10-Q/A

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

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

For the quarterly period ended June 30, 2011

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 its 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

(Registrants telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer   (Do not check if 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 oNox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 12, 2011.

Title Of Each Class	Number of Shares Outstanding
Common Stock, $0.01 par value	144,474,138

1

EXPLANATORY NOTE

This Amendment No. 1 to our Form 10-Q for the quarterly period ended June 30, 2011 is filed to provide the interactive data files required by Item 6 of Form 10-Q.  There is no change to the Company’s financial position, results of operations, cash flows or any other information contained in the Company’s original Form 10-Q for the quarterly period ended June 30, 2011, which was filed on August 15, 2011.  This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

PART II – OTHER INFORMATION

Item 6. Exhibits.

EXHIBIT NO.	DESCRIPTION
31.1*	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.
*  Previously filed.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

2

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.
	By: /s/ MATTHEW D. ROSEN
	Matthew D. Rosen
August 18, 2011	Chief Executive Officer
	By: /s/ GORDON HUTCHINS, JR.
	Gordon Hutchins, Jr.
August 18, 2011	President, Chief Operating Officer and Acting Chief Financial Officer

3

Index to Exhibits

EXHIBIT NO.	DESCRIPTION
31.1*	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**	XBRL Instance Document.
101.SCH**	XBRL Taxonomy Extension Schema Document.
101.CAL**	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE**	XBRL Taxonomy Extension Presentation Linkbase Document.
*  Previously filed.
** Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

4

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Condensed Consolidated Interim Statements of Operations (unaudited) (USD $)	3 Months Ended				6 Months Ended
	Jun. 30, 2011		Jun. 30, 2010		Jun. 30, 2011		Jun. 30, 2010
Revenue	$ 10,643,036		$ 9,727,200		$ 20,847,316		$ 19,315,832
Operating expenses:
Cost of revenues	9,655,765	[1]	8,753,785		18,801,395		17,417,554
Depreciation and amortization	148,530		207,909		317,068		439,785
Selling general and administrative expenses	2,005,991	[2]	2,195,581	[3]	4,166,744	[4]	4,391,892	[5]
Advertising and marketing	819		17,425		5,382		21,196
Total operating expenses	11,811,105		11,174,700		23,290,589		22,270,427
Operating loss	(1,168,069)		(1,447,500)		(2,443,273)		(2,954,595)
Other income (expenses):
Interest income	61		120		157		243
Interest expense	(55,786)		(54,716)		(104,169)		(104,307)
Gain on settlements of debt							9,500
Other	21,134		3,862		109,829		8,729
Total other income (expenses)	(34,591)		(50,734)		5,817		(85,835)
Loss from continuing operations	(1,202,660)		(1,498,234)		(2,437,456)		(3,040,430)
Discontinued operations:
Discontinued operations	152		(86,982)		8,364		(88,355)
Net loss	(1,202,508)		(1,585,216)		(2,429,092)		(3,128,785)
Loss applicable to common stockholders:
Loss from continuing operations	(1,202,660)		(1,498,234)		(2,437,456)		(3,040,430)
Preferred stock dividends in arrears	(122,816)		(159,462)		(266,717)		(317,171)
Net loss from continuing operations applicable to common stockholders:	(1,325,476)		(1,657,696)		(2,704,173)		(3,357,601)
Discontinued operations	152		(86,982)		8,364		(88,355)
Net loss applicable to common stockholders:	$ (1,325,324)		$ (1,744,678)		$ (2,695,809)		$ (3,445,956)
Basic and diluted loss per common share:
Loss from continuing operations per common share	$ (0.01)		$ (0.02)		$ (0.02)		$ (0.03)
Loss from discontinued operations per common share	$ 0.00		$ 0.00		$ 0.00		$ 0.00
Loss per common share	$ (0.01)		$ (0.02)		$ (0.02)		$ (0.03)
Weighted average common shares outstanding:
Basic and diluted	139,666,939		108,396,957		136,151,459		102,960,496

[1] exclusive of depreciation and amortization, shown separately below

[2] including $9,705 of stock-based compensation for the three months ended June 30, 2011

[3] including $68,668 of stock-based compensation for the three months ended June 30, 2010

[4] including $33,387 for the six months ended June 30, 2011

[5] including $137,045 for the six months ended June 30, 2010

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Condensed Consolidated Interim Statements of Cash Flows (unaudited) (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net loss	$ (2,429,092)	$ (3,128,785)
Discontinued operations	(8,364)	88,355
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	317,068	439,785
Bad debt expense	95,783	(4,651)
Stock-based compensation	33,387	137,045
Settlement of vendor liability	(75,000)
Gain on extinguishment of debt		(9,500)
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
Accounts receivable	(147,983)	(548,134)
Prepaid expenses and other current assets	(22,834)	(44,431)
Other assets	2,671	(15,215)
Payments of security deposits	(1,250)	(10,098)
Accounts payable and accrued expenses	144,338	2,820
Other long-term liabilities	(8,746)	(14,748)
Net cash used in operating activities	(2,100,022)	(3,107,557)
Cash flows from investing activities:
Purchase of property and equipment	(35,746)	(53,958)
Returns of restricted cash		10,000
Net cash used in investing activities	(35,746)	(43,958)
Cash flows from financing activities:
Proceeds from the sale of common stock, net	484,080	2,611,940
Proceeds from the sale of common stock not yet issued		275,000
Proceeds from notes payable - related parties	1,975,740	1,248,000
Proceeds from notes payable - non-related parties		100,000
Payments on capital lease/equipment financing obligations	(2,587)	(5,010)
Repayments of notes payable - related parties	(95,000)	(245,000)
Repayments of notes payable - non-related parties	(182,893)
Net cash provided by financing activities	2,179,340	3,984,930
Net increase (decrease) in cash and cash equivalents from continuing operations	43,572	833,415
Cash flows from discontinued operations:
Cash (used in) provided by operating activities of discontinued operations	(38,390)	(24,856)
Net change in cash and cash equivalents:
Net change in cash and cash equivalents	5,182	808,559
Cash and cash equivalents - start of period	20,370	99,019
Cash and cash equivalents - end of period	25,552	907,578
Supplemental disclosure of cash flow information:
Cash paid for interest	19,421	13,205
Supplemental schedule of non-cash investing and financing activities:
Conversion of notes payable - related parties to common stock	195,000	486,000
Conversion of notes payable - non related parties to common stock	250,000	200,000
Conversion of interest payable to common stock	3,311	19,982
Transfer from escrow payable to common stock		321,417
Transfer from equity to escrow payable - shares to vendor, not yet issued		75,000
Preferred stock converted into common stock	$ 2,500,000

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Document and Entity Information (USD $)	3 Months Ended
	Jun. 30, 2011
Document and Entity Information
Entity Registrant Name	Fusion Telecommunications International Inc
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Entity Central Index Key	0001071411
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Current Reporting Status	No
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Entity Common Stock, Shares Outstanding	143,829,151
Entity Public Float	$ 9,964,001.9

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Accounting Changes and Error Corrections

3 Months Ended

Jun. 30, 2011

Accounting Changes and Error Corrections

Accounting Changes and Error Corrections [Text Block]

9.     Recently Adopted and Issued Accounting Pronouncements

In January 2010, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new disclosures regarding transfers in and out of the Level 1 and 2 and activity within Level 3 fair value measurements and clarifies existing disclosures of inputs and valuation techniques for Level 2 and 3 fair value measurements. ASU 2010-06 also includes conforming amendments to employers’ disclosures about post-retirement benefit plan assets. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure of activity within Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those years. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.

In April 2010, the FASB issued ASU No. 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” This new accounting guidance clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The accounting guidance is effective for interim and annual periods beginning on or after December 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In December 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” ASU 2010-28 provides amendments to Topic 350 to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts to clarify that, for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. As a result of this standard, goodwill impairments may be reported sooner than under current practice. The adoption of this standard did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 provides amendments to Topic 820 effective for public entities for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Early adoption is not permitted for public entities. The Company has determined that the adoption of ASU 2011-04 will not have a material impact on its results of operations or its financial position.

The Company does not believe that any other recently issued but not yet effective accounting pronouncements, if currently adopted, would have a material effect on the accompanying condensed consolidated interim financial statements.

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Intangible Assets, Goodwill and Other

3 Months Ended

Jun. 30, 2011

Intangible Assets, Goodwill and Other

Goodwill and Intangible Assets Disclosure [Text Block]

5.      Intangible Assets

Identifiable intangible assets as of June 30, 2011 and December 31, 2010 are comprised of: 

		June 30, 2011 (unaudited)				December 31, 2010
		Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Trademarks	$	478,871	$	(177,903)	$	478,871	$	(143,926)
Intellectual Property		86,397		(18,513)		86,397		(12,342)
Total	$	565,268	$	(196,416)	$	565,268	$	(156,268)

Amortization expense for the three months ended June 30, 2011 and 2010 was $19,815 and $16,988, respectively.  Amortization expense for the six months ended June 30, 2011 and 2010 was $40,148 and $33,976, respectively.  Estimated future aggregate amortization expense is as follows for the periods indicated:

Remaining six months ending December 31,	2011	40,148
Year ending December 31:	2012	79,626
	2013	78,912
	2014	78,912
	2015	78,911

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Segment Reporting

3 Months Ended

Jun. 30, 2011

Segment Reporting

Segment Reporting Disclosure [Text Block]

11.    Segment Information

The Company complies with the accounting and reporting requirements on Disclosures about Segments of an Enterprise and Related Information. The guidance requires disclosures of segment information on the basis that is used internally for evaluating segment performance and for determining the allocation of resources to the operating segments.

The Company has two reportable segments that it operates and manages – corporate services and carrier services. These segments are organized by the products and services that are sold and the customers that are served. The Company measures and evaluates its reportable segments based on revenues and gross profit margins.  The Company’s executive, administrative and support costs are allocated to the Company’s operating segments and are included in segment income.  The Company’s segments and their principal activities consist of the following:

Carrier Services

Carrier Services includes the termination of carrier traffic utilizing VoIP technology as well as traditional TDM (circuit switched) technology.  VoIP permits a less costly and more rapid interconnection between the Company and international telecommunications carriers, and generally provides better profit margins for the Company than does TDM technology.  The Company currently interconnects with over 270 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.

Corporate Services and Other

The Company provides a wide variety of communications services to small and medium-sized corporations, as well as enterprise customers, including basic voice and data communications services, broadband Internet access, private line services, audio and web conferencing services, e-fax services, and a variety of other value-added services. These customers are sold through both the Company’s direct sales force and its partner sales program, which utilizes the efforts of independent third-party distributors to sell the Company’s products and services.

Unaudited operating segment information for the three and six months ended June 30, 2011 and 2010 is summarized as follows:

Three Months Ended June 30, 2011

			Carrier Services		Corporate Services and Other		Corporate and Unallocated		Consolidated
Revenues		$	10,076,009	$	567,027	$	-	$	10,643,036
Cost of revenues (exclusive of
	depreciation and amortization)		9,286,892		368,874				9,655,766
Depreciation and amortization			145,296		3,234				148,530
Selling, general and administrative expenses			1,100,303		905,688				2,005,991
Advertising and marketing			-		818				818
Other expenses			20,088		14,503				34,591
Loss from continuing operations		$	(476,570)	$	(726,090)	$	-	$	(1,202,660)
Total assets		$	3,001,349	$	1,766,399	$	34,448	$	4,802,196

Three Months Ended June 30, 2010

		Carrier Services		Corporate Services and Other		Corporate and Unallocated		Consolidated
Revenues	$	9,316,018	$	411,182			$	9,727,200
Cost of revenues (exclusive of depreciation and amortization)		8,516,789		236,996				8,753,785
Depreciation and amortization		201,075		6,834				207,909
Selling, general and administrative expenses		1,533,270		662,311				2,195,581
Advertising and marketing		-		17,425				17,425
Other expenses		35,007		15,727				50,734
Loss from continuing operations	$	(970,123)	$	(528,111)	$	-	$	(1,498,234)
Total assets	$	4,189,434	$	760,236	$	1,330,321	$	6,279,991

Six Months Ended June 30, 2011

		Carrier Services		Corporate Services and Other		Corporate and Unallocated		Consolidated
Revenues	$	19,760,202	$	1,087,114	$	-	$	20,847,316
Cost of revenues (exclusive of depreciation and amortization)		18,104,966		696,429				18,801,395
Depreciation and amortization		313,820		3,248				317,068
Selling, general and administrative expenses		2,295,909		1,870,835				4,166,744
Advertising and marketing		58		5,324				5,382
Other expenses (income)		6,209		(12,026)				(5,817)
Loss from continuing operations	$	(960,760)	$	(1,476,696)	$	-	$	(2,437,456)
Capital expenditure	$	27,604	$	826	$	7,316	$	35,746

Six Months Ended June 30, 2010

		Carrier Services		Corporate Services and Other		Corporate and Unallocated		Consolidated
Revenues	$	18,523,250	$	792,582	$	-	$	19,315,832
Cost of revenues (exclusive of depreciation and amortization)		16,953,617		63,937				17,417,554
Depreciation and amortization		425,930		13,855				439,785
Selling, general and administrative expenses		2,994,519		1,397,373				4,391,892
Advertising and marketing		-		21,196				21,196
Other expenses (income)		59,226		26,609				85,835
Loss from continuing operations	$	(1,910,042)	$	(1,130,388)	$	-	$	(3,040,430)
Capital expenditure	$	-	$	-	$	53,958	$	53,958

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Related Party Disclosures

3 Months Ended

Jun. 30, 2011

Related Party Disclosures

Related Party Transactions Disclosure [Text Block]

12.    Related Party Transactions

In addition to the financing transactions discussed in Notes 7 and 13, on March 29, 2011 the Company entered into a Desk Space Use and Occupancy Agreement with an entity affiliated with Mr. Rosen.  Under the terms of the agreement, Mr. Rosen’s affiliate will be able to utilize a portion of the Company’s leased office space in New York City for a fee of $9,000 per month.  The term of the agreement runs from April 15, 2011 to October 14, 2011.  The Company believes that the fee it is receiving under this agreement is comparable to what it would receive had the agreement been entered into with an unrelated third party.

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Commitment and Contingencies

3 Months Ended

Jun. 30, 2011

Commitment and Contingencies

Commitments and Contingencies Disclosure [Text Block]

10.    Commitments and Contingencies

Legal Matters

On or about March 14, 2011, a landlord over premises leased by the Company commenced a proceeding in the New York City Civil Court, County of New York (Index No. 060260/11), in which the landlord sought to recover against the Company certain unpaid rent and related charges due under a lease agreement between the landlord and the Company, and to evict the Company from the premises. The Company filed its response to the landlord’s claims on April 6, 2011. By Stipulation dated July 5, 2011, the landlord and the Company agreed that the landlord would be entitled to a judgment in the amount of $228,645 and a warrant of eviction, but that the landlord would not enforce the judgment or execute the warrant as long as the Company complied with the Stipulation. To date, the Company has complied with all of its obligations under the Stipulation. We anticipate that this matter will be resolved in the manner indicated in the Stipulation, and that the final payment under the Stipulation will be made on or about November 15, 2011. The accompanying consolidated financial statements fully reflect the amounts owed to the landlord by the Company as of the date of the financial statements.

On July 30, 2008, a vendor that provided management consulting and software systems services filed a complaint in the Supreme Court for the State of New York (Software Synergy, Inc., v Fusion Telecommunications International, Inc., Index No. 602223/08) seeking damages in the amount of $624,594 plus $155,787 in Prejudgment interest and costs, allegedly due to the plaintiff under terms of a Professional Services Letter Agreement (the “PSLA”) and a Master Software License Agreement (the “MSLA”). This complaint asserted claims for relief against the Company for breach of contract, failure to pay to plaintiff moneys allegedly due under the terms of the PSLA, violation of the terms of the MSLA, and prejudgment interest and costs. On September 17, 2008, the Company filed its Answer and Counterclaim against the vendor alleging the plaintiff materially breached its obligations to the Company under the PSLA and MSLA and is liable to the Company for damages, including full repayment of the amounts which the Company paid to the plaintiff for its failed development effort. On June 25, 2010, the parties entered into a Confidential Settlement Agreement resolving the litigation, providing for certain payments to the vendor by the Company, providing for the mutual release of all claims, and agreeing to the dismissal of the case. As of June 30, 2011, the Company's obligations under this agreement have been paid in full, and they are reflected in the accompanying consolidated financial statements.

On June 14, 2010, three individuals filed an action against a former customer of the Company and other associated persons, and against the Company, in New York State Court, County of Kings (Index No. 24255/09). The plaintiffs alleged that the non-Fusion defendants accepted funds from the plaintiffs for investment in real estate, but subsequently used some or all of those funds for other purposes. The plaintiffs further alleged that the non-Fusion defendants made certain payments to the Company and they seek repayment of those sums from the Company in the amount of $237,913 plus interest. The Company believes that the plaintiffs' claims are without merit as the bank account information provided by the plaintiffs themselves shows that the majority of the funds allegedly paid to the Company were actually paid to other non-affiliated entities. Moreover, those funds that were received by the Company from the non-Fusion defendants were payment for specific telecommunications equipment and services purchased by the non-Fusion defendants from the Company, and the Company had no knowledge of any alleged misuse of funds by the non-Fusion defendants. The Company has prepared and filed its answer to the complaint, and intends to vigorously defend itself. As the Company cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the amount or range of potential financial impact, if any, no adjustment has been made in the Company’s accompanying consolidated financial statements because of this claim.

The Company is from time to time involved in claims and legal actions arising in the ordinary course of business. Management does not expect that the outcome of any such claims or actions will have a material effect on the Company’s operations or financial condition. In addition, due to the regulatory nature of the telecommunications industry, the Company periodically receives and responds to various inquiries from state and federal regulatory agencies. Management does not expect the outcome of any such regulatory inquiries to have a material impact on the Company’s operations or financial condition.

Other Matters

In September 2008, the Company entered into a settlement agreement with a vendor providing, in part, that the Company issue common stock in the amount of $75,000 to the vendor in settlement of a debt. However, due to a failure by the vendor to perform its obligations under the settlement agreement, the Company never actually issued the shares, resulting in a transfer from equity to escrow payable in 2010 in the amount of $75,000, and an adjustment to the number of shares issued and outstanding.  On February 10, 2011, the Company executed a settlement agreement with the vendor which released the Company of all liability with respect to this matter.  As a result, the Company reduced its escrow payable amount and recorded other income of $75,000 in the first six months of 2011.    

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Deferred Costs, Capitalized, Prepaid, and Other Assets

3 Months Ended

Jun. 30, 2011

Deferred Costs, Capitalized, Prepaid, and Other Assets

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Table Text Block]

3.     Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following at June 30, 2011 and December 31, 2010:

	June 30, 2011	December 31, 2010
	(unaudited)
Prepaid insurance	$         88,242	$      59,805
Inventory	-	4,243
Other prepaid expenses	37,601	38,961
Total	$       125,843	$    103,009

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Payables and Accruals

3 Months Ended

Jun. 30, 2011

Payables and Accruals

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

6.     Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following at June 30, 2011 and December 31, 2010:

		June 30, 2011		December 31, 2010
		( unaudited )
Trade accounts payable	$	7,662,868	$	7,773,241
Accrued expenses		571,002		551,266
Accrued payroll and vacation		97,499		140,341
Cost accrual		30,176		2,752
Interest payable		376,530		291,782
Deferred revenue		189,335		149,545
Other		427,442		269,747
	$	9,354,852	$	9,178,674

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Debt

3 Months Ended

Jun. 30, 2011

Debt

Debt Disclosure [Text Block]

7.     Long–Term Debt and Capital Lease/Equipment Financing Obligations

At June 30, 2011 and December 31, 2010, components of long-term debt and capital lease/equipment financing obligations of the Company are comprised of the following:

				June 30,		December 31,
				2011		2010
				(unaudited)
Promissory notes payable - related parties		$		4,106,364	$	2,420,625
Promissory notes payable - non-related parties				250,977		683,870
Capital lease/equipment financing obligations				1,963		4,550
Total promissory notes payable and capital lease/equipment financing obligations				4,359,304		3,109,045
Less:
	Current portion of capital lease/equipment financing obligations			(1,963)		(4,550)
	Current portion of notes payable - related parties			(4,106,364)		(2,420,625)
	Current portion of notes payable - non-related parties			(250,977)		(683,870)
Current portion of promissory notes payable and capital lease/equipment financing obligations			$	-	$	-

Promissory notes payable – related parties

From 2007 through 2010, the Company borrowed an aggregate of $3,415,267 from Marvin Rosen, the Company’s Chairman of the Board of Directors.  These loans were evidenced by promissory notes bearing interest at rates ranging from 3% to 10% per annum.  Principal payments on the indebtedness related to these promissory notes through December 31, 2010 totaled $394,843.  In addition, at various times during 2010, Mr. Rosen converted a total of $724,800 of indebtedness evidenced by promissory notes into an aggregate of 5,320,002 shares of the Company’s common stock and warrants to purchase a total of 2,360,004 shares of the Company’s common stock.  The warrants are generally exercisable for a period of five years from the respective dates of conversion at exercises prices ranging from 120% to 150% of the closing price of the Company’s common stock at the time of the conversion.  Substantially all of the promissory notes grant the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable and are payable in full upon ten days notice from the lender.  To date, the Company has not received a demand for payment.

On May 21, 2009, the Company borrowed $125,000 from Marose, LLC, of which Mr. Rosen is a member.  This loan is evidenced by a promissory note, which initially matured on July 20, 2009, and bears an interest rate of 8% per annum. The note also grants the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.  On the July 20, 2009 initial maturity date of the note, the note became a demand note pursuant to its terms, and the entire amount of this note remained outstanding at December 31, 2010 and June 30, 2011.  To date the Company has not received a demand for payment.  

On April 27, 2011, Mr. Rosen converted $175,000 of previously issued promissory notes into 2,187,500 shares of the Company’s common stock and five-year warrants to purchase 437,500 shares of common stock.  The warrants are exercisable at 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.         

During the first six months of 2011, the Company borrowed an additional $1,955,740 from Mr. Rosen, $95,000 of which was repaid during the period.  These loans were evidenced by 24 short-term promissory notes, each of which is payable in full upon ten days notice from the lender and bear interest at the rate of 3.25% per annum.  Each note also grants the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.  The proceeds were used for general working capital purposes.  As of June 30, 2011, the principal amount of $1,860,740 pertaining to these notes remained outstanding and, to date, the Company has not received a demand for payment.

On January 21, 2011, the Company borrowed $20,000 from a Director of the Company.  The note was payable in full upon ten days notice of demand from the lender, with accrued interest at the rate of 3.25% per annum, and granted the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.  On April 27, 2011, the principal balance of this note, along with the accrued interest, was converted into 252,160 shares of the Company’s common stock and five-year warrants to purchase 50,432 shares of common stock.  The warrants are exercisable at 125% of the average closing price of the Company’s common stock for the five trading days prior to closing. 

At June 30, 2011 and December 31, 2010 the Company had outstanding notes payable to related parties in the amount of $4.1 million and $2.4 million, respectively.

Promissory notes payable – non-related parties

During 2008, the Company borrowed an aggregate of $375,000 from two stockholders, of which $333,870 remained outstanding as of December 31, 2010. The loans are evidenced by promissory notes which matured on various dates during the year ended December 31, 2010 and bear interest at the rate of 10% per annum.  These notes automatically converted to demand notes on their respective maturity dates whereupon the outstanding principal and all accrued interest on the notes became payable in full upon ten days notice from the lender.  Each note also grants the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.  Principal payments for the six months ended June 30, 2011 totaled $182,893, and at June 30, 2011 approximately $150,977 remained outstanding. 

Also during 2008, the Company borrowed $200,000 under a promissory note issued to an unrelated party.  During 2010 the lender converted $100,000 of this note into 769,231 shares of common stock and warrants to purchase 153,847 shares of common stock and agreed to extend the maturity date of the $100,000 balance of the loan to February 8, 2011 while increasing the interest rate to 12 percent (12%) per annum.  The note also grants the lender a collateralized security interest, pari passu with other lenders, in the Company’s accounts receivable.  The note was not repaid by the maturity date and remained outstanding as of June 30, 2011.  While the principal balance and all accrued interest are now payable in full upon ten days notice from the lender, the Company has not received a demand for payment. On August 5, 2011 $50,000 of the outstanding principal on this note and approximately $15,000 of accrued interest was converted into shares of the Company’s common stock (see Note 13).

On December 22, 2010, the Company borrowed $250,000 from an unrelated party, evidenced by a promissory note which is payable in full upon ten days notice from the lender and bears interest at the rate of 3.25% per annum.  On May 11, 2011 the entire principal balance of this note, along with $3,139 of accrued interest, was converted into 2,531,387 shares of the Company’s common stock and 5-year warrants to purchase 506,278 shares of common stock.  The warrants are exercisable at 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.

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Equity

3 Months Ended

Jun. 30, 2011

Equity

Stockholders' Equity Note Disclosure [Text Block]

8.     Equity Transactions

During the first six months of 2011, the Company entered into subscription agreements with 15 accredited investors, under which the Company issued an aggregate of 5,045,787 shares of common stock and five-year warrants to purchase 1,009,162 shares of the Company’s common stock for aggregate consideration of $0.5 million.  The warrants are exercisable at 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.      

As previously discussed in Note 7, two of the Company’s directors and one unrelated note holder converted an aggregate of $445,000 of promissory notes that were payable on demand into an aggregate of 4,971,047 shares of the Company’s common stock and warrants to purchase 994,210 shares of the Company’s common stock. 

On May 16, 2011, an accredited investor converted 1,500 shares of Series A-1 Preferred Stock with an aggregate liquidation preference of $1.5 million into 898,204 shares of the Company’s common stock.  Also on May 16, 2011, this same investor converted 750 shares of Series A-2 Preferred Stock with an aggregate liquidation preference of $750,000 into 903,615 shares of common stock.  These conversions were made in accordance with the respective terms of the preferred stock. 

As of June 30, 2011, the Company is authorized to issue 300,000,000 shares of common stock, and there were 143,829,121 shares of common stock issued and outstanding.

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Organization, Consolidation and Presentation of Financial Statements

3 Months Ended

Jun. 30, 2011

Organization, Consolidation and Presentation of Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation, Consolidation, and Summary of Selected Significant Accounting Policies

The accompanying notes to the condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for Fusion Telecommunications International, Inc. and its Subsidiaries (collectively, the “Company”).  All material intercompany balances and transactions have been eliminated in consolidation.  These condensed consolidated interim financial statements have been prepared in accordance with instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”) and therefore omit or condense certain footnotes and other information normally included in condensed consolidated interim financial statements prepared in accordance with accounting principles generally accepted in the United States (the “U.S. GAAP”).  In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the condensed consolidated interim financial statements have been made. The results of operations for an interim period are not necessarily indicative of the results for the entire year. 

During the three and six months ended June 30, 2011 and 2010, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations.  In addition, certain prior year balances have been reclassified to conform to the current presentation.

Income taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes.  Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.  In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets.  The Company is subject to income tax examinations by major taxing authorities for all tax years since inception and may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. During the three and six month periods ended June 30, 2011, the Company recognized no adjustments for uncertain tax positions.

Loss per share

The Company complies with the accounting and disclosure requirements regarding earnings per share. Basic loss per share excludes dilution and is computed by dividing loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company.

Unexercised options to purchase 5,286,174 and 5,912,875 shares of the Company’s common stock as of June 30, 2011 and 2010, respectively, and unexercised warrants to purchase 43,668,191 and 43,959,580 shares of the Company’s common stock as of June 30, 2011 and 2010, respectively, were not included in the computation of diluted loss per share because the inclusion of these securities would be anti-dilutive.  The net loss per common share calculation includes a provision for preferred stock dividends in the approximate amount of $267,000 and $317,000 for the six months ended June 30, 2011 and 2010, respectively.  As of June 30, 2011, the Board of Directors had not declared any dividends on the Company’s preferred stock.  As of June 30, 2011, the Company has accumulated approximately $2,520,000 of preferred stock dividends.

Discontinued operations

The Company classifies a business component that has either been disposed of or is classified as held for sale as a discontinued operation if the cash flow of the component has been or will be eliminated from ongoing operations and the Company will no longer have any significant continuing involvement in the component.  The results of operations of the discontinued component through the date of disposition, including any gains or losses on disposition, are aggregated and presented separately in the condensed consolidated interim statements of operations.  See Note 4 for additional information regarding discontinued operations.

Stock–based compensation

The Company accounts for stock-based compensation by recognizing the fair value of the compensation cost for all stock awards over their respective service periods (generally equal to the vesting period).  This compensation cost is determined using option pricing models intended to estimate the fair value of the awards at the date of grant using the Black-Scholes option-pricing model.  An offsetting increase to stockholders' equity is recorded equal to the amount of the compensation expense charge.

Stock-based compensation expense recognized in the condensed consolidated interim statements of operations for the three and six months ended June 30, 2011 and 2010 includes compensation expense for stock-based payment awards granted prior to June 30, 2011 but not yet vested, based on the estimated grant date fair value.  As stock-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. When estimating forfeitures, the Company considered historical forfeiture rates as well as ongoing trends for actual option forfeiture.

The impact of stock-based compensation expense on the Company’s results of continuing operations was approximately $10,000 and $69,000 for the three months ended June 30, 2011 and 2010, respectively, and approximately $33,000 and $137,000 for the six months ended June 30, 2011 and 2010, respectively.  These amounts are included in selling, general, and administrative expenses in the condensed consolidated interim statements of operations.

The following table summarizes the stock option activity for the six months ended June 30, 2011:

(unaudited)
Activity	Number of Options		Weighted Average Exercise Price
Outstanding at December 31, 2010	5,722,375	$	0.96
Granted	105,000	$	0.09
Cancelled or expired	(541,201)	$	1.20
Outstanding at June 30, 2011	5,286,174	$	0.92
Exercisable at June 30, 2011	3,915,888	$	1.20

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

	(unaudited)
	Six Months Ended June 30,
	2011		2010
Dividend yield	0.00	%	0.00	%
Stock volatility	138.1- 179.70	%	127.95	%
Average Risk-free interest rate	1.93- 2.46	%	2.72	%
Average option term (years)	4		4

As of June 30, 2011, there was approximately $57,000 of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the Company’s Stock Incentive Plans, which is expected to be recognized over a weighted-average period of 1.89 years.

Fair value of financial instruments

The carrying amounts of the Company’s assets and liabilities approximate the fair value presented in the accompanying Condensed Consolidated Interim Balance Sheets, due to their short-term maturities.

Use of estimates

The preparation of the condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could be affected by the accuracy of those estimates.

Restricted cash

As of June 30, 2011 and December 31, 2010, the Company had approximately $533,437 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit. This restricted cash is required as security deposits under the Company’s non-cancelable operating leases for office facilities.

Going Concern Note

2.   Going Concern

At June 30, 2011, the Company had a working capital deficit of 11.0 million and an accumulated deficit of $147.4 million.  The Company has continued to sustain losses from operations and has not generated positive cash flow from operations since inception.  Management is aware that its current cash resources are not adequate to fund its operations for the remainder of the year. During the six months ended June 30, 2011, the Company raised approximately $2.4 million, net of expenses, from the issuance of related party promissory notes and the sale of its securities.  The Company cannot provide any assurances if and when it will be able to attain profitability.  These conditions, among others, raise substantial doubt about the Company’s ability to continue operations as a going concern.  No adjustment has been made in the condensed consolidated interim financial statements to the amounts and classification of assets and liabilities which could result should the Company be unable to continue as a going concern.

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Discontinued Operations and Disposal Groups

3 Months Ended

Jun. 30, 2011

Discontinued Operations and Disposal Groups

Schedule of Disposal Groups, Including Discontinued Operations, Income Statement, Balance Sheet and Additional Disclosures [Table Text Block]

4.     Discontinued Operations

In 2009, in order to streamline operations, reduce expenses, and focus on the development of the Company’s corporate services and carrier services segments, the Company eliminated the consumer services segment and restructured its overall operations.  In accordance with requirements under U.S. GAAP, the Company has classified the operating results of its consumer services segment as a discontinued operation in the accompanying condensed consolidated interim financial statements.  The June 30, 2011 and 2010 condensed consolidated interim financial statements have been adjusted for the Company’s discontinued consumer services segment.  The following table represents the assets and liabilities of the discontinued operations as of June 30, 2011 and December 31, 2010:

		June 30, 2011 (Unaudited)		December 31, 2010
Property and equipment, net	$	9,869	$	12,449
Total current assets reclassified to discontinued operations	$	9,869	$	12,449
Capital lease obligations, current portion	$	99,517	$	99,517
Accounts payable and accrued expenses		21,938		65,757
Current liabilities reclassified to discontinued operations	$	121,455	$	165,274

The operating results of the discontinued operations for the six months ended June 30, 2011 and 2010 are as follows:

	Six Months Ended June 30,
		2011		2010
		(unaudited)		(unaudited)
Revenues	$	-	$	1,617
Cost of revenues		-		-
Depreciation and amortization		2,580		12,178
Selling, general and administrative		(3,349)		77,794
Advertising and marketing		-		-
Other income (expense)		7,595		-
Net income (loss)	$	8,364	$	(88,355)

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Subsequent Events

3 Months Ended

Jun. 30, 2011

Subsequent Events

Subsequent Events [Text Block]

13.    Subsequent Events

Between July 1, and August 10, 2011, Mr. Rosen loaned the Company an additional $500,000.  These loans were evidenced by four promissory notes with terms identical to the promissory notes issued to Mr. Rosen during the first six months of 2011.

On August 5, 2011, one of the Company’s unrelated noteholders converted $50,000 of outstanding principal and approximately $15,000 of accrued interest into 644,987 shares of the Company’s common stock and 5-year warrants to purchase 128,998 shares of common stock.  The warrants are exercisable at 125% of the average closing price of the Company’s common stock for the five trading days prior to closing. 

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Condensed Consolidated Balance Sheet (USD $)	Jun. 30, 2011		Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 25,552		$ 20,370
Accounts receivable	2,773,786	[1]	2,721,585	[2]
Prepaid expenses and other current assets	125,843		103,009
Assets held for sale	808		1,089
Current assets from discontinued operations	9,869		12,449
Total current assets	2,935,858		2,858,502
Property and equipment, net	918,374		1,124,398
Other assets:
Security deposits	14,580		13,330
Restricted cash	533,437		533,437
Intangible assets, net	368,852		409,000
Other assets	37,096		39,486
Total other assets	953,965		995,253
TOTAL ASSETS	4,808,197		4,978,153
Current liabilities:
Promissory notes payable - non-related parties	250,977		683,870
Promissory notes payable - related parties	4,106,364		2,420,625
Capital lease/equipment financing obligations, current portion	1,963		4,550
Escrow payable	80,000		155,000
Accounts payable and accrued expenses	9,354,852		9,178,674
Current liabilities from discontinued operations	121,455		165,274
Total current liabilities	13,915,611		12,607,993
Long-term liabilities:
Other long-term liabilities	419,900		428,646
Total long-term liabilities	419,900		428,646
Stockholders' deficit:
Preferred stock	50	[3]	73	[4]
Common stock	1,438,291	[5]	1,320,105	[6]
Capital in excess of par value	136,455,855		135,613,755
Accumulated deficit	(147,421,510)		(144,992,419)
Total stockholders' deficit	(9,527,314)		(8,058,486)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$ 4,808,197		$ 4,978,153

[1] net of allowance for doubtful accounts of approximately $290,000

[2] net of allowance for doubtful accounts of approximately $370,000

[3] $0.01 par value, 10,000,000 shares authorized, 5,045 shares issued and outstanding

[4] $0.01 par value, 10,000,000 shares authorized, 7,295 shares issued and outstanding

[5] $0.01 par value, 300,000,000 shares authorized, 143,829,151 shares issued and outstanding

[6] $0.01 par value, 300,000,000 shares authorized, 132,010,498 shares issued and outstanding