowledge, based solely upon our review of the copies of such reports furnished to us, we believe that no directors, officers and stockholders had more than 10% of a registered class of our equity securities.

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Code of Conduct and Ethics

On November 1, 2004, we adopted a Corporate Code of Conduct and Ethics applicable to all employees and directors of the Company, including our principal executive officer and principal financial and accounting officer. A copy of our Code of Ethics is available on our website at www.fusiontel.com under the Corporate Governance subsector of the “investors” tab. Disclosure regarding any amendments to, or waivers from, provisions of the Code of Conduct and Ethics that apply to our directors, principal executive and financial officer will be included in a Current Report on Form 8-K within five business days following the date of the amendment or waiver, unless website posting of such amendments or waivers is then permitted by the rules of The American Stock Exchange.

Item 11. Compensation of Directors and Executives

Executive Summary Compensation Table

The following table provides information regarding the compensation earned during the fiscal year ended December 31, 2007 and 2006 by our Chief Executive Officer, the President and Chief Operating Officer, and our Chief Financial Officer. It also includes the compensation of one other individual who served as an executive officer during a portion of 2007, but was not an executive officer at the end of the year.

           
Name and Principal Position   Year   Salary ($)(1)   Bonus ($)(1)   Option
Awards ($)(2)
  All Other
Compensation
($)(3)
  Total ($)
Matthew D Rosen,
Chief Executive Officer
    2007     $ 350,000     $     $ 247,377     $ 3,157     $ 600,534  
    2006     $ 350,000     $     $ 153,122     $ 3,211     $ 506,333  
Gordon Hutchins, Jr.,
President and Chief
Operating Officer(4)
    2007     $ 220,000     $     $ 91,941     $ 387     $ 312,328  
    2006     $ 220,000     $     $ 59,758     $ 441     $ 280,199  
        
Barbara Hughes,
Chief Financial Officer
    2007     $ 175,000     $     $ 26,886     $ 387     $ 202,273  
    2006     $ 170,312     $     $ 20,373     $ 441     $ 191,126  
Roger Karam,
Former President of VOIP Division(5)
    2007     $ 93,833     $     $     $ 151,235     $ 245,068  
    2006     $ 250,000     $ 62,500     $     $ 20,459     $ 332,959  
        

(1) Included in this column are amounts earned, though not necessarily received, during the corresponding fiscal year.
(2) Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS No. 123R, of awards pursuant to the Company’s 1998 Stock Option Plan and may include amounts from awards granted both in and prior to 2007. Assumptions used in the calculation of these amounts are included in Notes 2 and 14 to the Company’s audited financial statements for the fiscal year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2008. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
(3) All other compensation represents life insurance premiums except for Roger Karam, who entered into a consulting agreement with the Company after his resignation as the President of the VOIP Division. As such, the amount represents his consulting fees.
(4) Subsequent to fiscal year end, Mr. Hutchins was promoted to President and Chief Operating Officer.
(5) Mr. Karam resigned as an executive officer on May 10, 2007, but continues to serve as a consultant to the Company.

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EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS

We currently have an employment agreement in place with Mr. Matthew Rosen, our Chief Executive Officer. Mr. Rosen's employment agreement was initiated on November 11, 2004, and amended on March 16, 2006 to extend the term until September 30, 2008, provided that the term shall extend for an additional one year unless terminated by either side on 90 days notice. The agreement provides for an annual salary of not less than $350,000, with a minimum annual bonus equal to 25% of his annual salary. In the event that we achieve a positive EBITDA for two successive quarters, he will be paid a one-time bonus equal to 50% of his annual salary then in effect. In the event that the employment is terminated without cause, including by change of control, the agreement provides that Mr. Rosen will receive unpaid base salary accrued through the effective date of the termination plus any pro-rata bonus and a lump sum of 200% of his base salary and 200% of his highest annual bonus for the three years preceding his termination. If that had occurred on December 31, 2006, the amount due to Mr. Rosen would have been $975,000. The agreement also provides for a one year non-compete provision. In the event of a sale of the company for an amount in excess of $100 million, Mr. Rosen would receive a bonus equal to 2% of proceeds between $100 million and $200 million, 3% of proceeds between $200 million and $300 million, 4% of proceeds between $300 million and $400 million, and 5% of proceeds over $400 million. Mr. Rosen has voluntarily waived his bonus opportunity since December of 2006, pending improvement in Company's financial position.

Mr. Gordon Hutchins Jr. serves as President and Chief Operating Officer of the Company. Mr. Hutchins does not have an employment agreement with the Company. His promotion to President and Chief Operating Officer on March 26, 2008 provides for an increase in his annual salary from $220,000 to $250,000, and he will retain a targeted bonus opportunity equal to 25% of annual salary, based on achievement of corporate performance metrics.

Ms. Barbara Hughes serves as the Chief Financial Officer of the Company. Ms Hughes does not have an employment agreement with the Company. Her annual salary is $175,000 and she has a targeted bonus opportunity equal to 25% annual salary based on achievement of corporate performance metrics.

We previously had an employment agreement with Mr. Roger Karam, however, Mr. Karam's resignation in May 2007 as President of the company's VoIP Division effectively terminated the employment agreement that had an initial effective date of January 2005. Said employment agreement had provided for an annual salary of not less than $225,000, and was subsequently increased to $250,000 with a minimum annual bonus equal to 25% of his annual salary. Additionally, Mr. Karam was entitled to participate in our stock option plan and received 50,000 options at an exercise price equal to $6.45 as the price of each share in our public offering. Subsequently, on May 10, 2007 Mr. Karam entered into a consulting agreement with the company for a period of one year. This new consulting agreement will renew automatically for a period of three (3) months unless terminated by either party fifteen (15) days prior to the end of said consulting agreement. The consulting agreement provides for an annual consulting fee of $250,000 and a discretionary bonus of 25% of his consulting fee based on achievement of certain goals as set forth in the consulting agreement.

Outstanding Equity Awards at 2007 Fiscal Year-End

The following table presents the outstanding equity awards held by the executive officers referenced above as of the fiscal year ended December 31, 2007. These options vest in three equal annual installments on each of the first through third anniversaries of the grant date.

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Name   Grant Date   Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Equity
Incentive Plan Awards;
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
Matthew D. Rosen     6/16/06       53,333       106,667              $ 2.28       06/16/16  
    3/7/06       44,286       88,572              $ 2.46       03/07/16  
    3/7/06       35,714       71,428              $ 2.80       03/07/16  
    7/14/04       62,143                       $ 3.15       07/14/14  
    7/14/04       280,715                       $ 4.38       07/14/14  
    3/29/07                350,000              $ 0.69       03/29/17  
Gordon Hutchins, Jr.     3/7/06       35,714       71,428              $ 2.80       03/07/16  
    3/7/06       5,953       11,905              $ 2.65       03/07/16  
    3/29/07                175,000              $ 0.69       03/29/17  
Barbara Hughes     12/22/05       26,667       13,333              $ 2.46       12/22/15  
    2/9/05       20,000                       $ 6.45       02/09/15  
    7/14/04       8,215                       $ 3.15       07/14/14  
    7/14/04       40,358                       $ 4.38       07/14/14  
    3/29/07                60,000              $ 0.69       03/29/17  
Roger Karam     12/22/05       26,667       13,333              $ 2.46       12/22/15  
    1/15/05       50,000                       $ 6.45       01/15/15  
    11/19/04       40,000                       $ 4.38       11/19/14  

2007 Director Compensation

Our directors do not receive cash compensation for their services on our Board or Board committees; however, we reimburse our directors for out-of-pocket expenses associated with their attendance at Board of Directors’ meetings.

             
             
  Director Compensation   Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
  All Other
Compensation(3) ($)
  Total(4) ($)
Name   Fees Earned
or Paid in
Cash ($)
  Stock
Awards
($)
  Option
Awards(1) ($)
  Non-Equity
Incentive Plan
Compensation
($)
Marvin S. Rosen                     $ 7,624 (2)    $     $     $ 14,000     $ 21,624  
E. Alan Brumberger                     $ 7,624 (2)    $     $     $     $ 7,624  
Michael J. DelGiudice                     $ 7,624 (2)    $     $     $     $ 7,624  
Julius Erving                     $ 7,624 (2)    $     $     $     $ 7,624  
Evelyn Langlieb Greer                     $ 7,624 (2)    $     $     $     $ 7,624  
Fred Hochberg                     $ 7,624 (2)    $     $     $     $ 7,624  
Raymond E. Mabus                     $ 7,624 (2)    $     $     $     $ 7,624  
Dennis Mehiel                     $ 7,624 (2)    $     $     $     $ 7,624  
Paul C O’Brien                     $ 7,624 (2)    $     $     $     $ 7,624  
Philip D. Turtis                     $ 7,624 (2)    $     $     $     $ 7,624  

(1) Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2007, in accordance with SFAS No. 123R, of awards pursuant to the Company’s 1998 Stock Option Plan and may include amounts from awards granted both in and prior to 2007. Assumptions used

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in the calculation of these amounts are included in Notes 2 and 14 to the Company’s audited financial statements for the fiscal year ended December 31, 2007 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 2008.
(2) On March 29, 2007, we granted each of our director options to purchase 20,000 shares of our Common Stock, under our 1998 Stock Option Plan. These options have an exercise price per share of $0.69. The grant date fair value computed in accordance with SFAS No. 123R for 20,000 options granted to each director amounted to $7,624.
(3) All other compensation includes reimbursement to Mr. Marvin S. Rosen of approximately $2,000 per month from January 2007 through July 2007 was for a portion of the monthly rent for his apartment in Fort Lauderdale, Florida, which is used by certain executives in lieu of such executives having to incur hotel expenses. That reimbursement was discontinued after July 2007.
(4) The table does not include reimbursement for out of pocket expenses associated with their attendance at the Board of Directors’ meetings.
(5) The aggregate number of options held by each director at the end of December 31, 2007 is 40,000 except for Dennis Mehiel who holds 61,429.

Stock Option Plan

Our Board of Directors adopted the Plan in May 1998, re-approved the Plan in November 1999, and in February 2000, our stockholders approved the Plan. In July 2007, the shares of common stock available for issuance under our Plan were increased from 4,000,000 to 7,000,000.

The purposes of the Plan are: (i) to enable us to attract and retain qualified and competent employees and to enable such persons to participate in our long-term success and growth by giving them an equity interest in the Company; (ii) to enable us to use grants of stock options in lieu of all or part of cash fees for directors who are not officers or employees, thereby aligning the directors' interests with that of the stockholders; and (iii) to provide consultants and advisors with options, thereby increasing their proprietary interest in us. Employees and directors are eligible to be granted awards under the Plan. Consultants and advisors to Fusion are eligible to be granted awards under the Plan if their services are of a continuing nature or otherwise contribute to our long-term success and growth.

The Plan is administered by our Compensation and Nominating Committee of the Board of Directors. The Committee may adopt, alter, or repeal any administrative rules, guidelines, and practices for carrying out the purposes of the Plan, and its determination, interpretation, and construction of any provision of the Plan are final and conclusive. The Committee has the right to determine, among other things, the persons to whom awards are granted, the terms and conditions of any awards granted, the number of shares of common stock covered by the awards, and the exercise prices and other terms thereof.

Stock option awards are granted to new employees when they are hired based upon the employee's position and salary level. Additionally, on an annual basis, the Company aims to award option grants to executive management as well as the general employee base to reward past performance and provide incentive and motivation to achieve the future plans of the Company. The Compensation Committee has an annual meeting to review executive and upper level management performance for the past year, and to determine what amount of option grants they will consider recommending to the Board for approval for executive management, and what amount they will authorize as a block of grants to be issued to the remaining employee base. Also, throughout the year, the Chief Executive Officer may issue individual options for extraordinary performance or for an employee's promotion. Any awards for employees at salary levels of greater than $150,000 and/or options of greater than $100,000 in value require submission to the Committee for review and for their recommendation to the Board of Directors for approval.

The exercise price, term, and exercise period of each stock option is fixed by the committee at the time of grant. No incentive stock option shall have an exercise price that is less than 100% of the fair market value of the common stock on the date of the grant. In addition, no stock option shall be (i) exercisable more than 10 years after the date such incentive stock option is granted, or (ii) be granted more than 10 years after the Plan is adopted by the Board.

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Most options held by employees vest over four years. Options held by Executive Officers vest over three years, and options held by the Board of Directors vest over six months or two years. In certain cases, we have agreed to extend the duration of options granted to non-employee directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table presents information regarding the beneficial ownership of our common stock as of March 31, 2008:

each person who beneficially owns more than 5% of our common stock;
each of our directors and named executive officers individually; and
all current executive officers and directors as a group.

Beneficial ownership is determined under the rules of the SEC. These rules deem common stock subject to options currently exercisable, or exercisable within sixty (60) days, to be outstanding for purposes of computing the percentage ownership of the person holding the options or of a group of which the person is a member, but these rules do not deem the stock to be outstanding for purposes of computing the percentage ownership of any other person or group. To our knowledge, the persons named in the table have sole voting and sole investment control with regard to all shares beneficially owned.

   
Name of Beneficial Owners   Number of
Shares
Beneficially
Owned
  Percent of
Common
Stock
E. Alan Brumberger(1)     423,448       1.2 % 
Julius Erving(2)     97,411       *  
Michael DelGiudice(3)     457,157       1.3 % 
Evelyn Langlieb Greer(4)     253,442       *  
Fred Hochberg(5)     293,379       *  
Barbara Hughes(6)     115,240       *  
Gordon Hutchins, Jr.(7)     186,850       *  
Roger Karam(8)     1,429,310       4.0 % 
Raymond E. Mabus(9)     73,983       *  
Dennis Mehiel(10)     1,004,807       2.8 % 
Paul C. O’Brien(11)     195,536       *  
Marvin S. Rosen(12)     3,002,306       8.3 % 
Matthew D. Rosen(13)     783,381       2.1 % 
Philip D. Turits(14)     2,606,421       7.2 % 
All Executive Officers as a group(15)     190,719       *  

* Less than 1% of outstanding shares
** Unless otherwise indicated (i) all addresses are c/o Fusion Telecommunications International, Inc. 420 Lexington Avenue, Suite 1718, New York, NY 10170.
(1) Includes (i) 10,715 shares of Common Stock held by trusts for which his wife serves as trustee; (ii) 5,988 share of Common Stock issuable upon the exercise of Convertible Preferred Stock Series A-1; (iii) 40,000 share of Common Stock issuable upon the exercise of options that are presently exercisable and (iv) 54,357 Redeemable Common Stock Purchase Warrants.
(2) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of options (ii) 29,940 shares of Common Stock issuable upon the exercise of Convertible Preferred Stock Series A-1 and (iii) 14,971 Redeemable Common Stock Purchase Warrants.
(3) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of options (ii) 67,781 Redeemable Common Stock Purchase Warrants; and (iii) 119,760 shares of Common Stock issuable upon the exercise of Convertible Preferred Stock Series A-1.
(4) Includes (i) 101,715 shares of Common Stock held by a trust for which she serves as trustee; (ii) 105,739

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Redeemable Common Stock Purchase Warrants (iii) 40,000 shares of Common Stock issuable upon the exercise of options that are presently exercisable and (iv) 5,998 shares of Common Stock issuable upon the exercise of Convertible Preferred Stock Series A-1.
(5) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of options, (ii) 91,675 Redeemable Common Stock Purchase Warrants and (iii) 60,601 shares of Common Stock issuable upon exercise of Convertible Preferred Stock Series A-1 and A-2.
(6) Represents 115,240 shares of Common Stock issuable upon the exercise of options.
(7) Includes (i) 141,668 shares of Common Stock issuable upon the exercise of options (ii) 30,121 shares of common stock issuable upon the exercise of Preferred Stock Series A-2 and (iii) 15,061 Redeemable Common Stock Warrants.
(8) Includes (i) 1,439,643 shares of Common Stock issued at the closing of the IPO pursuant to January 2005 Purchase Agreement between us and Mr. Karam, less 75,000 shares sold and (ii) 116,667 shares of Common Stock issuable upon the exercise of options that are presently exercisable.
(9) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of options, (ii) 5,998 shares of Common Stock issuable upon exercise of Convertible Preferred Series A-1 and (iii) 2,995 Redeemable Common Stock Purchase Warrants.
(10) Includes (i) 61,429 shares of Common Stock issuable upon the exercise of options; (ii) 45,000 shares of Common Stock held by Four M Capital for which Mr. Mehiel has beneficial ownership and (iii) 129,841 Redeemable Common Stock Purchase Warrants and (iv) 59,880 shares of Common Stock issuable upon conversion of Preferred Stock Series A-1.
(11) Includes (i) 40,000 shares of Common Stock issuable upon the exercise of options, (ii) 59,880 shares of Common Stock issuable upon conversion of Preferred Stock Series A-1 and (iii) 29,941 redeemable purchase stock warrant.
(12) Includes (i) 272,431 Redeemable Common Stock Purchase Warrants; and (ii) 40,000 shares of Common Stock issuable upon the exercise of options, and (iii) 60,061 shares of common stock issuable upon exercise of convertible stock series A-1 and A-2.
(13) Includes 672,860 shares of Common Stock issuable upon the exercise of options, (ii) 35,965 shares of Common Stock issuable upon exercise of Convertible Preferred Stock Series A-1 and A-2 and (iii) 17,984 redeemable Common Stock Warrants.
(14) Includes (i) 10,715 shares of Common Stock held by a trust for which he serves as trustee; (ii) 267,959 Redeemable Common Stock Purchase Warrants; (iii) 40,000 shares of Common Stock issuable upon the exercise of options; (iv) 51,117 shares of Common Stock issuable upon exercise of Convertible Preferred Stock A-1 and A-2; and (v) 4,286 shares of Common Stock held by his wife. Mr. Turits has granted certain individuals options to purchase an aggregate of 21,429 shares of his Common Stock.
(15) Represents 190,719 shares of Common Stock issuable upon the exercise of options.

Equity Compensation Plans

The following table provides certain aggregate information with respect to all of our equity compensation plans in effect for year ended December 31, 2007:

     
Plan Category   Number of
Securities to
be Issued Upon
Exercise of
Outstanding
Options,
Warrants and
Rights
  Weighted
Average
Exercise Price
of Outstanding
Options,
Warrants and Rights
  Number of
Securities
Remaining
Available
for Future
Issuance
Equity compensation plans approved by security holders     3,116,676     $ 2.43       3,883,324  
Total     3,116,676     $ 2.43       3,883,324  

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Item 13. Certain Relationships, Related Transactions, and Director Independence

Officer and Director Loans to Company

On December 4, 2007, December 18, 2007 and December 19, 2007, the Company borrowed an aggregate of $540,000 from two directors of the Company. The loans are evidenced by three promissory notes that are payable in 24 equal monthly installments of principal and interest (at the rate of 10% per annum) commencing January 4, 2008, January 18, 2008 and January 19, 2008; provided that the lenders have the right to demand payment of all unpaid principal and interest at any time after December 4, 2008, December 18, 2008 and December 19, 2008. The Company’s obligations under the notes are collateralized by a security interest in the Company’s accounts receivable. The proceeds of the loans will be used for general working capital purposes.

On December 21, 2007, the Company borrowed $160,000 from a director of the Company. The loan is evidenced by a non-interest bearing promissory note that is payable on January 3, 2008. The loan was paid on January 3, 2008.

During October 2007, the Company borrowed $400,000 from two members of its Board of Directors, which was repaid on November 2, 2007. Interest was paid based upon an 10% per annum interest rate

Other Transactions

We have an informal verbal agreement with Mr. John H. Sununu, the Chairman of our Advisory Board, pursuant to which Mr. Sununu will be compensated for any international business relationships, which Mr. Sununu assists us in developing. The amount, form and terms of any such compensation will depend on the business relationship developed and will be negotiated at the time any such relationship is developed.

During the year ending December 31, 2007, the Company received $120,000 from the members of its Board of Directors and Officers of the Company associated with the private placement for Preferred Stock A-2. The names and amounts are as follows:

 
Name   Amount
E. Alan Brumberger (Director)   $ 10,000  
Marvin S. Rosen (Director)     25,000  
Philip D. Turits (Director)     30,000  
Fred P. Hochberg (Director)     25,000  
Matthew D. Rosen (Officer and Director)     5,000  
Gordon Hutchins, Jr. (Officer)     25,000  
Total   $ 120,000  

During the year ending December 31, 2007, the Company received $50,000 from Marvin S. Rosen and $50,000 from Philip D. Turits associated with the private placement for the Company’s Common Stock.

Director Independence

The Company applies the standards of The American Stock Exchange, the stock exchange upon which the Company's Common Stock is listed, for determining the independence of the members of its Board of Directors and Board committees. Based upon its application of those standards, the Board of Directors has determined that the following members of our Board of Directors (and committee members, as applicable) are independent:

E. Alan Brumberger
Julius Erving
Evelyn Langlieb Greer
Raymond E. Mabus
Dennis Mehiel
Paul C. O'Brien
Michael J. DelGiudice
Fred P. Hochberg

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Item 14. Principal Accounting Fees and Services

The aggregate fees billed to the Company for the years ended December 31, 2007 and 2006, by our principal accounting firm Rothstein, Kass & Company, P.C. are as follows:

Audit-Related Fees:  There were no fees for audit-related services for the years ended December 31, 2007 and 2006.

Tax Related Fees:  There were no fees for tax-related services for the years ended December 31, 2007 and 2006. The Company obtains tax related services from an accounting firm other than Rothstein, Kass & Company, P.C.

All Other Fees:  There were no fees for other services that were not included in the three categories above during the years ended December 31, 2007 and 2006.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND
PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT ACCOUNTANTS

Consistent with SEC policies regarding auditor independence, the Audit Committee has responsibility for appointing, setting compensation and overseeing the work of the independent accountant. In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent accountant.

Prior to engagement of the independent accounting firm for the next year's audit, management will submit an aggregate of services expected to be rendered during that year for each of three categories of services to the Audit Committee for approval.

1. Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent accountant can reasonably be expected to provide, including comfort letters, statutory audits, and attest services and consultation regarding financial accounting and/or reporting standards.

2. Audit-Related services are for assurance and related services that are traditionally performed by the independent accountant, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.

3. Other Fees are those associated with services not captured in the other categories. The Company generally does not request such services from the independent accountant.

Prior to engagement, the Audit Committee pre-approves these services by category of service. The fees are budgeted and the Audit Committee requires the independent accountant and management to report actual fees versus the budget periodically throughout the year by category of service. During the year, circumstances may arise when it may become necessary to engage the independent accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent accountant.

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

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PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)(1) Financial Statements.

The Consolidated Financial Statements filed as part of this Annual Report on Form 10-K are identified in the Index to Consolidated Financial Statements on page F-1 hereto.

(a)(2) Financial Statement Schedules.

Schedule II — Valuation and Qualifying Accounts is included on page F-32 hereto. All other financial statement schedules have been omitted because the information required to be set forth therein is not applicable or is shown on the financial statements or notes thereto.

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2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

(a)(3) Exhibits.

The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.

 
Exhibit
No.
  Description
 3.1      Certificate of Incorporation, as amended(*)
 3.1(a)   Certificate of Designation of Series C Convertible Redeemable Preferred Stock(*)
 3.1(b)   Certificate of Designation of the Rights and Preferences of the Series A-2 Preferred Stock(6)
 3.1(c)   Certificate of Designation of the Rights and Preferences of the Series A-3 & 4 Preferred Stock(9)
 3.1(d)   Form of Subscription Agreement(7)
 3.2      Bylaws(*)
10.1      1998 Stock Option Plan(*)
10.2      Employment Agreement between registrant and Matthew Rosen(*)
10.2.1    Amended and Restated Employment Agreement between registrant and Matthew Rosen(3)
10.3      Master Service Agreement between registrant and Terremark Worldwide, Inc., dated May 29, 2003(*)
10.5      Joint Venture Agreement between registrant and Karamco, Inc., dated December 12, 2002(*)
10.6      Agreement between Fusion registrant and Communications Ventures PVT. LTD, dated May 13, 2004(*)
10.7      Form of Warrant to Purchase Common Stock(*)
10.8      Lease Agreement between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office(*)
10.8.1     Lease Modification Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office(8)
10.8.2     Lease Modification Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office(8)
10.8.3     Lease Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office(8)
10.9       Lease Agreement between registrant and 67 Broad Street LLC for the 75 Broad Street, New York, NY office(*)
10.10      Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended(*)
10.10.11   Amendment dated February 10, 2006, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office, as amended(8)
10.11      Lease Agreement between Efonica FZ- LLC and Dubai Internet City for Dubai offices(8)
10.13      Shareholders Joint Venture Agreement between registrant and Communications Ventures Index Pvt. Ltd., dated March 11, 2000(*)
10.19      Warrant to Purchase Common Stock issued by registrant to Marvin Rosen, dated July 31, 2002(*)
10.28      Non-Competition Agreement between registrant and Marvin Rosen(*)
10.29      Stock Purchase Agreement between registrant, Convergent Technologies, Ltd. And the stockholders listed on Schedule 1 Attached thereto, dated December 16, 2004, as amended and restated, dated January 11, 2005(*)

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Exhibit
No.
  Description
10.30      Employment Agreement between registrant and Roger Karam(*)
10.31.1    Stock Purchase Agreement between registrant, Efonica FZ-LLC and Karamco, Inc., dated January 11, 2005 and the amendment thereto(*)
10.31.2    Amendment to Stock Purchase Agreement between registrant, Efonica FZ-LLC and Karamco, Inc., dated March 24, 2006(8)
10.32      Carrier Service Agreement for International Terminating Traffic between the registrant and Qwest Communications Corporation, dated May 17, 2000(*)
10.33      Carrier Service Agreement between registrant and Telco Group, Inc. dated April 3, 2001, as amended(*)
10.34      Colocation License Agreement between the registrant and Telco Group, dated January 28, 2002.(*)
10.35      International VoIP Agreement, dated April 25, 2002, as amended(*)
10.36.1    Stock Purchase Agreement dated March 8, 2005 between FUSION TURKEY, L.L.C., LDTS UZAK MESAFE TELEKOMÜNIKASYON VE .ILETIS,IM HIZMETLERI SAN.TIC.A.S. and Bayram Ali BAYRAMOGLU; Mecit BAYRAMOGLU Mehmet; Musa BAYSAN; Yahya BAYRAMOGLU and Özlem BAYSAN.(1)
10.37      Lease Agreement dated April 28, 2005, between Convergent Technologies Limited and Oceanic Digital Jamaica Limited (**)
10.38      Promissory Note issued by iFreedom Communications International Holdings, Limited; iFreedom Communications Corporation; iFreedom Communications (Malaysia) Sdn. Bhd.; iFreedom Communications, Inc.; iFreedom Communications Hong Kong Limited and iFreedom UK, Ltd., jointly and severally, to Registrant.(8)
10.39      Form of Subscription Agreement(5)
10.40      Form of Warrant(5)
10.41      Certificate of Designation of the Rights and Preferences of the Series A-1 Preferred Stock(5)
14         Code of Ethics of Registrant(8)
21.1       List of Subsidiaries(8)
31.1       Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4)
31.2       Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4)
32.1       Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(4)
32.2       Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(4)

* Originally filed with our Registration Statement no. 33-120412 and incorporated herein by reference.
** Originally filed with our Registration Statement no. 33-120206 and incorporated herein by reference.
(1) Filed as Exhibit to our Current Report on Form 8-K filed on March 14, 2005 and incorporated herein by reference.
(2) Filed as Exhibit to or Annual Report on Form 10-K filed March 31, 2005 and incorporated herein by reference.
(3) Filed as Exhibit to our Current Report on Form 8-K filed on March 17, 2006, and incorporated herein by reference.
(4) Filed herewith.

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(5) Filed as Exhibit to our Current Report on Form 8-K filed on December 15, 2006, and incorporated herein by reference.
(6) Filed as Exhibit to our Current Report on Form 8-K filed on May 9, 2007, and incorporated herein by reference.
(7) Filed as Exhibit to our Current Report on Form 8-K filed on November 23, 2007 and 8K/A on Novermber 27, 2007, and incorporated herein by reference.
(8) Filed as Exhibit to our Current Report on Form 10-K filed on March 31, 2006, and incorporated herein by reference.
(9) Identical to Certificate of Rights and Preferences of Series A-2 Preferred Strock filed as exhibit on Form 8-K on May 9, 2007.

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2007 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K

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: April 30, 2008

By:

/s/ Matthew D. Rosen
Matthew D. Rosen
Chief Executive Officer

Date: April 30, 2008

By:

/s/ Barbara Hughes
Barbara Hughes
Chief Financial Officer

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
  
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Fusion Telecommunications International, Inc.

We have audited the accompanying consolidated balance sheets of Fusion Telecommunications International, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fusion Telecommunications International, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has had negative working capital balances, incurred negative cash flows from operations and net losses since inception and has limited capital to fund future operations that raises a substantial doubt about their ability to continue as a going concern. Management’s plans in regard to this matter are also described in Note 3. The consolidated financial statements do not include any adjustment that might result from this uncertainty.

In connection with our audits of the consolidated financial statements referred to above, we audited the consolidated financial statement schedule listed in the accompanying index. In our opinion, the consolidated financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information stated therein.

/s/ Rothstein, Kass & Company P.C.
  
Roseland, New Jersey
March 31, 2008

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
  
CONSOLIDATED BALANCE SHEETS

   
  December 31,
     2007   2006
ASSETS
                 
Current assets
                 
Cash and cash equivalents   $ 114,817     $ 2,743,155  
Accounts receivable, net of allowance for doubtful accounts of approximately $830,000 and $694,000 in 2007 and 2006,
respectively
    5,545,408       6,743,753  
Restricted cash           365,000  
Prepaid expenses and other current assets     481,556       622,207  
Assets held for sale     129,231       129,231  
Total current assets     6,271,012       10,603,346  
Property and equipment, net     5,425,846       6,422,016  
Other assets
                 
Security deposits     66,638       141,868  
Restricted cash     416,566       416,566  
Goodwill     964,557       4,971,221  
Intangible assets, net     4,892,215       4,913,360  
Other assets     91,455       104,923  
Total other assets     6,431,431       10,547,938  
Total assets   $ 18,128,289     $ 27,573,300  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Current liabilities
                 
Long-term debt, current portion   $ 566,567     $ 150,000  
Capital lease/equipment financing obligations, current portion     233,759       1,066,746  
Accounts payable and accrued expenses     9,663,325       11,461,112  
Investment in Estel           554,286  
Liabilities of discontinued operations     15,829       95,085  
Total current liabilities     10,479,480       13,327,229  
Long-term liabilities
                 
Long-term debt, net of current portion     283,433        
Capital lease/equipment financing obligations, net of current portion     10,922        
Other long-term liabilities     659,271       800,113  
Total long-term liabilities     953,626       800,113  
Commitments and contingencies