FUSION TELECOMMUNICATIONS INTERNATIONAL INC (Form: S-1, Received: 11/12/2004 14:35:43)

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 2004

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

Delaware 4813 58-2342021

(State or Other Jurisdiction of Employer (Primary Standard Industrial (I.R.S. Employer

Incorporation or Organization Number) Classification Code Number) Identification Number)

420 Lexington Avenue, Suite 518
New York, New York 10170
(212) 972-2000
(Address and Telephone Number of Principal Executive Offices)

Heitz & Associates, P.C.
345 Woodcliff Drive
Fairport, New York 14450
(585) 387-0000
(Name, Address and Telephone Number of Agent for Service)

Copies of all communications to:

Arthur Marcus, Esq. David Alan Miller, Esq. William R. Heitz, Esq.

Gersten, Savage, Kaplowitz, Graubard Miller Heitz & Associates, P.C.

Wolf & Marcus, LLP 600 Third Avenue 345 Woodcliff Drive

101 East 52nd Street New York, New York 10016 Fairport, New York 14450

New York, New York 10022-6018 212-818-8800 585-387-0000

212-752-9700 Fax: 212-818-8881 Fax: 585-387-0130

Fax: 212-813-9768

Approximate date of commencement of proposed sale to the public: As soon as practicable following the date on which this Registration Statement becomes effective.

If any securities being offered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]

(continued on next page)

CALCULATION OF REGISTRATION FEE

Proposed

Maximum Proposed Amount of

Title of Each Class of Securities to be Amount to be Offering Price Maximum Registration

Registered (1) Registered Per Security (2) Offering Price Fee

Common Stock $.01 par value
      Per share, (the “Common Stock”) (3) 3,823,750
$7.00
$26,766,250 $ 3,391.28

Redeemable Common Stock
      Purchase Warrants (4) 3,823,750 $ .05 $ 191,188 $ 24.22

Common Stock Issuable Upon Exercise
      of Redeemable Warrants 3,823,750 $8.00 $30,590,000 $ 3,875.75

Representative’s Warrants 332,500 $ .0001 $38.24 $ .01

Common Stock Issuable Upon Exercise
      of the Representative’s Warrants 332,500 $7.00 $ 2,676,625 $ 339.13

Redeemable Warrants Underlying
      Representative’s Warrants 332,500 $ .05 $19,119 $ 2.42

Common Stock Issuable Upon
      Exercise of Redeemable Warrants

      Underlying the Representative’s
      Warrants 332,500 $8.00 $ 3,059,000 $ 387.58

Selling Securityholder Redeemable
      Warrants (5) 3,141,838 $ .05 $ 157,092 $ 19.90

Common Stock Issuable Upon Exercise

      of the Selling Securityholder

      Redeemable Warrants 3,141,838 $8.00 $25,134,704 $ 3,184.57

Total Registration Fee: $11,224.86

(1)		Pursuant to Rule 416, also being registered are such additional securities as may become issuable pursuant to antidilution provision of the Representative’s Warrants, stock splits, stock dividends or similar transactions.

(2)		Estimated solely for the purpose of calculating the registration fees.

(3)		Includes 498,750 shares of common stock issuable upon exercise of the underwriter’s over allotment option.

(4)		Includes 498,750 Redeemable Warrants issuable upon exercise of the underwriter’s over allotment option.

(5)		Represents Redeemable Warrants issuable to investors upon their conversion of series C preferred stock.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one to be used in connection with an initial public offering of 3,325,000 shares of our common stock and 3,325,000 purchase warrants (the “Prospectus”) and one to be used in connection with the potential resale of an aggregate of 3,141,838 purchase warrants by certain selling securityholders (the “Selling Securityholder Prospectus”). The Prospectus and Selling Securityholder Prospectus will be identical in all respects except for the alternate pages for the Selling Securityholder Prospectus included herein which are labeled “Alternate Page for Selling Securityholder Prospectus.”

The information in this preliminary prospectus supplement and the accompanying prospectus is not complete and may be changed. This preliminary prospectus supplement and the accompanying prospectus are not an offer to sell these securities nor a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PRELIMINARY PROSPECTUS

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

3,325,000 Shares of Common Stock
and
3,325,000 Redeemable Common Stock Purchase Warrants

___________

This is our initial public offering of 3,325,000 shares of our common stock and 3,325,000 redeemable common stock purchase warrants. We anticipate that the offering price per share of our common stock will be between $5.00 and $7.00 and that the offering price per warrant will be $.05.

Each purchase warrant will entitle you to purchase one share of our common stock for $6.00 during the four-year period beginning on the first anniversary of the date of this prospectus. The warrant excercise price will increase to $8.00 on the eighteen month anniversary of the date of this prospectus provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. We may redeem the purchase warrants at any time after they become exercisable, for $.01 per purchase warrant, on not less than thirty (30) days’ prior written notice if the last sale price of our common stock has been at least 200% of the then-current exercise price of the purchase warrants (initially $6.00) for the twenty (20) consecutive trading days ending on the third day prior to the date on which notice is given.

Prior to this offering, there has been no public market for our securities and we cannot assure you that a market will develop. We have applied to list our common stock and purchase warrants on the American Stock Exchange under the symbols FSN and FSNW, respectively.

INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. PLEASE SEE THE SECTION ENTITLED “RISK FACTORS” BEGINNING ON PAGE 9 TO READ ABOUT RISKS YOU SHOULD CONSIDER CAREFULLY BEFORE BUYING OUR SECURITIES.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

___________

Underwriting

Initial public discount and

offering price commissions Proceeds to us

Per share of common stock $ 6.00 $
.54
$ 5.46

Per purchase warrant .05
.0045
.0455

Total $ 6.05 $
.5445
$ 5.5055

Our underwriters have an option to purchase up to an additional 498,750 shares of our common stock and/or 498,750 purchase warrants to cover over allotments.

Our underwriters are offering our securities as set forth in the section entitled “Underwriting.” Our underwriters expect to deliver our securities to purchasers on or about _____, 2005.

The date of this prospectus is November ___, 2004.

Table of Contents

Prospectus Summary 3

Summary Historical Financial Data 7

Risk Factors 9

Special Note Regarding Forward-Looking Statements 17

Use of Proceeds 17

Dividend Policy 18

Capitalization 19

Dilution 20

Management's Discussion and Analysis of Financial Condition and Results of Operations 23

Operating Expenses 25

Company Highlights 26

Business 38

History and Corporate Information 38

Growth Strategy 38

Services 40

Marketing 41

Network Strategy 42

Dynamics of the Global Communications Market 43

Competition 49

Government Regulation 50

Trademarks 51

Employees 51

Properties 52

Legal Proceedings 53

Management 54

Executive Officers and Senior Management 54

Board of Directors 56

Advisory Board 58

Board Committees 59

Certain Relationships and Related Transactions 63

Principal Stockholders 65

Description of Securities 66

Shares Eligible for Future Sale 69

Underwriting 71

Legal Matters 73

Experts 73

Where You Can Find More Information 73

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and purchase warrants and seeking offers to buy shares of common stock and purchase warrants only in jurisdictions where offers and sales are permitted.

Until _______, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotment or subscription.

PROSPECTUS SUMMARY

You should read the following summary together with the more detailed information regarding us, the securities being sold in this offering, the risk factors and the financial statements and notes thereto appearing elsewhere in this prospectus. In this prospectus, “Fusion,” the “Company,” “we,” “us” and “our” refer to Fusion Telecommunications International, Inc. and its subsidiaries.

Unless otherwise indicated, information in this prospectus reflects a 3.5 for 1 reverse stock split and the conversion of our outstanding common stock into class A common stock to be effectuated prior to the date of this prospectus.

About Us. We seek to become a leading provider of VoIP (Voice Over Internet Protocol) and other Internet services to, from, in and between emerging markets in Asia, the Middle East, Africa, the Caribbean and Latin America. The emerging markets we target typically have higher barriers to entry, substantial growth prospects, higher margin opportunity, an increasing number of multinational corporations and a larger percentage of their voice and data traffic with and between the developed world and other countries in which we offer our services. We currently provide communications services to corporations, Postal Telephone and Telegraph companies (PTTs), international carriers, government entities, Internet service providers (ISPs) and consumers in over 45 countries. In the future we intend to provide service to cable operators.

Our infrastructure features Softswitch technology that enables us to more rapidly deploy our products and services and more quickly and economically expand our capacity and geographical reach. We believe this advanced infrastructure provides us with a competitive advantage over larger communications carriers, many of which are burdened with costly investments in outdated systems. We control our network and service offerings from a central location in the United States, allowing us to deliver Internet Protocol (IP) services around the world with quality, flexibility and reliability regardless of the number of countries served.

In the spring of 2000, our board of directors assembled a new management team who restructured and refined our business and corporate strategy. As part of this refinement and restructuring the Company exited non-core operations and focused on the emerging markets and new services, such as VoIP. Our management team has significant experience in communications and international business development and has demonstrated a keen ability to establish relationships with local partners in emerging countries, who can distribute and support our products and services. Since January 2004, we have raised $5.9 million in financing from the sale of our equity securities and converted $0.6 million in debt. The funds from these offerings helped us to increase revenues in the first six months of 2004 by 59% over the prior year period to nearly $27 million and develop our Softswitch based infrastructure. In addition, our improved financial condition enabled us to further reduce accounts payable and debt by $2.4 million in 2004, which includes $2.0 million in negotiated reductions with vendors and other debtors.

Strategy. Our strategy is to gain early entry in an emerging country and then market advanced communication services such as VoIP, private networks, Internet access, Internet video conferencing, and other Internet services. In many cases, we will establish a foothold within an emerging market through a partnership with a local organization. We believe that working with strong local partners allows us to best distribute services and attract, retain and support customers. These local partners offer time to market advantages as their existing infrastructure, sales distribution channels, and technical support can be utilized, while simultaneously reducing the capital needed to enter the market. Additionally, these partners typically provide or arrange for the last mile connectivity that is required for the delivery of local Internet access and private networks. This last mile connectivity, which is the connection between the in-country telecommunications facility and the customer’s physical location, in combination with local support, expands the geographic coverage of our global service offering and helps differentiate us from our competitors. Local partners also offer critical insights into the regulatory environment and are familiar with the specific cultural nuances of their region. In the future, we anticipate that our partners will work with us prior to the rollout of any new services, contributing critical market intelligence to ensure a successful introduction of new products. This partnership approach allows the local infrastructure to progress to a more technologically advanced platform while positioning us to benefit from the rapid growth and revenues that these technologies enable.

We work with our partners to enable them to distribute and support our products and services which can be Fusion branded, co-branded or private labeled. Our private label alternative allows 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 or leverage their own brand.

Services. Our services include:

•

VoIP: VoIP enables customers, typically for a lower cost than traditional telephony, to place voice calls anywhere in the world using their PC, IP phone or regular telephone 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 offered directly to corporations around the world, on a private label, co-branded or wholesale basis to ISPs, PTTs and cable operators who wish to market to corporations and consumers under their own brand name, or through our retail services company, Efonica F-Z, LLC (“Efonica”). Efonica offers PC-to-Phone and IP Phone-to-Phone services to customers located in Asia, the Middle East and Africa, and is currently expanding into Latin America. Advanced services that will shortly be available to customers include voicemail, call waiting and call forwarding.

Additionally, we enter into VoIP interconnect agreements with PTTs or other carriers in our target markets. These agreements enable us to terminate traffic into a country and in some cases originate traffic from that country through the PTT or other carrier. We use capacity on these networks to carry our own retail traffic in addition to selling capacity to other carriers desiring voice termination to that specific destination. As we grow, we intend to use an increasing percentage of our capacity for higher margin, retail traffic.

•

Managed private networks: We offer managed end-to-end networks that typically connect multinational corporations or government facilities in emerging markets with locations in other countries. We also market this service to software developers, call centers, and telemarketing facilities, all of which rely on high quality, reliable service. In markets where we do not have network facilities deployed, we utilize other carriers’ networks, allowing us to provide an integrated global network that can connect a customer to virtually anywhere in the world. We also offer services on a private label basis as a subcontractor for other communication carriers that are seeking network connectivity to countries that they do not otherwise service.

•

Internet Access: We offer peering with multiple tier-one Internet backbone providers utilizing an intelligent routing capability. This ensures efficiency, speed and reliability. The tier-one providers we utilize own or control a national network that trades traffic with other national providers. This traffic trading is referred to as “peering.” A tier-one provider can carry its own Internet traffic across the country and hand it off at any one of the public or private hand-off locations known as "peering points," metropolitan access points or national access points. In select locations such as India, we have established Internet points of presence (PoPs) that are then connected to our New York facility. This, in turn, provides interconnectivity with the Internet and peering with the top Internet backbone networks. In regions where we do not own network facilities, we utilize other carriers’ facilities. We also provide services on a private label basis as a sub contractor for other communication carriers that are seeking Internet access in countries that they do not otherwise service.

•
Internet video conferencing: We offer an Internet-based video conferencing service that can be initiated instantly on a personal computer (similar to popular instant messaging services) and can handle from two to two hundred participants per conference, of which six can be visually displayed. The service can be installed in a matter of minutes and only requires a standard camera and headset to operate. We are marketing our desktop video conferencing service directly to multinational corporations seeking to enhance face-to-face communications without the costly inefficiencies of business travel, and to our international partners to distribute within their country.

• Co-location: 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.

The Offering

Securities Offered 3,325,000 shares of our common stock and 3,325,000 purchase warrants. Each purchase warrant will entitle you to purchase one share of our common stock for $6.00 (100% of the offering price of one share of our common stock) during the four-year period beginning on the first anniversary of the date of this prospectus. The warrant exercise price will increase to $8.00 (133% of the offering price of one share of our common stock) on the eighteen month anniversary date of issuance provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. We may redeem the purchase warrants, at any time after they become exercisable, for $.01 per purchase warrant, on not less than thirty (30) days’ prior written notice if the last sale price of our common stock has been at least 200% of the then-current exercise price of the purchase warrants (initially $6.00) for the twenty (20) consecutive trading days ending on the third day prior to the date on which notice is given.

Common equity outstanding prior
to the offering
Class A common stock 17,480,333 shares

Common stock 0 shares

Common equity to be outstanding
after the offering
Class A common stock 17,480,333 shares

Common stock 7,118,353 shares

Purchase warrants to be
outstanding after the
offering 6,466,838 purchase warrants

Use of proceeds At an assumed initial offering price of $6.00 per share of common stock and $.05 per warrant we estimate that we will receive approximately $17,066,250 in net proceeds after deducting commissions and offering expenses. We intend to use approximately $6,466,250 of the net proceeds of the offering for working capital and general corporate purposes; $2,100,000 for repayment of certain indebtedness; $2,000,000 to fund the purchase of equipment for expanded capacity and service offerings; $500,000 for marketing and advertising; and $6,000,000 for international deployment, including the purchase of business licenses, network equipment and securing letters of credit and bonds, all as more particularly described herein. Any net proceeds from the exercise of the Underwriter’s over allotment will be added to working capital.

Proposed American Stock Exchange
symbols Common Stock: FSN

Purchase Warrants: FSNW

Corporate information Fusion was incorporated in Delaware in September 1997. Our principal executive offices are located at 420 Lexington Avenue, Suite 518, New York, NY 10170. The main telephone number is (212) 972-2000. Our web site is www.fusiontel.com . The information contained in our web site is not part of this prospectus.

Certain terms used in this
Prospectus In this prospectus “common stock” refers to our common stock, par value $.01 per share and “purchase warrants” refers to the redeemable common stock purchase warrants being sold in this offering. We refer sometimes to our common stock and purchase warrants as our “securities.”

The information in this prospectus reflects a recapitalization of the old common stock outstanding by a conversion rate of 3.5 shares of old common stock into one share of class A common stock, or an aggregate of 17,480,333 shares of class A common stock. The class A common stock has the same voting and other rights as the new common stock being sold in this offering except that it is not publicly transferable until after the first anniversary of the date of this prospectus, at which time it will automatically convert into the same class of new common stock being sold in this offering. Prior to the conversion date of the class A common stock, holders may convert their stock after the effective date of the prospectus, by entering into a lock up agreement with the company until the first anniversary of this prospectus, which restriction on public sale can be released only with the consent of the representative. The series C preferred stock converts into shares of common stock, subject to a lock up agreement for one year, and warrants equivalent to those offered hereby. The warrants being offered by this prospectus and the warrants issued on conversion of the series C preferred stock and to the representative will be exercisable for the common stock. The data in this prospectus has been adjusted for the recapitalization.

Except as set forth in the financial statements or as otherwise specifically stated, all information in this prospectus assumes:

• no conversion of the 17,480,333 shares of class A common stock into an equal number of shares of our common stock;

• no exercise of our underwriters’ over-allotment option to purchase up to 498,750 shares of our common stock and/or 498,750 purchase warrants;

• no exercise of the purchase warrants offered by us in the offering;

• no exercise of the representative’s purchase option to purchase up to 332,500 shares of our common stock and/or 332,500 purchase warrants;

• no exercise of 3,141,838 warrants issued to investors in our offering of series C preferred stock;

• the conversion of series C preferred stock into 3,141,838 shares of our common stock;

• no exercise of 286,567 warrants outstanding which were issued;

• no exercise of 1,660,772 options outstanding which were granted under our plans;

• 2,680,857 shares reserved for issuance under our 1998 Stock Option Plan; and

• the conversion of an aggregate of $2,508,333 of convertible promissory notes.

SUMMARY HISTORICAL FINANCIAL DATA

The following financial information should be read in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto contained elsewhere in this prospectus:

(unaudited)

Years Ended December 31, Six Months Ended June 30,

2001 2002 2003 2003 2004 (1)

Consolidated Statement of
Operations:

Revenues $ 29,614,565 $ 28,422,149 $33,725,275 $ 16,945,832 $26,978,042

Loss from operations (11,629,584) (10,014,342) (7,541,513) (3,523,069) (2,164,157)

Loss from continuing operations (12,112,228) (9,358,524) (4,385,191) (2,729,703) (930,553)

Income/(loss) from discontinued
operations (7,029,511) 0 208,620 0 0

Net loss (19,141,739) (9,358,524) (4,176,571) (2,729,703) (930,553)

Operating Data:

EBITDA (2) $ (6,622,602) $ (6,980,268) $(4,519,932) $ (2,189,190) $ (971,263)

Capital expenditures 501,882 533,610 645,340 85,094 739,479

Consolidated Balance Sheet Data:

Cash and cash equivalents $ 0 $ 768,898 $ 3,240,652 $ 264,760 $ 4,017,260

Restricted cash 784,000 1,250,793 961,536 994,232 1,057,866

Total assets 14,273,723 12,287,532 13,033,913 11,842,131 16,206,957

Total debt 12,211,878 9,640,955 5,176,861 9,990,081 4,449,330

Preferred shares subject to
mandatory redemption 0 0 3,466,538 0 9,368,249

Total stockholders’ deficit (11,537,659) (14,800,981) (9,774,002) (13,477,348) (9,417,514)

The below summarizes actual and proforma as adjusted June 30, 2004 consolidated balance sheet data.

(unaudited)

As of June 30, 2004

Pro Forma

Actual As Adjusted (3)

Cash and cash equivalents $ 4,017,260 $20,346,510

Restricted cash 1,057,866 1,057,866

Total assets 16,206,957 32,536,207

Total debt 4,449,330 1,894,330

Preferred shares subject to
mandatory redemption 9,368,249 0

Total stockholders’ (deficit) equity (9,417,514) 19,455,318

(1)		We adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity.” SFAS No. 150 requires us to classify as a long-term liability our series C preferred stock and classify dividends and accretion from the series C preferred stock as interest expense. For the six months ended June 30, 2004, interest expense includes $687,389 related to dividends and accretion on the series C preferred shares subject to mandatory redemption.

(2)		EBITDA means net income (loss) (adjusted for loss on impairments and forgiveness of debt) before income (loss) from discontinued operations, interest expense and depreciation and amortization. We believe EBITDA is useful to investors because EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance and leverage. We believe EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies. While provid-

ing useful information, EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flows data prepared in accordance with generally accepted accounting principles. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

(3) The proforma as adjusted column of this consolidated balance sheet data table reflects (a) the conversion of all outstanding series C preferred shares into common stock upon completion of this offering, (b) the repayment of $1,555,000 in debt and $512,000 in interest payable to certain officers and directors, and (c) a transaction that occurred subsequent to June 30, 2004, whereby the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible note. These two notes aggregate $2,508,333 and automatically convert upon the completion of this Offering into 651,515 shares of common stock based upon a conversion price of $3.85 per share and (d) the issuance and sale by us of 3,325,000 shares of common stock and common stock purchase warrants in this offering at an assumed initial public offering price of $6.00 and $0.05, respectively, a fter deducting estimated underwriting discounts and commissions and estimated offering expenses, as if these events had occurred as of June 30, 2004.

Years Ended December 31, Six Months Ended June 30,

2001 2002 2003 2003 2004 (1)

A reconciliation of net loss to
EBITDA follows:

Net loss $(19,141,739) $(9,358,524) $(4,176,571) $(2,729,703) $ (930,553)

(Income)/loss from discontinued
operations 7,029,511 0 (208,620) 0 0

Loss from continuing
operations (12,112,228) (9,358,524) (4,385,191) (2,729,703) (930,553)

Adjustments:

Interest expense, net 595,116 1,175,714 919,590 458,988 860,510

Depreciation and amortization 2,069,361 2,546,869 2,128,610 1,083,818 1,075,375

Forgiveness of debt 0 (1,812,092) (3,918,295) (1,196,294) (1,976,595)

Loss on impairment 2,825,149 467,765 735,354 194,001

EBITDA $ (6,622,602) $(6,980,268) $(4,519,932) $(2,189,190) $ (971,263)

RISK FACTORS

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before you decide to invest in our securities. If any of the following events actually occur, our business could be seriously harmed. In such case, the value of your investment may decline and you may lose all or part of your investment. You should not invest in our securities unless you can afford the loss of your entire investment.

Risks Related to Business

We have a history of operating losses, a working capital deficit and a stockholders’ deficit.

There can be no assurance that any of our business strategies will be successful or that we will ever achieve profitability. At June 30, 2004, we had a working capital deficit of approximately $6,400,000 and a stockholders’ deficit of approximately $9,400,000. We have continued to sustain losses from operations and for the years ended December 31, 2003, 2002 and 2001, we have incurred a net loss applicable to common stockholders of approximately $4,812,000, $10,001,000 and $19,142,000, respectively. We incurred a net loss applicable to common stockholders of approximately $1,316,000 for the six-month period ended June 30, 2004. In addition, we have not generated positive cash flow from operations for the years ended December 31, 2003, 2002 and 2001 and the six months ended June 30, 2004. 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.

We may be unable to manage our growth or implement our expansion strategy.

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. 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, our financial condition and results of operations could be materially and adversely affected.

The success of our planned expansion is dependent upon market developments and traffic patterns.

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 which would have a materially adverse effect on our financial condition and results of operations.

We may be unable to adapt to rapid technology trends and evolving industry standards.

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.

Our growth is dependent upon our ability to build new relationships with PTTs, bring on new customers and
to obtain the necessary licenses in new countries in which we have not previously operated.

Our ability to grow through quick and cost effective deployment of our IP services is due, in part, to our ability to create new interconnection agreements with PTTs, and other licensed carriers, to sign contracts with new customers, and, in many cases, to enter into joint venture or strategic agreements with local partners, as well as to obtain the necessary licenses to operate in emerging markets. While we pursue several opportunities simultaneously, we might not be able to create the necessary partnerships and interconnections, expand our customer base, deploy networks and generate profitable traffic over these networks within the time frame envisioned.

We are pursuing new business lines, which require specialized skill sets. Our ability to effectuate our business plan is due, in part, to the roll out of new services, including PC-To-Phone, IP Phone-To-Phone and Internet video conferencing.

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. These issues include our ability to competitively price such products and services, in addition, certain service offerings such as IP video are relatively new in our industry and the market potential is relatively untested. Additionally, our ability to market these products and service offerings may prove more difficult. To date, we have not significantly focused on selling Internet video conferencing and thus have derived extremely limited revenue from this offering, and there can be no assurance that we will increase our current focus and/or derive significant revenue from this offering.

We have substantial past due liabilities.

As of September 30, 2004, our liabilities, other than the recorded liability to holders of the series C preferred stock, totaled approximately $15.4 million, approximately $2.6 million of which is past due. Of the $2.6 million, approximately $900,000 is owed to one equipment vendor and $200,000 of interest is owed to two different individuals, such interest to be paid from the proceeds of this offering. While we are working to change the payment terms of certain of these liabilities as well as to reduce the extent of these liabilities through negotiations, including the equipment vendor, we may not be able to make the required principal and interest payments. Certain of our indebtedness is payable on demand. In the event that a demand is made on these liabilities, there could be a severe liquidity crisis.

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 PTT, resulting in high margins for the gray market operator and substantially lower revenues for the PTT), 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, our business initiatives could be materially and adversely effected.

Industry consolidation could make it more difficult 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 infra-

structures and more established relationships with vendors, distributors and partners than we have. With these heightened competitive pressures, there is a risk that our financial performance could be adversely impacted and the value of our common stock could decline.

Certain of our competitors are emerging from bankruptcy.

Several companies in the telecommunications industry have gone through bankruptcy proceedings and have emerged, or are expected to emerge, as viable competitors. These companies may emerge with cost structures that are significantly lower than those companies that have not entered into and emerged from bankruptcy proceedings, allowing them to market services at lower prices. This in turn may result in us having to reduce our prices, which would have an adverse impact on our future financial performance.

Our ability to provide services is often dependent on our suppliers and other service providers.

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, ISPs, 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 financial condition or results of operations may be adversely affected.

We rely on third party equipment suppliers.

We are dependent on third party equipment suppliers for equipment and hardware components, including Cisco, Nuera, Juniper Networks, Santa Cruz Networks 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 a materially adverse impact on our financial condition or results of operations.

We rely on the cooperation of PTTs.

In some cases we will require the cooperation of the PTT or another carrier in order to provide services under a license or partnership agreement. In the event the PTT or another carrier does not cooperate, our service roll-out may be delayed, or the services we offer could be negatively affected. If we acquire a license for a market and the PTT 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 do not operate our new Softswitch technology effectively, many of the potential benefits of the new
technology may not be realized.

We have made a fundamental change in our business operations by migrating to new Softswitch technology. There are inherent risks associated with using such a relatively new technology. We may be required to spend additional time or money on integration of this technology, which could otherwise be spent on developing our services. We expect to experience a temporary decline in revenues during and immediately following the migration to the new softswitch technology. If we do not operate the technology effectively or if we and our technical staff spend too much time on operational issues, it could harm our business, financial condition, and results of operations.

Our Efonica joint venture relies on outside vendors to provide key functions, including billing and providing of service(s).

We rely on outside vendors to support certain capabilities including billing, provisioning and certain other back office services for our IP Phone-to-Phone, and PC-to-Phone services. In the event that any of these outside vendors, for any reason, fail to adequately perform in a timely and effective manner, there will be an interruption in these services that will adversely affect our business and/or results of operation.

If we are unable to develop and maintain successful relationships with our joint venture partners, our business may suffer.

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 also 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 adversely affect our business or results of operations.

Should our joint venture partners decide to raise capital, our financial statements and business operations may be adversely affected.

If our joint ventures decide to raise capital, we may find ourselves unable to consolidate our financial statements, resulting in loss of revenue. In addition, the resulting ownership change may cause us to lose our current voting controls and accordingly, we may not have the same ability to control the operations of the joint venture.

We need to retain key management personnel and hire additional qualified personnel. We are dependent on the efforts of our executive officers and senior management and on our ability to hire and retain qualified management personnel.

We anticipate that in order to successfully implement our business strategy, including the expansion of the geographic scope of our operations, we will be required to recruit and hire a substantial number of sales and other personnel. Failure to attract and retain additional qualified sales and other personnel, including management personnel who will train and integrate our new employees, in addition to their role in continuing to manage our growth strategy, could adversely affect us. The loss of services by any of our key management personnel or executive officers could materially and adversely affect our business and our future prospects. We have not entered into employment agreements with any of our senior officers, except Matthew Rosen, our President and Chief Operating Officer. Additionally, Mr. Marvin Rosen does not receive compensation for his services as our Chief Executive Officer and there is no guarantee that he will spend a substantial portion of his time working for us. To the extent that he devotes his time to other endeavors and not to us, our business could be adversely affected. However, we have a non-competition agreement with Mr. Marvin Rosen for two years. The loss of either Matthew or Marvin Rosen could adversely affect our business.

Service interruptions could affect our business.

Our networks have been and may be shut down from time to time as a result of disputes with PTTs, vendors, carriers or general service providers due to billing disputes, late payments, or other issues. Network shut downs can have a significant negative impact on revenue and cash flows and there is no assurance that we will be able to quickly resolve disputes, if ever.

We are dependent on our information and processing systems for effective billing and client service.

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 have an adverse effect on us.

Breaches in our network security systems may adversely affect us.

We could lose clients and expose ourselves to liability if there are any breaches to our network security systems, which in turn 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. Since these breaches occurred, we have taken additional steps to further enhance our network security policies. Any network failure would have a material adverse affect on our business and results of operation.

We face additional risks because we do business on an international level.

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 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 may change resulting in 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.

Regulatory treatment of VoIP outside the United States varies from country to country. Some countries 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. In such cases, our failure to register could subject us to fines or penalties. 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 DSL 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.

We need to obtain additional licenses and approvals in order to expand our services and enter new markets.

We must, from time to time, obtain additional licenses and approvals from governmental agencies in order to provide our services. There may be difficulties or delays in obtaining them. If we encounter difficulties or delays in obtaining licenses, our ability to provide new services and expand into new markets could be adversely affected.

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

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 we have, or, our joint venture partners, will receive the international, United States Federal Communications Commission (“FCC”), or state regulatory approvals we or they 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 financial condition or results of operations.

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.

In addition to new regulations being adopted, existing laws may be applied to the Internet.

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, which may have a material adverse effect on our business, financial condition and results of operations.

We are exposed to fluctuations in exchange rates and exchange control regulations.

Although substantially all of our revenues are currently earned in U.S. dollars, our business plan contemplates that during the next twelve months we will begin to earn more revenues paid in foreign currencies. We also expect to have more costs payable in foreign currencies. While these revenues and costs sometimes will offset each other, there may be instances where we are left with net foreign currency exposure. Some of these foreign currencies might be subject to exchange control regulations or other impediments to convertibility to U.S. dollars. Although we may attempt to hedge our currency risks wherever possible, we may be unsuccessful in doing so. To the extent that we are unable or choose not to convert these currencies to U.S. dollars or utilize them to pay our expenses in-country, we might earn revenues which we are unable to repatriate outside of the country in which they are earned. We do not anticipate that this will have a materially adverse effect on our financial statements.

Indian law limits the percentage of foreign investment in companies in the telecommunications sector.

We currently own a 49% direct interest in Estel Communications Private Ltd. (“Estel”), the joint venture through which we conduct our operations in India. In addition we have voting rights in another 1.01% of Estel, giving us voting control over 50.01% of Estel until May 2007. However, our percentage ownership remains subject to regulation by the Government of India.

Our foreign partner currently manages Estel’s operations.

Our foreign partner currently manages Estel’s operations. An unfavorable change in current regulations or the interpretation thereof, may result in the loss of our voting control in Estel. In addition, we may not be able to further capitalize on our relationship with Estel if our partner is incapable or unwilling to invest its proportional share of capital in this joint venture.

Limited financial resources have caused a strain between the joint venture partners, and may inhibit future growth prospects.

Estel has been unable to pay us in a timely manner for services rendered. We cannot be assured that Estel will make the payments due us in a timely manner in the future or that we will be fully paid for past obligations by Estel.

The members of the Estel joint venture are considering selling the joint venture, or all or a portion of certain
membership interests.

The members of the Estel joint venture are considering the possibility of selling the joint venture, or all or of a portion of certain membership interests to a third party or each other. No decision as to the disposition has been made to date.

Risks related to the offering

The offering price of our securities is arbitrary.

The offering price of our securities was arbitrarily determined by negotiation between us and our underwriters and may not bear a direct relationship to our assets, revenues, book value, results of operations or any other objective standard.

A significant portion of the proceeds of this offering will be used for the repayment of debt to certain of our officers and directors and will not be used to fund our operations.

We will use approximately $2,100,000, of the proceeds of this offering to repay certain indebtedness. These amounts consist primarily of (i) approximately $1,056,000, including accrued interest of approximately $302,000 through June 30, 2004, owed to Marvin Rosen, (ii) approximately $853,000, including accrued interest of approximately $154,000 through June 30, 2004, owed to Philip Turits and members of his family to repay demand notes; and (iii) approximately $158,000, including accrued interest of approximately $56,000 through June 30, 2004, owed to Evelyn Langlieb Greer. The use of a significant portion (12%) of the net proceeds from this offering to repay this indebtedness instead of funding our operations could have a material adverse affect on our business and hamper our growth prospects.

We have broad discretion as to the use of the net proceeds from this offering and we may use the proceeds of this offering in a manner that you may not approve.

We have broad discretion as to the use of the net proceeds we will receive from the offering. We cannot assure you that we will apply these funds effectively or in a manner that you would approve. If we do not utilize the net proceeds

of the offering effectively, our business and prospects may be seriously harmed and the value of our securities may decrease.

Our principal stockholders will continue to hold a substantial portion of our stock after the offering.

Our executive officers and directors collectively will control approximately 23.9% of our outstanding common stock after the offering and, therefore they will be able to significantly influence the vote on matters requiring stockholder approval, including the election of directors. This control means that purchasers of our securities being sold in the offering will not be able to effectively influence the manner in which we are governed.

There may be substantial sales of our common stock after the expiration of lock-up periods, which could cause the price of our stock to fall.

After the offering, 24,598,686 shares of both classes of our common stock will be outstanding, including 17,480,333 shares of our class A common stock. All of the 3,325,000 shares of our common stock sold in the offering will be freely tradable, except for shares purchased by holders subject to lock-up agreements or by any of our existing “affiliates,” as that term is defined in Rule 144 under the Securities Act, which generally includes officers, directors or 10% stockholders. The class A common stock may not be converted into common stock until one year after the offering unless the holder executes and delivers, after the effective date of this prospectus, a one year lock up agreement from the effective date of the prospectus. The remaining 3,793,353 shares of of our common stock outstanding after the offering and the 17,480,333 shares of class A common stock outstanding will be restricted as a result of its terms or lock-up agreements from transfer for 12 months after the date of this prospectus. Our underwriter in its sole discretion, however, may waive or permit us to waive the lock-up at any time for common stockholders. Sales of a substantial number of shares of our common stock could cause the price of our securities to fall.

Our stock price may be volatile because of factors beyond our control. As a result, you may lose all or a part of your investment.

Our securities have not previously been publicly traded. Following the offering, the market price of our securities may decline substantially. In addition, the market price of our securities may fluctuate significantly in response to a number of factors, many of which are beyond our control, including, but not limited to, the following:

• our ability to obtain securities analyst coverage;

• changes in securities analysts’ recommendations or estimates of our financial performance;

• changes in market valuations of companies similar to us; and announcements by us or our competitors of significant contracts, new offerings, acquisitions, commercial relationships, joint ventures or capital commitments; and

• the failure to meet analysts’ expectations regarding financial performances.

Furthermore, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us, regardless of its merit, could result in substantial costs and divert the attention of our management from other business concerns, which in turn could harm our business.

Investors in the offering will suffer immediate and substantial dilution.

The public offering price of $6.00 per share of our common stock is substantially higher than the pro forma net tangible book value per share of our outstanding common stock immediately after the offering. Accordingly, if you purchase our common stock in the offering, you will experience immediate and substantial dilution of approximately $5.20 per share, or approximately 87% of the assumed offering price. See “Dilution” for a more detailed description of the dilution you will experience if you purchase our common stock in the offering.

If you do not exercise your purchase warrants prior to 18 months it will cost you more to exercise.

The purchase warrants contain a feature that provides for an increase in the exercise price after 18 months. During the first 18 months, the purchase warrants will be exercisable at $6.00 per share (100% of the offering price). Thereafter, the exercise price will increase to $8.00 per share (133% of the offering price). In the event that a holder of the purchase warrants does not exercise during the first 18 months, the holder will have to pay a higher price to exercise. In addition, the existence of the 18 month reset provision may adversely affect the market price of the purchase warrants.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. The forward-looking statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to:

• general economic and business conditions;

• our business strategy for expanding our presence in our industry;

• anticipated trends in our financial condition and results of operations;

• the impact of competition and technological change;

• existing and future regulations effecting our business; and

• other risk factors set forth under “Risk Factors” in this prospectus.

You can identify forward-looking statements generally by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “intends,” “plans,” “should,” “could,” “seeks,” “pro forma,” “anticipates,” “estimates,” “continues,” or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussions and Analysis of Financial Condition and Results of Operations,” and “Business,” as well as under other captions elsewhere in this prospectus. These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect.

Although we believe that the assumptions and estimates reflected in the forward-looking statements contained in this prospectus are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements.

USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $17,066,250 from the sale of the 3,325,000 shares of common stock and 3,325,000 purchase warrants being offered by us, assuming an initial public offering price of $6.00 per share and $.05 per warrant, after deducting approximately $1,825,000 for underwriting discounts and commissions and estimated expenses of approximately $1,225,000. If our underwriters exercise their over-allotment option in full, we will receive an additional $2,745,868 from the sale of an additional 498,750 shares of our common stock and 498,750 purchase warrants, after deducting $271,569 for underwriting discounts and commissions.

The following table describes the expected allocation of the net proceeds of the offering, assuming that our underwriters do not exercise their over-allotment option:

Application of Percentage of

Net Proceeds Net Proceed

To fund the purchase of equipment for expanded capacity
and service offerings $ 2,000,000 11.7
%

Payment of certain indebtedness ⁽¹⁾ 2,100,000 12.3

International deployment including purchase of business license,
network equipment and securing letters of credit and bonds. 6,000,000 35.2

Marketing and Advertising 500,000 2.9

Working capital and general corporate purposes 6,466,250 37.9

Total
$17,066,250

100

%


(1)		Of such amount, (i) approximately $1,056,000, including accrued interest of approximately $302,000 through June 30, 2004, will be paid to Marvin Rosen to repay demand notes that bear interest at 4.75% per annum (except for one note for $125,000 which bears interest at 9.25%), (ii) approximately $823,000, including accrued interest of approximately $154,000 through June 30, 2004, will be paid to Philip Turits and members of his family to repay demand notes. Philip and Lisa Turits’ notes bear interest at 4.75% per annum, except for one note for $125,000 which bears interest at 9.25%, and Michael Turits’ note bears interest at 12.00% per annum, and (iii) approximately $158,000, including accrued interest of approximately $56,000 through June 30, 2004, will be paid to Evelyn Langlieb Greer for a note that bears interest at 15% per annum. The proceeds of these loans were utilized for international deployment, working capital and the purchase of equipment.

We believe that the net proceeds of the offering will be sufficient to fund the purchase of equipment to expand our infrastructure domestically and deploy our business internationally. Our management will have broad discretion in the use of the net proceeds of the offering. Investors will be relying on the judgment of our management regarding the application of the proceeds of the offering.

Until we use the net proceeds as discussed above, we may invest the net proceeds from the offering in short term direct obligations of the United States or Federal agencies, in each case with maturities of less than one year, short term certificates of deposit or other time deposits with banks or corporate bonds.

DIVIDEND POLICY

We paid dividends to the holders of our series A convertible preferred stock and series B convertible redeemable preferred stock in the form of common stock until the date of their conversion.

The series C preferred stock is entitled to receive cumulative pro rata dividends at the rate of 8% per annum of the stated value of $90 per share. The dividends are payable in cash, annually, commencing on December 19, 2004. However, if this offering is completed prior to December 18, 2004 and the series C convertible redeemable preferred stock is therefore automatically converted into our common stock before that date, then no dividends or a portion thereof will be payable.

We do not anticipate paying any cash dividends on either of our classes of common stock in the foreseeable future but plan to retain future earnings, if any, to be used in implementing our business plan.

CAPITALIZATION

The following table sets forth our consolidated capitalization as follows:

• On an actual basis, as of June 30, 2004.

• On a pro forma basis to reflect (1) the automatic conversion of all of our outstanding series C preferred stock into an aggregate of 3,141,838 shares of common stock, which will occur upon completion of the offering, (2) the repayment of $1,555,000 in debt and $512,000 in interest payable to certain officers and directors and (3) a transaction that occurred subsequent to June 30, 2004, whereby the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible note. The two notes aggregate $2,508,333 and automatically convert upon the completion of this Offering into 651,515 shares of common stock based upon a conversion price of $3.85 per share.

• On a pro forma as adjusted basis to give effect to the receipt of the net proceeds from the sale by us in this offering of shares of common stock and purchase warrants at an assumed initial public offering price of $6.00 per common share and $.05 per purchase warrant, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

June 30, 2004

Proforma

Actual Pro Forma as adjusted

(unaudited) (unaudited) (unaudited)

Cash and cash equivalents
$    4,017,260

$ 3,280,260

$ 20,346,510

Long-term debt, including current portion:

      Notes payable to related parties 2,794,100 239,100 239,100

      Notes payable 150,000 150,000 150,000

      Short-term borrowing obligations 536,450 536,450 536,450

      Capital leases 968,780 968,780 968,780

Convertible preferred stock, series C, subject to
      mandatory redemption (a) 9,368,249 — —

Stockholders’ deficit:

Common Stockholders’ equity (deficit):

      Common stock, $0.01 par value: 105,000,000 shares
authorized, 0 shares issued and outstanding, actual;
105,000,000 shares authorized, 3,793,353 shares
issued and outstanding pro forma; 105,000,000 shares
authorized, 7,118,353 shares issued and outstanding
proforma, as adjusted

37,934

71,184

Common stock, class A $0.01 par value: 21,000,000
shares authorized, 17,338,273 shares issued and
outstanding, actual; 21,000,000 shares authorized,
17,338,273 shares issued and outstanding pro forma;
21,000,000 shares authorized, 17,338,273 shares issued
and outstanding, pro forma as adjusted
173,383

173,383

173,383

      Capital in excess of par value 64,434,718 76,203,366 93,236,366

      Stock dividend distributable 365,961 365,961 365,961

      Accumulated other comprehensive income 100,825 100,825 100,825

      Accumulated deficit
(74,492,401)

(74,492,401)

(74,492,401)

       Total stockholders’ (deficit) equity
(9,417,514)

2,389,068

19,455,318

       Total capitalization
$    4,400,065

$ 4,283,398

$ 21,349,648

( a) Each share of series C preferred stock is convertible into our common stock at a conversion price equal to the lesser of (i) 75% of the initial public offering price of common stock, or (ii) the voluntary conversion price then in effect.

(b)
The table above excludes the following:
1,660,772 shares of class A common stock issuable upon the exercise of options outstanding at June 30, 2004, at a weighted average exercise price of $8.61 per share; and 286,567 shares of class A common stock issuable upon the exercise of warrants outstanding at June 30, 2004, at a weighted average exercise price of $3.19 per share.

DILUTION

When you purchase a share of our common stock, you will suffer immediate per share “dilution” in an amount equal to the difference between the price you paid per share and the net tangible book value per share after the offering. Net tangible book value per share represents the amount of our tangible assets less the amount of our liabilities divided by the number of shares of our common stock outstanding.

As of June 30, 2004, our net tangible book value available to our common stockholders was $(9,388,067) or $(0.54) per share of our common stock. Our net tangible book value per share is based on 17,338,273 shares outstanding as of June 30, 2004.

As of June 30, 2004, our pro forma net tangible book value would have been $2,418,515 or $0.11 per share of common stock. Our pro forma net tangible book value gives effect to the conversion of all of our outstanding series C preferred stock into 3,141,838 shares of our common stock and a transaction that occurred subsequent to June 30, 2004, whereby the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible note. The two notes aggregate $2,508,333 and automatically convert upon the completion of this offering into 651,515 shares of common stock based upon a conversion price of $3.85 per share. Our pro forma net tangible book value per share is based upon a total of 21,131,626 shares of both classes of our common stock outstanding.

Giving effect to the issuance of 3,325,000 shares of common stock and 3,325,000 purchase warrants offered by us at an initial public offering price of $6.00 per share and $.05 per warrant (after the deduction of estimated underwriting discounts and offering expenses payable by us), our net tangible book value on a pro forma as adjusted basis as of June 30, 2004, would have been $19,484,765 or $0.80 per share. This represents an immediate increase in net tangible book value of $0.69 per share to our existing stockholders and an immediate dilution of $5.20 per share to investors in the offering.

The following table illustrates this dilution per share of common stock as of the closing of the offering in an adjusted pro forma net tangible book value basis:

Initial public offering price per share $6.00

      Net tangible book value per share available to common
            stockholder as of June 30, 2004 $(0.54)

            Increase attributable to pro forma adjustments
                  before offering $  0.65

                   Pro forma net tangible book value per share
                        before offering $  0.11

                  Increase per share attributable to new investors
                        in the offering $  0.69

Pro forma net tangible book value per share after
      the offering $0.80

Dilution per share to new investors in the offering $5.20

The following table shows as of June 30, 2004, the number of shares of both classes of our common stock to be owned following the offering by existing securityholders and the new investors in the offering:

Shares purchased Total consideration

Average

Number Percent Amount Percent price/share

Existing securityholders 21,131,626 86.40% 78,040,428 79.64% $3.69

New investors 3,325,000 13.60% 19,950,000 20.36% $6.00

Total
24,456,626

100.00%
97,990,428 100.00%

Selected Financial Data

The following table sets forth selected historical financial data as of and for each of the periods ended December 31, 1999, 2000, 2001, 2002 and 2003, and June 30, 2003 and 2004. The selected financial data as of December 31, 2001, 2002 and 2003 are derived from consolidated financial statements of Fusion Telecommunications International, Inc., which have been audited, by Rothstein, Kass & Company, PC., independent auditors. The consolidated financial statements, and the report thereon, as of December 31, 2002 and 2003, and for each of the three years ended December 31, 2003, are included elsewhere in this prospectus. The historical financial data as of and for the six months ended June 30, 2003 and 2004 are derived from our unaudited consolidated financial statements. 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 prospectus.

Years Ended December 31, Six months ended June 30,

1999 2000 2001 2002 2003 2003 2004

Revenues $    3,714,290 $24,806,641 $  29,614,565 $  28,422,149 $33,725,275 $16,945,832 $26,978,042

Operating expenses:

Cost of revenues 3,926,451 16,886,171 24,591,188 25,443,863 29,246,014 14,518,282 23,179,782

Depreciation and
      amortization 1,647,904 745,145 2,069,361 2,546,869 2,128,610 1,083,818 1,075,375

Loss on impairment — 6,861,412 2,825,149 467,765 735,354 194,001 —

Selling, general and
      administrative expenses 5,893,989 9,614,610 11,758,451 9,977,994 9,156,810 4,672,800 4,887,042

Operating loss (7,754,054) (9,300,697) (11,629,584) (10,014,342) (7,541,513) (3,523,069) (2,164,157)

Other income (expense)

Interest expense, net (63,120) (113,436) (595,116) (1,175,714) (919,590) (458,988) (860,510)

Forgiveness of debt — — — 1,812,092 3,918,295 1,196,294 1,976,595

Other — — — — — — 37,980

Minority interests 531,317 2,017,389 112,472 19,440 157,617 56,060 79,539

468,197 1,903,953 (482,644) 655,818 3,156,322 793,366 1,233,604

Loss from continuing
      operations (7,285,857) (7,396,744) (12,112,228) (9,358,524) (4,385,191) (2,729,703) (930,553)

Discontinued operations:

Income (loss) from
      discontinued operations (1) (25,949,828) 7,588,938 (7,029,511) — 208,620 — —

Net income (loss) $(33,235,685) $ 192,194 $(19,141,739) $  (9,358,524) $ (4,176,571) $ (2,729,703) $    (930,553)

Losses applicable to
      common stockholders:

Loss from continuing
      operations $  (7,285,857) $ (7,396,744) $(12,112,228) $  (9,358,524) $ (4,385,191) $ (2,729,703) $    (930,553)

Preferred stock dividends — — — (642,552) (635,254) (82,016) (385,918)

Net loss applicable to
      common stockholders
      from continuing
      operations (7,285,857) (7,396,744) (12,112,228) (10,001,076) (5,020,445) (2,811,719) (1,316,471)

Income (loss) from
      discontinued operations (25,949,828) 7,588,938 (7,029,511) — 208,620 — —

Net income (loss)
      applicable to common
      stockholders $(33,235,685) $     192,194 $(19,141,739) $(10,001,076) $ (4,811,825) $(2,811,719) $(1,316,471)

Years Ended December 31, Six months ended June 30,

1999 2000 2001 2002 2003 2003 2004

Basic and diluted net loss
      per common share:

      Loss from continuing
            operations $ (0.89) $ (0.81) $ (1.30) $ (1.01) $ (0.37) $ (0.22) $ (0.08)

      Income (loss) from
            discontinued operations (3.15) 0.83 (0.76) — 0.02 — —

Net income (loss)
      applicable to
      common stockholders $ (4.04) $ 0.02 $ (2.06) $ (1.01) $ (0.35) $ (0.22) $ (0.08)

Weighted average shares
      outstanding

Basic and diluted 8,218,367 9,082,483 9,305,857 9,885,901 13,616,803 13,056,391 15,967,983

Operating Data:

EBITDA (2) $  (5,574,833) $ (5,348,063) $  (6,622,602) $  (6,980,268) $(4,519,932) $  (2,189,190) $    (971,263)

Capital expenditures (6,049,699) (7,295,721) (501,882) (533,610) (645,340) (85,094) (739,479)

Summary Cash Flow Data:

Net cash used in operating
      activities $(12,175,123) $ (4,917,915) $  (9,561,199) $  (4,322,231) $(5,056,370) $  (3,719,854) $ (4,185,783)

Net cash used in investing
      activities (6,049,699) (5,564,562) (1,271,632) (901,056) (612,635) (121,714) (746,312)

Net cash provided by
      financing activities 20,741,578 7,374,117 10,618,846 5,992,185 8,140,759 3,337,430 5,708,703

Balance Sheet Data
      (at period end):

Cash $ 3,322,345 $ 213,985 $ — $ 768,898 $  3,240,652 $264,760 $  4,017,260

Restricted cash — — 784,000 1,250,793 961,536 994,232 1,057,866

Property and equipment 7,684,197 15,109,868 13,686,124 12,700,397 11,858,931 12,769,183 12,939,986

Property and equipment, net 7,180,231 12,438,899 10,145,087 7,429,433 5,054,973 6,416,988 4,736,828

Total assets 24,593,019 18,806,300 14,273,723 12,287,532 13,033,913 11,842,131 16,206,957

Total debt 3,389,794 7,616,413 12,211,878 9,640,955 5,176,861 9,990,081 4,449,330

Redeemable preferred stock — — — — 3,466,538 — 9,368,249

Total stockholders’ deficit (6,871,098) (665,330) (11,537,659) (14,800,981) (9,774,002) (13,477,348) (9,417,514)

Net income (loss) $(33,235,685) $ 192,194 $(19,141,739) $(9,358,524) $(4,176,571) $(2,729,703) $   (930,553)

Income (loss) from
      discontinued operations (25,949,828) 7,588,938 (7,029,511) — 208,620 — —

Loss from continuing
      operations (7,285,857) (7,396,744) (12,112,228) (9,358,524) (4,385,191) (2,729,703) (930,553)

Adjustments

      Interest expense, net 63,120 113,436 595,116 1,175,714 919,590 458,988 860,510

      Depreciation and
            amortization 1,647,904 745,145 2,069,361 2,546,869 2,128,610 1,083,818 1,075,375

      Forgiveness of debt — — — (1,812,092) (3,918,295) (1,196,294) (1,976,595)

      Loss on impairment — 1,190,100 2,825,149 467,765 735,354 194,001 —

EBITDA from continuing
      operations
$  (5,574,833)

$(5,348,063)

$  (6,622,602)

$(6,980,268)

$(4,519,932)

$(2,189,190)

$   (971,263)


(1)		The December 31, 2000 income from discontinued operations includes a $16.4 gain on the sale of one of our subsidiaries which is net with a loss of $8.8 million from the discontinued operations of three subsidiaries.
(2)		EBITDA means net income (loss) (adjusted for loss on impairments and forgiveness of debt) before income (loss) from discontinued operations, interest expense and depreciation and amortization. We believe EBITDA is useful to investors because EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance and leverage. We believe EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies. While providing useful information, EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flows data prepared in accordance with generally accepted accounting principles. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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 accompanying notes included elsewhere in this prospectus.

Overview

We are an international communications carrier delivering VoIP, private networks, Internet access, IP video conferencing and other advanced services to, from, in and between emerging markets in Asia, the Middle East, Africa, the Caribbean and Latin America. In 2000, after early acquisitions, our focus on domestic retail and residential services and incurring significant losses, our board of directors selected a new management team to develop and initiate a new corporate strategy, improve our operational and financial performance and identify growth opportunities.

The new corporate strategy focused our resources on VolP and the emerging international markets, and we exited the more highly competitive, infrastructure-dependent businesses that characterized us in 2000 and 2001. Since then, we sought 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 enabled us to introduce our IP communications services in these markets, thereby benefiting from the time-to-market advantages, expanded geographic reach and reduced capital requirements that local partnerships afford. We embarked on a network strategy that employs the most currently available Softswitch technology, relieving us of the burden of costly, inefficient legacy systems and allowing more rapid and cost-effective deployment and expansion of services worldwide. Additionally, long-range efforts in cost controls and reductions were initiated, which included significant reductions in staffing, fixed overhead expenses and debt. The combination of these efforts has led to improved financial results.

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

(unaudited)

Years Ended December 31, Six Months Ended June 30,

2001 2002 2003 2003 2004

Revenues $  29,614,565 $28,422,149 $33,725,275 $16,945,832 $26,978,042

Operating expenses:

      Cost of revenues 24,591,188 25,443,863 29,246,014 14,518,282 23,179,782

      Depreciation and amortization 2,069,361 2,546,869 2,128,610 1,083,818 1,075,375

      Loss on impairment 2,825,149 467,765 735,354 194,001

      Selling, general and
            administrative 11,758,451 9,977,994 9,156,810 4,672,800 4,887,042

Operating loss (11,629,584) (10,014,342) (7,541,513) (3,523,069) (2,164,157)

Other income (expense)

      Interest expense, net (595,116) (1,175,714) (919,590) (458,988) (860,510)

      Forgiveness of debt 0 1,812,092 3,918,295 1,196,294 1,976,595

      Other 0 0 0 0 37,980

      Minority interests 112,472 19,440 157,617 56,060 79,539

(482,644) 655,818 3,156,322 793,366 1,233,604

Loss from continuing operations (12,112,228) (9,358,524) (4,385,191) (2,729,703) (930,553)

Income (loss) from discontinued
      operations (7,029,511) 0 208,620 0 0

Net loss $(19,141,739) $ (9,358,524) $ (4,176,571) $ (2,729,703) $    (930,553)

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

(unaudited)

Years Ended December 31, Six Months Ended June 30,

2001 2002 2003 2003 2004

Revenues 100.0% 100.0% 100.0% 100.0% 100.0%

Operating expenses:

      Cost of revenues 83.0% 89.5% 86.7% 85.7% 85.9%

      Depreciation and amortization 7.0% 9.0% 6.3% 6.4% 4.0%

      Loss on impairment 9.5% 1.6% 2.2% 1.1% 0.0%

      Selling, general and
            administrative 39.7% 35.1% 27.2% 27.6% 18.1%

Operating loss (39.3)% (35.2)% (22.4)% (20.8)% (8.0)%

Other income (expense)

      Interest expense, net (2.0)% (4.1)% (2.7)% (2.7)% (3.2)%

      Forgiveness of debt 0.0% 6.4% 11.6% 7.1% 7.3%

      Other 0.0% 0.0% 0.0% 0.0% 0.1%

      Minority interests 0.4% 0.1% 0.5% 0.3% 0.3%

(1.6)% 2.3% 9.4% 4.7% 4.6%

Loss from continuing operations (40.9)% (32.9)% (13.0)% (16.1)% (3.4)%

Income (loss) from discontinued
      operations (23.7)% 0.0% 0.6% 0.0% 0.0%

Net loss (64.6)% (32.9)% (12.4)% (16.1)% (3.4)%

Revenues

Since our restructuring in 2001, we have generated the majority of our revenue from voice traffic sold to other carriers, with a primary focus on VoIP terminations to the emerging markets. We have increased our business in this area through an internal focus on the growth of our existing customer base, adding new customers, and the establishment of in-country partnerships that help us to more quickly deploy direct VoIP terminating arrangements with PTTs and other licensed carriers in emerging markets. Although we believe that this business continues to be strong, ongoing competitive and pricing pressures have caused us to increase our focus on higher margin, value-added services (VoIP to consumers and businesses, Internet access, IP videoconferencing and private networks) and market them to, or in conjunction with, international carriers, ISP’s, cable companies and wireless operators on a direct, co-branded or private label basis.

In an effort to further increase margins, expand our customer base, and develop more stable revenue streams, we have begun to target enterprise customers (large corporations, government entities and other businesses). Revenues generated from sales to these customers are primarily derived from the sale of the value-added services mentioned above. With a primary focus on marketing VoIP services to these Enterprise customers, we believe we will recognize higher margin and stronger growth opportunities. While this does not yet represent a significant portion of our revenue base, we expect to continue to increase the our emphasis in this area. We believe that this will complement our carrier business with a higher margin and more stable customer base. In the third and fourth quarter of 2004, we expect to experience a temporary decline in revenues during, and immediately following, the migration to the new Softswitch technology.

In 2002, we established Efonica F-Z, LLC as a retail services company marketing VoIP products to consumer and corporate customers in emerging markets. Beginning in the Middle East, Asia and Africa, then extending into Latin America, Efonica’s services are primarily sold through distribution channels on a pre-paid basis. Efonica’s customers can place calls from anywhere in the world to any destination using a PC, IP 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 enhance this value-added offering. Since its inception in 2002, Efonica’s VoIP revenue grew $0 to $0.3 million in 2003, and to $0.7 million in the first six months of 2004.

Our increased focus on VoIP services resulted in a growing upward trend in voice traffic carried over Internet protocol. During the first six months of 2004, voice traffic terminated on our network was 72% VoIP, compared to 57% VoIP in the first six months of 2003.

We also receive revenues from other services, including co-location and the sale of customer premise equipment. These services currently represent a small portion of the revenue base.

OPERATING EXPENSES

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

Cost of revenues includes costs incurred with the operation of our leased network facilities, and the purchase of voice termination and IP services from other telecommunications carriers and ISP’s. As we have increased the percentage of VoIP traffic carried on the network, our fixed network cost of voice services to carriers as a percentage of the voice revenues has declined. This is illustrated by the decrease of this percentage to 2.2% in the first six months of 2004 from 4.8% in the first six months of 2003. We also continue to work to lower the variable component of the cost of revenue through the use of least cost routing, continual negotiation of usage-based and fixed costs with domestic and international service providers.

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

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.

COMPANY HIGHLIGHTS

The following summary of significant events from the past three fiscal years ended December 31, 2003 and the first six months ended June 30, 2004, highlights the accomplishments and events that have influenced our performance during that time period.

First Six Months 2004

• Capital fund-raising – We raised $4.6 million to complete the second traunche of a series C convertible preferred stock offering that had been initiated in November of 2003. Additionally, we raised $1.3 million from a common stock offering that was initiated in 2003.

• Revenue Growth – Revenue grew 59% in the first half of 2004 over the first half of 2003.

• Debt Reduction – We further reduced debt by negotiating $2.0 million in reductions of outstanding vendor obligations through settlements, and by another $0.4 million that was paid off in outstanding vendor obligations and notes. In addition, the Company converted $0.6 million of debt to series C convertible preferred stock.

• Purchase of Veraz Switch – In April of 2004, we purchased a Veraz softswitch which is now operational. Management believes that compared to older infrastructure, this switch is easier to expand with reduced deployment time. Management also believes this will further enhance our service offerings, flexibility and will allow us to size the network equipment to the traffic as the volume grows, rather than requiring heavy capital investments in anticipation of future revenue growth.

2003

• Capital fund-raising – In November 2003, we initiated a series C convertible preferred stock offering, with the first of two stock closings occurring in December 2003. In the first closing, the Company raised $2.5 million. We also raised $3.0 million from common stock purchases in 2003 initiated with the private placement from 2002, and we raised an additional $3.8 million from common stock purchases in 2003 associated with an equity offering initiated in 2003.

• Revenue Growth – Revenue grew $5.3 million, or 18.7%, from the prior year, excluding discontinued operations.

• Debt Reduction – We further reduced debt by negotiating $3.9 million in reduction of outstanding vendor obligations through settlements. We also converted $3.2 million in debt to preferred and common stock.

• Addition of San Jose Point of Presence – In November of 2003, we added network equipment and a PoP in San Jose, California, to support service to Asia.

• Successful bid of Government Contracts – We were awarded a subcontractor bid to be the provider for Internet access for seventeen U.S. Embassies and Consulates located in Asia and the Middle East, and we also were awarded a bid to supply a private network for the U.S. Department of Defense in the Persian Gulf.

• Reduced SG&A – We reduced SG&A by $0.8 million, or 8%, from the prior year, while total revenues increased 18.7%.

2002

• Capital fund-raising – We raised $0.7 million in an equity offering for series B preferred stock in March of 2002, which was extended until September of 2002. Additionally, we raised $1.6 million through an equity offering for common stock that was initiated in July of 2002, and was extended into 2003.

• Debt Reduction – We further reduced debt by negotiating $1.8 million in reductions and outstanding obligations through settlements, and we converted $3.7 million of debt into common stock.

• Revenue – Revenue decreased $1.2 million, or 4%, from the prior year, excluding discontinued operations. This decrease was primarily attributable to the loss of two large voice networks.

• Pakistan J.V. – We established a joint venture in mid 2002 that gave us a 75% equity interest in an entity which provides VoIP service to Pakistan.

• Efonica FC-LLC – We established a joint venture in December of 2002 that gave us a 50.2% equity interest in a company that provides VoIP services to consumers and corporations throughout emerging markets in the Middle East, Africa, Asia and Latin America.

• Reduced SG&A – SG&A decreased $1.8 million or 15.1% from 2001.

2001

• Capital fund-raising – We raised $4.2 million in an equity offering for series A preferred stock that was initiated in June of 2001, and closed in November of 2001. Additionally, we raised $0.8 million from a common stock offering.

• Revenue growth – Revenue grew $4.8 million, or 19%, from the prior year, excluding discontinued operations.

• Divestiture of Domestic Retail Services – In mid-2001, we divested the domestic retail telecommunications service by selling three different lines of business to three non-affiliated parties. This resulted in a loss from discontinued operations of approximately $7.0 million during 2001.

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

Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003

Revenues

Revenues increased $10.1 million or 59.2% to approximately $27.0 million in the first six months of 2004 compared to $16.9 million in the first six months of 2003. Most of the increase ($8.8 million) was attributable to an increase in revenues in voice services, primarily VoIP terminating to the emerging markets sold to carriers. In addition, during 2004, there was an increase of 15% in the total amount of VoIP traffic terminated, evidencing our increased focus on VoIP services. Our VoIP services to consumers more than doubled from $0.3 million in the first six months of 2003 to $0.7 million in the first six months of 2004.

Consolidated revenues from our Enterprise services grew 40%, from $1.5 million in 2003 to $2.1 million in 2004, primarily due to the addition of government-related contracts that were awarded in the latter part of 2003.

Operating Expenses

Cost of Revenues. Cost of Revenues increased $8.7 million or 59.7% to $23.2 million in 2004 from $14.5 million in 2003. This percentage increase is consistent with the percentage increase in revenues resulting from the higher volume discussed above.

Depreciation and Amortization. Depreciation and amortization stayed relatively flat in the first six months of 2004 over the first six months of 2003.

Loss on impairment. Loss on impairment was $0.2 million during the first six months of 2003. This impairment related to the adjustment of equipment being used by our joint venture in India to its fair value based on estimated cash flows. No loss on impairments occurred during the six months ended June 2004.

Selling, General and Administrative. Selling, general and administrative expenses increased $0.2 million or 4.6% to $4.9 million in 2004 from $4.7 million in 2003. This increase is primarily attributed to the growth of our Efonica joint venture.

Operating Loss. Our operating loss decreased $1.4 million or 38.6% to $2.1 million in the first six months of 2004 from a loss of $3.5 million in the first six months of 2003. The decrease in operating loss was primarily attributable to the increase in revenue and gross margin.

Other Income (Expense). Total other income (expense) increased $0.4 million to $1.2 million in the first six months of 2004 from $0.8 million in the first six months of 2003. Interest expense increased $0.4 million to $0.9 million in 2004 from $0.5 million in 2003, primarily attributable to the adoption of SFAS 150 during 2003. This resulted in our recording $0.7 million in interest expense related to dividends and accretion on the series C convertible preferred stock subject to mandatory redemption for the six months ended June 30, 2004, partially offset with a decrease in interest expense during 2004 resulting from the reduction of average outstanding debt. Gain on debt forgiveness realized from vendor settlements increased in the first six months of 2004 by $0.8 million to $2.0 million from $1.2 million for the six months ended June 30, 2003. Minority interest due from joint venture partners increased $24,000 to $80,000 in 2004 from $56,000 in 2003.

Net Loss. Our 2004 net loss attributable to common stockholders was $1.3 million after giving effect to $0.4 million in dividends applicable to common stockholders. This was an improvement of $1.5 million from the prior year’s net loss applicable to common stockholders of $2.8 million.

EBITDA. EBITDA means net income (loss) (adjusted for loss on impairments and forgiveness of debt) before income (loss) from discontinued operations, interest expense and depreciation and amortization. We believe EBITDA is useful to investors because EBITDA is commonly used in the communications industry to analyze companies on the basis of operating performance and leverage. We believe EBITDA allows a standardized comparison between companies in the industry, while minimizing the differences from depreciation policies, financial leverage and tax strategies. While providing useful information, EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flows data prepared in accordance with generally accepted accounting principles. EBITDA was approximately $(1.0) million during the six months ended June 30, 2004 compared to $(2.2) million during the six months ended June 30, 2003.

Six Months Ended Six Months Ended

June 30, 2004 June 30, 2003

Net loss $ (930,553) $(2,729,703)

Adjustments:

Interest expense, net 860,510 458,988

Depreciation and amortization 1,075,375 1,083,818

Forgiveness of debt (1,976,595) (1,196,294)

Loss on impairment 0 194,001

EBITDA $ (971,263) $(2,189,190)

Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

Revenues

Revenues. Revenues from continuing operations increased $5.3 million or 18.7% to $33.7 million in 2003 compared to $28.4 million in 2002. Voice services sold to carriers represented approximately 95% of this growth, partially fueled by growth in new international network deployments. The remaining approximate 5% of the revenue increase was attributed to the introduction of VoIP services to consumers and corporations in early 2003.

Operating Expenses

Cost of Revenues. Cost of Revenues increased $3.8 million or 14.9% to $29.2 million in 2003 from $25.4 million in 2002. This increase was caused by the growth in volume over the prior year. The improvement in gross margin in 2003 is a result of a reduction in 2003 fixed cost of revenues that related to two large international voice networks that were turned down late in 2002 due primarily to capital constraints and disputes with the vendors. In addition, we increased our efforts in utilizing least cost routing options.

Depreciation and Amortization. Depreciation and amortization from continuing operations decreased $0.4 million to $2.1 million in 2003 from $2.5 million in 2002. This decrease was attributable to fixed assets impaired during 2002 being depreciated during a portion of 2002 but not at all during 2003.

Loss on Impairment. Loss on Impairment increased $0.3 million in 2003. The $0.7 million recorded during 2003 relates to an impairment on switching equipment which was replaced by upgraded equipment and an impairment on equipment being used by the Company’s joint venture in India. These impairments were determined based upon estimated future cash flows from these assets. The $0.5 million impairment recorded during 2002 related to the termination and abandonment of a voice network in the Caribbean which was deactivated and no longer generating revenue.

Selling General and Administrative. Selling, general and administrative expenses decreased $0.8 million or 8.2% to $9.2 million in 2003 from $10.0 million in 2002. This decrease is primarily attributed to staff reductions and other cost reduction and containment strategies.

Operating Loss. The operating loss decreased $2.5 million or 24.7% to $7.5 million in 2003 from $10.0 million in 2002, due to the items mentioned above.

Other Income (Expense). Total other income (expense) increased $2.5 million or 381.3% to $3.2 million in 2003 from $0.7 million in 2002, due to several factors. Interest expense decreased $0.3 million to $0.9 million in 2003 from $1.2 million in 2002, mainly due to settlements and conversions of outstanding debt. Gain on Debt Forgiveness increased by $2.1 million to $3.9 million, from $1.8 million, resulting from settlements of vendor payable obligations. Minority interest due from joint venture partners increased $138,000 to $158,000 in 2003 from $20,000 in 2002.

Discontinued Operations. Income from discontinued operations in 2003 was $0.2 million due to the elimination of a prior accrual for a vendor obligation. There was no discontinued operations income in 2002. See “Discontinued Operations” note.

Net Loss. The factors discussed above resulted in a decrease in the 2003 net loss applicable to common stockholders by $5.2 million to $4.8 million in 2003 from $10.0 million in 2002 after giving effect to $0.6 million in stock dividends in both 2003 and 2002.

EBITDA. EBITDA was approximately $(4.5) million during 2003 compared to approximately $(7.0) million during 2002.

Year Ended Year Ended

December 31, 2003 December 31, 2002

      Net loss $(4,176,571) $(9,358,524)

      Income from discontinued operations (208,620) 0

      Loss from continuing operations (4,385,191) (9,358,524)

      Adjustments

      Interest expense, net 919,590 1,175,714

      Depreciation and amortization 2,128,610 2,546,869

      Forgiveness of debt (3,918,295) (1,812,092)

      Loss on impairment 735,354 467,765

      EBITDA $(4,519,932) $(6,980,268)

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Revenues

Revenues. Revenues from continuing operations decreased $1.2 million or 4.0% to $28.4 million in 2002 compared to $29.6 million in 2001. This decline was primarily due to the deactivation of two large voice networks in late 2001 caused by disputes with the related vendors and our inability to stay current with accounts payable.

Operating Expenses

Cost of Revenues. Cost of revenues increased $0.8 million or 3.5% to $25.4 million in 2002 from $24.6 million in 2001 due primarily to a less effective job in least cost routing during 2002 in comparison to 2001. In addition, there was a reduction in gross margin from 2002 versus 2001. This was caused partially by our increased cost of revenues, but also was impacted by our inability to stay current on our accounts payable and certain disputes, which resulted in the loss of a large Caribbean voice network that had been earning high gross margins during a significant portion of 2001.

Depreciation and Amortization. Depreciation and amortization from continuing operations increased $0.4 or 23.1% million to $2.5 million in 2002 from $2.1 million in 2001. The increase was attributable to recognition of the depreciation associated with the assets transferred from our discontinued retail communication service operations.

Loss on Impairment. The loss on impairment decreased $2.3 million to $0.5 million in 2002 from $2.8 million in 2001. The significant charge in 2001 relates primarily to a joint venture we had with Clarion Global Network, Inc. to form an entity called C&F Switching, LLC. The joint venture was created in order to combine efforts in building gateway telecommunications switches. In connection with this acquisition, we accounted for the transaction under the purchase method of accounting and allocated the purchase price of $2.5 million to goodwill and property and equipment. The goodwill was considered impaired during 2001 and is consequently included in loss on impairment. The $0.5 million loss on impairment in 2002 has been previously discussed.

Selling, general and administrative. Selling, general and administrative expenses decreased $1.8 million or 15.1% to $10.0 million in 2002 from $11.8 million in 2001 primarily due to staff reductions and cost reduction and containment strategies after the divestiture of our domestic retail subsidiary.

Operating Loss. Our operating loss decreased $1.6 million or 13.9% to $10.0 million in 2002 from $11.6 million in 2001 due to the factors discussed above.

Other Income (Expense). Total other income (expense) changed 235.9% from $(0.5) million in expense in 2001 to $0.7 million in income in 2002. Interest expense increased from $0.6 million in 2001 to $1.2 million in 2002 due to higher average borrowings during 2002, which was offset by a gain on debt forgiveness of $1.8 million, compared to zero in the prior year. This gain on debt forgiveness resulted from settlements of vendor payable obligations. Minority interest due from joint venture partners decreased from $0.1 million in 2001 to $20,000 in 2002.

Discontinued Operations. There was no income or loss from discontinued operations in 2002. The 2001 loss from discontinued operations was $7.0 million.

Net Loss. The 2002 net loss applicable to common stockholders was $10.0 million, compared to $19.1 million in 2001, after giving effect to the $0.6 million of dividends in 2002. This $9.1 million decrease in net loss applicable to common stockholders is primarily attributed to the $7.0 million loss for discontinued operations in 2001 as well as other factors previously disclosed.

EBITDA. EBITDA was approximately ($7.0) million during 2002 compared to approximately ($6.7) million during 2001.

Year Ended Year Ended

December 31, 2002 December 31, 2001

Net loss $(9,358,524) $(19,141,739)

Loss from discontinued operations 0 7,029,511

Loss from continuing operations $(9,358,524) (12,112,228)

Adjustments:

Interest expense, net 1,175,714 595,116

Depreciation and amortization 2,546,869 2,069,361

Forgiveness of debt (1,812,092) 0

Loss on impairment 467,765 2,825,149

EBITDA $(6,980,268) $ (6,662,602)

During 2001, we decided to cease the operations of our domestic retail telecommunication services. In connection with this decision, we opted out of a capital lease under which we were leasing switching equipment located in Miami, Florida and returned all of the switching equipment covered under the lease to the lessor. In 2002, we abandoned a telecommunications facility located in Miami, which was being used to house the switching equipment utilized by C&F Switching, LLC. The office was being leased under a non-cancelable operating lease agreement, which is currently the subject of an on-going litigation.

The principal costs of the discontinuation of the retail services included the remaining unpaid operating lease obligations on the Miami office space, which aggregated approximately $0.8 million (this amount includes a draw down on a letter of credit securing the lease of approximately $0.1 million). The costs also include the write-off of the remaining net book value of leasehold improvements made to the Miami location of approximately $0.3 million. In accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have not included the results of operations of our retail telecommunication services in the results from continuing operations. The results of operations for these services have been reflected in discontinued operations for the year ended December 31, 2001. The loss from discontinued operations for the year ended December 31, 2001, consists of the following:

Revenues $ 4,274,000

Cost of revenues (4,407,000)

Depreciation and amortization (424,000)

Selling, general and administrative expenses (5,049,000)

Interest expense (60,000)

Accrual of office lease expenses (1,073,000)

Write-off of leasehold improvements (291,000)

Net loss $(7,030,000)

During the year ended December 31, 2003, certain trade payables, associated with the discontinuation of our retail services, were determined not to be payable to a vendor, which resulted in a gain on trade payable reductions of approximately $0.2 million.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating and net losses. In addition, we have not generated positive cash flows from operations. As of June 30, 2004, we had an accumulated stockholders’ deficit of approximately $9.4 million and a working capital deficit of approximately $6.4 million. However, during the six months ended June 30, 2004, we have been able to increase our revenues and renegotiate and pay down certain obligations, which has resulted in reduced losses and reduced outstanding debt.

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 Year Ended Year Ended Six months ended

December 31, 2001 December 31, 2002 December 31, 2003 June 30, 2004 (1)

Cash used in operating activities $ (9,561,199) $(4,322,231) $(5,056,370) $(4,185,783)

Cash used in investing activities (1,271,632) (901,056) (612,635) (746,312)

Cash provided by financing activities 10,618,846 5,992,185 8,140,759 5,708,703

Increase (Decrease) in cash and

      cash equivalents (213,985) 768,898 2,471,754 776,608

Cash and cash equivalents, beginning

      of period (213,985) 768,898 3,240,652

Cash and cash equivalents, end

      of period $ 0 $     768,898 $  3,240,652 $ 4,017,260

(1) These figures include an aggregate of approximately $2.2 million that was paid during the period to satisfy past obligations.

Source of Liquidity

As of June 30, 2004 we had cash and cash equivalents of approximately $4.0 million. In addition, as of June 30, 2004, we had approximately $1.1 million of cash restricted from withdrawal and held by banks as certificates of deposits securing letters of credit (equal to the amount of the certificates of deposit).

From our inception through June 2004, we financed our operations from cash provided from financing activities. These activities were primarily through the private placement of approximately $52.2 million of equity securities and $26.7 million of net proceeds resulting from the issuance of notes and capital leases.

Although we believe the net proceeds from this offering, together with our existing cash and cash equivalents and revenues from operations will be sufficient to meet our working capital and capital expenditure needs for the next 12 months, as to 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 relating to our debt and 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 $0.7 million during the six months ended June 30, 2004 and were $0.6 million during the year ended December 31, 2003. We expect our cash capital expenditures to be approximately $2.0 million for the full year ending December 31, 2004. The 2004 estimated capital expenditures include a sig-

nificant investment we are making to upgrade our switching and transmission systems utilizing the softswitch technology.

Cash used in operations was approximately $5.1 million during the year ended December 31, 2003 and approximately $4.2 million during the six months ended June 30, 2004. 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 included in our June 30, 2004 and December 31, 2003 cash flows statements include a significant amount of cash payments and forgiveness of debt that relates to liabilities from prior periods. Consequently, the resulting net cash used in operating activities during these two periods was negatively impacted. Now that we have paid and settled a significant amount of these old liabilities, as well as seeing an improvement in our operating results, we expect our net cash used in operating activities to improve during future periods. Additionally, the 2004 net cash used in operating activities includes approximately $0.7 million in interest and dividends accreted on our series C preferred stock. The accretion on this stock will cease upon completion of the offering.

We expect to use the net proceeds from this offering for working capital and general corporate purposes, for the repayment of certain indebtedness, for international deployment, including purchase of business license, network equipment and securing letters of credit and bonds, to fund the purchase of equipment for expanded capacity and service offerings, and marketing and advertising.

Debt Service Requirements

At June 30, 2004, we had approximately $3.9 million of current and long-term notes payable and capital leases. We owe approximately $1.9 million in debt and accrued interest to two of our officers who have signed forbearance agreements, providing that they will not call due this debt and interest until such time that a successful offering is completed or one year after the first closing on our series C preferred stock, whichever comes first. A significant portion of our debt is due during the 12 months subsequent to June 30, 2004 and approximately $1,555,000 in debt and $512,000 in accrued interest will be repaid with the proceeds from the offering. Also, this reduction in our debt balances is expected to result in a significant reduction in our interest expense in the future.

Capital Instruments

The only outstanding preferred stock we have as of June 30, 2004 is our series C preferred stock. This stock provides for the payment of dividends at a rate equal to 8.0% per annum. The dividends are payable in cash annually, commencing on the first anniversary of the initial closing of the series C preferred stock offering, unless the series C preferred stock is converted into common stock upon the completion of the offering, in which case no dividend will be due. At our option, we may redeem for cash, all or a portion of the series C preferred stock at any time upon 30 days notice, given during the 13th month from December 19, 2003, at 115% of the stated value, plus accrued but unpaid dividends. If we choose to redeem the series C preferred stock, we are required to give holders 30 days notice of such redemption during which period holders shall have the right to convert to common stock at a price of $3.15 per share, subject to adjustment. So long as our common stock or other securities into which series C preferred stock is convertible into, is not publicly traded, at any time after the second anniversary of the initial closing of this offering, the holders of the series C preferred stock may require us to redeem their respective shares of the series C preferred stock may require us to redeem their respective shares of the series C preferred stock for cash equal to 112% of the stated value plus payment of accrued and unpaid dividends. Each share of the series C preferred stock is convertible, at the option of the holder at any time, at the conversion price of $3.15 per share. Upon the closing of this offering, the series C preferred stock shall automatically convert into shares of our new common stock at the lesser of (i) the voluntary conversion price then in effect or (ii) 75% of the offering price of the common stock, and, the holders of the series C preferred stock shall also receive a warrant equivalent to those offered hereby for each share of common stock issued.

Summary of Contractual Obligations

As of June 30, 2004

Payments due by period before the offering:

Less than More than

1 year 1-3 years 3-5 years 5 years Total

Contractual obligations:

Debt maturing within one year $ 3,480,550 $ 0 $ 0 $ 0 $ 3,480,550

Preferred shares subject to mandatory
redemption (1) 9,368,249 0 0 9,368,249

Capital leases 833,780 135,000 0 0 968,780

Operating leases 1,040,000 2,143,000 2,106,000 790,000 6,079,000

Minimum purchase commitments (2) 6,119,313 2,624,400 0 0 8,743,713

Total contractual cash obligations $11,473,643 $14,270,649 $2,106,000 $790,000 $28,640,292


(1)		This represents the obligation for the redemption of series C preferred stock plus accrued and unpaid dividends if we do not convert the shares to common stock in an initial public offering prior to the second anniversary of the initial closing. This obligation will be eliminated upon the occurrence of the initial public offering because this series C preferred stock will automatically convert into shares of our common stock in connection with the offering.
(2)		Minimum purchase commitments relates primarily to the following: An agreement with Pakistan Telecommunications Company Limited to purchase at least $437,400 of traffic per month through December 2005. A settlement with a vendor that will require us to spend an additional $417,000 between July 1 and December 31, 2004. Remaining costs of approximately $400,000 were associated with our new soft switch.

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, 2003, included in this Form S-1. 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, 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 provi-

sioning, 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 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 are booked to deferred revenue, until usage occurs.

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

Cost of revenues and cost of revenues accrual — Cost of revenues is comprised primarily of costs incurred from other domestic and international telecommunications 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 that are 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).

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 May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments the beginning of the first fiscal period after June 15, 2003. At December 31, 2003, our series C preferred stock qualifies under the provisions of SFAS 150 and has accordingly been classified as a liability. In the event we complete a successful qualified public offering for our stock, the series C preferred stock will be converted into shares of our common stock and will be reclassified from a liability to equity.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. We do not have any such derivative instruments as of June 30, 2004.

In January 2003, the FASB issued Financial Interpretation Number (“FIN”) No. 46, “Consolidation of Variable Interest Entities” and in December 2003, issued FIN 46R, which superseded FIN 46 (collectively “FIN 46”) to address perceived weaknesses in the accounting and financial reporting for investments or interests in entities commonly known as special purpose or off-balance-sheet entities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was required to be applied to preexisting entities of companies as of the beginning of the first quarter after June 15, 2003. FIN 46 was required to be applied to all new entities with which we became involved beginning February 1, 2003. Provisions of FIN 46R are applicable to all entities subject to the Interpretation no later than the end of the first quarter after March 15, 2004. The adoption of FIN 46 did not have a material impact on our consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB No. 4, (Reporting Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for Intangible Assets of Motor Carriers), No. 64, (Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment of FASB Statement No. 13 (Accounting for Leases) and Technical Corrections.” This statement eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead, such gains and losses will be classified as other income items.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS No. 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS No. 146, a company may not restate its previously issued financial statements and the new statement grandfathers the accounting for liabilities that a company had previously recorded under EITF issue 94-3.

Inflation

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

Quantitative and Qualitative Disclosures About Market Risk

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

At June 30, 2004, 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.

We are subject to interest rate risk on certain of our convertible notes payable and our short-term borrowings. Our exposure to interest rate risk is limited as a significant portion of our debt is at fixed interest rates. Of the approximate

$4.4 million debt balance as of June 30, 2004, only $0.8 million of this debt was variable. As such, we currently believe that our interest rate risk is fairly low.

We currently conduct a minimal portion of our business in currencies other than the United States dollar (approximately 4% of our revenues are denominated in foreign currencies). The foreign currencies are primarily the India Rupee and the SDR. The reporting currency for our financial statements is the United States dollar. The functional currency for all (except one) of our respective subsidiaries is the U.S. dollar. We have accounted for any adjustments resulting from foreign currency translations as an adjustment to “accumulated other comprehensive income” within the stockholders’ deficit section of the consolidated balance sheet. Based upon our current volume of activity in this country, foreign currency risk is considered minimal. However, in the future, we may conduct a larger percentage of our business in this currency or other foreign currencies that could have an adverse impact on our future results of operations.

BUSINESS

History And Corporate Information

Fusion was founded as a Delaware corporation in September 1997.

Overview

We seek to become a leading provider of VoIP and other Internet services to, from and within emerging markets in Asia, the Middle East, Africa, the Caribbean, and Latin America. With our lead product, VoIP, we provide a full suite of communications services to corporations, PTTs, other licensed carriers, ISPs, government entities, consumers and we intend to provide such services to cable operators. Our packet based network infrastructure includes the latest Softswitch technology. This technology allows us to deliver IP services around the world with quality and reliability.

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

• Capitalize upon the growth in VoIP, a market that Insight Research Corporation expects to grow from $13 billion in 2002 to nearly $197 billion by 2007 and expand our international penetration of VoIP applications to consumers and corporations.

• Establish our company as an “early mover” in emerging markets through our product suite, technology platform and relationships with our partners.

• Continue to expand the number of international partnerships in key emerging markets to facilitate the distribution and local support of our product line and leverage our existing international partnerships to sell our additional services in targeted markets.

• Expand our emerging market network connectivity by acquiring additional communications licenses through existing and new strategic relationships.

We target markets that we believe have: (i) barriers to entry, (ii) substantial growth prospects, (iii) an increasing number of corporations operating within them, and (iv) a substantial quantity of voice and data traffic between the developed world (e.g., the United States, United Kingdom) and other countries within our network. 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 45 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.

Growth Strategy

Strategy: Our strategy is to gain early entry in an emerging country and then market advanced communication services such as VoIP, private networks, Internet access, IP video conferencing, and other Internet services. In many cases, we will establish a foothold within an emerging market through a partnership with a local organization. We believe that working in conjunction with local partners enables us to offer global services with local support.

The details of our strategy include:

•

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 time to market advantages as their existing infrastructure, sales distribution channels, and technical support can be utilized, while simultaneously reducing capital needed to enter the market. Additionally, these partners typically provide last mile connectiv-

ity in their country required for the delivery of local Internet access and private networks. This last mile connectivity, which is the connection between the in-country telecommunications facility and the customer’s physical location, in combination with local support, expands the geographic coverage of our global service offering and helps differentiate us from our competitors.

We intend to work with our partners to enable them to distribute and support our products and services (either co-branded or private labeled). 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 our partners will work with us prior to the rollout of any new services, contributing market intelligence, to ensure a successful introduction of new products. This partnering approach allows the local infrastructure to progress to a more technologically advanced platform while positioning us to benefit from the rapid growth and reserves that these technologies enable.

•

Deploy IP infrastructure.

We deliver a broad array of IP based communication services, primarily VoIP, which require a lower capital investment than traditional strategies. This approach allows us to accomplish what we believe many of our partners in emerging markets are seeking a way to enhance existing in-country technology and service offerings at minimal cost. This allows the local infrastructure to progress to a more technologically advanced platform while positioning us to benefit from the rapid growth that these new technologies and under penetrated markets enable.

•

Establish Market Position in VoIP Business.

One of our key service offerings is VoIP, which allows us to offer Internet-based long distance services at competitive prices to any business, consumer or carrier 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. Additionally, 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 PTTs, and other licensed carriers, which facilitate higher quality transmission than the services offered by gray market operators, and (ii) competitive pricing. We believe that carriers seeking to access these gray markets will increasingly want to work with companies that have established relationships with PTTs and other licensed carriers, as opposed to quasi-legal gray market 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 PTT and other licensed carriers that tend to produce higher margin than our outbound voice services. We believe this inbound traffic from PTTs 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 that specific destination. 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.

• Support Partners and Services with Advanced Packet Switched, Low Cost, Flexible Network.

We employ an IP network that consists of Company-owned and partner-owned PoPs and usage based or leased transmission facilities. Our network has several key attributes, including: open standard compliance; distributed architecture; centralized management; a wide array of signaling support; and policy based routing. With just one network PoP, our partners have acces to all of the products and services that we offer, as well as to certain back office systems required to manage services being delivered.

We believe that this strategy allows us to control the network intelligence critical to providing transmission quality and high quality customer support. At the same time, we are not burdened by large capital requirements and high fixed network costs in a market that has seen dramatic price reductions. The majority of our network operating costs are variable; that is, directly proportional to usage and revenue.

• Target Enterprise, including Government Market Segment.

We intend to build upon our market position in the international VoIP business to market our managed private networks and other Internet-based services to multinational businesses. By utilizing our own direct sales force and local partner distribution channels, we are able to market our services to customers in the United States and abroad. Our engineering team works closely with both our sales team and customers to provide solutions to our clients. As part of our corporate service offerings, we provide a single point of contact, ensure active end-to-end management and guarantee service levels. As a result of our geographic coverage, we have been asked by several large communication carriers to potentially be their subcontractor for services in regions they do not otherwise cover.

We believe that the U.S. Federal Government provides an opportunity for us. By leveraging our relationships and experience in navigating international markets, we have been able to penetrate this sector. In 2003, we were approved by the U.S. Government as a prime contractor to provide services to the Department of Defense (“DoD”) and was awarded our first contract in this sector. Under this contract, we are providing a private network connecting two DoD facilities in the Persian Gulf. Although we are seeking to increase the amount of our government contracts, only 3% of our revenue is currently derived directly from them and arrangements whereby we act as a subcontractor on government contracts. Under one such arrangement, we provide Internet connectivity to 16 U.S. embassies and consulates in Asia and the Middle East, with another scheduled to be installed by the end of 2004. These contracts, however, often give the government the right to terminate at any time. Although we try to include liberal cancellation arrangements with our suppliers, we may make contractual commitments with third party vendors to fulfill portions of such contracts that do not contain similar termination provisions. In the event that the government terminates a contract that we have made third arrangements for we may have significant unrecouped costs.

•

Exploit Communication Patterns Among and Between Our Markets.

We look to provide connectivity to, from, in and between our emerging markets. We are seeing demand from our business customers for multi-country connectivity such as a U.S. corporation seeking connectivity to India, China and the Philippines from one provider. We recently began marketing this service. In addition, we are targeting connectivity between markets with significant traffic flows such as the traffic flows between India and multiple countries in the Middle East. In countries where we do not have facilities, we will work with other international communications providers to utilize their networks to deliver this service. In our VoIP business, we are seeing similar trends. We believe that traffic among emerging markets is less susceptible to price and margin erosion than traffic among developed countries.

Services

We have tailored our service offerings to meet the needs of our target customers requiring services to, from, in and between emerging markets.

•		VoIP: VoIP enables customers, typically for a lower cost than traditional telephony, to place voice calls anywhere in the world using their PC, IP phone or regular telephone 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 offered directly to corporations around the world, on a private label, co-branded or wholesale basis to ISPs, PTTs and cable operators who wish to market to corporations and consumers under their own brand name, or through our retail services company, Efonica. Efonica offers PC-to-Phone and IP Phone-to-Phone services to customers located in Asia, the Middle East and Africa, and is currently expanding into Latin America. Advanced services that will shortly be available to customers include voicemail, call waiting and call forwarding.
•		Additionally, we enter into VoIP interconnect agreements with PTTs or other carriers in our target markets. These agreements enable us to terminate traffic into a country and in some cases originate traffic from that country through the PTT or other carrier. We use capacity on these networks to carry our own retail traffic in addition to selling capacity to other carriers desiring voice termination to that specific destination. As we grow, we intend to use an increasing percentage of our capacity for higher margin, retail traffic.

.

• Managed private networks: We offer managed end-to-end networks that typically connect multinational corporations or government facilities in emerging markets with locations in other countries. We also market this service to software developers, call centers, and telemarketing facilities, all of which rely on high quality, reliable service. In markets where we do not have network facilities deployed, we utilize other carriers’ networks, allowing us to provide an integrated global network that can connect a customer to virtually anywhere in the world. We also offer services on a private label basis as a subcontractor for other communication carriers that are seeking network connectivity to countries that they do not otherwise service.

• Internet Access: We offer peering with multiple tier-one Internet backbone providers utilizing an intelligent routing capability. This ensures efficiency, speed and reliability. The tier-one providers we utilize own or control a national network that trades traffic with other national providers. This traffic trading is referred to as “peering.” A tier-one provider can carry its own Internet traffic across the country and hand it off at any one of the public or private hand-off locations known as “peering points,” metropolitan access points or national access points. In select locations such as India, we have established Internet PoPs that are then connected to our New York facility. This, in turn, provides interconnectivity with the Internet and peering with the top Internet backbone networks. In regions where we do not own network facilities, we utilize other carriers’ facilities. We also provide services on a private label basis as a subcontractor for other communication carriers that are seeking Internet access in countries that they do not otherwise service.

• Internet video conferencing: We offer an Internet-based video conferencing service that can be initiated instantly on a personal computer (similar to popular instant messaging services) and can handle from two to two hundred participants per conference, of which six can be visually displayed. The service can be installed in a matter of minutes and only requires a standard camera and headset to operate. We are marketing our desktop video conferencing service directly to multinational corporations seeking to enhance face-to-face communications without the costly inefficiencies of business travel, and to our international partners to distribute within their country.

• Co-location: 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.

Marketing

We deliver multi-product communications solutions to targeted market segments requiring quality, reliability, flexibility and scalability. VoIP services are offered on a private label or co-branded basis to PTTs, other licensed carriers, ISPs, cable companies and wireless operators. VoIP is also marketed to corporations, government agencies and consumers through direct sale, in-country partners or third party distribution. Private Network solutions, including international point to point private lines, IPVPN, IP-IPLs, ATM and Frame Relay are offered directly or though in-country partners and third party distribution to PTTs, other licensed carriers, ISPs, government agencies and corporations. Internet Access is marketed through direct and alternate channels to PTTs and other licensed carriers, ISPs, cable companies, wireless operations, corporations and government agencies. Our IP videoconferencing services, InterView, is marketed to small, medium and large corporate customers through PTTs and other licensed carriers, ISPs, in-countrty partners and other distribution channels on a private lable or re-sale basis. InterView is also offered on a direct sale basis to corporations and government agencies.

For the years ended December 31, 2003 and 2002, the Telco Group accounted for 13.7% and 13.8%, respectively of our total revenues and for the year ended December 31, 2001, Qwest Communication accounted for 16.0% of our total revenues.

We market our services via a variety of distribution channels.

• 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 focus 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.

•		*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, share revenue and/or profits with each other.

•		Joint Ventures – We enter into formal joint venture agreements with certain partners.


	•	Certain joint venture arrangements are done on a private label basis in which we typically provide the service and technical support and the partner is responsible for marketing and sales, first line customer support and billing and collections. The parties mutually agree on pricing and product development and share revenue and/or profits.

	•	Other joint ventures are based on an ownership model. We typically set up a legal entity that we control for purposes of introducing a set of products into a particular market or markets, either vertical and/or geographical with marketing, distribution, service delivery, technical and customer support, billing and collections are the responsibility of the entity.

Network Strategy

Our network strategy incorporates a packet switched platform capable of interfacing with IP protocols and Time Division Multiplexing (TDM) platforms. 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-Label Protocol Switching (MPLS) and Any Transport over MPLS.

The core of our network design is a packet-based switching system that accommodates VoIP and traditional voice, Internet, data and video services. 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 supports 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”, Nuera Orca equipment, and carrier class Cisco and Juniper routers to transport voice, data, video, and Internet traffic. This provides us with routing capabilities to further enhance services and performance available to our clients.

Key attributes of our soft switch include:

•		*Open standards compliance:* Our infrastructure interoperates with a wide range of third-party products, which gives us the ability to grow the network and expand service offerings with best of breed third-party elements. Additionally this ensures a cost efficient expansion path. There is no need to replace the entire switch once expansion opportunities have been exhausted as was required in the past.

•		*Distributed Architecture:* Call control and signaling are decoupled from the switching hardware which allows geographic distribution and enhanced reliability and redundancy.

•		*Centralized Management:* Web-based tools and reporting capabilities enable efficient management, including the troubleshooting and diagnostics of a global distributed network from a single location.

• Wide Array of Signaling Support: An ability to support a large number of signaling systems or protocols, providing an integrated platform for both traditional and advanced products and services, including, but not limited to DS-O, T-1, E-1, DS-3, STM-1/CC3/(C), SS7/ISUP, ISDN, PRI, SIP, H323, MGCP, G.711, G.723 and G.729.

• Policy Based Routing: An ability to create complex, multi-tiered routing policies based on an extensive set of static and dynamic parameters.

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 has 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.

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 architectures 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

We have created a standard concept for the deployment of a PoP in a remote region. This regional “PoP” will enable our full feature set to be offered and delivered from this remote location while the intelligence and management of the services are in our New York facility.

This modular approach allows us to respond and deploy our services rapidly.

Dynamics of the Global Communications Market

Voice over Internet Protocol (VoIP)

VoIP has emerged from an obscure technological term into a major communications driver. Until recently, the traditional world of voice communications consisted of millions of circuit connections established between two points by the use of physical wires or wireless systems and a vast number of switching systems throughout the world. These circuits remain connected for the duration of a telephone call. VoIP, however, uses the Internet Protocol to break up communications, including voice, into small “packets.” These packets travel across Internet systems without having a dedicated point-to-point connection, and are thus much more efficient in the use of network transmission facilities. VoIP dramatically reduces the wasted capacity that is inherent within circuit-switched networks. This substantially enhanced efficiency, reduced overall cost, and ease of deployment are driving carriers to implement VoIP. The following data points evidence this:

•		According to Gartner Inc., the market for consumer VoIP is projected to increase from $517 million in 2004 to $1.92 billion in 2005 and to $9.5 billion by 2008.
•		According to the Radicati Group’s July 2004 report, the number of corporate telephone lines that use VoIP is expected to grow from 4 percent in July 2004 to 44 percent by 2008.
•		According to the Radicati Group’s July 2004 report, corporate spending on VoIP is projected to rise from an expected $1 billion in 2004 to $5.5 billion by 2008. By 2008, installation should cost corporations only about $75 to $600 per line, down from the current $375 to $1,000 per line.

According to Telegeography 2004, VoIP providers carried only 150 million minutes of international telephone calls in 1998, less than 0.2% percent of the world’s international traffic. By 2002, cross-border VoIP traffic had grown to just under 19 billion minutes, about 11 percent of the world’s international traffic.

International VoIP carriers have achieved growth by carrying traffic on behalf of other long-distance service providers. Consequently, most end-users are likely unaware that many of their phone calls are traversing the Internet, rather than traditional long-distance networks.

According to Telegeography 2004, a combination of aging regulations and new technology enabled these and other start-up carriers to capture significant market share in only a few years.

International VoIP and PSTN Traffic Summary, 1998 – 2003

1998 1999 2000 2001 2002 2003 (est.) CAGR

VoIP Traffic (millions of minutes)
150

1,655

5,954

10,147

18,045

24,519

177%

PSTN Traffic (millions of minutes)
93,000

108,000

132,027

146,095

155,165

166,615

12%

VoIP Share of
International Traffic
0.2%

1.5%

4.3%

6.5%

10.4%

12.8%

From: TeleGeography 2004

Source: PriMetrica, Inc.

Private Networks and Virtual Private Networks (VPNs)

Private networks generally fall into two categories: leased line networks and virtual private networks (VPN). Leased line networks refer to point-to-point connectivity on satellite, fiber optic, or wireless facilities to interconnect various locations. These private networks are totally separate from the Internet or other networks, although some may permit interconnection with the Internet through stringent security methods such as firewalls. VPNs utilize shared network facilities such as the Internet, frame relay, ATM (Asynchronous Transfer Mode) or MPLS networks to carve out a secure portion of the network, thus making it a VPN. As carriers have become more technically adept, the use of leased lines has begun to decline. VPNs are more cost effective and can achieve similar levels of confidentiality.

According to Interactive Data Corporation (March 2004), carrier-based IP VPN growth is expected to outperform other data networking options, such as frame relay and ATM connectivity.

Revenue from worldwide VPN services was $18 billion last year and, driven by the quest for increased productivity and cost savings, is projected to reach over $30 billion in 2008. Demand for security services is also rising, with revenues growing from $3.1 billion in 2003 to $7.7 billion in 2008, according to Infonetics Research, August 2004.

Internet Access

Internet access services have rapidly moved from entertainment to a required tool for businesses and consumers alike. Although Internet connectivity has technically been available since the advent of the US Defense Advanced

Research Projects Agency (DARPA) network “ARPAnet” in the late 1960s, it did not begin to achieve widespread popularity and ubiquity until the mid-1990s. Since then, the Internet has changed the way people conduct business, entertain themselves, and communicate throughout the world. People can connect to the Internet in the following ways: using a modem and dialing into an Internet Service Provider (ISP hub), via a dedicated connection to the ISP such as a cable modem, Digital Subscriber Line (DSL), or leased circuit, or via a wireless connection.

The growth in number of Internet users between 2000 and 2004 and the percentage of global users in each region of the world is illustrated below:

As of September 30, 2004

      % of

Region % Growth Global Users

Middle East
227.8%

2.1%

  Latin America/Caribbean
209.5%

6.9%

Africa
186.6%

1.6%

Europe
124.0%

28.4%

Asia
125.6%

31.7%

North America
105.5%

27.3%

Oceana
107.2%

  1.9%

Source: www.internetworldstats.com

From a growth perspective, the greatest opportunities are represented internationally, especially from previously underserved markets.

•		The number of Internet users in Asia increased from 114 million as of December 2000 to 175 million in November 2002 (www.internetstats.com), and had been expected to rise to 188 million by 2004, according to Gartner Group Asia 2002. The actual number of users as of May 31, 2004 was 243.7 million users (www.internetstats.com). It is clear that these forecasts underestimated the actual demand.
•		The number of Internet users in Latin America was projected to reach 43.4 million by the end of 2003 and 60.6 million by the end of 2004, according to eMarketer, October 2002. As of May 2004, the number was estimated at 51.18 million (www.internetstats.com). In this instance, it is likely that the forecasts are on target, and perhaps slightly low.
•		The number of Internet users in the Middle East and Africa is expected to grow from approximately 13.9 million in November 2002 to approximately 34 million users in 2005 (www.internetstats.com). The estimated number of users as of May 2004 was 29 million (www.internetstats.com). We believe these forecasts appear to be accurate.

Video Conferencing

According to the Telecommunications Industry Association (February 2004), IP applications, revenues are also expected to grow at a rapid rate. IP revenues for audio conferencing, videoconferencing, Web conferencing, follow-me services (follow-me services permit incoming calls to a mobile device or Personal Data Assistant (PDA) to be routed to a service subscriber, giving them the ability to know the identity of the caller and to then decide whether to accept or defer the caller to voicemail), unified messaging and instant messaging totaled $1.5 billion in 2003, more than twice the $696 million of 2002. Revenues will increase to a projected $11.4 billion by 2007, a 66.5 percent compound annual growth rate.

There are a variety of video conferencing types available. These include full conference room video, requiring substantial bandwidth and significant investment in equipment, as well as free Internet-based services. The growth is likely to come from affordable, high quality integrated voice and video services that can be used with modest investment and with a reasonable amount of Internet bandwidth.

Regional Outlook

Deregulation

The deregulation of monopoly telecommunications and Internet environments in emerging markets has allowed carriers such as Fusion to deliver competitive and innovative IP communications services. Monopoly limitations on alternative international long distance carriers have historically constrained competition and provided little incentive or ability for competitors to build facilities in developing countries. Incumbent carriers in the country are suddenly having to compete in their markets by having to provide more Internet services and improved customer service. We believe deregulation and resultant competition from new entrants facilitate improved communications infrastructure, additional service offerings, lower prices, and increased demand. However, we also believe that to obtain the most profitable and enduring relationships, it is important to have an understanding of the sensitivities of the local PTTs, which have been the former monopoly carriers in their respective markets, and regulatory authorities in these countries. Accordingly, we seek to develop these relationships and gain expertise in these markets early in the deregulation process.

Emerging Market Dynamics

Growth of Multinational Businesses in Emerging Markets

The continued trend of multinational corporations to locate offices and factories in emerging markets is playing an increasingly important role in the economic development of these regions. Management believes that as the globalization of business increases, the need for high quality and cost effective data and voice IP services will grow. Many American and other developed country IT executives are believed by Management to be adjusting budgets to support international growth and reduce operating expenditures by deploying resources in developing countries in an attempt to improve customer service, upgrade Web-site performance, and enhance network security. At the same time, many countries, notably China, India, Pakistan, Philippines, Singapore, and Vietnam, are encouraging the development of IT and communications intensive industries to spur economic growth. Several emerging markets are focused on building themselves as centers for IT industries, such as software development, call centers and customer relationship management, where the relatively low cost but highly skilled labor force becomes extremely attractive to multinational corporations from the developed world.

Asia

According to BuddeCom, 2003 Information Highways in Asia, despite Asia’s rebound from the Economic Crisis of the late 1990s, the region has had to contend with the impact of a global economic slowdown. Through 2002 into 2003, the region’s telecommunications sector has continued to grow, but in a somewhat muted fashion. Despite this, the Internet has continued to develop, with spectacular growth in broadband access occurring in some of the developed Asian economies. According to BuddeCom, 2003 Information Highways in Asia, the giant telecommunications market in China has continued to grow in spectacular style and is expected to reach $US27 billion by 2006, or 20% of the total Asian market. Moreover, Asia had a total of over 870 million (fixed and mobile) telephone subscribers, according to BuddeCom, 2003 Information Highways in Asia.

According to Telecomasia.net, incumbent telecommunications carriers are experiencing the impact of five dynamics:

•		Fixed and, to a lesser extent, wireless markets are at saturation point
•		New technologies like IP and VoIP are eroding margins
•		Competition is increasing in scale and intensity
•		The lack of a strategy beyond broadband
•		The loss of wireline voice traffic to mobile operators.

Telecom Asia’s survey found likely areas of growth included broadband services. In addition to broadband are IP-based next-generation networks and DSL.

We believe that Asia represents an opportunity for us to work with incumbent as well as emerging competitive carriers to expand products, services, and pursue entrepreneurial opportunities that fit within our capabilities.

Middle East

In terms of communications development, the Middle East is one of the most diverse regions in the world. According to Telecommunications International 2 October 2003, fixed line teledensity ranges from almost 56% in Cyprus to just 2.7 percent in Yemen. The Israeli mobile market has reached the saturation point, with reported penetration of 99 percent. Despite variances among Middle Eastern markets, each is characterized by liberalization, except Iraq, where market regulation is secondary to rebuilding basic infrastructure after years of war and neglect.

Bahrain, Saudi Arabia and Lebanon have all passed new communications laws and have either established new independent regulatory bodies to oversee the development of the industry, or are in the process of doing so. The Syrian government has, to date, shown no inclination to open up the fixed line telecom sector to competition but in early 2003, the Ministry of Communications revealed plans for the creation of a new council to regulate and encourage investment in the telecom industry.

According to Telecommunications International 2 October 2003, the United Arab Emirates (34.2 percent teledensity) is reluctant to discuss liberalization, but is under pressure to introduce competition. The World Trade Organization (WTO) is interested in competition for Etisalat, the incumbent communications provider for the UAE. The private sector is anxious to see the government end the monopoly situation and create a competitive business environment.

Africa

Despite remarkable changes in Africa’s telecommunications market over the past few years, teledensities remain extremely low. According to Research and Markets ( http://www.researchandmarkets.com ) July 2004, with around 12% of the world’s population and less than 3% of the world’s telephone lines, Africa is a continent of substantial opportunity. Many governments are relinquishing their grip on telecommunications operators resulting in advancement in communications through the deployment of innovative technologies, which creates unprecedented growth. This trend is opening new frontiers and brings with it considerable possibilities for development and progress.

Many countries are undergoing communications reform, and foreign investment is being actively encouraged as privatization and liberalization are introduced. More than one-third of all state telephone companies (PTTs) have already privatized and several more are set to be privatized in the near future.

We believe that the convergence of fixed and mobile networks and services will continue to dominate the market with future licensees gaining combination licenses with the ability to operate both wired and wireless systems. The ability to offer wireless services should speed development of badly needed “last mile” services, such as broadband Internet access and VoIP.

According to Global Information, Inc. (2/2004), recent telecommunications sector reforms have had impressive results, especially in rolling out access to basic telecommunications services. However, the lack of telecommunications infrastructure is the most pressing economic issue currently holding back the continent’s development. Africa remains the least Internet connected continent in the world, both from a total bandwidth and Internet penetration perspective.

Africa’s data traffic is experiencing strong growth, according to Telecommunications in Asia 2004, Global Information, Inc., particularly in South Africa. Demand for value-added data services is driven by market forces and rarely as an initiative of service providers.

Another important development is the introduction of new entrants in the fixed-line market. SNO (Second National Operator) licenses have been issued to companies in Ghana, Nigeria, Tanzania, Seychelles, South Africa, Zimbabwe, and other countries are following this lead.

Caribbean

The Caribbean markets have gone through major transition over the past twenty-four months. The most significant changes have been instigated by the onset of deregulation of the Caribbean telecommunications industry, and the economic downturn in the U.S. after the September 11, 2001 terrorist attacks. According to Forrester Research, 2004, the Caribbean mainstay industries (tourism, hospitality, manufacturing and offshore finance) saw gross margins fall from the end of third quarter in 2001 through mid-second quarter 2002, with tourism experiencing the greatest decline. As a result many Caribbean governments began to seek economic diversification, and most turned to their technology and telecommunications sectors to make the shift. With the help of foreign regulatory agencies similar to the FCC, a number of Caribbean governments developed economic strategies that included the enacted legislative frameworks to regulate and ensure the security of e-business and e-commerce transactions; and some countries promoted significant tax exemptions to attract international service providers, and to raise additional revenue.

Unlike the initial stages of deregulation in the U.S., deregulations of the telecommunications industry in the Caribbean has proven to be an underlying stimulant for Caribbean economics. Forrester Research, 2004 predicts that telecommunications worldwide will grow from $901 billion in 2001, to $1.57 trillion by 2006. This represents a five-year compound annual growth rate of 11.7%. The Caribbean represents 4% of the growth.

Cable & Wireless (C&W), the incumbent operator in the Caribbean, still commands a significant portion of the telecommunications markets, approximately 95% of the PSTN market, and 48% of the Mobile market. With operations in more than 16 countries in the Caribbean, C&W has worked effectively to raise the barrier of entry into these markets by enforcing the establishment of costly interconnection fees for competitors. Although the opening of the Caribbean markets has allowed a number of telecom providers an opportunity to take advantage of the burgeoning voice traffic market, there is still little competition in the traditional PSTN and IP based voice services market across the Caribbean where C&W operates.

Latin America

Over the past few years, circumstances in Latin America have severely impacted communications growth. Consumer confidence is now returning to Latin America with communications spending on the rise. Not only have consumers and corporations begun signing up for value-added services, operators are once again making solid network investments. One of the areas expected to benefit the most from this renewed customer confidence is broadband, according to www.telecommagazine.com , Americas: Latin America, “Broadband and Wireless lead the way forward,” October 2003.

Broadband in Latin America, for the most part, means DSL, as indicated in an October 2003 Telecommagazine article. Throughout the region, ADSL services - in most cases provided by the incumbent providers - dominate, capturing 85 percent of broadband subscribers. Throughout Latin America, there were 685,000 cable modem subscribers in 2002, a number expected to grow to 805,000 by the end of 2003, and to 1.06 million by the end of 2004. Mexico, the largest cable modem market in Latin America, had only 141,000 cable modem subscribers in 2002, or 0.6 percent of households. By the end of 2003, that number was expected to grow to 218,000 subscribers, or one percent of households. Argentina, another cable modem stronghold, had about 110,000 cable modem subscribers by year-end 2002, compared to 55,000 residential DSL subscribers, according to the Yankee Group.

As a portion of overall communications, revenues from broadband remain very small. Broadband growth is high, but Latin America remains voice-centric and will likely continue to be so for the coming years as consumer based broadband connectivity increases as does the number of prospects for VoIP services. We are aggressively pursuing opportunities in this market.

Competition

The international communications 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 Voice over Internet Protocol (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 Net2Phone, Vonage, 8X8, Deltathree, Dialpad 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, Teleglobe International Holdings Ltd (which completed its merger with

IP-telephony pioneer ITXC in May 2004), 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 IP services.

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, have substantially greater financial, technical and marketing resources and larger networks.

We believe that the traditional distinctions between local, long distance, data transmission and Internet access markets are disappearing. We expect that new competitors, as well as gray market operators, are likely to join existing competitors in the communications industry, including the market for international VoIP, Internet and data services. While we believe that our strategy, relationships, partnerships and network are unique and that there is no one single carrier that provides our suite of service offerings aimed to serve all of our target markets, we do face significant pressures from various service providers throughout the world.

Most large-scale carriers have significant embedded legacy infrastructure. These investments create limits on how quickly they can migrate to new and more efficient systems like softswitch functionality. This in turn creates capital expenditure pressure on them and slows their ability to respond elegantly to rapidly changing market demands. Fusion is not burdened with these legacy limitations. We do not have a large number of physical installations with equipment that remains to be fully depreciated. Our equipment has not been surpassed in terms of functionality and flexibility by more modern offerings, and our network architecture provides us with agility into the future.

In the area of Internet conferencing, we compete with other Internet-based video or audio conferencing providers such as WebEx Communications, PlaceWare, Talkway Communications, and InterCall. We can be perceived as competitive with free services such as Yahoo video and Microsoft Netmeeting. Each of these competitors has their own strengths and weaknesses. Some are unable to do more than one-on-one conferencing or require use of free public servers and are therefore subject to varying levels of quality and usefulness. Others are designed solely for the corporate marketplace and require substantial up-front investment in servers and on-going management. We also expect that companies such as Microsoft and IBM will seek to integrate a video conferencing service directly into personal computers.

We compete with business-oriented Internet access providers, including AT&T, MCI, 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 our Company. 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.

Government Regulation

General. 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 the governments and their telecommunications agencies. At each of these levels, there are significant regulations imposed on the provision of telecommunications services in our business.

We cannot assure you 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 authori-

zations. If authority is not obtained or if our pricing, and/or terms or conditions of service, 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 costs.

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 (IP) format, transported over AT&T Internet backbone, and then converted back from IP format and delivered to the called party through the local exchange carrier (LEC) local business lines (not Feature Group D trunks), the service was a “telecommunications service” for which terminating access charges were due the LEC. 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 (PSTN), and the calls underwent no net protocol conversion and provided no enhanced functionality to the end user due to the provider’s use of IP 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)).

As of August 2004, VoIP services of all types are not regulated by the FCC, and, as such, are not subject to USF charges or other public policy regulation such as 911/E911, CALEA, etc.

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.

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 IP service providers could materially increase our costs and may limit or eliminate the competitive pricing we currently enjoy.

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:

1.		Fusion Telecommunications International
2.		FTI
3.		Diamond / Block Logo
4.		Diamond Logo

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

1.		O Efonica (logo)
2.		Efonica
3.		Fusion
4.		Fusion Tel
5.		Fusion Telecom

The telecommunications 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.

Employees

As of September 30, 2004, we had 59 employees in Fusion Telecommunications International, Inc., Efonica F-Z LLC had 13 employees and Estel Communications Pvt. Ltd. had approximately 60 employees. None of our employees is represented by a labor union. We consider our employee relations to be good.

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 September 30, 2004.

Location Lease expiration Purpose Approx. sq. ft Annual Rent

420 Lexington Avenue, Suite 518 January 2010 Lease of principal 8,100 $314,496 (1)

New York, New York 10170 executive offices

75 Broad Street March 2010 Lease of network 15,000 $507,600 (2)

New York, New York 10007 facilities

1475 W. Cypress Creek Road, April 2009 Lease of network 9,700 $111,734 (3)

Suite 204 facilities and office

Fort Lauderdale, Florida 33309 space

(1)
This lease is subject to increase to $330,624 for years 2006 to 2010.

(2) This lease is subject to gradual increase to $672,702 from years 2005 to 2010.

(3) This lease is subject to gradual increase to $130,712 from years 2005 to 2009.

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.

LEGAL PROCEEDINGS

On May 8, 2002, Donna Marie Furlong, a former employee, filed a complaint against us with the Executive Department, Division of Human Rights, New York Office, State of New York ( Donna Marie Furlong vs. Fusion Telecommunications International, Inc., Case No. IB-E-DS-02-1254784-D) seeking damages in an unspecified amount. This employee claims that she was discharged from her job in violation of Title VII and the New York State Human Rights Law. We are vigorously opposing these claims and have filed a position statement with the Department. We believe the claim to be without merit.

On April 15, 2003, World Access, Inc., a former customer of ours, brought an action against us for recovery of preferential transfers and other claims under the Bankruptcy Code in the United States Bankruptcy Court, Northern District of Illinois Eastern Division ( In Re: World Access, Inc., et al vs. Fusion Telecommunications International, Inc., Adv. Pro. No. 03 A 00851). The suit seeks damages in the amount of $334,877 for our alleged Avoidance of Preferential Transfers, Recovery of Transfers, Setoff, Recovery Setoff, Payment of Improperly Setoff Debt, Turnover of Property, and Damages for Overdue Debt & Turnover of Property. We filed a Proof of Claim with the Court in the amount of $85,475.78 for amounts that were due us at the time this customer filed bankruptcy. We plan to defend this suit vigorously and do not expect the outcome to have an adverse effect on our financial condition.

On May 28, 2003, Jack Grynberg, et al., an investor in one of our 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 us: 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, we filed with the Court our Motion to dismiss which was granted. The plaintiffs have filed an appeal of the motion which is pending.

In 1999, we guaranteed a real property lease on behalf of our joint venture, C&F Switching, LLC. The joint venture subsequently defaulted on the lease and on July 17, 2003, the landlord, NWT Partners, Ltd., brought an action in the Miami-Dade County Circuit Court, State of Florida. ( NWT Partners, Ltd. v. C&F Switching L.L.C. et al., Case No. 03-16654 CA 01 (6)). We are being sued for back rent, interest, courts costs and attorney fees in the amount in excess of $96,931.48. In addition, the landlord is seeking to accelerate the balance of the lease, which would result in us owing approximately $1,005,000 in additional rent. We believe that this dispute will be resolved amicably, but if we are unable to resolve the action, we can make no assurance that the outcome will not have an adverse effect on our financial condition. We have filed a counterclaim and have asserted several affirmative defenses including, among other things, plaintiff's failure to mitigate damages. The action is currently in the discovery phase and the plaintiff filed an amended motion to dismiss and/or strike defendants’ second amended counterclaim and incorporated motion for sanctions on October 28, 2004. No bearing with respect to the motion has been set to date.

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

MANAGEMENT

The following tables set forth information concerning our directors, executive officers, and other key members of senior management as of the date of this prospectus. Our directors are elected to serve for one-year terms at our annual meeting of stockholders.

Directors and executive officers:

Name Age Position

Marvin S. Rosen 64 Chief Executive Officer, Chairman of

the Board of Directors

Matthew D. Rosen 32 President and Chief Operating Officer

Joel H. Maloff 54 Executive Vice President & Chief

Technology Officer

Eric D. Ram 54 Executive Vice President

Barbara Hughes 51 Vice President of Finance

Jan Sarro 50 Vice President of Sales and Marketing

Philip D. Turits 71 Treasurer, Secretary and Director

Cesar A. Baez 49 Director

E. Alan Brumberger 64 Director

Julius Erving 54 Director

Evelyn Langlieb Greer 54 Director

Raymond E. Mabus 55 Director

Manuel D. Medina 52 Director

Paul C. O’Brien 65 Director

Kenneth I. Starr 55 Director

Michael J. Del Giudice 61 Director

Fred P. Hochberg 52 Director

Executive Officers and Senior Management

The following are our Executive Officers and Senior Management:

Marvin S. Rosen, co-founded the Company in 1997 and has served as our Chief Executive Officer since April 2000, the Chairman of our Board of Directors since November 2004, the Chairman of our Executive Committee since September 19, 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.

Matthew D. Rosen has served as our President and Chief Operating Officer since August 2003, 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. 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 also serves as Chairman of our joint venture, Efonica, and he is the son of our Chief Executive Officer, Marvin Rosen.

Joel H. Maloff, Ph.D., has served as our Executive Vice President and Chief Technology Officer since March 2000. Dr. Maloff first became involved with the Internet in 1986 and has written four books and numerous articles on the Internet, business applications for the Internet, network security, and international Internet development. He has also served as advisor to former Senator Al Gore and Senator John Kyl on Internet-related issues. From September 1998 to September 1999 he served as Chief Operating Officer of Internet Operations Center. Acting as an advisor and “turn-around” expert for the Board of Directors, from May 1996 to May 1997, he served as Chief Technology Officer for VASCO Data Security, and from June 1997 to August 1998, he served as General Manager of CAI Wireless Internet. From November 1990 to December 1993, he served as Vice President-Client Services for Advanced Network & Services, which was acquired by America Online. From March 1989 to November 1990, Dr. Maloff served as the Executive Director of CICNet (the Big Ten universities research network).

Eric D. Ram, has served as our Executive Vice President - International since August 1999. Mr. Ram served as Chairman and Managing Director of The World Group of Companies, a group engaged in the development and management of communications businesses worldwide, which he founded in May 1995. From 1988 through 1995, Mr. Ram was an investor in international business ventures. From June 1986 to December 1988, he served as a Senior Vice President of US WEST Financial Services, Inc., the finance subsidiary of the Regional Bell Operating Company in the United States, which is now a subsidiary of Qwest Communications International Inc. Mr. Ram has engaged in business activities in more than 75 countries worldwide, including both developed and emerging countries in Africa, Asia, Australia, Europe and Latin America. In addition to his business background, Mr. Ram is a lawyer having graduated first in his class and Magna Cum Laude from law school. He also is a Certified Public Accountant.

Barbara Hughes has served as our Vice President of Finance since June of 2003, 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 positions in Finance at Federal Express Corporation from 1980 to 1996, including Regional Finance Manager for Central Region Operations in the U.S. Domestic Operations and later as Finance Director of the Latin American Division.

Jan Sarro has served as the 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.

Philip D. Turits has served as a director since September 1997 and as our Secretary since October 1997, Treasurer since March 1998, co-founded the Company in September 1997 and served as 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.

BOARD OF DIRECTORS

Cesar A. Baez has served as a director since March 1998. Since January 2004, Mr. Baez has been serving as the head of alternative investments for the public employees retirement fund for the State of New Jersey, a $72 billion pension fund. From September 2001 to November 2003, Mr. Baez was a Partner of Momentum Media Capital. From April 1995 to July 2001, Mr. Baez was a Principal at Hicks, Muse, Tate & Furst Incorporated, an international private investment firm and responsible for much of the firm’s investment activities in Latin America. January 1994 to March 1995, he was President and Chief Executive Officer of Bancomer Securities International, the United States investment banking subsidiary of Grupo Financiero Bancomer, Mexico’s largest financial group. From September 1991 to January 1994, Mr. Baez was in charge of Smith Barney’s Investment Banking Group for Latin America and from February 1990 to August 1991, he was in charge of the Latin American Investment Banking Group of Nomura Securities International. Mr. Baez currently serves on the boards of Pan American Sports Partners Company, Pan American Sports Holdings Ltd., International Outdoor Advertising Holdings Company, Venezuela Cable Service Holdings Ltd., Hicks, Muse, Tate & Furst – LA Argentina Cable Company (Teledigital), and Seed Cayman L.L.C.

E. Alan 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 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 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 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 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.

Manuel D. Medina has served as a director since December 1998. Since 1982, Mr. Medina has served as the Chairman of the Board of Directors and Chief Executive Officer of Terremark Worldwide, Inc., a publicly held operator of Internet exchanges and provider of Internet infrastructure and managed services around the world. In addition, Mr. Medina is a managing partner of Communications Investors Group. Before founding Terramark, Mr. Medina worked with PricewaterhouseCoopers LLP.

Paul C. 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).

Kenneth I. Starr has served as a director since March 1998. Since its founding in 1989, Mr. Starr has served as the Chairman and Chief Executive Officer of Starr & Company, a New York City-based accounting and business management firm. From April, 2000 to May, 2003, Mr. Starr served as a member of the board of directors of Terremark Worldwide, Inc.

Michael J. Del Giudice 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. Michael J. Del Giudice also serves as Chairman and Chief Executive Officer of Rockland Capital Energy Investments LLC, founded in April 2003. Mr. Del Giudice 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. Del Giudice was a General Partner and Managing Director at Lazard Frères & Co. LLC from 1985 to 1995. From 1983 to 1985, Mr. Del Giudice 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 has served as a director since November 2004. In 2004, he became Dean of the Robert J. Milano Graduate School of Management and Urban Policy of New School University and chief administrator of the graduate division. From 2001-2002, he was Senior Advisor to Mario Cuomo during his campaign for Governor of New York and has been a speaker on National Public Radio. From May 1998 to January 2001, Mr. Hochberg served as Deputy then Acting Administrator of the Small Business Administration, an agency elevated to Cabinet rank by President Clinton. Additionally, Mr. Hochberg served on the President Clinton’s Management Council. From 1994 to 1998, he was founder and President of Heyday Company, a private investment company managing real estate, stock market investment and venture capital projects. From 1975 to 1993, Mr. Hochberg served as president and chief operating officer of the Lillian Vernon Corporation, a publicly traded direct marketing corporation. Mr. Hochberg has served on numerous business and civic boards including the Democratic National Committee, the Young Presidents’ Organization, and as co-chair of the Human Rights Campaign. Mr. Hochberg is currently a trustee of New School University, The Citizens Budget Commission, FINCA, Lillian Vernon International House at New York University and the Wolfsonian Museum in Miami Beach, Florida.

ADVISORY BOARD

We have the benefit of an advisory board which provides us advice and general assistance concerning the business of the company. The advisory board may be compensated for the business they generate for the company and may be eligible to participate in the company’s stock option plan. Our advisory board members include:

John H. Sununu Mr. Sununu serves as Chairman. He is currently the President of JHS Associates, Ltd. and was formerly a partner in Trinity International Partners, a private financial firm. From 1989 through 1992, Governor Sununu served President Bush as Chief of Staff and as Counselor to the President. Prior to that, Governor Sununu served three consecutive terms as Governor of New Hampshire. Governor Sununu also serves on the Board of Directors of Kinark Corporation.

Patrick A. Bello Mr. Bello is the co-founder, President and CEO of Belldon Development, LLC, an oceanfront real estate development company. Prior to founding Belldon, Mr. Bello was co-founder, President and CEO of Topline Group, LLP, a professional services company. From February, 1998 to September 1999, Mr. Bello served as President and CEO of Fusion Telecommunications International, Inc. Mr. Bello has also provided consulting services to other telecommunications companies in both the United States and the Caribbean. He co-founded a telecommunications company that was sold to GE Capital Communications Services and then served as President and COO of the combined entity. Mr. Bello has also started companies in the systems integration field, one of which was sold to a NYSE listed company.

Alan M. Braverman Mr. Braverman is an executive advisor and merchant banker. He has been an Institutional Investor and Wall Street Journal ranked analyst and Managing Director in the Technology, Media and Telecommunications sectors for several investment banks, as well a Managing Director for US Trust where he was responsible for private equity investments in the communications industry. Previously, he served as President at NBC Internet, majority owned and later acquired by General Electric. Prior to that, Mr. Braverman was also a senior manager at US West (Qwest) where he founded and ran the company’s first Internet business and launched its Russian cellular telephone company.

Jack Rosen Mr. Rosen is the chief executive of several commercial and residential real estate firms. His business interests include investments in healthcare, cosmetics and telecommunications. Mr. Rosen is Chairman of the American Jewish Congress. He is very active in government and political affairs. Mr. Rosen has also served on numerous presidential commissions and delegations and has personal relationships with the leaders of numerous countries throughout the world. Jack Rosen is not related to Matthew Rosen or Marvin Rosen.

Joseph R. Wright, Jr. is President and Chief Executive Officer of PanAmSat, Inc., one of the largest providers of satellite/fiber communications services around the globe. Prior to becoming Chief Executive Officer in 2001, he was Chairman of GRC Intl., Inc., a public company that provided advanced IT technologies to government and commercial customers, and was sold to AT&T in 2000. He was also Co-Chairman of Baker & Taylor Holdings, Inc., an international book/video/software distribution company. From 1989-1994, he was Executive Vice President and Vice Chairman of W. R. Grace Company, a global chemicals and material company. In the 1980’s, he served in the U.S. Government under President Reagan as Deputy Secretary of Commerce, and then as Deputy Director and Director of the Office of Management and Budget in the Executive Office of the President and a member of the Cabinet. Prior to his time in Washington, he was President of two Citibank subsidiaries and was a partner of Booz, Allen and Hamilton. Mr. Wright currently serves on the Board of Advisors/Directors of AT&T Government Solutions, Titan Corporation, Proxim, Barington Capital, Terremark Worldwide, and Verso Technologies. He is a member of the Federal Communication Commission’s Network Reliability and Interoperability Council as well as the Media Security and Reliability Council, and was on former President Bush’s Export Council, and the current President Bush’s Commission on the U.S. Postal Service Reform. He is a member of the Council on Foreign Relations, Council for Excellence in Government, Chief Executives Organization, Committee for a Responsible Federal Budget and the New York Economic Club.

BOARD COMMITTEES

Audit Committee. Our audit committee’s main function will be to oversee our accounting and financial reporting processes, internal systems of control, independent auditor relationships and the audits of our financial statements. 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 auditors and the adequacy of our internal accounting controls;

• reviewing analyses prepared by our management and independent auditors concerning significant financial reporting issues and judgments made in connection with the preparation of our financial statements;

• reviewing the independence of the independent auditors;

• reviewing our auditing and accounting principles and practices with the independent auditors and reviewing major changes to our auditing and accounting principles and practices as suggested by the independent auditor or our management;

• selecting and recommending the appointment of the independent auditor 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 auditors, including the range of audit and nonaudit fees.

The members of our audit committee are Paul C. O’Brien, Chairman; Evelyn Langlieb Greer, Raymond E. Mabus and Kenneth I. Starr, each of whom is a non-employee member of our board of directors. Kenneth I. Starr 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 AMEX. We intend to comply with future audit committee requirements as they become applicable to us.

Compensation and Nominating Committee. Our compensation and nominating committee’s main function will be (i) to review and recommend to our board compensation and equity plans, policies and programs and approve executive officer compensation, and (ii) to review and recommend to our board the nominees for election as directors of the company and to review related Board development issues including succession planning and evalualtion. The members of our compensation and nominating committee are Cesar A. Baez, E. Alan Brumberger and Manuel D. Medina, each of whom is a non-employee member of our board of directors. Our board has determined that each of the directors serving on our compensation and nominating committee is independent within the existing standards of AMEX.

Strategic and Investment Banking Committee. The members of our strategic and investment banking committee are E. Alan Brumberger, Chairman; Cesar A. Baez, Manuel D. Medina, Marvin S. Rosen, Kenneth I. Starr and Phillip 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.

Director Compensation

We have granted to each of our directors options to purchase 21,429 shares of our class A common stock, under our 1998 stock option plan. These options will have an exercise price per share of no less than the higher of the aggregate offering price of one share and warrant or market price of stock of a share of our common stock on the date of grant. These options will vest in four equal installments over a three-year period commencing on the date of grant. We also reimburse our directors for out-of-pocket expenses associated with their attendance at board of directors’ meetings.

Code of Ethics

We have adopted a Code of Ethics to apply to our directors, officers and employees. This code is intended to promote ethical conduct and compliance with laws and regulations, to provide guidance with respect to the handling of ethical issues, to implement mechanisms to report unethical conduct, to foster a culture of honesty and accountability, to deter wrongdoing and to ensure fair and accurate financial reporting.

Limitations on Liability and Indemnification Matters

We are a Delaware corporation and are governed by the Delaware General Corporation Law. Delaware law authorizes Delaware corporations to indemnify any person who was or is a party to any proceeding other than an action by, or in the right of, the corporation, by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation. The indemnity authorized by Delaware law also applies to any person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other entity. Indemnification applies against liability incurred in connection with an indemnifiable proceeding, including any appeal, if the person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation. To be eligible for indemnity with respect to any criminal action or proceeding, the person must have had no reasonable cause to believe his or her conduct was unlawful.

In the case of an action by or on behalf of a corporation, indemnification may not be made if the person seeking indemnification is found liable, unless the court in which the action was brought determines such person is fairly and reasonably entitled to indemnification.

The indemnification provisions of Delaware law require indemnification of a director, officer, employee or agent who has been successful in defending any action, suit or proceeding to which he or she was a party by reason of the corporation. The indemnity covers expenses actually and reasonably incurred in defending the action.

The indemnification authorized under Delaware law is not exclusive and is in addition to any other rights granted to officers and directors under the certificate of incorporation or bylaws of the corporation or any agreement between officers and directors and the corporation.

Our certificate of incorporation provides for the elimination, to the fullest extent permissible under Delaware law, of the liability of our directors to us for monetary damages. This limitation of liability does not affect the availability of equitable remedies such as injunctive relief. Our bylaws also provide that we shall indemnify our directors and officers against certain liabilities that may arise by reason of their status or service as a director or as an officer, other than liabilities arising from certain specified misconduct. We are required to advance all expenses incurred as a result of any proceeding against our directors for which they could be indemnified, including in circumstances in which indemnification is otherwise discretionary under Delaware law.

Currently, we are not aware of any pending litigation or proceeding involving a director, officer, employee or other agent of ours in which indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of ours based on the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy and is, therefore, unenforceable.

Summary Compensation Table

Long-Term

Annual Compensation Compensation Awards

All Other

Bonus Securities Underlying Compen-

Name and Principal Position Year Salary ($) ($) Option/SAR’s sation ($)

Marvin S. Rosen, Chief Executive Officer 2003 0 0 7,143 0

2002 0 0 0 0

2001 0 0 0 0

Matthew D. Rosen, President and 2003 170,000 0 0 0

      Chief Operating Officer 2002 170,000 0 85,715 0

2001 170,000 0 0 0

Joel H. Maloff, Executive Vice President 2003 175,000 0 0 0

      & Chief Technology Officer 2002 175,000 0 0 0

2001 175,000 0 0 0

Eric D. Ram, Executive Vice President 2003 175,000 0 0 0

2002 175,000 0 0 0

2001 175,000 0 0 0

Jan Sarro, Vice President of Sales 2003 135,000 0 0 0

      and Marketing 2002 135,000 0 35,715 0

Mr. Marvin Rosen has been reimbursed for certain expenses, including approximately $2,000 per month for a portion of the monthly rent for his apartment in Fort Lauderdale, Florida, which is used by certain of our executives in lieu of such executives having to incur hotel expenses.

We have entered into an employment agreement with Mr. Matthew Rosen, our President and Chief Operating Officer. This agreement is effective on November 11, 2004 and expires on January 31, 2007, 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 $250,000, 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 addition, he will be entitled to a bonus of $25,000 upon the successful completion of an initial public offering. The agreement also provides for a one year non-compete provision.

Option Grants in 2003

We did not grant any options to acquire common stock to our named executive officers during fiscal 2003. However, in connection with a loan made by Fusera, LLC, we granted certain warrants to all of the members. As two of the members, we granted Marvin S. Rosen and Philip D. Turits each 7,143 warrants to purchase our class A common stock at a price equal to $2.97 per share which expire on July 1, 2005. The per share value of these warrants was $0.11 on the date of grant using the Black Scholes option pricing model. Input variables used in the model included no expected dividend yield, an average risk free interest rate of 1.77% and an estimated life of 2 years. Because the company was non-public on the date of grant, no assumption as to the volatility of the stock price was made. No other warrants were granted to any executive officer.

Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year End Option/SAR Values

The following table sets forth the information with respect to the named executive officers set forth in the Summary Compensation Table concerning the exercise of options during fiscal year 2003, the number of securities underlying company-granted options as of December 31, 2003 and the year-end value of all unexercised in-the-money options held by such individuals.

Numbers of Securities Underlying

Shares Value Unexercised Options/SARs Value of Unexercised In The Money

Acquired on Realized At Fiscal Year End Options/SARs at Fiscal Year End ($)

Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable

Marvin S. Rosen 0 0 7,143/0 0/0

Matthew D. Rosen 0 0 50,358/73,929 0/0

Eric D. Ram 0 0 96,429/0 0/0

Joel H. Maloff 0 0 48,215/16,072 0/0

Jan Sarro 0 0 8,929/26,786 0/0

Stock Option Plan

Our Board of Directors adopted the 1998 Stock Option Plan in May 1998, re-approved the option plan in November 1999, and in February 2000, our stockholders approved the option plan. Currently 2,680,857 shares of our class A common stock have been reserved for issuance under the option plan. As of the date of this prospectus, options to purchase an aggregate of 3,365,122 shares have been granted (88,857 of these options have been exercised and 1,615,493 have been cancelled prior to the date of this Prospectus) under the option plan. Accordingly, an aggregate of 1,660,772 options are currently outstanding.

The purposes of the option 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 our 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 option plan. Consultants and advisors to Fusion are eligible to be granted awards under the option plan if their services are of a continuing nature or otherwise contribute to our long-term success and growth.

The option 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 option plan, and its determination, interpretation, and construction of any provision of the option 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.

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 (i) have an exercise price that is less than 100% of the fair market value of the common stock on the date of the grant, (ii) be exercisable more than 10 years after the date such incentive stock option is granted, or (iii) be granted more than 10 years after the option plan is adopted by the Board.

Most options held by employees vest over four years. Options held by consultants and non-employee directors can vest immediately in some cases. In certain cases, we have agreed to extend the duration of options granted to non-employee directors. (In April 2002, the board of directors reduced the exercise price for all options to current employees with exercise prices above $8.75 per share to $8.75 per share and the vesting period from five years to four years.)

In July 2004, the Company’s stock option committee approved the issuance of 446,057 options to employees who had been previously granted stock options. Each employee would receive new options equal to 50% of their existing options priced at $3.15 per share and 50% at $4.38 per share, both with a four year vesting period and furthermore would receive credit for the vesting time on previously issued options, and the original options will be cancelled if not exer

cised within six months and one day of the issuance of the new options. In addition, during July 2004, the Company’s stock option committee approved the issuance of 667,686 options to employees, consultants and Board members at a price of $4.38 per share.

We increased the amount of shares issuable under the option plan to an amount equal to 13% of the shares outstanding immediately prior to this offering. We have agreed with the representative of the underwriters that we will not increase the number of shares subject to the Option Plan or adopt any other stock award plan for two years after the date of this prospectus. The options presently held by each option holder who were issued new options will be cancelled or expire 6 months and one (1) day from July 14, 2004. The vesting schedule varies by individual depending on the number of years employed with us.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Officer and Director Loans to Company

Over the last five years, several of our senior officers and directors have made loans to us and our joint ventures to fund their operations. These loans have taken the form of demand notes, term notes and convertible notes. The interest rate on these notes has ranged from the prime rate to 15%. All current balances below are as of September 30, 2004.

Since April 1999, Marvin Rosen, our Chairman of the Board, has loaned us a total of $2,618,045. Of the aggregate amount loaned to us, $564,604 has been repaid, $901,000 has been converted into common stock at a conversion price of $2.28 per share, $100,000 was converted into shares of series A preferred stock at a conversion price of $10 per share, which was subsequently converted into 28,572 shares of common stock at a conversion price of $3.50 per share, and $300,000 was converted into shares of series C preferred stock at a conversion price of $90 per share. Currently, Mr. Rosen has total notes outstanding of $752,441 with interest calculated at 4.75% on all but one convertible subordinated note, which is for $125,000. That convertible note for $125,000 bears interest at an annual rate of 9.25% (was 7.25% prior to April 2004). As of September 30, 2004, the demand, promissory, and convertible notes have accrued unpaid interest in the amount of $312,520. Our indebtedness to Mr. Rosen will be repaid out of the proceeds of this offering. In April 2003, Mr. Rosen pledged 34,286 shares of his common stock as collateral for the performance of a settlement agreement between us and Compania De Telecommunications El Salvador S.A., D.E.C.V. We currently owe Compania De Telecommunications approximately $66,000 under the terms of the settlement agreement, which we expect to pay in full by February 2005.

Since April 1999, Philip Turits, our Treasurer, has loaned us a total of $4,181,449. Of the aggregate amount loaned to us, $779,604 has been repaid, $2,499,563 has been converted into common stock at a conversion price of $2.28 per share, $165,000 has been converted into series A preferred stock at a conversion price of $10 per share and subsequently converted into common stock at $8.75 per share, and $300,000 was converted into shares of series C preferred stock at a conversion price of $90 per share. Currently, Mr. Turits has total notes outstanding of $437,282. The weighted average interest rate of these demand notes is currently an interest rate of 4.75%, except for one $125,000 convertible note, which has an interest rate of 9.25% (was 7.25% prior to April 2004). As of September 30, 2004, these demand, promissory, and convertible notes had accrued unpaid interest of $124,490. Our indebtedness to Mr. Turits will be repaid out of the proceeds of this offering.

On January 25, 2001, a trust controlled by Evelyn Langlieb Greer, loaned us $1,000,000. This loan was due on July 15, 2001 and bears interest at the rate of 13% per annum. In addition, the Trust received 85,715 warrants to purchase our common stock in connection with this and other loans. As of September 30, 2004, this loan had accrued unpaid interest in the amount of $119,167. In November 2004, all principal and interest owing to the Trust was repaid. In addition, Ms. Greer personally loaned our Pakistan joint venture $250,000 which bears interest at the rate of 15% per annum. In January 2004, $148,000 of this note was converted into 1,644 shares of series C convertible Preferred stock at a conversion price of $90 per share. This loan is due on demand. As of September 30, 2004, this loan had accrued unpaid interest in the amount of $59,688. Our indebtedness to Ms. Greer will be repaid out of the proceeds of this offering.

On May 22, 2001, World Capital Corporation (“WCC”), of which Mr. Eric Ram, our Executive Vice President, International, is a managing director and principal shareholder loaned us $400,000 for use in meeting our funding obli-

gations in Estel. The loan was due on February 16, 2002 and accrues interest at 12% per annum. In December 2003, World Capital was paid $100,000 towards repayment of this loan and converted the remaining principal into 1,111 shares of the series C preferred stock at a conversion price of $90 per share.

In July 2002, Patrick Bello loaned our Pakistan joint venture $25,000. This loan, which was payable on demand, was converted into 277 shares of series C preferred stock at $90 per share. As security for repayment of the loans to the Pakistan joint venture, we granted the lenders a second priority lien on all of our equipment that was then owned. We also granted the lenders a lien on our receivables subordinate to other existing liens on our receivables.

From August through December, 2002, and again in April, 2003, Lisa Ornburg Turits, wife of Philip Turits, loaned us an aggregate of $265,000. Of these loans, $175,000 was secured by a portion of our Letter of Credit associated with the leasehold of our premises located at 75 Broad Street and the remainder, are demand loans. Of these notes, $53,897 has been repaid, and $9,313 was converted to a new note, transferred to Philip Turits and converted into 103 shares of series C preferred stock at $90 per share. In addition, Michael Turits, son of Philip Turits, loaned the company $80,000 in April of 2001. The loan was due on demand and bears interest at the rate of 12% per annum. In December 2001, Michael Turits converted $40,000 into 4,000 shares of series A Preferred stock at a conversion price of $10 per share and subsequently converted into 4,572 shares of common stock at $8.75 per share. In February 2003, $10,000 of that loan was repaid. In aggregate, the notes of Michael Turits had accrued interest of $17,510, and Lisa Turits had accrued interest of $799 as of September 30, 2004. The principal and interest balance of these loans that aggregated $250,399 as of September 30, 2004, will be repaid out of the proceeds of this offering.

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.

In January and February 2003, Mr. Sununu loaned us $25,000 and Patrick Bello, a member of our Advisory Board, loaned us $50,000 to fund working capital for our Efonica joint venture. This investment was structured in the form of 7 ¹ / _⁴ % Convertible Notes which was expected to be paid back to these investors over 24 months from distributions from Efonica. In addition, these lenders were to receive a portion of our profits in Efonica. In February 2004, Mr. Sununu converted his entire loan to series C convertible preferred stock at a conversion price of $90 per share. In January 2004, Mr. Bello converted $25,000 of his loan to series C convertible preferred stock at $90 per share and in September 2004 converted the remaining $25,000 into a new note due the earlier of the closing of the offering or September 1, 2005, which bears interest at 4.5% and eliminated any right to participate in any profits of Efonica.

During the fourth quarter of 2002, Evelyn Greer loaned us $400,000, Patrick Bello loaned us $100,000 and Philip Turits loaned us $100,000 in connection with the development of an opportunity to provide VoIP services in Cambodia. These funds were intended to be used for license deposit fees and working capital for the Cambodian venture. These funds were held in an escrow account and have been repaid except for $10,000 from Patrick Bello which was converted to 111 shares of series C preferred stock at $90 per share.

In May 2003, we were awarded a subcontractor role to provide IP services for embassies and consulates of the U.S. Department of State and are providing service to 16 U.S. embassies and consulates in Asia and the Middle East with another one scheduled to be installed. Terremark Worldwide, Inc., is serving as the primary contractor. Our Chief Executive Officer, Marvin Rosen is a director of Terremark. Our Chairman, Joel Schleicher and Kenneth Starr, one of our directors, formerly served on Terremark’s board. Manuel Medina, Terremark’s Chairman and Chief Executive Officer, is one of our directors.

In July 2003, Marvin Rosen, Philip Turits and John Sununu loaned us an aggregate of $100,000 to purchase certain equipment and resolve a dispute with an equipment vendor. In exchange for this loan, they were issued a promissory note which bears interest at the rate of 8% per annum with monthly payments for 21 months followed by a balloon

payment due in June of 2005. Messrs. Rosen, Turits and Sununu were part of a group which lent us an aggregate of $300,000. The group has a security interest in the equipment.

During July 2002, an entity controlled by Jose Vitienes Colubi, a member of our board, loaned our Pakistan joint venture $20,000. This loan was due on demand and provided for interest at the rate of 10% per annum. This loan, including interest, was subsequently converted into 9,242 shares of our common stock at a conversion rate of $2.28 per share.

PRINCIPAL STOCKHOLDERS

The following table presents information regarding the beneficial ownership of both classes of our common stock, treated as one, as of September 30, 2004 and as adjusted to reflect the sale of the new common stock in this offering:

• each person who beneficially owns more than 5% of both classes of our common stock;

• each of our directors and named executive officers; 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.

Number of Shares

Beneficially Percentage of outstanding shares to be owned

Name** Owned Before the offering After the offering

Cesar A. Baez 29,908 * *

E. Alan Brumberger(1) 237,524 1.1% 1.0%

Evelyn L. Greer(2) 203,086 * *

Joel H. Maloff(3) 71,143 * *

Manuel D. Medina(4) 469,303 2.2% 1.9%

Paul C. O’Brien(5) 65,715 * *

Eric D. Ram(6) 96,429 * *

Marvin S. Rosen(7) 2,251,188 10.4% 9.0%

Matthew D. Rosen(8) 138,000 * *

Kenneth I. Starr(9) 194,858 * *

Philip D. Turits(10) 1,940,388 9.0% 7.8%

Sandy Beach Investments 1,430,299 6.6% 5.7%

Executive Officers & Directors as a
group (11 persons) 5,697,565 27.6% 23.9%

* less than 1%

** Unless otherwise indicated (i) all addresses are c/o Fusion Telecommunications International, Inc. 420 Lexington Avenue, Suite 518 New York, NY 10170, and (ii) all persons own class A common stock.

(1) Includes (i) 10,715 shares of common stock held by trusts for which his wife serves as trustee; and (ii) 8,572 shares of common stock issuable upon conversion of 300 shares of series C preferred stock.

(2) Includes (i) 70,400 of common stock held by a trust for which she serves as trustee; (ii) 46,972 shares of common stock held by same trust issuable upon conversion of 1,644 shares of series C preferred stock; and (iii) presently exercisable warrants to purchase 85,715 shares of stock.

(3) Includes 64,286 shares of common stock issuable upon exercise of presently exerciseable options, which expire in January 2005. Does not include 71,429 shares of common stock issuable upon the exercise of options that are not exercisable in the next 60 days.

(4) Represents 469,303 shares of common stock owned by Communications Investors Group, a partnership controlled by Mr. Medina.

(5) Includes 21,429 shares of common stock issuable upon exercise of presently exerciseable options.

(6) Includes 96,429 shares of common stock issuable upon exercise of presently exerciseable options, which expire in January 2005. Does not include 96,429 shares of common stock issuable upon the exercise of options that are not exercisable in the next 60 days. Does not include 178,572 options which Marvin Rosen granted Mr. Ram and does not include 42,857 options Philip Turits has granted Mr. Ram.

(7) Includes (i) 6,701 shares of common stock issuable upon conversion of 9 1 / 4 % Convertible Notes (interest rate was 7 1 / 4 % prior to April 2004), which are convertible at the option of the holder at $18.66 per share; (ii) 95,229 shares of common stock issuable upon conversion of 3,333 shares of series C preferred stock; and (iii) 7,143 shares of common stock issuable upon exercise of a presently exercisable warrant. Mr. Rosen has granted certain individuals options to purchase an aggregate of 392,857 shares of the common stock.

(8) Includes 81,429 shares of common stock issuable upon exercise of presently exerciseable underlying immediately exercisable options. Does not include 385,714 shares of common stock issuable upon the exercise of options that are not exercisable in the next 60 days, which expire in January 2005. Does not include a 37,143 stock option, which Philip Turits granted to Matthew Rosen.

(9) Includes (i) 186,286 shares of common stock held by his wife; and (ii) 8,572 shares of common stock issuable upon conversion of 300 shares of series C preferred stock held by his wife.

(10) Includes (i) 257,143 shares of common stock held by Sagaponack Group, L.P., of which Mr. Turits serves as general partner; (ii) 6,701 shares of common stock underlying 9 1 / 4 % Convertible Notes (interest rate was 7 1 / 4 % prior to April 2004), which are convertible at the option of the holder assuming such at $18.66 per share; (iii) 10,715 shares of common stock held by a trust for which he serves as trustee; (iv) 95,229 shares of common stock issuable upon conversion of 3,333 shares of series C preferred stock; and (v) 7,143 shares of common stock issuable upon exercise of presently exercisable warrants and (vi) 4,286 shares of common stock held by his wife. Mr. Turits has granted certain individuals options to purchase an aggregate of 157,143 shares of his common stock.

DESCRIPTION OF SECURITIES

Our authorized capital stock is 136,000,000 shares, consisting of 105,000,000 shares of common stock, $.01 par value; 21,000,000 shares of class A common stock, $.01 par value and; 10,000,000 shares of preferred stock, $.01 par value, of which 110,000 have been designated as series C preferred stock. The previously designated and issued series A preferred stock and series B preferred stock have been retired and the shares returned to the status of authorized and unissued preferred stock. Upon the closing of the offering, all shares of series C preferred stock currently outstanding will be converted into 3,141,838 shares of our common stock at the conversion price equal to the lesser of (i) 75% of the initial public offering price of the common stock, or (ii) $3.15 per share. Also, upon the closing of the offering, $2,508,333 in convertible notes (which were issued in a transaction that occurred during November 2004 whereby the Company received net cash proceeds of $1,330,000 and refinanced $1,108,333 of existing notes payable and accrued interest) will automatically convert into 651,515 shares of common stock based upon a conversion price of $3.85 per share.

Prior to the effective date of this offering, we effectuated a 3.5 for 1 reverse stock split and conversion of our outstanding common stock into class A common stock. As a result of this capital transaction, all of our outstanding common stock prior to this offering was reclassified as class A common stock.

The following summary of the terms and provisions of our capital stock does not purport to be complete. Reference should be made to our Amended and Restated Certificate of Incorporation, Bylaws and to applicable law, for the complete description of the terms and provisions of our securities.

Common stock

Subject to the rights of holders of preferred stock, if any, holders of shares of our common stock are entitled to share equally on a per share basis in such dividends as may be declared by the Board of Directors out of funds legally available. There are presently no plans to pay dividends with respect to the shares of common stock. Upon liquidation, dissolution or winding up, after payment of creditors and the holders of any senior securities, including preferred stock, if any, our assets will be divided pro rata on a per share basis among the holders of the shares of common stock. The common stock is not subject to any liability for further assessments. There are no conversion or redemption privileges or any sinking fund provisions with respect to the common stock and the common stock is not subject to call. The holders of common stock do not have any pre-emptive or other rights.

Holders of shares of common stock are entitled to cast one vote for each share held at all stockholders’ meetings, for all purposes, including the election of directors. The common stock does not have cumulative voting rights.

Class A common stock. Prior to the date of this prospectus, we converted our outstanding common stock into class A common stock. We are authorized to issue up to 21,000,000 shares of class A common stock, $.01 par value per share. The holders of the class A common stock have identical rights and privileges as our regular common stock, except that they will not be able to transfer shares of class A common stock until the first anniversary of the date of this prospectus. After the effective date of this prospectus, the class A common stock may be converted at the option of the holder if the holder executes and delivers a lock up agreement preventing the public sale of the common stock until the first anniversary of the date of this prospectus without the consent of the representative of the underwriters. The class A common stock automatically will convert into the common stock on the first anniversary of the date of this prospectus.

Preferred Stock

Our Board of Directors is authorized to issue up to 10,000,000 shares of preferred stock, par value $.01 per share, in one or more series and to fix, by resolution, conditional, full, limited or no voting powers, and the designations, preferences, the number of shares, dividend rates, conversion or exchange rights, redemption provisions or other special rights of the shares constituting any class or series as the board of directors may deem advisable without any further vote or action by the stockholders. Any shares of preferred stock issued by us could have priority over our common stock and class A common stock with respect to dividends or liquidation rights and could have voting and other rights of stockholders. Any issuance of our preferred stock, depending upon the rights, preferences and designations of these shares, may delay, deter or prevent a change in control or could result in the dilution of the voting power of any of our authorized but unissued shares of preferred stock and we have agreed not to issue any shares of preferred stock for one year after the offering without our underwriter’s prior written consent. In addition, certain “anti-takeover” provisions of Delaware law, among other things, may restrict the ability of our stockholders to effect a merger or business combination or to obtain control of us.

The Company has the following series of preferred stock currently outstanding:

Series C preferred stock. We have 109,962 shares of series C preferred stock outstanding with a stated value of $90.00 per share. The rights, designations, preferences, privileges, qualifications of our series C preferred stock are described in our certificate of designation. The document has been filed as an exhibit to the registration statement of which this prospectus is a part. Upon the closing of the offering, all shares of series C preferred stock currently outstanding will be converted into shares of our common stock at a conversion price equal to the lesser of (i) 75% of the initial public offering price of the common stock, or (ii) $3.15 per share. Holders of the series C preferred stock will also receive a purchase warrant for each share of common stock that they receive upon conversion.

9 1/4% Convertible Notes

On April 9, 1999, we issued $300,000 of our 7 ¹ / _⁴ % Convertible Notes (the “Notes”) to Marvin Rosen, Philip Turits, and Patrick Bello, a former senior executive of Fusion. (See “CERTAIN TRANSACTIONS”.) The proceeds from the Notes were used by the Company to fund its operations. The principal of the Notes shall be converted into shares of our common stock, at the closing of this offering if the offering price equals or exceeds 125% of the conversion price, which is $18.66 per share. There is also an optional conversion clause that the noteholders shall have the right, at their option, at any time up to and including the maturity date, to convert the outstanding principal at $18.66 per share. These notes had a $250,000 remaining balance in April 2004 at which point the interest rate was modified to 9 ¹ / _⁴ %.

Warrants

As part of various debt and other agreements, we have issued warrants to purchase our common stock. As of June 30, 2004, we have issued a total of 286,567 warrants with per share warrant prices of between $0.04 to $8.75. The exercise period for these warrants range between twenty months and 106 months. The weighted average exercise price of these warrants at June 30, 2004 was $3.19.

Purchase Warrant

Each purchase warrant will entitle you to purchase one share of our common stock for $6.00 at any time during the four-year period beginning on the first anniversary of the date of this prospectus. The purchase warrant exercise price will increase to $8.00 (133% of the offering price of one share of our common stock) on the eighteen month anniversary of the date of this prospectus, provided that the registration statement covering the shares, of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date.

Unless we extend the terms of the purchase warrants in our sole discretion, the purchase warrants will expire at 5:00 p.m., New York time, five years from the date of this prospectus.

We may redeem any outstanding purchase warrants you hold, once they become exercisable, at a price of $.01 per purchase warrant on not less than 30 days’ prior written notice to you if the last sale price of our common stock has been at least 200% of the then-current exercise price of the purchase warrants (initially $6.00) for the 20 consecutive trading days ending on the third day prior to the date on which we provide you with such notice. The purchase warrants will be exercisable until the redemption date.

The purchase warrants will be issued in registered form under a warrant agreement between us and Continental Stock Transfer & Trust Company, as warrant agent. Please refer to the warrant agreement (which has been filed as an exhibit to the registration statement of which this prospectus is a part) for a complete description of the terms and conditions of the purchase warrants, as this description is qualified in its entirety by our reference to such warrant agreement.

The exercise price and number of shares of our common stock or other securities issuable on exercise of the purchase warrants are subject to adjustment to protect against dilution if we issue a stock dividend, or we conduct a stock split, recapitalization, reorganization, merger or consolidation or other similar event. We cannot assure you that the market price of our common stock will exceed the exercise price of the purchase warrants at any time during the period in which they are exercisable.

You cannot exercise any of your purchase warrants unless at the time of exercise we have filed with the SEC a prospectus covering the shares of our common stock issuable upon exercise of the purchase warrants you wish to exercise and such shares have been registered or qualified to be exempt under the securities laws of your state of residence. Although we have undertaken and intend to have all shares of our common stock qualified for sale in the states where our securities are being offered and to maintain a current prospectus relating to our common stock until the expiration or redemption of the purchase warrants, subject to the terms of the warrant agreement, we cannot assure you that we will be able to do so.

The purchase warrants do not give you any dividend, voting, preemptive or any other rights our stockholders may have.

Upon conversion of the Class C preferred stock, we will issue an additional 3,141,838 purchase warrants. These warrants and the underlying common stock will be registered for resale by the holders thereof.

American Stock Exchange Listing

We have applied to list our common stock and purchase warrants on the American Stock Exchange under the trading symbols “FSN” and “FSNW”, respectively.

Transfer Agent, Warrant Agent & Registrar

Continental Stock Transfer & Trust Company will act as our transfer agent, our warrant agent and as registrar for our common stock and purchase warrants.

Delaware Anti-Takeover Law

The following discussion concerns certain provisions of Delaware law that may delay, deter or prevent a tender offer or takeover attempt that you might consider to be in your best interest, including offers or attempts that might result in a premium being paid to you over the market price of our securities.

Delaware Anti-Takeover Law. We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

— prior to the business combination the corporation’s board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; or

— upon the consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the outstanding voting stock of the corporation at the time the transaction commenced, excluding for the purpose of determining the number of shares outstanding those shares owned by the corporation’s officers and directors and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

— at or subsequent to the time the business combination is approved by the corporation’s board of directors and authorized at an annual or special meeting of its stockholders, and not by written consent, by the affirmative vote of at least 66 ² / _³ % of its outstanding voting stock, which is not owned by the interested stockholder.

A business combination includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder. An interested stockholder is a person who, together with affiliates and associates, owns (or within three years did own) 15% or more of the corporation’s vesting stock.

SHARES ELIGIBLE FOR FUTURE SALE

Shares Eligible and lock-ups of existing securityholders

Rule 144

In general, under Rule 144 as currently in effect, a person who has owned restricted shares of common stock beneficially for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of the then average weekly trading volume or 1% of the total number of outstanding shares of the same class. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. A person who has not been one of our affiliates for at least the three months immediately preceding the sale and who has beneficially owned shares of common stock for at least two years is entitled to sell the shares under Rule 144 without regard to any of the limitations described above.

Effect Of Sales Of Shares

Before the offering, there has been no market for our common stock, and no precise prediction can be made about any effect that market sales of our common stock or the availability for sale of our common stock will have on the market price of the common stock. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price for our securities and could impair our future ability to raise additional capital through the sale of our securities.

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the underwriters named below, for which Kirlin Securities, Inc. is acting as the representative, are committed to severally take and pay for the respective number of our securities set forth opposite their names, if any are taken, other than the securities covered by the over-allotment option described below unless and until this option is exercised.

Number Number

Underwriters of Shares of Warrants

Kirlin Securities, Inc.

Total

Our underwriters have qualified their several obligations under the underwriting agreement to the approval of legal matters by our counsel and various other conditions, and subject to these conditions, our underwriters are obligated to severally purchase all of the shares of our common stock and purchase warrants offered by this prospectus (other than the shares of our common stock and purchase warrants covered by the over-allotment option described below).

The underwriters, through the representative, have advised us that they propose to offer our securities to the public at the initial public offering prices set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $_____ per share of our common stock and $______ per purchase warrant. The underwriters may allow, and such dealers may re-allow, a concession not in excess of $_____ per share of common stock and $_____ per purchase warrant to certain other dealers. After the offering, our underwriters may change the offering price and other selling terms without our consent.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. We also have agreed to pay to the underwriters an expense allowance on a non-accountable basis equal to 3% of the gross proceeds derived from the sale of the securities offered by this prospectus, $100,000 of which has been paid to date. We also have agreed to pay all expenses in connection with qualifying our securities offered hereby for sale under the laws of such states as our underwriters, through their representatives, may designate and registering the offering with the National Association of Securities Dealers, Inc., or NASD, including fees and expenses of counsel retained for these purposes by our underwriter in connection with this registration.

We have granted to the underwriters an option, exercisable within 45 business days from the date of this prospectus, to purchase at the offering price, less underwriting discounts and the non-accountable expense allowance, up to an aggregate of 498,750 additional shares of our common stock and/or 498,750 additional purchase warrants for the sole purpose of covering over allotments, if any.

We have engaged the representative of the underwriters on a non-exclusive basis as our agent for the solicitation of the exercise of the purchase warrants. To the extent consistent with NASD guidelines and SEC rules and regulations, we have agreed to pay the representative of the underwriters for bona fide services rendered a commission equal to 5% of the exercise price for each purchase warrant exercised after one year from the date of this prospectus if the exercise was solicited by the representative. In addition to soliciting, either orally or in writing, the exercise of the purchase warrants, these services also may include disseminating information, either orally or in writing, to our warrantholders about us or the market for our securities, and assisting in the processing of the exercise of the purchase warrants. We will not pay the representative any fee connection with the exercise of the purchase warrants if the purchase warrants are exercised within one year from the date of this prospectus, if the market price of the underlying shares of our common stock is lower than the exercise price, the purchase warrants are held in a discretionary account, the purchase warrants are exercised in an unsolicited transaction, the warrantholder has not confirmed in writing that the representative solicited such exercise or the arrangement to pay the commission is not disclosed in the prospectus provided to warrantholders at the time of exercise. In addition, unless granted an exemption by the SEC from Regulation M under the Exchange Act, while soliciting the exercise of the purchase warrants, the representative will be prohibited from engaging in any market-making activities or solicited brokerage activities with regard to our securities unless the representative has waived its right to receive a fee for the exercise of the purchase warrants.

In connection with the offering, we have agreed to sell to the representative for an aggregate of $100, a purchase option, consisting of the right to purchase up to an aggregate of 332,500 shares of our common stock and 332,500 purchase warrants. The representative purchase option is exercisable initially at a price of $7.20 per share and $.06 per warrant (120% of the per share offering price to investors) for a period of four years commencing one year from the date of this prospectus. The representative purchase option may not be transferred, sold assigned or hypothecated during the one-year period following the date of this prospectus except to officers or partners of the representative, underwriters and the selected dealers and their officers or partners. The representative purchase option grants to the holders thereof certain “piggyback” and demand rights for periods of seven and five years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the underwriter purchase option.

Pursuant to the underwriting agreement, all of our officers and directors, and all holders of our capital stock immediately prior to this offering either by the terms of the class A common stock or by agreement may not to sell any shares of our common stock for either 12 or 18 months from the date of this prospectus without the consent of the representative of the underwriters. In addition, the underwriting agreement provides that, for a period of five years from the date of this prospectus, the representative will have the right to send a representative to observe each meeting of our board of directors.

If, within five years of the date of this prospectus, we complete a merger, acquisition, joint venture or other transaction with a party that the representative introduces to us, the representative will receive a finder’s fee equal to 5% of the consideration.

Prior to the offering, there has been no public market for any of our securities. Accordingly, the offering prices of our securities and the terms of the purchase warrants have been determined by negotiation between us and the underwriters and do not bear any relation to established valuation criteria. Factors considered in determining such prices and terms, in addition to prevailing market conditions, included an assessment of the prospects for the industry in which we will compete, our management and our capital structure.

In connection with the offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

• Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

• Over-allotment involves sales by the underwriters of our securities in excess of the number of securities the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of our securities over-allotted by the underwriters is not greater than the number of our securities they may purchase in the over-allotment option. In a naked short position, the number of our securities involved is greater than the number of securities in the over-allotment option. Our underwriters may close out any covered short position by either exercising through their representative the over-allotment option and/or purchasing our securities in the open market.

• Syndicate covering transactions involve purchases of our securities in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of securities to close out the short position, our underwriters will consider, among other things, the price of securities available for purchase in the open market as compared to the price at which it may purchase securities through the over-allotment option. If our underwriters sell more securities than could be covered by the over-allotment option, a naked short position, the position only can be closed out by buying our securities in the open market. A naked short position is more likely to be created if our underwriters are concerned that there could be downward pressure on the price of our securities in the open market after pricing that could adversely affect investors who purchase in the offering.

• Penalty bids permit our underwriters to reclaim a selling concession from a selling group member when the securities originally sold by the selling group member are purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our securities or preventing or retarding a decline in the market price of our securities. As a result, the price of our securities may be higher than the price that might otherwise exist in the open market.

On October 22, 2003, the representative loaned the Company $200,000. The loan did not bear interest and was repaid on December 11, 2003.

LEGAL MATTERS

Gersten, Savage, Kaplowitz, Wolf & Marcus LLP, New York, New York, will opine as to the validity of the common stock and purchase warrants offered by this prospectus and to certain legal matters for us. Certain members of Gersten, Savage, Kaplowitz, Wolf & Marcus LLP own an aggregate of 35,714 shares of our common stock. They did not receive such shares for legal services rendered. Graubard Miller, New York, New York, has served as counsel to the several underwriters in connection with this offering.

EXPERTS

Our consolidated financial statements as of December 31, 2002 and 2003, and for each of the three years in the period ended December 31, 2003, have been audited by Rothstein, Kass & Company, P.C., an independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, are so included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 relating to the securities being offered through this prospectus. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information described in the registration statement. For further information about us and our securities, you should read our registration statement, including the exhibits and schedules. In addition, we will be subject to the requirements of the Securities Exchange Act of 1934, as amended, following the offering and thus will file annual, quarterly and special reports, proxy statements and other information with the SEC. These SEC filings and the registration statement are available to you over the Internet at the SEC’s web site at http://www.sec.gov . You may also read and copy any document we file with the SEC at the SEC’s public reference room in 450 Fifth Street, N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Statements contained in this prospectus as to the contents of any agreement or other document are not necessarily complete and, in each instance, you should review the agreement or document which has been filed as an exhibit to the registration statement.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Contents

Consolidated Financial Statements—June 30, 2004

      Consolidated Balance Sheet F-1

      Consolidated Statements of Operations F-2

      Consolidated Statement of Changes in Stockholders’ Deficit F-3

      Consolidated Statements of Cash Flows F-4

      Notes to Consolidated Financial Statements F-6

Consolidated Financial Statements—December 31, 2003 and 2002

      Independent Auditors’ Report F-24

      Consolidated Balance Sheets F-25

      Consolidated Statements of Operations F-26

      Consolidated Statement of Changes in Stockholders’ Deficit F-27

      Consolidated Statements of Cash Flows F-28

      Notes to Consolidated Financial Statements F-30

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Balance Sheet

	June 30, 2004
	(unaudited)

ASSETS
Current assets
Cash and cash equivalents		$ 4,017,260
Accounts receivable, net of allowance for doubtful accounts of approximately $804,000		4,510,958
Restricted cash		587,591
Prepaid expenses and other current assets		554,622

Total current assets		9,670,431

Property and equipment, net		4,736,828

Other assets
Security deposits		1,141,412
Restricted cash		470,275
Other		188,011

Total other assets		1,799,698

		$16,206,957

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Long-term debt, related parties, current portion		$ 2,794,100
Long-term debt, current portion		150,000
Short-term borrowing obligations		536,450
Capital lease obligations, current portion		833,780
Accounts payable and accrued expenses		10,123,795
Liabilities of discontinued operations		1,653,650

Total current liabilities		16,091,775

Long-term liabilities
Capital lease obligations, net of current portion		135,000
Preferred stock, Series C, subject to mandatory redemption (liquidation preference in the aggregate of approximately $9,897,000)		9,368,249

Total long-term liabilities		9,503,249

Minority interests		29,447

Commitments and contingencies
Stockholders’ deficit
Common stock, $.01 par value, authorized 105,000,000 shares, 17,338,273 shares issued and outstanding		173,383
Capital in excess of par value		64,434,718
Stock dividend distributable		365,961
Accumulated other comprehensive income		100,825
Accumulated deficit		(74,492,401)

Total stockholders’ deficit		(9,417,514)

		$16,206,957

See accompanying notes to consolidated financial statements.

F-1

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations

Six months ended June 30,

2004 2003

(unaudited) (unaudited)

Revenues $26,978,042 $16,945,832

Operating expenses:

      Cost of revenues 23,179,782 14,518,282

      Depreciation and amortization 1,075,375 1,083,818

      Loss on impairment 194,001

      Selling, general and administrative expenses 4,887,042 4,672,800

Operating loss (2,164,157) (3,523,069)

Other income (expense)

      Interest expense, net (860,510) (458,988)

      Forgiveness of debt 1,976,595 1,196,294

      Other 37,980

      Minority interests 79,539 56,060

1,233,604 793,366

Net loss (930,553) (2,729,703)

      Preferred stock dividends (385,918) (82,016)

Net loss applicable to common stockholders $(1,316,471) $(2,811,719)

Basic and diluted net loss applicable to per
      common stockholders per common share:

      Net loss $ (0.08) $ (0.22)

Weighted average shares outstanding

Basic and diluted 15,967,983 13,056,391

See accompanying notes to consolidated financial statements.

F-2

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Deficit

Six months ended June 30, 2004 (unaudited)

Accumulated

Redeemable Compre- Other

Preferred Preferred Preferred Capital in Stock hensive Compre-

Stock Stock Stock Common Excess of Dividend Income hensive Accumulated

Series C Series A Series B Stock Par Value Distributable (Loss) Income Deficit Total

Balances,

      January 1, 2004 $3,466,538 $ 4,072 $ 735 $153,412 $62,597,546 $ 553,238 $ 92,925 $(73,175,930) $(9,774,002)

Proceeds from sales of
      common stock,
      net of investment
      expenses 4,302 1,272,769 1,277,071

Proceeds from sales of
      Series C preferred
      stock, net of investment
      expenses 4,628,962

Conversion of long-term
      debt to Series C
      preferred stock 585,360

Conversion of long-term
      debt to common stock 7 2,063 2,070

Conversion of Series
      A & B preferred stock
      to common stock (4,072) (735) 13,735 (8,928)

Stock dividend declared 385,918 (385,918)

Stock dividend issued 1,927 571,268 (573,195)

Foreign currency
      translation adjustment $ 7,900 7,900 7,900

Accretion of interest and
      dividends on Series C
      preferred stock 687,389

Net loss (930,553) (930,553) (930,553)

Total comprehensive loss $(922,653)

Balances, June 30, 2004 $9,368,249 $ — $ — $173,383 $64,434,718 $ 365,961 $100,825 $(74,492,401) $(9,417,514)

See accompanying notes to consolidated financial statements.

F-3

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Six months ended June 30,

2004 2003

(unaudited) (unaudited)

Cash flows from operating activities

      Net loss $ (930,553) $(2,729,703)

      Adjustments to reconcile net loss to net cash

            used in operating activities:

            Loss on impairment 194,001

            Gain from sale of property and equipment (17,750)

            Depreciation and amortization 1,075,375 1,083,818

            Bad debt expense 138,599 59,121

            Gain on forgiveness of debt (1,976,595) (1,196,294)

            Minority interest (79,539) (56,060)

            Interest and dividends accreted on Series C preferred stock 687,389

            Increase (decrease) in cash attributable to

                  changes in operating assets and liabilities:

                  Accounts receivable (2,633,910) (862,864)

                  Prepaid expenses and other current assets (223,951) (331,820)

                  Other assets 11,514 101,000

                  Accounts payable and accrued expenses (211,295) 177,738

                  Liabilities of discontinued operations (25,067) (158,791)

Net cash used in operating activities (4,185,783) (3,719,854)

Cash flows from investing activities

      Purchase of property and equipment (739,479) (85,094)

      Repayments of (payments for) security deposits 89,497 (293,181)

      Repayments of restricted cash (96,330) 256,561

Net cash used in investing activities (746,312) (121,714)

Cash flows from financing activities

      Proceeds from sale of common stock, net 1,277,071 3,679,537

      Proceeds from sale of Series C preferred stock, net 4,628,962

      Proceeds from short-term borrowings 4,493 18,880

      Proceeds from long-term debt 600,000 824,605

      Payments of long-term debt and capital lease obligations (788,071) (238,325)

      Repayments of escrow advances (73,330) (950,000)

      Proceeds from contributions from minority stockholders of joint ventures 59,578 2,733

Net cash provided by financing activities 5,708,703 3,337,430

Net increase (decrease) in cash and cash equivalents 776,608 (504,138)

Cash and cash equivalents, beginning of period 3,240,652 768,898

Cash and cash equivalents, end of period $ 4,017,260 $ 264,760

See accompanying notes to consolidated financial statements.

F-4

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

Six months ended June 30,

2004 2003

(unaudited) (unaudited)

Supplemental disclosure of cash flow information:

      Cash paid during the period for interest $114,582 $ 94,138

Supplemental disclosure of noncash investing and financing activities:

      Acquisition of capital lease $ — $180,279

      Conversion of long-term debt to common stock $ — $251,000

      Conversion of capital lease obligations to common stock $ — $ 32,500

      Conversion of Series A and B preferred stock to common stock $ 4,807 $ —

      Conversion of long-term debt to Series C preferred stock $585,360 $135,313

      Stock dividends issued $573,195 $724,568

      Stock dividends declared $385,918 $724,568

See accompanying notes to consolidated financial statements.

F-5

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Nature of operations

Fusion Telecommunications International, Inc. and Subsidiaries (collectively the “Company”) is a Delaware corporation, incorporated in September 1997. The Company is an international communications carrier delivering Voice over Internet Protocol (“VoIP”), Private Networks, Internet Access, IP Video Conferencing and other advanced services to, from and within emerging markets in Asia, the Middle East, Africa, the Caribbean, and Latin America. With its lead product, VoIP, the Company provides a full suite of communications solutions to corporations, Postal Telephones and Telegraphs, Internet Service Providers, government entities, consumers and cable operators.

2. Summary of significant accounting policies

Principles of Consolidation

The consolidated financial statements include the accounts of Fusion Telecommunications International, Inc. and its wholly owned, majority owned, and voting controlled subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

The Company recognizes revenue and related costs at the time services are rendered. Revenue is derived from fees charged to terminate voice and data services over the Company’s network. Recurring charges received in advance are recorded as deferred revenue.

Cash and Cash Equivalents

The Company considers all highly-liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

Accounts Receivable

The Company values its accounts receivable net of an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a 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.

Fair Value of Financial Instruments

The fair value of the Company’s assets and liabilities which qualify as financial instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107, “Disclosures About Fair Value of Financial Instruments,” approximate the carrying amounts presented in the accompanying consolidated balances sheets.

Impairment of Long-Lived Assets and Impairment Charges

The Company complies with Statement SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company continually evaluates whether events and circumstances have occurred that indicates the remaining estimated useful life of long-lived assets, such as property, and equipment may warrant revision, or the remaining balance may not be recoverable.

F-6

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Impairment of Long-Lived Assets and Impairment Charges (continued)

During the first six months of 2003, the Company recorded an impairment totaling approximately $194,000. The impairment is related to the adjustment of equipment being used by the Company’s joint venture in India (see Note 4) to its fair value based on estimated future cash flows from these assets in accordance with SFAS No. 144.

Property and Equipment

Property and equipment are stated at cost and are depreciated or amortized on the straight-line method over the estimated useful lives of the assets as follows:

Estimated

Asset Useful Lives

Network equipment 5-7 Years

Furniture and fixtures 3-7 Years

Computer equipment and software 3-5 Years

Leasehold improvements Lease terms

Maintenance and repairs are charged to operations, while betterments and improvements are capitalized.

Advertising

Advertising costs are charged to operations as incurred and were approximately $13,000, and $6,000 during the six months ended June 30, 2004 and 2003, respectively.

Income Taxes

The Company complies with SFAS No. 109, “Accounting for Income Taxes,” which requires an asset and liability approach to financial 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.

Comprehensive Income

The Company complies with SFAS No. 130, “Reporting Comprehensive Income”. SFAS No. 130 establishes rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires the Company’s change in the foreign currency translation adjustment to be included in other comprehensive income.

Earnings Per Share

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

Unexercised stock options to purchase 631,486 and 931,743 shares of the Company’s common stock as of June 30, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share because the exercise of the stock options would be anti-dilutive to earnings per share.

F-7

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Earnings Per Share (continued)

Unexercised warrants to purchase 286,567, and 160,643 shares of the Company’s common stock as of June 30, 2004 and 2003, respectively, were not included in the computation of diluted earnings per share because the exercise of the warrants would be anti-dilutive to earnings per share.

Non-converted debt to purchase 10,714 and 39,286 shares of the Company’s common stock as of June 30, 2004 and 2003, respectively were not included in the computation of diluted earnings per share because the conversion of the debt would be anti-dilutive to earnings per share. Had the debt been converted interest expense would have been reduced by approximately $10,000 and $15,000 during the six months ended June 30, 2004 and 2003, respectively.

Stock-Based Compensation

The Company follows SFAS No. 123, “Accounting for Stock-Based Compensation”. The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” (“APB 25”) but disclose the pro forma effect on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans.

The Company provides the disclosure only requirements of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123”. If compensation expense for the Company’s stock-based compensation plan had been determined based on the fair value at the grant dates as calculated in accordance with SFAS No. 123, the Company’s net loss attributable to common stockholders and net loss per common share would approximate the pro forma amounts below:

June 30, 2004 June 30, 2003

Net loss applicable to common stockholders,
      as reported $(1,316,471) $(2,811,719)

Deduct: total stock-based compensation expense
      under fair value method for awards, net of related
      tax effect (369,165) (49,956)

Net loss applicable to common stockholders,
      pro forma $(1,685,636) $(2,861,675)

Earnings per share:

      Basic and diluted net loss applicable to common

            stockholders, as reported $ (0.08) $ (0.22)

      Basic and diluted net loss applicable to common
            stockholders, pro forma $ (0.11) $ (0.22)

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: dividend yield of 0%; weighted average option term of four years; average risk free interest rate of 4.35% and 4.43% during the six months ended June 30, 2004 and 2003, respectively. The weighted average fair value of common stock options granted was $0.00 and $0.00 during the six months ended June 30, 2004 and 2003, respectively.

F-8

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Recently Issued Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments the beginning of the first fiscal period after June 15, 2003. At June 30, 2004, the Company’s Series C Preferred Stock qualifies under the provisions of SFAS 150 (see Note 13), and has accordingly been classified as a liability.

In the event the Company completes a successful qualified public offering for its stock, the Series C Preferred Stock will be converted into shares of the Company’s common stock and will be reclassified from a liability to equity.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not have any such derivative instruments as of June 30, 2004.

In January 2003, the FASB issued Financial Interpretation Number (“FIN”) No. 46, “Consolidation of Variable Interest Entities” and in December 2003, issued FIN 46R, which superseded FIN 46 (collectively “FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was required to be applied to preexisting entities of the Company as of the beginning of the first quarter after June 15, 2003. FIN 46 was required to be applied to all new entities with which the Company became involved beginning February 1, 2003. Provisions of FIN 46R are applicable to all entities subject to the Interpretation no later than the end of the first quarter after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial statements.

Use of Estimates

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

3. Liquidity

At June 30, 2004, the Company has a working capital deficit of approximately $6,421,000 and a stockholders’ deficit of approximately $9,418,000. The Company has continued to sustain losses from operations and for the six months ended June 30, 2004 and 2003 has incurred a net loss of approximately $931,000 and $2,730,000, respectively. In addition, the Company has not generated positive cash flow from operations for the six months ended June 30, 2004 and 2003. During

F-9

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3. Liquidity (continued)

the six months ended June 30, 2004, the Company has raised approximately $4,629,000 of additional proceeds, net of offering costs, through the issuance of Series C Preferred Stock (see Note 15) and intends to raise additional future capital through equity financing. The Company also converted approximately $585,000 of long-term debt into shares of the Company’s Series C Preferred Stock. In addition, during the six months ended June 30, 2004, the Company has been able to increase its revenues and renegotiate and pay down certain obligations, which have resulted in reduced losses and reduced outstanding debt. While management believes that its current cash resources should be adequate to fund its operations for the year ending December 31, 2004, the Company’s long-term liquidity is dependent on its ability to attain future profitable operations. The Company cannot make any guarantees if and when it will be able to attain future profitability.

4. Joint ventures, acquisitions and divestitures

In March, 2000, the Company entered into a joint venture agreement with Communications Ventures India Pvt. Ltd. to form an entity named Estel Communication Pvt. Ltd. (“Estel”). Estel is organized and exists under the laws of India and has its office in New Delhi, India. The Company directly owns 49% of the joint venture and has voting rights in another 1.01%, which in turn gives the Company a 50.01% voting control in the joint venture. Estel was established to engage in the business of selling and supporting internet service protocol operations. Basically, Estel is in business as an Internet service provider in India. The joint venture has been funded primarily by the Company which has also provided certain equipment for the establishment of the required technology platforms.

In July 2002, the Company acquired a 75% equity interest in a joint venture with Turner Hill Investments, L.P. (“Turner Hill”) to provide VoIP services for calls terminating in Pakistan. During 2003 and 2002, the Company contributed certain telecommunications equipment and advances to the joint venture in exchange for its equity interest in the new joint venture. This joint venture operates out of facilities provided by Turner Hill and began providing VoIP service in November 2002. In connection with this joint venture agreement, the Company entered into a service agreement with a Pakistan telecommunications company to provide termination services for calls terminating in Pakistan (see Note 12 for additional details).

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. As of December 31, 2003 no capital has been contributed to the joint venture by either partner, but rather working capital loans have been provided for operating purposes. Operations of the joint venture began during 2003.

5. Discontinued operations

During 2001, management of the Company decided to cease the operations of its domestic retail telecommunication services business lines. In connection with this decision, the Company opted out of a capital lease under which it was leasing switching equipment located in Miami, Florida and returned all of the switching equipment covered under the lease to the lessor. The Company also abandoned an office located in Miami, which was being used to house the switching equipment. The office was being leased under a non-cancelable operating lease agreement.

As of June 30, 2004, liabilities of discontinued operations included approximately $670,000 from the cancellation of the operating lease obligation and approximately $984,000 of trade payables reclassified from accounts payable and accrued expenses.

F-10

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

6. Property and equipment

At June 30, 2004, property and equipment is comprised of the following:

Network equipment, including $769,360 under capital leases $ 9,460,995

Furniture and fixtures 112,016

Computer equipment and software 687,593

Leasehold improvements 2,679,381

12,939,985

Less accumulated depreciation and amortization, including $465,032
under capital leases (8,203,157)

$ 4,736,828

7. Restricted cash

As of June 30, 2004, the Company had approximately $1,058,000 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit (equal to the amount of the certificates of deposit). A significant portion of this restricted cash is required as security deposits for certain of the Company’s non-cancelable operating leases for office facilities.

8. Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following at June 30, 2004:

Trade accounts payable $ 5,542,690

Accrued expenses 2,111,930

Interest payable 849,802

Deferred revenue 1,023,188

Other 596,185

$10,123,795

The deferred revenue balance at June 30, 2004 includes approximately $500,000 related to a debt settlement agreement with a domestic carrier. The provisions of the agreement noted $555,000 due to the carrier would be resolved with a service agreement whereby the carrier will receive a reduced rate for every minute of traffic that is passed through the Company’s network for a period of 24 months beginning in December 2003. During the six months ended June 30, 2004, approximately $55,000 of deferred revenue was recognized in connection with this service agreement.

F-11

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations

At June 30, 2004 components of long-term debt and capital lease obligations of the Company is comprised of the following:

Convertible notes payable (a) $ 250,000

Demand notes payable (b) 898,931

Demand notes payable (c) 260,688

Promissory notes payable (d) 1,150,000

Promissory notes payable (e) 25,000

Promissory notes payable (f) 102,000

Promissory notes payable (g) 257,481

Capital lease obligations (h) 968,780

Total long-term debt and capital lease obligations 3,912,880

Less current portion 3,777,880

$ 135,000

(a) Three stockholders of the Company each entered into convertible subordinated note agreements aggregating $300,000, which mature in five years (or April 9, 2004), at an interest rate of 7.25% per annum (modified to 9.25% in April 2004). Interest shall be paid semi-annually on January 31 and July 31. The principal of the note shall be converted into shares of common stock of the Company, at the closing of a qualified initial public offering (“IPO”), if the IPO price equals or exceeds 125% of the conversion price, which is $18.66 per share. There is also an optional conversion clause that the note holders shall have the right, at their option, at any time up to and including the maturity date, to convert the outstanding principal. In February 2004, one stockholder converted $33,750 of its notes into 375 shares of Preferred C Stock at $90 per share. The remaining $16,250 note balance was paid in April 2004. Consequently, the June 30, 2004 balance includes two convertible subordinated note agreements aggregating $250,000, both of which are covered under forbearance agreements (see below for further details).

(b) Two officers of the Company each entered into various loan agreements with the Company in exchange for demand notes payable. The outstanding balance of these notes were $898,931 as of June 30, 2004. The notes bear interest at rates ranging from 4%–4.75% per annum and are due on demand.

(c) Between March 2001 and September 2002, the Company issued promissory notes to three stockholders. The balance outstanding at June 30, 2004 was $110,688. The notes bear interest at rates ranging from 8% to 12% per annum and are due on demand. In addition, during February 2004, the Company entered into a settlement agreement for $600,000. In the same month the Company paid $450,000 and agreed to make 12 monthly payments for the remaining $150,000.

(d) In January 2001, the Company issued a promissory note in the amount of $1,000,000, with monthly payments of interest only at 13% per annum, with principal to be paid in full December 2001. This promissory note is secured by certain of the Company’s accounts receivables. At June 30, 2004, this note was in default and, accordingly, has been classified as currently due.

Between September 2002 and April 2003, the Company entered into various promissory note payable agreements for which $150,000 is outstanding as of June 30, 2004. Interest at 8% per annum was to be paid in full through May 2003. At June 30, 2004, these notes were in default and, accordingly, have been classified as currently due.

F-12

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations (continued)

(e) Between December 2002 and February 2003, the Company entered into loan agreements with various stockholders, for the purpose of generating funds to initiate a joint venture project in the United Arab Emirate ( See Note 4 ). During January and February 2004, all but one stockholder converted the outstanding notes to 277 shares of Preferred C stock at $90 per share. The remaining stockholder converted his $25,000 note into a new promissory note, which bears interest at 4.5% per annum. Principal and interest are payable in one lump sum on the earlier of 15 days from the completion of an IPO or September 1, 2005.

(f) In July 2002, the Company entered into loan agreements with various stockholders, aggregating $500,000 for the purpose of generating funds to initiate the Pakistan service project with Pakistan Telecommunications Company Limited (“Pakistan”) (See Note 12). The loans were to be repaid by the Company with funds it receives from PTCL in equal monthly installments, immediately upon available funds or February 2003, and continuing through August 2003, bearing interest at 15% per annum. In 2003, a portion of these loan agreements, aggregating $250,000, was converted into shares of the Company’s Series C Preferred and common stock. During January 2004, $148,000 of the loans were converted to 1,644 shares of Series C Preferred stock at $90 per share.

(g) In September 2003, the Company issued promissory notes payable aggregating $300,000 to various stockholders for the purpose of resolving the Company’s capital lease debt service contract with the lessor of the equipment. The notes were to accrue interest at 8% per annum and be paid in equal monthly installments of approximately $500 to $2,000 per month with the outstanding principal due on October 31, 2004. The Company also issued warrants to these investors to purchase the aggregate of 85,714 shares of the Company’s common stock at a purchase price of $2.98 per share. The warrants are to expire July 1, 2005. At the date of grant, these warrants had a nominal value assigned to them that was immaterial to the consolidated financial statements. As of June 30, 2004, the outstanding balance of the various note payables aggregated $257,481.

(h) During the six months ended June 30, 2004, approximately $193,000 of capital lease obligations had been forgiven and recorded to forgiveness of debt (See Note 16).

At June 30, 2004, approximately $720,000 of the capital lease obligations were in default and accordingly have been classified as currently due.

The following summarizes additional debt activity during the six months ended June 30, 2004:

Between October and November 2003, the Company issued two convertible notes payables, aggregating $140,000, to two stockholders for the purposes of an Asian venture. The notes were to accrue interest at prime rate, were payable monthly on the first of every month, and were due on January 15, 2004 and October 31, 2004, respectively. In the event, the Asian venture materialized, the principal of the notes, at the option of the stockholders, could have been converted into shares of common stock of the Company. The conversion price per share would be in proportion to the overall initial capitalization. During the six months ended June 30, 2003, the Asian venture had not materialized. Consequently one of the notes was repaid in full and the other was converted to 1,111 shares of Preferred C Stock.

In December 2000, the Company entered into a promissory note payable agreement of $200,000 with a stockholder, calling for monthly payments of approximately $4,500, including interest at 12% per annum, through January 2006. On September 1, 2002, the Company added an additional agreement for the option to convert a portion of the promissory note into 28,571 shares of the Company’s common stock at $2.28 per share. In September 2003, the Company revised the promissory note agreement for an additional principal amount of $100,000 with monthly payments of approximately $2,500, including interest at 12% per annum. During the six months ended June 30, 2004, the remaining promissory note of $159,079 was repaid in full.

F-13

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations (continued)

In May 2001, the Company issued a promissory note payable agreement for the sum of $400,000, including interest at 12% per annum, and due in full February 2002. In connection with the private placement offering for Series C Preferred Stock (see Note 14), the Company provided the stockholder with the option to convert the promissory note into 3,334 shares of the Company’s Series C preferred stock at an exchange price of $90 per share. As of June 30, 2004, the stockholder was paid a portion of the remaining balance and exercised his option to convert the remaining promissory note payable balance into the Company’s Series C preferred stock.

Future aggregate principal payments on long-term debt and capital leases in the years subsequent to June 30, 2004 are as follows:

2005				$ 3,985,645
2006				108,000
2007				27,000

Total minimum payments				4,120,645
Less amount representing interest				(207,765)

Present value of minumum payments				3,912,880
Less current portion				(3,777,880)

				$ 135,000

In December 2003, two officers of the Company signed forbearance agreements, providing the officers would not call due approximately $1,829,000 of long-term debt and accrued interest until such time the Company completed a successful IPO, or December 19, 2004, whichever occurs first.

10. Short-term borrowing obligations

Short-term borrowing obligations of the Company represent a revolving line of credit agreement between an Indian bank and the Company’s Estel joint venture. The line of credit provides for borrowings up to $600,000 at an interest rate at the bank’s prime rate (approximately 2% at June 30, 2004) and was initially due in August 2004, but was extended to August 2005. The line of credit is collateralized by substantially all of the assets of the Estel joint venture. As of June 30, 2004, drawings on the line of credit amounted to approximately $536,000.

11. Income taxes

Due to the operating losses incurred, the Company has no current income tax provision for the six months ended June 30, 2004 and 2003. The provision for income taxes consists of the following:

2004 2003

Deferred

Federal $(316,000) $(925,000)

State (44,000) (11,000)

(360,000) (936,000)

Change in valuation allowance 360,000 936,000

$ — $ —

F-14

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11. Income taxes (continued)

The following reconciles the Federal statutory tax rate to the effective income tax rate for the six months ended June 30, 2004 and 2003:

2004 2003

% %

Federal statutory rate 34.0 34.0

State, net of federal tax 3.1 0.3

Other 1.6

Change in valuation allowance (38.7) (34.3)

Effective income tax rate — —

The components of the Company’s deferred tax assets and liability consist of approximately the following at June 30, 2004:

Deferred tax assets

      Net operating losses $ 23,637,000

      Allowance for doubtful accounts 308,000

      Accrued liabilities and other 664,000

24,609,000

Deferred tax liability

      Property and equipment (285,000)

Deferred tax asset, net 24,324,000

      Less valuation allowance (24,324,000)

$ —

The Company has available at June 30, 2004, approximately $69,522,000, of unused net operating loss carryforwards that may be applied against future taxable income, which expire in various years from 2013 to 2024. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards and credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The amount of such limitation, if any, has not been determined.

Management of the Company had decided to fully reserve for its net deferred tax assets, as it is more likely than not that the Company will not be able to utilize these deferred tax assets against future taxable income, coupled with certain limitations on the utilization of the net operating losses due to various changes in ownership over the past several years.

F-15

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12. Commitments and contingencies

The Company has various non-cancelable operating lease agreements for office facilities. A summary of the lease commitments under non-cancelable leases at June 30, 2004 is approximately as follows:

Year ending June 30,

            2005 $1,040,000

            2006 1,060,000

            2007 1,083,000

            2008 1,107,000

            2009 999,000

            Thereafter 790,000

$6,079,000

Rent expense for all operating leases was approximately $645,000 and $626,000 during the six months ended June 30, 2004 and 2003, respectively.

In May 2002, the Company entered into a Service Agreement (the “Agreement”) with Pakistan Telecommunications Company, Ltd (“PTCL”), under which PTCL would provide for the termination of incoming international traffic into Pakistan focusing on VoIP services from the United States and Europe. The Agreement provides for an initial term of one year, with additional one year extensions terms. The Company has exercised its option to extend the agreement, which is in effect through May 2005. The Agreement provides for the Company to place all necessary switching equipment in Pakistan, the United States and Europe (which it has done so through the Pakistan joint venture formed with Turner Hill–See Note 4). Under the terms of the Agreement PTCL will provide the Company with voice termination services within Pakistan, for which the Company will pay PTCL a maximum service charge of $0.19 per minute for all calls terminating in Pakistan using the Company’s VolP platform. The Agreement also requires the Company to guarantee a minimum of three million minutes a month to terminate to Pakistan.

The Company is required to keep on deposit with PTCL, a one month rolling advance equal to the number of minutes terminated during the preceding month, times the prevailing termination rate charged by PTCL to the Company. For the six months ended June 30, 2004 and 2003, the Company has incurred approximately $4,971,000 and $4,513,000, respectively of termination charges under this agreement.

In connection with the joint venture agreement with Turner Hill ( See Note 4 ), the joint venture entity is required to pay a management fee to Turner Hill equal to the number of minutes terminating in Pakistan on a monthly basis times a fixed rate per minute. During the six months ended June 30, 2004 and 2003, the joint venture incurred management fees to Turner Hill for approximately $169,000 and $164,000, respectively.

Legal Matters

The Company is a defendant in an employment claim that management believes has no merit. The claim is filed in the State of New York before an administrative agency. The administrative department is currently reviewing the case and management believes it will be dismissed. Regardless, management believes that this claim will not have a material effect on the Company’s business or results of operations.

In April 2003, a former customer of the Company brought an action against the Company for recovery of preferential transfers and other claims under the Bankruptcy Code. The suit, brought in the United States Bankruptcy Court for the Northern District of Illinois Eastern Division, seeks damages in the amount of approximately $335,000. The Company and management plan to defend this suit vigorously and do not expect the outcome to have an adverse effect on the Company’s financial condition.

F-16

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

12. Commitments and contingencies (continued)

Legal Matters (continued)

In May 2003, a shareholder of the Company brought an action in the District Court in and for the City and County of Denver and the State of Colorado. The action is seeking damages in the amount of $400,000. The Company and management plan to defend this suit vigorously and do not expect the outcome to have an adverse effect on the Company’s financial condition. This action was dismissed in August 2004. The plaintiff has filed an appeal for the motion, which is pending.

In 1999, the Company guaranteed a real property lease on behalf of a joint venture. The joint venture subsequently defaulted on the lease and in July 2003 the landlord brought an action in the Circuit Court, Miami, Florida. The Company is also being sued for back rent and costs. The Company believes that this dispute will be resolved amicably, but if the Company and management are unable to amicably resolve the action, the Company can make no assurance that the outcome will not have an adverse effect on the Company’s financial condition.

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

13. Preferred stock

The Company has authorized 10,000,000 shares of its stock for the issuance of Preferred Stock. The Company has designated 1,100,000, 1,500,000 and 110,000 shares of $10 Series A Convertible Redeemable Preferred Stock (“Series A Preferred Stock”), $10 Series B Convertible Redeemable Preferred Stock (“Series B Preferred Stock”) and $90 Series C Convertible Redeemable Preferred Stock (“Series C Preferred Stock”), respectively (collectively “Preferred Stock”).

During May 2004, each outstanding share of Series A and Series B Preferred Stock was converted to common stock at a conversion rate of $3.50 per share, consequently as of June 30, 1004, there were no outstanding shares of Series A and B Preferred Stock.

Dividends

The holders of Series A Preferred Stock were entitled to receive cumulative dividends of 12% per share per annum, which were payable annually in arrears beginning on August 31, 2002 and were payable (at the Company’s option) in cash or shares of the Company’s common stock at a rate equal to the conversion rate in effect at the date of declaration of the dividend. The holders of Series B Preferred Stock were entitled to a cumulative dividend of 11.5% per share per annum, which was payable annually in arrears beginning on March 31, 2003 and was payable (at the Company’s option) in cash or shares of the Company’s common stock at a rate equal to the conversion rate in effect at the date of declaration of the dividend. The holders of Series C Preferred Stock are entitled to receive cumulative dividends of 8% per share per annum which are payable annually beginning on December 18, 2004 and are payable in cash, unless the Company completes a successful IPO before December 18, 2004.

No dividends can be paid on any outstanding shares of common stock, or Series A and B Preferred Stock, unless all then accrued, but unpaid dividends have been paid with respect to all outstanding shares of Series C Preferred Stock.

F-17

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13. Preferred stock (continued)

Dividends (continued)

In December 2003, the Company’s Board of Directors (the “Board”) declared a stock dividend payable on the outstanding shares of Series A and B Preferred Stock (due on August 31, 2003 and March 31, 2004, respectively). The Board elected to issue shares of the Company’s common stock in lieu of cash at a conversion rate equal to $2.98 per share times the aggregate dividends due to the holders of both Series A and B Preferred Stock at date of record (August 15, 2003 and March 15, 2004, respectively). At December 31, 2003, the Company recorded a stock dividend distributable of approximately $553,000 for the issuance of 185,962 shares of common stock to the holders of the Company’s Series A and Series B Preferred Stock. These shares were issued during the six months ended June 30, 2004, along with an additional 6,708 shares of common stock for unredeemed dividends on Series B Preferred Stock totaling approximately $20,000.

In connection with the conversion of the Series A and Series B Preferred Stock into common stock, accrued dividends from September 1, 2003 and April 1, 2004 to the date of the respective conversions will be issued in the form of common stock. These common stock dividends aggregated 121,500 additional shares of common stock and were issued subsequent to June 30, 2004. The stock dividend distributable balance related to these dividends, for which common stock was not yet issued at June 30, 2004, is approximately $366,000.

Liquidation

Following the Series C Preferred Stock liquidation payment, the remaining assets and funds of the Company legally available for distribution, if any, shall be distributed ratably among the holders of common stock and Series C Preferred Stock in proportion to the number of shares of common stock held on as as-if converted basis.

Redemption

The Company had the right to redeem the outstanding shares of Series A and B Preferred Stock at any time (with 30 days prior notice) for a redemption price of $10 per share plus accrued, but unpaid dividends. As discussed previously, this right was exercised during the first six months of June 30, 2004. The Company has the right to redeem the outstanding shares of Series C Preferred Stock, commencing on the first anniversary of the first issuance of Series C Preferred Stock, at a price per share equal to 115% of the stated value, plus pro rata accrued and unpaid dividends due through the date of redemption.

After the second anniversary of the first issuance of the Company’s Series C Preferred Stock and so long as all classes of the Company’s stock are not publicly traded and a liquidation has not occurred, each holder of Series C Preferred Stock may, at its option, require the Company to redeem its shares at a price equal to 112% of the stated value of the stock, plus pro rata accrued and unpaid dividends due. In accordance with SFAS 150, the Series C Preferred Stock has been classified as a liability and the initial carrying amount of this stock has been recorded at is fair value at the date of issuance. The carrying amount is being increased by periodic accretions, using the interest method, so that the carrying amount will equal the mandatory redemption amount at the mandatory redemption date. Accretion during the six months ended June 30, 2004 was approximately $687,000 which is included in interest expense for the six months ended June 30, 2004 in the accompanying statement of operations. At June 30, 2004, the redemption value of the Series C Preferred Stock was approximately $10,584,000.

F-18

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13. Preferred stock (continued)

Conversion

Each share of Series A and B Preferred Stock was convertible, at the option of the stockholder, at any time after the issuance date of such share into a number of shares of common stock as determined by the conversion rate in effect at the time of conversion, plus all accrued and unpaid dividends payable in either cash or common stock (at the Company’s option). Each share of Series C Preferred Stock is convertible, at the option of the stockholder, at any time after the issuance date of such shares into a number of shares of common stock, based upon a conversion price of $3.15 per common share.

Upon the closing of an IPO, all Preferred Stock will be converted into shares of common stock at the conversion rates in effect at the time of the offering, as adjusted for stock splits, stock dividends, recapitalizations and the like.

Voting

No holders of Preferred Stock have voting rights, except as provided by law.

14. Stock options and warrants

Under the Company’s 1998 stock option plan (as amended), the Company has reserved 1,714,286 shares of common stock for issuance to employees at exercise prices determined by the Board. Options under the plan vest in annual increments over a four year period, expire ten years from the date of grant and are issued at exercise prices no less than 100% of the fair market value at the time of grant. As reported in Note 2, the Company has elected to adopt the disclosure–only provisions of SFAS No. 123 and will account for stock-based employee compensation plans in accordance with APB 25. As a result, no compensation cost for its stock option plan has been recognized in the periods presented. In November 2004, the Board approved an increase in the number options available for grant under the Company’s 1998 stock option plan to 2,680,857.

A summary of the Company’s stock option plan as of June 30, 2004 and 2003 and changes during the six months then ended on those dates is as follows:

Weighted

Number Average

of Per Share Option

Shares Option Price Price

Shares under options at January 1, 2003 1,009,771 $2.35 – $14.00 $ 8.96

      Granted in 2003 13,543 8.75 – 8.85 8.75

      Expired in 2003 (91,571) 8.75 – 8.75 8.75

Shares under options at June 30, 2003 931,743 2.35 – 14.00 7.18

Shares under options at January 1, 2004 656,207 2.35 – 11.66 8.72

      Granted in 2004 18,143 8.75 – 8.75 8.75

      Expired in 2004 (42,864) 8.75 – 11.66 10.19

Shares under options at June 30, 2004 631,486 $2.35 – $11.66 $ 8.61

Options exercisable at June 30, 2004 505,279 $2.35 – $11.66 $ 8.58

Options exercisable at June 30, 2003 608,032 $2.35 – $11.66 $ 6.55

F-19

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

14. Stock options and warrants (continued)

The following table summarizes information about stock options outstanding at June 30, 2004:

Options Outstanding Options Exercisable

Number Weighted-Average Number

Outstanding Remaining Weighted-Average Exercisable Weighted-Average

Exercise Prices at 6/30/04 Contractual Life Exercise Price at 12/31/03 Exercise Price

$ 2.35 42,857 4.5 years $ 2.35 42,857 $ 2.35

8.23 – 8.75 524,343 7.7 years 8.75 398,136 8.75

11.66 64,286 5.4 years 11.66 64,286 11.66

631,486 505,279

The Company, as part of various debt and other agreements, have issued warrants to purchase the Company’s common stock. The following summarizes the information relating to warrants issued and the activity during the first six months of 2004 and 2003:

All warrants are fully exercisable upon issuance.

15. Equity transactions

Weighted

Number Average

of Per Share Warrant

Shares Warrant Price Price

Shares under warrants at January 1, 2003 159,214 $0.04 – $8.75 $3.57

Issued in 2003 1,429 2.98 – 2.98 2.98

Shares under warrants at June 30, 2003 160,643 0.04 – 8.75 3.57

Shares under warrants at January 1, 2004 252,752 0.04 – 8.75 3.92

Issued in 2004 33,815 2.28 – 3.57 2.66

Shares under warrants at June 30, 2004 286,567 $0.04 – $8.75 $3.19

In June 2003, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 5,714,286 shares of the Company’s $0.01 par value common stock at $2.98 per share. The private placement was valid through September 15, 2003, but was extended for an additional 90 days. The total number of shares of common stock issued in this private placement in 2003 was 1,342,844 shares for which proceeds of approximately $3,763,000 were received, net of expenses of approximately $247,000.

During the six months ended June 30, 2004, an additional 430,252 shares were issued in this private placement for which proceeds of approximately $1,277,000 were received, net of expenses of approximately $3,000.

F-20

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

15. Equity transactions (continued)

In November 2003, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 110,000 shares of the Company’s Series C Preferred Stock at $90 per share. The private placement was valid through December 15, 2003, but was extended for an additional 107 days. The total number of shares of Series C Preferred Stock issued in this private placement during 2003 was 33,542 shares for which proceeds of approximately $2,526,000 were received, net of expenses of approximately $492,000. During the first quarter of 2004, an additional 59,492 shares of Series C Preferred Stock were issued in this private placement. The proceeds were approximately $4,629,000, net of expenses of approximately $723,000.

During March 2004, certain note holders elected to convert approximately $585,000 of their notes into shares of the Company’s Series C Preferred Stock at a conversion rate of $90 a share. The conversion resulted in the issuance of 6,504 additional shares of Series C Preferred Stock.

In May 2004, the shareholders of all the outstanding series A and B Preferred Stock, elected to convert all their shares into shares of the Company’s common stock at a conversion rate of $3.50 per share. This resulted in the issuance of 1,373,546 shares of common stock.

16. Forgiveness of debt

During the six months ended June 30, 2004, the Company recorded approximately $1,977,000 related to forgiveness of debt. As of December 31, 2003, the Company had an outstanding capital lease obligation aggregating approximately $238,000. In January 2004, the Company entered into an agreement whereas the Company agreed to pay the sum of $45,000 resulting in a $193,000 forgiveness of debt. In addition, during the six months ended June 2004, the Company recorded approximately $1,784,000 of additional forgiveness of debt primarily related to settled accounts payable disputes.

17. Profit sharing plan

The Company has a defined contribution profit sharing plan, which covers all employees who meet certain eligibility requirements. Contributions to the plan are made at the discretion of the Board. No contributions to the profit sharing plan were made during the six months ended June 30, 2004 and 2003.

18. Concentrations

Major Customers

During the six months ended June 30, 2004, six customers of the Company accounted for revenues exceeding 47% in total and at least 5% individually of the Company’s total revenues during this period. During the six months ended June 30, 2003 seven customers of the Company accounted for revenues exceeding 51% in total and at least 5% individually of the Company’s total revenues during this period. Revenues earned from these customers were approximately $12,785,000 and $8,569,000 during the six months ended June 30, 2004 and 2003, respectively. At June 30, 2004 the amounts owed to the Company by these customers were approximately $2,759,000.

F-21

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

18. Concentrations (continued)

Geographic Concentrations

The Company’s operations are significantly influenced by economic factors and risks inherent in conducting business in foreign countries, including government regulations, currency restrictions and other factors that may significantly affect management’s estimates and the Company’s performance.

During the six months ended June 30, 2004 and 2003, the Company generated revenue from customers in the following countries.

2004 2003

India $ 982,900 $ 1,141,000

United States 25,303,200 15,771,000

Other 691,900 34,000

$26,978,000 $16,946,000

At June 30, 2004, the Company had foreign long lived assets as follows:

2004

India $1,183,030

Pakistan 174,281

United Arab Emirates 110,990

$1,468,301

Revenues by geographic area are based upon the location of the Company’s customers. The foreign long lived assets by geographic area represent those assets physically used in the operations in each geographic area.

19. Subsequent events

In July 2004, the Company’s Stock Option Committee approved a recommendation to issue 446,057 options to its employees who had been previously granted stock options. Each employee would receive new options equal to 50% of their existing options priced at $3.15 per share and 50% at $4.38 per share, both with a four year vesting period and furthermore would receive credit for the vesting time on previously issued options, and the original options will be cancelled if not exercised within six months and one day of the issuance of the new options. In addition, during July 2004, the Stock Option Committee also approved the issuance of 667,686 options to employees, consultants and Board members at a price of $4.38 per share.

On November 1, 2004, the Board of Directors, upon approval of the stockholders, authorized the increase of the amount of eligible stock under the Company’s employee stock option plan from 1,714,286 to 2,680,857.

On November 1, 2004, the Board of Directors, upon approval of the stockholders, authorized a 3.5 to 1 reverse stock-split applicable to all outstanding shares of the Company’s common stock. All transactions and disclosures in the consolidated financial statements, related to the Company’s common stock have been restated to reflect the effect of the reverse stock-split.

F-22

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

19. Subsequent events (continued)

On November 1, 2004, the Board of Directors, upon approval of the stockholders, increased the authorized number of shares to 136,000,000 which includes 105,000,000 shares of common stock, 10,000,00 shares of preferred stock and 21,000,000 shares of Class A common stock. On or about December 15, 2004, each share of the Company’s outstanding common stock will automatically be converted into one share of Class A common stock. The Class A common stock may not be converted into common stock until one year after the successful completion of an initial public offering unless the holder agrees to exercise a one year lock up agreement.

In November 2004, the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible promissory note. These two notes aggregate $2,508,333 bear interest at 6.5% per annum and are due in November 2006. The notes would automatically convert into common shares at a conversion price of $3.85 per share upon successful registration from an initial public offering. The common stock is subject to a one year lock up provision.

F-23

INDEPENDENT AUDITORS’ REPORT

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 (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the three years ended December 31, 2003. 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

/s/ Rothstein, Kass & Company, P.C.
Roseland, New Jersey
April 23, 2004, except for paragraph 3
of Note 12 which is as of August 24, 2004 and Note 21
as to which the date is November 10, 2004

F-24

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets

December 31,

2003 2002

ASSETS

Current assets

Cash and cash equivalents $ 3,240,652 $   768,898

      Accounts receivable, net of allowance for doubtful accounts of
            approximately $688,000 and $517,000, in 2003 and 2002, respectively 2,015,647 1,356,374

      Restricted cash 611,261 199,611

      Prepaid expenses and other current assets 330,671 421,677

                  Total current assets 6,198,231 2,746,560

Property and equipment, net 5,054,973 7,429,433

Other assets

       Security deposits 1,230,909 959,357

      Restricted cash 350,275 1,051,182

      Other 199,525 101,000

                  Total other assets 1,780,709 2,111,539

       $ 13,033,913 $ 12,287,532

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities

       Long-term debt, related parties, current portion $ 3,423,452 $ 4,468,371

      Long-term debt, current portion 1,028,000

      Short-term borrowing obligations 531,957 489,030

      Capital lease obligations, related party, current portion 110,000

      Capital lease obligations, current portion 1,011,280 2,615,554

      Accounts payable and accrued expenses 12,428,492 15,256,072

      Liabilities of discontinued operations 1,686,617 2,088,618

                  Total current liabilities 19,081,798 26,055,645

Long-term liabilities

       Long-term debt, related parties, net of current portion 18,750 375,000

      Long-term debt, net of current portion 555,000

      Capital lease obligations, net of current portion 191,422

      Preferred stock, Series C, subject to mandatory redemption
            (liquidation preference in the aggregate of approximately $3,959,000) 3,466,538

                  Total long-term liabilities 3,676,710 930,000

Minority interests 49,407 102,868

Commitments and contingencies

Stockholders’ deficit

       Preferred stock, Series A, $.01 par value, authorized 1,100,000 shares,
            407,225 shares issued and outstanding 4,072 4,072

      Preferred stock, Series B, $.01 par value, authorized 1,500,000 shares,
            73,500 shares issued and outstanding (liquidation preference, in the
            aggregate, of approximately $1,167,000 and $1,163,000 in 2003 and
            2002, respectively) 735 735

      Common stock, $.01 par value, authorized 105,000,000 shares,
            issued and outstanding 15,341,193 shares and 11,686,309 shares
            in 2003 and 2002, respectively 153,412 116,863

      Capital in excess of par value 62,597,546 52,732,476

      Stock dividend distributable 553,238

      Accumulated other comprehensive income 92,925 66,426

      Accumulated deficit (73,175,930) (67,721,553)

      Total stockholders’ deficit (9,774,002) (14,800,981)

       $ 13,033,913 $ 12,287,532

See accompanying notes to consolidated financial statements.

F-25

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations

      Years Ended December 31,

2003 2002 2001

Revenues $33,725,275 $ 28,422,149 $ 29,614,565

Operating expenses:

      Cost of revenues 29,246,014 25,443,863 24,591,188

      Depreciation and amortization 2,128,610 2,546,869 2,069,361

      Loss on impairment 735,354 467,765 2,825,149

      Selling, general and administrative expenses 9,156,810 9,977,994 11,758,451

Operating loss (7,541,513) (10,014,342) (11,629,584)

Other income (expense)

      Interest expense, net (919,590) (1,175,714) (595,116)

      Forgiveness of debt 3,918,295 1,812,092

      Minority interests 157,617 19,440 112,472

3,156,322 655,818 (482,644)

Loss from continuing operations (4,385,191) (9,358,524) (12,112,228)

Discontinued operations:

      Income (loss) from discontinued operations 208,620 (7,029,511)

Net loss $ (4,176,571) $ (9,358,524) $(19,141,739)

Losses applicable to common stockholders:

      Loss from continuing operations $ (4,385,191) $ (9,358,524) $(12,112,228)

      Preferred stock dividends (635,254) (642,552)

Net loss applicable to common stockholders from
      continuing operations (5,020,445) (10,001,076) (12,112,228)

      Income (loss) from discontinued operations 208,620 (7,029,511)

Net loss applicable to common stockholders $ (4,811,825) $(10,001,076) $(19,141,739)

Basic and diluted net loss per common share:

      Loss from continuing operations $ (0.37) $   (1.01) $   (1.30)

      Income (loss) from discontinued operations 0.02 (0.76)

Net loss applicable to common stockholders $ (0.35) $   (1.01) $   (2.06)

Weighted average shares outstanding

Basic and diluted 13,616,803 9,885,901 9,305,857

See accompanying notes to consolidated financial statements.

F-26

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statement of Changes in Stockholders’ Deficit

Years Ended December 31, 2003, 2002, and 2001

Accumulated

Redeemable Compre- Other

Preferred Preferred Preferred Capital in Stock hensive Compre-

Stock Stock Stock Common Excess of Dividend Income hensive Accumulated

Series C Series A Series B Stock Par Value Distributable (Loss) Income Deficit Total

Balances, January 1, 2001 $ — $ — $ — $ 93,097 $38,462,863 $ — $ — $(39,221,290) $ (665,330)

Proceeds from sale of
      common stock 810,000 810,000

Proceeds from sale of
      Series A preferred
      stock, net of investment
      expenses 4,432 4,238,952 4,243,384

Common stock issued for
      the acquisition of
      C&F Switching 2,500,000 2,500,000

Conversion of common
      stock to Series A

      preferred stock 133 (129) (4)

Conversion of long-term
      debt to Series A

      preferred stock 630 629,370 630,000

Proceeds from the exercise
      of stock options 42,680 42,680

Foreign currency
      translation adjustment $ 43,346 43,346 43,346

Net loss (19,141,739) (19,141,739) (19,141,739)

Total comprehensive loss $(19,098,393)

Balances, December 31, 2001 5,195 92,968 46,683,861 43,346 (58,363,029)
(11,537,659)

Proceeds from sale of
      common stock 7,188 1,628,779 1,635,967

Proceeds from sale of
      Series B preferred
      stock, net of investment
      expenses 835 704,662 705,497

Conversion of Series A & B
      preferred stock to

      common stock (1,123) (100) 1,405 (182)

Conversion of long-term
      debt to common stock 15,302 3,715,356 3,730,658

Foreign currency
      translation adjustment $ 23,080 23,080 23,080

Net loss (9,358,524) (9,358,524) (9,358,524)

Total comprehensive loss $ (9,335,444)

Balances, December 31, 2002 4,072 735 116,863 52,732,476 66,426 (67,721,553) (14,800,981)

Proceeds from sale of
      common stock, net of
      investment expenses 26,964 6,819,923 6,846,887

Proceeds from sale of
      Series C preferred
      stock, net of investment
      expenses 2,526,299

Conversion of long-term
      debt to common stock 6,232 2,273,932 2,280,164

Conversion of long-term
      debt to Series C
      preferred stock 930,239

Common stock issued for
      the assumption of letter
      of credit 168 49,832 50,000

Conversion of advances to
      Series C preferred stock 10,000

Stock dividends declared 1,277,806 (1,277,806)

Stock dividends issued 3,185 721,383 (724,568)

Foreign currency
      translation adjustment $26,499 26,499 26,499

Net loss (4,176,571) (4,176,571) (4,176,571)

Total comprehensive loss $ (4,150,072)

Balances, December 31, 2003 $3,466,538 $4,072 $ 735 $153,412 $62,597,546 $ 553,238 $92,925 $(73,175,930) $(9,774,002)

See accompanying notes to consolidated financial statements.

F-27

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended December 31,

2003 2002 2001

Cash flows from operating activities

      Net loss $(4,176,571) $(9,358,524) $(19,141,739)

      Adjustments to reconcile net loss to net cash

            used in operating activities:

            Loss on impairment 735,354 467,765 2,825,149

            Loss (gain) from sale of assets 125,836 (98,627)

            Depreciation and amortization 2,128,610 2,546,869 2,493,429

            Bad debt expense 183,735 231,088 1,526,927

            Gain on forgiveness of debt (3,918,295) (1,812,092)

            Minority interest (157,617) (19,440) (112,472)

            Increase (decrease) in cash attributable to

                  changes in operating assets and liabilities:

                  Accounts receivable (843,008) 98,403 182,986

                  Prepaid expenses and other current assets 91,006 (121,479) (1,543)

                  Other assets (98,525) 1,198,439 279,276

                  Accounts payable and accrued expenses 1,248,607 2,864,007 2,490,207

                  Liabilities of discontinued operations (375,502) (318,640) (103,419)

Net cash used in operating activities (5,056,370) (4,322,231) (9,561,199)

Cash flows from investing activities

      Purchase of property and equipment (645,340) (533,610) (501,882)

      Proceeds from sale of property and equipment 15,000 215,570

      Repayments of (payments for) security deposits (271,552) (116,223) 14,250

      Repayments of (payments for) restricted cash 289,257 (466,793) (784,000)

Net cash used in investing activities (612,635) (901,056) (1,271,632)

Cash flows from financing activities

      Proceeds from sale of common stock, net 6,846,887 1,635,967 810,000

      Proceeds from sale of Series A preferred stock, net 4,243,384

      Proceeds from sale of Series B preferred stock, net 705,497

      Proceeds from sale of Series C preferred stock, net 2,526,299

      Proceeds from exercise of stock options 42,680

      Proceeds from (repayments of) escrow advances (1,130,500) 1,380,500

      Proceeds from short-term borrowings 42,927 6,805 421,969

      Proceeds from long-term debt 2,091,696 3,854,749 6,724,470

      Payments of long-term debt and capital lease obligations (2,340,706) (1,713,641) (1,736,129)

      Proceeds from contributions from minority

            stockholders of joint ventures 104,156 122,308 112,472

Net cash provided by financing activities 8,140,759 5,992,185 10,618,846

Net increase (decrease) in cash and cash equivalents 2,471,754 768,898 (213,985)

Cash and cash equivalents, beginning of year 768,898 213,985

Cash and cash equivalents, end of year $ 3,240,652 $ 768,898 $ —

See accompanying notes to consolidated financial statements.

F-28

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows (continued)

Years ended December 31,

2003 2002 2001

Supplemental disclosure of cash flow information:

      Cash paid during the years for interest $ 187,600 $ 250,932 $ 462,888

Supplemental disclosure of noncash investing and
      financing activities:

      Acquistion of capital leases $ 373,200 $ 193,963 $ 1,070,952

      Credits received from sale of property and equipment $ 15,000 $ — $ —

      Common stock issued for the acquisition of
            C&F Switching $ — $ — $ 2,500,000

      Conversion of long-term debt to common stock $ 2,280,164 $ 3,730,658 $ —

      Common stock issued for the assumption of a
            letter of credit $ 50,000 $ — $ —

      Conversion of long-term debt to Series A preferred stock $ — $ — $ 630,000

      Conversion of long-term debt to Series C preferred stock $ 930,239 $ — $ —

      Conversion of escrow advances to Series C preferred stock $ 10,000 $ — $ —

      Stock dividends issued $ 724,568 $ — $ —

      Stock dividends declared $ 1,277,806 $ — $ —

      Conversion of long-term debt to deferred revenue $ 555,000 $ — $ —

F-29

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

1. Nature of operations

2. Summary of significant accounting policies

Principles of Consolidation

Revenue Recognition

Cash and Cash Equivalents

The Company considers all highly-liquid debt instruments purchased with maturities of three months or less to be cash equivalents.

Accounts Receivable

Fair Value of Financial Instruments

Impairment of Long-Lived Assets and Impairment Charges

The Company complies with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. The Company continually evaluates whether events and circumstances have occurred that indicates the remaining estimated useful life of long-lived assets, such as property and equipment may warrant revision, or the remaining balance may not be recoverable.

F-30

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Impairment of Long-Lived Assets and Impairment Charges (continued)

During 2003, the Company recorded two impairments totaling approximately $735,000. The first impairment of $375,000 related to management’s decision to sell (to a third-party) certain switching equipment, which will be replaced by upgraded equipment. The Company continued to utilize the switching equipment in 2003, and in 2004, the Company entered into an agreement to sell the equipment under a sales-type capital lease. In accordance with the provisions of SFAS No. 144, the Company evaluated the present value of the future cash flows to be generated from this lease and determined that the present value of the future cash flows were less than the carrying value of the equipment, thus there was an impairment on the switching equipment. The remaining impairment of approximately $360,000 was related to the adjustment of equipment being used by the Company’s joint venture in India (see Note 4) to their fair value based on estimated future cash flows from these assets in accordance with SFAS No. 144.

During 2002, the Company recorded an impairment on equipment for approximately $468,000. This impairment was due to the termination and abandonment of a voice network to a route in the Caribbean, which during 2002, was deactivated and no longer generating revenues for the Company. The impairment was equal to the net book value of the equipment at the date this Caribbean voice network was deactivated.

During 2001, the Company recorded three impairments totaling approximately $2,825,000, primarily relating to goodwill acquired through various joint ventures (see Note 4). These joint ventures could not sustain profitable operations and based upon the fair value of estimated future cash flows, the Company determined that the goodwill relating to these joint ventures had no value.

Property and Equipment

Property and equipment are stated at cost and are depreciated or amortized on the straight-line method over the estimated useful lives of the assets as follows:

Estimated

Asset Useful Lives

Network equipment 5-7 Years

Furniture and fixtures 3-7 Years

Computer equipment and software 3-5 Years

Leasehold improvements Lease terms

Maintenance and repairs are charged to operations, while betterments and improvements are capitalized.

Advertising

Advertising costs are charged to operations as incurred and were approximately $32,000, $19,000 and $5,000, for 2003, 2002 and 2001, respectively.

Income Taxes

F-31

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Comprehensive Income

Earnings Per Share

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

Unexercised stock options to purchase 656,207, 1,009,771 and 937,314 shares of the Company’s common stock as of December 31, 2003, 2002 and 2001, respectively, were not included in the computation of diluted earnings per share because the exercise of the stock options would be anti-dilutive to earnings per share.

Unexercised warrants to purchase 252,751, 159,214, and 59,214 shares of the Company’s common stock as of December 31, 2003, 2002 and 2001, respectively, were not included in the computation of diluted earnings per share because the exercise of the warrants would be anti-dilutive to earnings per share.

Non-converted debt to purchase 47,215, 39,286 and 39,286 shares of the Company’s common stock as of December 31, 2003, 2002 and 2001, respectively were not included in the computation of diluted earnings per share because the conversion of the debt would be anti-dilutive to earnings per share. Had the debt been converted interest expense would have been reduced by approximately $30,000 in each of the years ended December 31, 2003, 2002 and 2001.

Stock-Based Compensation

F-32

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Stock-Based Compensation (continued)

2003 2002 2001

Net loss applicable to common stockholders,
      as reported $(4,811,825) $(10,001,076) $(19,141,739)

Deduct: total stock-based compensation expense
      under fair value method for awards, net of related
      tax effect (99,911) (345,221) (521,069)

Net loss applicable to common stockholders,
      pro forma $(4,911,736) $(10,346,297) $(19,662,808)

Earnings per share:

      Basic and diluted net loss applicable to common
            stockholders, as reported $ (0.35) $ (1.01) $ (2.06)

      Basic and diluted net loss applicable to common
            stockholders, pro forma $ (0.36) $ (1.05) $ (2.11)

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: dividend yield of 0%; weighted average option term of four years; average risk free interest rate of 4.43%, 5.61%, and 5.81%, in 2003, 2002, and 2001, respectively. The weighted-average fair value of common stock options granted was $0.00, $0.00 and $1.24 in 2003, 2002 and 2001, respectively.

Recently Issued Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to existing financial instruments the beginning of the first fiscal period after June 15, 2003. At December 31, 2003, the Company’s Series C Preferred Stock qualifies under the provisions of SFAS No. 150 (see Note 13), and has accordingly been classified as a liability. In the event the Company completes a successful qualified public offering for its stock, the Series C Preferred Stock will be converted into shares of the Company’s common stock and will be reclassified from a liability to equity.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not have any such derivative instruments as of December 31, 2003.

F-33

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

2. Summary of significant accounting policies (continued)

Recently Issued Accounting Pronouncements (continued)

In January 2003, the FASB issued Financial Interpretation Number (“FIN”) No. 46, “Consolidation of Variable Interest Entities” and in December 2003, issued FIN 46R, which superseded FIN 46 (collectively “FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was required to be applied to preexisting entities of the Company as of the beginning of the first quarter after June 15, 2003. FIN 46 was required to be applied to all new entities with which the Company became involved beginning February 1, 2003. Provisions of FIN 46R are applicable to all entities subject to the Interpretation no later than the end of the first quarter after March 15, 2004. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, (Reporting Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for Intangible Assets of Motor Carriers), No. 64, (Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements), Amendment of FASB Statement No. 13 (Accounting for Leases) and Technical Corrections.” This statement eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement.

In July 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 applies to costs associated with an exit activity (including restructuring). Those activities can include eliminating or reducing product lines, terminating employees and contracts, and relocating plant facilities or personnel. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. SFAS No. 146 will require a company to disclose information about its exit and disposal activities, the related costs, and changes in those costs in the notes to the interim and annual financial statements that include the period in which an exit activity is initiated and in any subsequent period until the activity is completed. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS No. 146, a company may not restate its previously issued financial statements and the new Statement grandfathers the accounting for liabilities that a company had previously recorded under EITF Issue 94-3.

Use of Estimates

3. Liquidity

At December 31, 2003, the Company has a working capital deficit of approximately $12,884,000 and a stockholders’ deficit of approximately $9,774,000. The Company has continued to sustain losses from operations and for the years ended December 31, 2003, 2002 and 2001 has incurred a net loss of approximately $4,177,000, $9,359,000 and $19,142,000, respectively. In addition, the Company has not generated positive cash flow from operations for the years ended December 31, 2003, 2002 and 2001. Subsequent to December 31, 2003, the Company has raised approximately $4,629,000 of additional proceeds, net of offering costs, through the issuance of Series C Preferred Stock (see Note 21) and intends to raise additional future capital through equity financing. The Company also converted approximately $585,000 of long-term debt into shares of the Company’s Series C Preferred Stock. In addition, subsequent to December 31, 2003, the Company has been able to increase its revenues and renegotiate and pay down certain obligations, which

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3. Liquidity (continued)

have resulted in reduced losses and reduced outstanding debt. While management believes that its current cash resources should be adequate to fund its operations for the year ending December 31, 2004, the Company’s long-term liquidity is dependent on its ability to attain future profitable operations. The Company cannot make any guarantees if and when it will be able to attain future profitability.

4. Joint ventures, acquisitions and divestitures

In April 1999, the Company entered into a joint venture agreement with Terremark World Wide Corporation to form an entity named IP.Com to engage in the international long distance telecommunications business, initially to and from Asia. The Company owned 50% of the joint venture and was the controlling party. This joint venture was terminated in 2000 due to recurring losses.

In June 1999, the Company entered into a joint venture agreement with Clarion Global Network, Inc. (“Clarion”) to form an entity named C&F Switching to combine their efforts in building gateway telecommunications switches in New York City, Miami, Florida and Los Angeles, California. The Company owned 50% of the joint venture and was the controlling party. The Company and Clarion contributed $1,000 each to the capital account. In February 2001, the Company purchased Clarion’s half of the joint venture for $2,500,000. Payment was made to Clarion by the Company issuing 142,857 shares of common stock of the Company at a price of $17.50 per share. The Company accounted for the transaction under the purchase method of accounting, whereby the Company allocated the purchase price of $2,500,000 to goodwill and property and equipment. At December 31, 2001, the Company recorded an impairment for the full amount of the goodwill (see Note 2).

In March 2000, the Company entered into a joint venture agreement with Communications Ventures India Pvt. Ltd. to form an entity named Estel Communication Pvt. Ltd. (“Estel”). Estel is organized and exists under the laws of India and has its office in New Delhi, India. The Company directly owns 49% of the joint venture and has voting rights in another 1.01%, which in turn gives the Company a 50.01% voting control in the joint venture. Estel was established to engage in the business of selling and supporting internet service protocol operations. Basically, Estel is in business as an Internet service provider in India. The joint venture has been funded primarily by the Company, which has also provided certain equipment for the establishment of the required technology platforms.

In May 2000, the Company acquired 100% of the outstanding stock of Integrated Telemanagement Solutions, Inc. (“ITS”), which was a Georgia corporation. The transaction was recorded under the purchase method of accounting. ITS was a consulting and management service company that specialized in the global hospitality market. In November 2001, the Company sold its interest in ITS. The operations of ITS are reflected in loss from discontinued operations for the year ended December 31, 2001. In addition, the Company accrued for 50% of the Atlanta location five year lease which the Company was still obligated under, which was settled in October 2003.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

4. Joint ventures, acquisitions and divestitures (continued)

5. Discontinued operations

The principal costs of the discontinuation of the retail services includes the remaining unpaid operating lease obligations on the Miami office space, which aggregated approximately $811,000 (this amount includes a draw down application on a letter of credit securing the lease of approximately $111,000). The costs also include the write-off of the remaining net book value of leasehold improvements made to the Miami location of approximately $291,000. In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company has not included the results of operations of its retail telecommunication services in the results from continuing operations. The results of operations for these services have been reflected in discontinued operations for the year ended December 31, 2001.

The loss from discontinued operations, representing retail telecommunication services, as well as the operations of ITS (See Note 4) for the year ended December 31, 2001, consists of approximately the following:

During the year ended December 31, 2003, certain trade payables, associated with the discontinuation of the Company’s retail services, were determined to be not payable to a vendor, which resulted in a gain on trade payable reductions of approximately $209,000.

As of December 31, 2002, liabilities of discontinued operations included the approximate $831,000 from the cancellation of the operating lease obligations and approximately $1,258,000 of trade payables reclassified from accounts payable and accrued expenses.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

6. Property and equipment

At December 31, 2003 and 2002, property and equipment is comprised of the following:

2003 2002

Network equipment, including $982,852 and $3,966,805
under capital leases in 2003 and 2002, respectively $ 8,539,925 $ 8,873,921

Furniture and fixtures 101,991 82,273

Computer equipment and software 579,815 1,157,913

Leasehold improvements 2,637,200 2,586,290

11,858,931 12,700,397

Less accumulated depreciation and amortization, including $721,158

and $1,478,338 under capital leases in 2003 and 2002, respectively 6,803,958 5,270,964

$5,054,973 $7,429,433

7. Restricted cash

As of December 31, 2003 and 2002, the Company had approximately $962,000 and $1,251,000, respectively, of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit (equal to the amount of the certificates of deposit). A significant portion of this restricted cash is required as security deposits for certain of the Company’s non-cancelable operating leases for office facilities.

8. Accounts payable and accrued expenses

Accounts payable and accrued expenses consist of the following at December 31, 2003 and 2002:

2003 2002

Trade accounts payable $ 6,643,313 $ 9,791,968

Accrued expenses 3,155,552 2,585,440

Interest payable 795,662 836,028

Deferred revenue 1,135,896 308,007

Amounts due to investors 250,000 1,380,500

Other 448,069 354,129

$12,428,492
$15,256,072

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations

At December 31, 2003 and 2002 components of long-term debt and capital lease obligations of the Company is comprised of the following:

2003 2002

Convertible notes payable
(a)
$ 300,000 $ 300,000

Demand notes payable
(b)
898,931 1,830,749

Convertible notes payable
(c)
299,079 832,622

Promissory notes payable
(d)
1,515,000

Demand notes payable
(e)
110,688 180,000

Promissory notes payable
(f)
1,150,000 1,218,000

Promissory notes payable
(g)
150,000 50,000

Promissory notes payable
(h)
250,000 500,000

Promissory notes payable
(i)
283,504

Capital lease obligations
(j)
1,202,702 2,725,554

Total long-term debt and capital lease obligations 4,644,904 9,151,925

Less current portion 4,434,732 8,221,925

$ 210,172 $ 930,000

(a) Three stockholders of the Company each entered into convertible subordinated note agreements aggregating $300,000, which mature in five years (or April 9, 2004), at an interest rate of 7.25% per annum (modified to 9.25% in April 2004). Interest shall be paid semi-annually on January 31 and July 31. The principal of the note shall be converted into shares of common stock of the Company, at the closing of a qualified initial public offering (“IPO”) if the IPO price equals or exceeds 125% of the conversion price, which is $18.66 per share. There is also an optional conversion clause that the note holders shall have the right, at their option, at any time up to and including the maturity date, to convert the outstanding principal. In 2004, $50,000 of these notes were settled, with the payment of the remaining $250,000 of the notes being deferred under forbearance agreements (see below for further detail).

(b) Two officers of the Company each entered into various loan agreements with the Company in exchange for demand notes payable aggregating $898,931 and $1,830,749 in 2003 and 2002, respectively. In 2003, a portion of these demand notes, aggregating $761,313, were converted into 6,677 shares and 70,467 shares, respectively of the Company’s Series C Preferred stock and common stock at conversion rates of $90 and $2.28, respectively, which approximated the fair market value of the stock at the conversion date. The notes bear interest at rates ranging from 4%–4.75% per annum and are due on demand.

(c) In connection with the development of an Asian venture opportunity to provide VoIP services, the Company raised $1,675,000 from certain existing shareholders, officers and directors during the months of October, November and December 2002. During August and November 2003, the Company issued two convertible notes payable, aggregating $140,000, related to a portion of these funds (the remaining portion of $1,535,000 was either held in escrow at December 31, 2003, repaid to investors, or converted to Series C Convertible Preferred Stock). The notes accrue interest at the prime rate, are payable monthly on the first of every month, and were and are due on January 15, 2004 and October 31, 2004, respectively. In the event this Asian venture materialized, the principal of the notes, at the option of the stockholders, are convertible into shares of common stock of the Company. The conversion price per share would be in proportion to the overall initial capitalization. As of December 31, 2003, the Asian venture had not materialized and these convertible notes remain outstanding.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations (continued)

In December 2000, the Company issued a promissory note in the principal amount of $200,000, to a stockholder, calling for monthly payments of approximately $4,500, including interest at 12% per annum, through January 2006. On September 1, 2002, the Company added an additional agreement providing for the option to convert a portion of the promissory note into 28,571 shares of the Company’s common stock at $2.28 per share. In September 2003, the Company revised the promissory note agreement for an additional principal amount of $100,000 with monthly payments of approximately $2,500, including interest at 12% per annum. At December 31, 2003 and 2002, the outstanding promissory note payable balance aggregated $159,079 and $82,622, respectively.

In May 2001, the Company issued a promissory note in the principal amount of $400,000 to a stockholder. The promissory note was due in full February 2002, with interest at 12% per annum. In connection with the private placement offering of Series C Preferred Stock (see Note 15), the Company provided the stockholder with the option to convert the promissory note into 3,334 shares of the Company’s Series C Preferred Stock at an exchange price of $90 per share. As of December 31, 2003, the stockholder was paid $100,000 of the remaining balance and exercised his option to convert the remaining promissory note payable balance of $300,000 into the Company’s Series C Preferred Stock.

In October 2002, the Company issued a promissory note in the principal amount of $350,000, with interest at 8% per annum with principal and interest due June 30, 2003. In December 2003, the Company entered into an agreement for the purpose of disposing the October 2002 note, which had not been paid at maturity. The agreement called for a payoff of $150,000 with monthly payments of approximately $20,000, including interest of 4.75% through December 2004. There was also an option to the stockholder to convert the remaining portion of $200,000 of the note into 67,227 shares of the Company’s common stock at an exchange price of $2.98 per share. At December 31, 2003, the stockholder exercised his option to convert the remaining portion of the note, which resulted in a zero outstanding note payable balance.

(d) On September 20, 2001, the Company issued a promissory note to a telecommunications company for the sum of $1,750,000, with monthly payments of approximately $55,000, including interest of 9% per annum, through September 2004. In December 2003, the Company entered into a new promissory note and settlement agreement, whereas both parties would satisfy and resolve all claims they may have against each other. The Company made available to the note holder, 246,667 shares of the Company’s common stock at a price of $5.25 per share in lieu of a portion of the outstanding note payable. The remaining indebtedness of $555,000 shall be resolved with a service agreement, where the note holder will receive a reduced rate for every minute of traffic that is passed through the Company’s network for a period of 24 months through December 2005. At December 31, 2003, the $555,000, related to the service agreement, is no longer classified as debt, but reclassified to deferred revenue. As of December 31, 2003 and 2002, the outstanding promissory note payable balance aggregated nil and $1,515,000, respectively.

(e) Between March 2001 and September 2002, the Company issued promissory notes to three stockholders, aggregating $110,688 and $180,000 in 2003 and 2002, respectively. The notes bear interest at rates ranging from 8% to 12% per annum and are due on demand.

(f) In January 2001, the Company issued a promissory note in the amount of $1,000,000, with monthly payments of interest only at 13% per annum, with principal to be paid in full December 2001. This promissory note is secured by certain of the Company’s accounts receivables. At December 31, 2003, this note was in default and, accordingly, has been classified as currently due.

Between September 2002 and April 2003, the Company issued various promissory notes aggregating $150,000 and $218,000 in 2003 and 2002, respectively. Interest at 8% per annum is to be paid in full through May 2003. At December 31, 2003, these notes were in default and, accordingly, have been classified as currently due.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations (continued)

(g) Between December 2002 and February 2003, the Company entered into loan agreements with various stockholders, for the purpose of generating funds to initiate a joint venture project in the United Arab Emirates (see Note 4), aggregating $100,000 and $50,000 in 2003 and 2002, respectively. The Company, a 50.2% equity interest holder in the joint venture, agreed as consideration, to give these stockholders 2% of the 50% profit distributions that the Company receives from the joint venture for a period of three years. The loans are to be repaid by the Company with funds it receives from the joint venture in twenty-four equal monthly installments, starting on the earlier of the first business day following the first month the joint venture generates a profit or July 1, 2003. As of December 31, 2003 and 2002, these loans have not been paid and remain outstanding. During January and February 2004, all but one stockholder converted the outstanding notes to 277 shares of Preferred C stock at $90 per share. During September 2004, the remaining stockholder converted his $25,000 note into a new promissory note, which bears interest at 4.5% per annum. Principal and interest are payable in one lump sum on the earlier of 15 days from the completion of an IPO or September 1, 2005.

(h) In July 2002, the Company entered into loan agreements with various stockholders, aggregating $500,000 for the purpose of generating funds to initiate the Pakistan service project with Pakistan Telecommunications Company Limited (“PTCL”) (See Note 12). The loans were to be repaid by the Company with funds it receives from PTCL in equal monthly installments, immediately upon available funds or February 2003, and continuing through August 2003, bearing interest at 15% per annum. In 2003, a portion of these loan agreements, aggregating $250,000, was converted into shares of the Company’s Series C Preferred Stock and common stock. As of December 31, 2003 and 2002, these loan agreements have outstanding balances of $250,000 and $500,000, respectively.

(i) In September 2003, the Company issued promissory notes aggregating $300,000 to various stockholders for the purpose of resolving the Company’s capital lease debt service contract with the lessor of the equipment under lease. The notes were to accrue interest at 8% per annum and be paid in equal monthly installments of approximately $500 to $2,000 per month with the outstanding principal due on October 31, 2004. The Company also issued warrants to these investors to purchase the aggregate of 85,714 shares of the Company’s common stock at a purchase price of $2.98 per share. The warrants are to expire July 1, 2005. At the date of grant, these warrants had a nominal value assigned to them that was immaterial to the consolidated financial statements. As of December 31, 2003 the outstanding balance of the various notes payable aggregated $283,504.

(j) As of December 31, 2003 and 2002, approximately $1,247,000 and $1,260,000, respectively of capital lease obligations had been forgiven and recorded to forgiveness of debt (see Note 16).

In June 2002, the Company issued warrants to one of the capital lease note holders to purchase 14,286 shares of the Company’s common stock at a purchase price of $0.04 per share. At the date of grant, these warrants had a nominal value assigned to them that was immaterial to the consolidated financial statements.

At December 31, 2003 and 2002, approximately $900,000 and $2,700,000 of the capital lease obligations were in default and accordingly have been classified as currently due.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

9. Long-term debt and capital lease obligations (continued)

Future aggregate principal payments on long-term debt and capital leases in the years subsequent to December 31, 2003 are as follows:

Year ending December 31,

            2004 $4,667,315

            2005 129,220

            2006 81,000

Total minimum payments 4,877,535

Less amount representing interest 232,631

Present value of minumum payments 4,644,904

Less current portion 4,434,732

$ 210,172

10. Short-term borrowing obligations

Short-term borrowing obligations of the Company represent a revolving line of credit agreement between an Indian bank and the Company’s Estel joint venture. The line of credit provides for borrowings up to $600,000 at an interest rate at the bank’s prime rate (approximately 2% at December 31, 2003 and 2002, respectively) and was initially due in August 2003, but was extended to August 2005. The line of credit is collateralized by substantially all of the assets of the Estel joint venture. As of December 31, 2003 and 2002 drawings on the line of credit amounted to approximately $532,000 and $489,000, respectively.

11. Income taxes

Due to the operating losses incurred, the Company has no current income tax provision for the years ended December 31, 2003, 2002 and 2001. The provision for income taxes consists of the following:

2003 2002 2001

Deferred

      Federal $(1,728,000) $(3,174,000) $(6,485,000)

      State (19,000) 20,000 (97,000)

(1,747,000) (3,154,000) (6,582,000)

Change in valuation allowance 1,747,000 3,154,000 6,582,000

$   — $   — $   —

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

11. Income taxes (continued)

The following reconciles the Federal statutory tax rate to the effective income tax rate:

	2003	2002	2001
	%	%	%

Federal statutory rate	34.0	34.0	34.0
State, net of federal tax	0.3	(0.2)	0.3
Other	7.5	(0.1)	0.1
Change in valuation allowance	(41.8)	(33.7)	(34.4)

Effective income tax rate	—	—	—

The components of the Company’s deferred tax assets and liability consist of approximately the following at December 31, 2003 and 2002, respectively:

2003 2002

Deferred tax assets

      Net operating losses $ 23,569,000 $ 21,950,000

      Allowance for doubtful accounts 257,000 207,000

      Accrued liabilities and other 677,000 951,000

24,503,000 23,108,000

Deferred tax liability

      Property and equipment (539,000) (891,000)

Deferred tax asset, net 23,964,000 22,217,000

      Less valuation allowance (23,964,000) (22,217,000)

$ — $ —

The Company has available at December 31, 2003 and 2002, approximately $69,320,000 and $64,559,000, respectively, of unused net operating loss carryforwards that may be applied against future taxable income, which expire in various years from 2012 to 2023. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards and credits may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. The amount of such limitation, if any, has not been determined.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

12. Commitments and contingencies

The Company has various non-cancelable operating lease agreements for office facilities. A summary of the lease commitments under non-cancelable leases at December 31, 2003 is approximately as follows:

Year ending December 31,

            2004 $1,030,000

            2005 1,049,000

            2006 1,072,000

            2007 1,095,000

            2008 1,119,000

            Thereafter 1,230,000

$6,595,000

Rent expense for all operating leases was approximately $1,238,000, $1,033,000 and $1,189,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

In May 2002, the Company entered into a Service Agreement (the “Agreement”) with Pakistan Telecommunications Company, Ltd (“PTCL”), under which PTCL would provide for the termination of incoming international traffic into Pakistan focusing on VoIP services from the United States and Europe. The Agreement provides for an initial term of one year, with additional one year extensions terms. The Company has exercised it’s option to extend the agreement, which is in effect through May 2005. The Agreement provides for the Company to place all necessary switching equipment in Pakistan, the United States and Europe (which it has done so through the Pakistan joint venture formed with Turner Hill–see Note 4). Under the terms of the Agreement PTCL will provide the Company with voice termination services within Pakistan, for which the Company will pay PTCL a maximum service charge of $0.19 per minute for all calls terminating in Pakistan using the Company’s VolP platform. The Agreement also requires the Company to guarantee a minimum of three million minutes a month to terminate to Pakistan. The Company is required to keep on deposit with PTCL, a one month rolling advance equal to the number of minutes terminated during the preceding month, times the prevailing termination rate charged by PTCL to the Company. For the years ended December 31, 2003 and 2002 the Company has incurred approximately $9,327,000 and $783,000, respectively of termination charges under this agreement.

In connection with the joint venture agreement with Turner Hill (See Note 4), the joint venture entity is required to pay a management fee to Turner Hill equal to the number of minutes terminating in Pakistan on a monthly basis times a fixed rate per minute. For the years ended December 31, 2003 and 2002, the joint venture incurred management fees to Turner Hill for approximately $361,000 and $36,000, respectively.

Legal Matters

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
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Notes to Consolidated Financial Statements

12. Commitments and contingencies (continued)

Legal Matters (continued)

In 1999, the Company guaranteed a real property lease on behalf of a joint venture. The joint venture subsequently defaulted on the lease and in July 2003 the landlord brought an action in the Circuit Court, Miami, Florida. The Company is also being sued for back rent and costs. The Company believes that this dispute will be resolved amicably, but if the Company and management are unable to amicably resolve the action, the Company believes it can sustain the impact of the judgement.

13. Preferred stock

Dividends

The holders of Series A Preferred Stock are entitled to receive cumulative dividends of 12% per share per annum, which are payable annually in arrears beginning on August 31, 2002 and are payable (at the Company’s option) in cash or shares of the Company’s common stock at a rate equal to the conversion rate in effect at the date of declaration of the dividend. The holders of Series B Preferred Stock are entitled to a cumulative dividend of 11.5% per share per annum, which are payable annually in arrears beginning on March 31, 2003 and are payable (at the Company’s option) in cash or shares of the Company’s common stock at a rate equal to the conversion rate in effect at the date of declaration of the dividend. The holders of Series C Preferred Stock are entitled to receive cumulative dividends of 8% per share per annum which are payable annually beginning on December 18, 2004 and are payable in cash, unless the Company completes a successful IPO before December 18, 2004.

No dividends shall be paid on any outstanding shares of common stock, or Series A and B Preferred Stock, unless all then accrued, but unpaid dividends have been paid with respect to all outstanding shares of Series C Preferred Stock.

Dividends in arrears at December 31, 2002 on the Company’s Series A Preferred Stock were approximately $643,000.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13. Preferred stock (continued)

Dividends (continued)

In January 2003, the Company’s Board of Directors (the “Board”) declared a stock dividend payable on the outstanding shares of Series A and B Preferred Stock (due on August 31, 2002 and March 31, 2003, respectively). The Board elected to issue shares of the Company’s common stock in lieu of cash at a conversion rate equal to $2.28 per share times the aggregate dividends due to the holders of both Series A and B preferred Stock at the date of record (August 15, 2002 and March 15, 2003, respectively). During the year ended December 31, 2003, 318,491 shares of the Company’s common stock valued at approximately $725,000 have been recorded and issued as a dividend to the Series A and Series B Preferred shareholders.

In December 2003, the Board declared a stock dividend payable on the outstanding shares of Series A and B Preferred Stock (due on August 31, 2003 and March 31, 2004, respectively). The Board elected to issue shares of the Company’s common stock in lieu of cash at a conversion rate equal to $2.98 per share times the aggregate dividends due to the holders of both Series A and B Preferred Stock at date of record (August 15, 2003 and March 15, 2004, respectively). At December 31, 2003, the Company recorded a stock dividend distributable of approximately $553,000 for the issuance of 185,962 shares of common stock to the holders of the Company’s Series A and Series B Preferred Stock.

Liquidation

In the event of any liquidation, dissolution, or winding up of the Company either voluntary or involuntary or a merger or consolidation with any other corporation, or a sale or other transfer of substantially all the assets of the Company, the holders of Series C Preferred Stock shall be entitled to receive, in preference to holders of Series A and B Preferred Stock and common stock, an amount equal to $90 per each outstanding share plus an amount equal to all accrued but unpaid dividends. Upon completion of the required distribution for Series C Preferred Stock, the holders of Series B Preferred Stock shall be entitled to receive, in preference to Series A Preferred Stock and common stock an amount equal to one and one half (1 1 / 2 ) times their initial investment, plus accrued and unpaid dividends.

If the assets and funds of the Company available for payment to the holders of the Series B and C Preferred Stock are insufficient to pay the liquidation preference described above, the entire remaining assets and property of the Company will be paid ratably to the holders of the Series B and C Preferred Stock in proportion to their aggregate liquidation preferences. Following the above payments, the remaining assets and funds of the Company legally available for distribution, if any, shall be distributed ratably among the holders of common stock, Series A, B and C Preferred Stock in proportion to the number of shares of common stock held on an as-if converted basis.

Redemption

The Company has the right to redeem the outstanding shares of Series A and B Preferred Stock at any time (with 30 days prior notice) for a redemption price of $10 per share plus accrued, but unpaid dividends. The Company has the right to redeem the outstanding shares of Series C Preferred Stock, commencing on the first anniversary of the first issuance of Series C Preferred Stock, at a price per share equal to 115% of the stated value of $90, plus pro rata accrued and unpaid dividends due through the date of redemption.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

13. Preferred stock (continued)

Conversion

Each share of Series A and B Preferred Stock is convertible, at the option of the stockholder, at any time after the issuance date of such share into a number of shares of common stock as determined by the conversion rate in effect at the time of conversion, plus all accrued and unpaid dividends payable in either cash or common stock (at the Company’s option). Each share of Series C Preferred Stock is convertible, at the option of the stockholder, at any time after the issuance date of such shares into a number of shares of common stock, based upon a conversion price of $3.15 per common share.

At various times through the first six months of 2004, all the holders of the Company’s Series A & B Preferred Stock, elected to convert their shares into common stock (See Note 21).

Voting

No holders of Preferred Stock have voting rights, except as provided by law.

14. Stock options and warrants

Under the Company’s 1998 stock option plan (as amended), the Company has reserved 1,714,286 shares of common stock for issuance to employees at exercise prices determined by the Board. Options under the plan vest in annual increments over a four year period, expire ten years from the date of grant and are issued at exercise prices no less than 100% of the fair market value at the time of grant. As reported in Note 2, the Company has elected to adopt the disclosure-only provisions of SFAS No. 123 and will account for stock-based employee compensation plans in accordance with APB 25. As a result, no compensation cost for its stock option plan has been recognized in the periods presented. In November 2004, the Board approved an increase in the number options available for grant under the Company’s 1998 stock option plan to 2,680,857.

F-46

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

14. Stock options and warrants (continued)

A summary of the Company’s stock option plan as of December 31, 2003, 2002 and 2001 and changes during the years ended on those dates is as follows:

Weighted

Number Average

of Per Share Option

Shares Option Price Price

Shares under options at January 1, 2001 1,127,814 $2.35 – 14.00 $ 8.54

      Granted in 2001 148,186 8.75 – 17.50 10.57

      Exercised in 2001 (1,143) 2.35 – 2.35 2.35

      Expired in 2001 (337,543) 2.35 – 17.50 6.55

Shares under options at December 31, 2001 937,314 2.35 – 14.00 10.15

      Granted in 2002 184,757 8.23 – 17.50 8.96

      Expired in 2002 (112,300) 2.35 – 17.50 10.50

Shares under options at December 31, 2002 1,009,771 2.35 – 14.00 7.39

      Granted in 2003 9,771 8.75 – 8.75 8.75

      Expired in 2003 (363,335) 2.35 – 14.00 5.11

Shares under options at December 31, 2003 656,207 $2.35 – $11.66
$ 8.72

Options exercisable at December 31, 2003 452,316 $2.35 – $11.66
$ 8.58

Options exercisable at December 31, 2002 573,743 $3.35 – $14.00
$ 6.44

Options exercisable at December 31, 2001 402,510 $2.35 – $14.00
$ 6.76

The following table summarizes information about stock options outstanding at December 31, 2003:

Options Outstanding Options Exercisable

Number Weighted-Average Number

Outstanding Remaining Weighted-Average Exercisable Weighted-Average

Exercise Prices at 12/31/03 Contractual Life Exercise Price at 12/31/03 Exercise Price

$ 2.35 42,857 4.8 years $ 2.35 42,857 $ 2.35

8.23 – 8.75 527,636 7.7 years 8.75 340,887 8.75

11.66 85,714 5.8 years 11.66 68,571 11.66

656,207 452,315

F-47

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

14. Stock options and warrants (continued)

Weighted

Number Average

of Per Share Warrant

Shares Warrant Price Price

Shares under warrants at January 1, 2001 43,500
$2.98 – $2.98
$2.98

      Issued in 2001 15,714
8.75 – 8.75
8.75

Shares under warrants at December 31, 2001 59,214
2.98 – 8.75
4.52

      Issued in 2002 100,000
0.04 – 3.50
3.01

Shares under warrants at December 31, 2002 159,214
0.04 – 8.75
3.57

      Issued in 2003 93,537
2.98 – 3.57
3.01

Shares under warrants at December 31, 2003 252,751
$0.04 – $8.75
$3.33

All warrants are fully exercisable upon issuance.

15. Equity transactions

In November 2000, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 2,571,429 shares of the Company’s $0.01 par value common stock at a purchase price of $17.50 per share. The private placement was open through March 1, 2001, but was extended for an additional 90 days. The total number of shares of common stock issued in this private placement during 2001 was 46,286 (189,143 in the aggregate between 2001 and 2000) shares for which proceeds of $810,000 (approximately $3,310,000 in the aggregate between 2001 and 2000) were received.

In June 2001, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 1,100,000 shares of the Company’s Series A Preferred Stock at a purchase price of $10 per share. The private placement was valid through September 30, 2001, but was extended for an additional 60 days. The total number of shares of Series A Preferred Stock issued in this private placement was 443,225 shares for which proceeds of approximately $4,243,000 were received, net of expenses of approximately $189,000.

In March 2002, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 1,500,000 shares of Series B Preferred Stock at $10 per share. The private placement was valid through June 30, 2002, but was extended for an additional 90 days. The total number of shares of Series B Preferred Stock issued in this private placement was 83,500 shares for which proceeds of approximately $705,000 were received, net of expenses of approximately $130,000.

In July 2002, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 8,000,000 shares of common stock at $2.28 per share. The private placement was valid through September 21, 2002 but was extended for an additional 135 days. The total number of shares of common stock issued in this private placement during 2002 was 719,106 shares for which proceeds of approximately $1,636,000 were received. The total number of shares of common stock issued in this private placement during 2003 was 1,353,508 shares for which proceeds of approximately $3,084,000 were received.

F-48

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

15. Equity transactions (continued)

In June 2003, the Company commenced a private placement for the purpose of raising working capital for the Company’s operations. The private placement provided for the issuance of a maximum of 5,714,286 shares of the Company’s $0.01 par value common stock at $2.98 per share. The private placement was valid through September 15, 2003, but was extended for an additional 90 days. The total number of shares of common stock issued in this private placement was 1,342,844 shares for which proceeds of approximately $3,763,000 were received, net of expenses of approximately $232,000.

In December 2003, certain note holders elected to convert their notes and related accrued interest, totaling approximately $930,000, into shares of the Company’s Series C Preferred Stock at a conversion rate of $90 per share, resulting in the issuance of 10,336 shares of Series C Preferred Stock. Also during December 2003, a $10,000 advance from a potential investor in a proposed Asian joint venture (which did not materialize) was converted into 111 shares of Series C Preferred Stock at a conversion rate of $90 per share.

At various times during the year ended December 31, 2003, certain note holders elected to convert approximately $2,280,000 (in the aggregate) of their notes and accrued interest into common stock at conversion rates ranging between $2.28 and $5.25 per share. The conversions resulted in the issuance of an additional 623,234 shares of common stock. Also during 2003, the Company issued 16,807 shares of its common stock, at $2.98 per share for the assumption of a $50,000 letter of credit in the name of and secured by a shareholder of the Company.

At various times during the year ended December 31, 2002, certain note holders elected to convert approximately $3,731,000 (in the aggregate) of their notes into common stock at a conversion rate of $2.28. The conversion resulted in the issuance of an additional 1,639,850 shares of common stock.

During 2002 holders of Series A and B Preferred Stock elected to convert 112,250 and 10,000 shares, respectively, of their stock into common stock at conversion rates of $8.75 and $8.23, respectively. The conversion resulted in the issuance of 140,444 shares of common stock.

During 2001, a shareholder of common stock elected to convert 12,857 shares of common stock to Series A Preferred Stock at a conversion rate of $35 per Series A Preferred Stock. The conversion resulted in the issuance of 13,250 additional shares of Series A Preferred Stock valued at approximately $133,000.

At various times during the year ended December 31, 2001, certain note holders elected to convert $630,000 (in the aggregate) of their notes into Series A Preferred Stock at a conversion rate of $10 per share. The conversions resulted in the issuance of 63,000 additional shares of Series A Preferred Stock for a total of $630,000.

During the year ended December 31, 2000, an officer of the Company relinquished 371,429 shares of his common stock back to the Company (at no cost) for the purpose of the Company utilizing this stock for reissuance in subsequent private placements and the settlement of certain debt. During the years ended December 31, 2000 and 2001, the Company reissued 42,857 and 218,857 shares, respectively. During the year ended December 31, 2002, the Company issued the remaining 109,714 shares of this stock in connection with the conversion of long-term debt into common stock.

F-49

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

16. Forgiveness of debt

During 2002, the Company had an outstanding capital lease obligation with a lessor, aggregating approximately $1,814,000. In June 2002, the Company entered into a settlement agreement with the lessor whereas the Company agreed to pay the sum of $175,000, and the lessor would receive 166,571 shares of the Company’s common stock at $2.28 per share, resulting in a $1,260,000 forgiveness of debt. The settlement agreement also granted the lessor warrants to purchase 14,286 shares of the Company’s common stock at a purchase price of $.04 per share (See Note 9). For the year ended December 31, 2002, the Company recorded approximately $1,812,000 forgiveness of debt, including approximately $552,000 of settled accounts payable disputes.

During 2003, the Company had three outstanding capital lease obligations with lessors, aggregating approximately $1,974,000. During 2003, the Company entered into settlement agreements whereas the Company agreed to pay the sum of $695,000 and agreed to issue 14,286 shares of common stock at $2.28 per share, resulting in approximately $1,247,000 forgiveness of debt. For the year ended December 31, 2003, the Company recorded approximately $3,918,000 of forgiveness of debt, including approximately $2,671,000 of settled accounts payable disputes.

17. Profit sharing plan

The Company has a defined contribution profit sharing plan, which covers all employees who meet certain eligibility requirements. Contributions to the plan are made at the discretion of the Board. No contributions to the profit sharing plan were made for the years ended December 31, 2003, 2002 and 2001, respectively.

18. Related party transactions

During 2003 and 2002, the Company generated funds from certain investors for the purposes of potential joint ventures and projects. These funds were put into escrow accounts, whereby if the projects are successful, the investors receive additional issuances of stock at the prevailing fair value of the stock or if unsuccessful are to be refunded to these investors. For the years ended December 31, 2003 and 2002, accounts payable and accrued expenses included $250,000 and $1,380,500, respectively, of amounts due to investors (See Note 8).

19. Concentrations

Major Customers

During 2003, eight customers of the Company accounted for revenues exceeding 56% in total and at least 5% individually of the Company’s total revenues for 2003. During 2002, five customers of the Company accounted for revenues exceeding 43% in total and at least 5% individually of the Company’s total revenues for 2002. During 2001, five customers of the Company accounted for revenues exceeding 38% in total and at least 5% individually of the Company’s total revenues for 2001. Revenues earned from these customers were approximately $18,816,000 in 2003, $12,169,000 in 2002 and $11,228,000 in 2001. At December 31, 2003, 2002 and 2001, the amounts owed to the Company by these customers were approximately $1,004,000, $474,000 and $661,000, respectively.

Geographic Concentrations

F-50

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

19. Concentrations (continued)

Geographic Concentrations (continued)

During 2003, 2002 and 2001, the Company generated revenue from continuing operations from customers in the following countries.

2003 2002 2001

India $ 2,119,000 $ 3,290,000 $ 1,472,000

United States 31,350,000 25,132,000 28,143,000

Other 256,000

$33,725,000 $28,422,000 $29,615,000

At December 31, 2003 and 2002, the Company had foreign long-lived assets as follows:

2003 2002

India $1,311,680 $1,779,646

Pakistan 229,522 286,648

$1,541,202 $2,066,294

Revenues by geographic area are based upon the location of the customers. The foreign long lived assets by geographic area represent those assets physically used in the operations in each geographic area

20. Selected quarterly results (unaudited)

2003

First Second Third Fourth

Quarter Quarter Quarter Quarter

      Net sales $ 9,373,375 $ 7,572,457 $ 7,894,724 $ 8,884,719

      Operating loss $(1,644,047) $(1,879,022) $(1,766,786) $(2,251,658)

      Forgiveness of debt 12,206 1,184,088 582,739 2,139,262

      Net loss $(1,825,083) $ (904,620) $(1,375,533) $ (71,335)

      Preferred stock dividends $ (82,015) $ — $ (488,670) $ (64,569)

      Net loss applicable to common
            stockholders $(1,907,098) $ (904,620) $(1,864,203) $ (135,904)

      Basic and diluted net loss per
            common share applicable to
            common stockholders $ (0.14) $ (0.07) $ (0.14) $ —

F-51

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

20. Selected quarterly results (unaudited) (continued)

2002

First Second Third Fourth

Quarter Quarter Quarter Quarter

      Net sales $ 9,104,339 $ 7,444,119 $ 5,517,079 $ 6,356,612

      Operating loss $(2,433,700) $(2,634,745) $(2,597,212) $(2,348,685)

      Forgiveness of debt — 1,611,094 2,460 198,538

      Net loss $(2,754,896) $(1,339,780) $(2,897,655) $(2,366,193)

      Preferred stock dividends $ — $ — $ (642,552) $ —

      Net loss applicable to common

            stockholders $(2,754,896) $(1,339,780) $(3,540,207) $(2,366,193)

      Basic and diluted net loss per

            common share applicable to

            common stockholders $ (0.28) $ (0.14) $ (0.39) $ (0.21)

21. Subsequent events

At various times through the first six months of 2004, all the shareholders of the Company’s Series A Preferred Stock, elected to convert their shares into common stock at a conversion rate of $3.50 per share. This conversion resulted in the issuance of 1,163,500 shares of common stock. In connection with this conversion accrued dividends from September 1, 2003 to the date of the respective conversions were issued in the form of common stock. These common stock dividends resulted in the issuance of 119,479 additional shares of common stock.

At various times through the first six months of 2004, all the shareholders of the Company’s Series B Preferred Stock, elected to convert their shares into common stock at a conversion rate of $3.50 per share. This conversion resulted in the issuance of 210,000 shares of common stock. In connection with this conversion accrued dividends from April 1, 2004 to the date of the respective conversions were issued in the form of common stock. These common stock dividends resulted in the issuance of 3,533 additional shares of common stock.

In March 2004, certain note holders elected to convert approximately $585,000 of their notes into shares of the Company’s Series C Preferred Stock at a conversion rate of $90 a share. The conversion resulted in the issuance of 6,504 additional shares of Series C Preferred Stock.

In March 2004, the Company issued 59,470 shares of its Series C Preferred Stock in a final closing of the private placement commenced in November 2003. The total proceeds received from the issuance of these shares amounted to approximately $4,629,000, net of investment expense of approximately $723,000.

In March 2004, the Board of Directors approved an increase of the authorized number of shares of the Company’s stock to be issued to 40,000,000. Of the total shares authorized to be issued, 30,000,000 are designated for the issuance of common stock and 10,000,000 are designated for the issuance of preferred stock.

F-52

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

21. Subsequent events (continued)

On November 1, 2004, the Board of Directors, upon approval of the stockholders, increased the authorized number of shares to 136,000,000 which includes 105,000,000 shares of common stock, 10,000,000 shares of preferred stock and 21,000,000 shares of Class A common stock. On or about December 15, 2004, each share of the Company’s outstanding common stock will automatically be converted into one share of Class A common stock. The Class A common stock may not be converted into common stock until one year after the successful completion of an initial public offering unless the holder agrees to exercise a one year lock up agreement.

In November 2004, the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net with a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible promissory note. These two notes aggregate $2,508,333, bear interest at 6.5% per annum and are due in November 2006. The notes would automatically convert into common shares at a conversion price of $3.85 per share upon successful registration from an initial public offering. The common stock is subject to a one year lock up provision.

F-53

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

Balance at Additions

beginning of charged to Deductions Balance at end

period expense from Reserves of period

Allowance for Doubtful Accounts for the Years Ended:

December 31, 2003 $ 517,409 $ 183,735 $ 13,654 $ 687,490

December 31, 2002 972,073 231,088 685,752 517,409

December 31, 2001 1,196,584 1,526,927 1,751,438 972,073

Tax Valuation Account for the Years Ended:

December 31, 2003 $22,217,000 $1,747,000 $ – $23,964,000

December 31, 2002 19,063,000 3,154,000 – 22,217,000

December 31, 2001 12,481,000 6,582,000 – 19,063,000

F-54

[Alternate Page for Selling Securityholder Prospectus]

PROSPECTUS

SUBJECT TO COMPLETION DATED NOVEMBER ___, 2004
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
3,141,838 PURCHASE WARRANTS

This Prospectus relates to 3,141,838 redeemable common stock purchase warrants (the “Selling Securityholders’ Warrants”), of Fusion Telecommunications International, Inc., which are being offered for sale by certain selling Securityholders (the “Selling Securityholders”). Each Selling Securityholders’ Warrant expires on ___________, 2009, five years after the date of Prospectus, and entitles the holder thereof, commencing one year from the date of this Prospectus, to purchase one share of common stock at an exercise price of $6.00 (100% of the offering price of our common stock) during the four-year period beginning on the first anniversary of the date of our Prospectus. The warrant exercise price will increase to 133% of the then current exercise price (initially $8.00) of the purchase warrants on the eighteen month anniversary of the date of the prospectus provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. The Selling Securityholders’ Warrants are redeemable by the company, at a price of $.01 per Selling Securityholders’ Warrant, with the prior written consent of Kirlin Securities, Inc., at any time once they become exercisable, for $.01 per purchase warrant, on not less than thirty (30) days prior written notice if the last sale price of the common stock has been at least 200% of the then-current exercise price of the purchase warrants (initially $12.00) for twenty (20) consecutive trading days ending on the third day prior to the date on which notice is given. The Purchase Warrants shall be exercisable until the close of the business day preceding the date fixed for redemption. The Selling Securityholders’ Warrants are sometimes hereinafter referred to as the “Selling Securityholders’ Securities.” See “SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION.”

We will not receive any of the proceeds from the sales of the Selling Securityholders’ Securities by the Selling Securityholders. The Selling Securityholders’ Securities may be offered from time to time by the Selling Securityholders, their pledgees and/or their donees, through ordinary brokerage transactions in the over-the-counter market, in negotiated transactions or otherwise, at market prices prevailing at the time of sale or at negotiated prices.

The Selling Securityholders, their pledgees and/or their donees, may be deemed to be “underwriters” as defined in the Securities Act of 1933, as amended (the “Securities Act”). If any broker-dealers are used by the Selling Securityholders, their pledgees and/or their donees, any commissions paid to broker-dealers and, if broker-dealers purchase any Selling Securityholders’ Securities as principals, any profits received by such broker-dealers on the resale of the Selling Securityholders’ Securities may be deemed to be underwriting discounts or commissions under the Securities Act. In addition, any profits realized by the Selling Securityholders, their pledgees and/or their donees, may be deemed to be underwriting commissions. All costs, expenses and fees in connection with the registration of the Selling Securityholders’ Securities offered by Selling Securityholders will be borne by the Company. Brokerage commission, if any, attributable to the sale of the Selling Securityholders’ Securities will be borne by the Selling Securityholders, their pledgees and/or their donees.

The Selling Securityholders’ Securities offered by this Prospectus may be sold from time to time by the Selling Securityholders, their pledgees and/or their donees. No underwriting arrangements have been entered into by the Selling Securityholders. The distribution of the Selling Securityholders’ Securities by the Selling Securityholders, their pledgees and/or their donees, may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary broker’s transactions, privately-negotiated transactions or through sales to one or more dealers for resale of such shares as principals, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders, their pledgees and/or their donees, in connection with sales of the Selling Securityholders’ Securities.

A-1

[Alternate Page for Selling Securityholder Prospectus]

On the date of this Prospectus, a registration statement under the Securities Act with respect to an underwritten public offering of 3,325,000 shares of Common Stock and 3,325,000 Purchase Warrants (without giving effect to the overallotment option (the Overallotment Option”) granted to the underwriters to purchase an additional 498,750 shares of Common Stock and 498,750 Purchase Warrants), with each Purchase Warrant entitling the holder to purchase one share of Common Stock of the Company, was declared effective by the Securities and Exchange Commission. In connection with the offering of the Common Stock and Redeemable Warrants, the Company granted the representative of the underwriter a warrant to purchase 332,500 shares of Common Stock and 332,500 Redeemable Warrants (the “Underwriters’ Warrants”).

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE “RISK FACTORS.”

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is ______________, 2004

A-2

[Alternate Page for Selling Securityholder Prospectus]

THE OFFERING

Securities Registered
3,141,838
Purchase Warrants, each warrant entitling its holder to purchase one share of common stock. See “DESCRIPTION OF SECURITIES” and “SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION.”

Risk Factors This Offering involves a high degree of risk. See “RISK FACTORS.”

A-3

[Alternate Page for Selling Securityholder Prospectus]

PLAN OF DISTRIBUTION

Each Selling Securityholder is free to offer and sell his or her Purchase Warrants at such times, in such manner and at such prices as he or she shall determine. Such Purchase Warrants may be offered by the Selling Securityholders in one or more types of transactions, which may or may not involve brokers, dealers or cash transactions. The Selling Securityholders may also use Rule 144 under the Securities Act, to sell such securities, if they meet the criteria and conform to the requirements of such rule. There is no underwriter or coordinating broker acting in connection with the proposed sales of Purchase Warrants by the Selling Securityholders.

The Selling Securityholders have advised us that sales of Purchase Warrants may be effected from time to time in transactions (which may include block transactions) on an exchange in the over-the-counter market, in negotiated transactions, or a combination of such methods of sale, at a fixed price which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Selling Securityholders may effect such transactions by selling Purchase Warrants directly to purchasers or to or through broker-dealers, which may as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions, or commissions from the Selling Securityholders and/or the purchasers of Purchase Warrants for whom such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer may be in excess of customary commissions). The Selling Securityholders and any broker-dealers that act in connection with the sale of the Purchase Warrants might be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act, and any commissions received by them and any profit on the resale of the Purchase Warrants as principal might be deemed to be underwriting discounts and commissions under the Securities Act. The Selling Securityholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.

Because Selling Securityholders may be deemed to be “underwriters” within the meaning of Section 2(11) of the Securities Act, the Selling Securityholders will be subject to prospectus delivery requirements under the Securities Act. Furthermore, in the event of a “distribution” of shares, any Securityholders, any selling broker-dealer and any “affiliated purchasers” may be subject to Regulation M under the Securities Exchange Act of 1934 which prohibits any “stabilizing bid” or “stabilizing purchase” for the purpose of pegging, fixing or stabilizing the price of Purchase Warrants in connection with this offering.

USE OF PROCEEDS

We will not receive any proceeds upon the sale of any of the Purchase Warrants registered on behalf of the Selling Securityholders.

A-4

[Alternate Page for Selling Securityholder Prospectus]

The following table sets forth certain information with respect to persons for whom the Company is registering the Selling Securityholders’ Securities for resale to the public. The Company will not receive any of the proceeds from the sale of the Selling Securityholders’ Securities. Beneficial ownership of the Selling Securityholders’ Securities by such Selling Securityholders after the Offering will depend on the number of Selling Securityholders’ Securities sold by each Selling Securityholder. The Selling Securityholders’ Securities offered by the Selling Securityholders are not being underwritten by the Underwriter.

           Beneficial Ownership of

                Beneficial Ownership after

Selling Securityholder (1)
           Shares and Warrants Prior to Sale

                offering if all Warrants are sold

Shares (2) Warrants Shares Warrants

David Abel 14,286 7,143 7,143 0

Michael I. Abrams 3,430 1,715 1,715 0

Russell Abrams 22,172 11,086 11,086 0

Scott Adams 15,830 7,915 7,915 0

Adventure Seekers LLC 57,144 28,572 28,572 0

AFA Private Equity Fund I 114,286 57,143 57,143 0

Dick Alaimo Jr 14,286 7,143 7,143 0

Gary Alderman 14,286 7,143 7,143 0

William B. Alsup III 51,430 25,715 25,715 0

Vijay Anand & Nanda Anand 17,144 8,572 8,572 0

David Anderson 28,572 14,286 14,286 0

Robert F. & Susan L. Arnold JTWROS 11,430 5,715 5,715 0

Howard Baron 15,830 7,915 7,915 0

Patrick A. Bello &
      Sheila M. Bello JTWROS* 62,804 31,402 31,402 0

Marc E. Bengualid 11,430 5,715 5,715 0

Anthony Beninato Sr &
      Johanne Beninato JTWROS 14,286 7,143 7,143 0

Mark Berkowitz & Lois Berkowitz 20,000 10,000 10,000 0

Berkowitz & Garfinkel DDS PA
      Employee Pension Plan 20,000 10,000 10,000 0

Berryman Global Holdings LLC 31,772 15,886 15,886 0

William Blake 28,572 14,286 14,286 0

Patrick Boyce & Sonja Boyce JTWROS 28,572 14,286 14,286 0

Thomas P. Broderick 28,572 14,286 14,286 0

Gregory Brotzman 28,572 14,286 14,286 0

James A. Brownell 31,716 15,858 15,858 0

Carl T. Brozek 28,572 14,286 14,286 0

E. Alan Brumberger* 17,144 8,572 8,572 0

Mark A. Bruno 31,716 15,858 15,858 0

Daniel Burstein 9,486 4,743 4,743 0

Bruce Buyers 28,572 14,286 14,286 0

John Buyers 28,572 14,286 14,286 0

Lawrence V. Carra 14,286 7,143 7,143 0

Nicholas Centola 14,286 7,143 7,143 0

Louis Centola Jr. 14,286 7,143 7,143 0

John Chaffins 31,716 15,858 15,858 0

Dennis Codon 28,572 14,286 14,286 0

Stephen Cohen 9,486 4,743 4,743 0

William W. Collins & Ann Y. Collins
      JTWROS 8,572 4,286 4,286 0

Continental Screen Printing Corporation
      Profit Sharing Plan & Trust 6,344 3,172 3,172 0

Stephen M. Cumbie 17,144 8,572 8,572
0

A-5

[Alternate Page for Selling Securityholder Prospectus]

           Beneficial Ownership of

                Beneficial Ownership after

Selling Securityholder (1)
           Shares and Warrants Prior to Sale

                offering if all Warrants are sold

Shares (2) Warrants Shares Warrants

John Curtin 14,286 7,143 7,143 0

Rameshahandra Dabhi &
      Nila Dabhi JTWROS 11,430 5,715 5,715 0

Davis Family Investments Limited Partnership 126,972 63,486 63,486 0

David W DeFisher 14,286 7,143 7,143 0

John DeFrancesco & Paula DeFrancesco
      JTWROS 31,716 15,858 15,858 0

Richard Della Porta 14,286 7,143 7,143 0

Jeffrey B. & Tamara S. Dierman TEN ENT 17,144 8,572 8,572 0

Nuala Drescher 14,286 7,143 7,143 0

Jonathan Ellman 15,830 7,915 7,915 0

James A. Enright & Judith A. Enright,
      Trustees of The Enright Family Trust
      UDT 5/3/02 14,286 7,143 7,143 0

Briggs Ferguson 28,572 14,286 14,286 0

Anita Frankel 15,830 7,915 7,915 0

Andrew Gamba & Wen Gamba JTWROS 14,286 7,143 7,143 0

Kumar Ganapathy 64,000 32,000 32,000 0

Alex Garfield 5,716 2,858 2,858 0

Eric Garfinkel & Cindy Garfinkel JTWROS 17,144 8,572 8,572 0

Marshall Geller 95,200 47,600 47,600 0

Greg Gentling 62,858 31,429 31,429 0

Gilcy Partners Ltd., LP 14,286 7,143 7,143 0

Peter J. Giroux 19,430 9,715 9,715 0

Global ePoint, Inc. 15,830 7,915 7,915 0

David Goldberg 28,572 14,286 14,286 0

Howard Goldberg 28,572 14,286 14,286 0

Roy Goldberg 28,572 14,286 14,286 0

George H. Gordon Trust 14,286 7,143 7,143 0

Patricia A Gordon Trust 14,286 7,143 7,143 0

Michael Graves 57,144 28,572 28,572 0

Randall M. Griffin 28,572 14,286 14,286 0

E. John Helmon 31,716 15,858 15,858 0

Joanne C. Himmel 17,144 8,572 8,572 0

Fred P. Hochberg * 14,286 7,143 7,143 0

Martin Hodas 57,144 28,572 28,572 0

Marc Honigfeld & Rona Honigfeld JT TEN 28,572 14,286 14,286 0

Paul Horowitz 7,144 3,572 3,572 0

John Houston 14,286 7,143 7,143 0

James E. Hutchinson 14,286 7,143 7,143 0

Insiders Trend Fund, LP 74,286 37,143 37,143 0

Miles Jaffe 63,486 31,743 31,743 0

Dr. Rajammal Jayakumar &
      Arumugam Jayakumar JTTEN 28,572 14,286 14,286 0

Jorel Management Corp. 17,144 8,572 8,572 0

Michael Karpoff &
      Patricia Rothbardt JTWROS 28,572 14,286 14,286 0

Allan J. Katz 2,858 1,429 1,429 0

Dr. Louis Katz & Irene Katz JTTEN 28,572 14,286 14,286 0

Alan & Amy Dean Kluger JTROS 22,858 11,429 11,429 0

Alain Krakirian 14,286 7,143 7,143

0

A-6

[Alternate Page for Selling Securityholder Prospectus]

           Beneficial Ownership of

                Beneficial Ownership after

Selling Securityholder (1)
           Shares and Warrants Prior to Sale

                offering if all Warrants are sold

Shares (2) Warrants Shares Warrants

Martin D. & Ruth F. Krall JTROS 17,144 8,572 8,572 0

Nathaniel Kramer 28,572 14,286 14,286 0

Denise Labella & Vito Labella JTWROS 14,286 7,143 7,143 0

Bruce Lamchick & Eileen Lamchick JTWROS 5,716 2,858 2,858 0

The Larsen 2000 Revocable Trust 28,572 14,286 14,286 0

James G. Lawrence 19,030 9,515 9,515 0

Richard Kurt Lee 28,572 14,286 14,286 0

Mark Lieb 12,686 6,343 6,343 0

Jeff Lippert 14,286 7,143 7,143 0

Arthur R. Lubojasky &
      Gaynor L. Lubojasky JTWROS 28,572 14,286 14,286 0

David Macchia Sr. 28,572 14,286 14,286 0

Jay Macchitelli 57,144 28,572 28,572 0

Margui Family Partners Ltd. 17,144 8,572 8,572 0

Markan Inc. 28,572 14,286 14,286 0

Peter Markovics 15,830 7,915 7,915 0

Paine Webber Group, Inc – Senior Officer
      Deferred Comp Plan DCA Trust FBO
      Donald B. Marron 158,686 79,343 79,343 0

Allan Marshall 28,572 14,286 14,286 0

Dee L. Martinez, MD 28,572 14,286 14,286 0

Michael M. Matluck &
      Karen S. Matluck JTWROS 47,546 23,773 23,773 0

Rachel L. Mellon 185,716 92,858 92,858 0

Robert A. Melnick 42,858 21,429 21,429 0

Joseph P. Metz & Catherine Metz JTWROS 20,000 10,000 10,000 0

Richard Milazzo 28,572 14,286 14,286 0

Joseph E. Miller, Jr. 126,972 63,486 63,486 0

Leo E. Mindel Non-Gst Exempt Family Trust II 74,286 37,143 37,143 0

Richard Molinsky 57,144 28,572 28,572 0

John Morton & Lorraine Morton JTWROS 14,286 7,143 7,143 0

Peter S Morton & Kathleen M Morton JTWROS 14,286 7,143 7,143 0

MRL Trust 93,944 46,972 46,972 0

Frank Musacchio 14,286 7,143 7,143 0

James Nation 14,286 7,143 7,143 0

Jerome Oksiuta 28,572 14,286 14,286 0

Terry R. Otton IRA Charles Schwab & Co.,
      Inc. Custodian 45,716 22,858 22,858 0

Jang S. Park 28,572 14,286 14,286 0

Frank J. Pearl, M.D. and
      Suzanne F. Pearl JT TEN 17,144 8,572 8,572 0

Performance Capital Group LLC 14,286 7,143 7,143 0

Robert L. Plummer 342,858 171,429 171,429 0

Walter Pollack & Barbara Pollack JTWROS 28,572 14,286 14,286 0

Michael F. Power 28,572 14,286 14,286 0

Preminger Family Trust 17,144 8,572 8,572 0

David Price 28,572 14,286 14,286 0

Tracy Price 28,572 14,286 14,286 0

Carl Priest & Katherine Priest JTWROS 14,286 7,143 7,143 0

Donald H. Putnam 28,572 14,286 14,286 0

Barry Rabkin 31,716 15,858 15,858 0

A-7

[Alternate Page for Selling Securityholder Prospectus]

           Beneficial Ownership of

                Beneficial Ownership after

Selling Securityholder (1)
           Shares and Warrants Prior to Sale

                offering if all Warrants are sold

Shares (2) Warrants Shares Warrants

Hubert Riegler 14,286 7,143 7,143 0

John C. Roberts 13,944 6,972 6,972 0

James Robertson 14,286 7,143 7,143 0

Donald A. Robins 14,286 7,143 7,143 0

Marvin S. Rosen* 190,458 95,229 95,229 0

Frederick Sandvick 28,572 14,286 14,286 0

Michael Sansevero 28,572 14,286 14,286 0

Charles A. Schmitz 28,572 14,286 14,286 0

John Schulman 28,572 14,286 14,286 0

Marilyn E. Shapo 22,858 11,429 11,429 0

David Shlaes 14,286 7,143 7,143 0

Gary R. Siegel 14,286 7,143 7,143 0

Eric R. Sisser 14,286 7,143 7,143 0

Gregory Small 38,058 19,029 19,029 0

David L. Smith 17,144 8,572 8,572 0

Kevin B. Smith 57,144 28,572 28,572 0

Michael Smith 28,572 14,286 14,286 0

Stanley Spielman 28,572 14,286 14,286 0

Richard Spinelli 15,830 7,915 7,915 0

Dean T. Sposto 28,572 14,286 14,286 0

Harold Stalcup & Rebecca Stalcup JTWROS 44,572 22,286 22,286 0

Joan Stanton 185,716 92,858 92,858 0

Marisa Starr 17,144 8,572 8,572 0

Edward Steinberg 63,486 31,743 31,743 0

Marshall Steingold 6,344 3,172 3,172 0

Sterling & Sterling, Inc 11,430 5,715 5,715 0

F. Joseph Straub 28,572 14,286 14,286 0

John H. Sununu * 142,802 71,401 71,401 0

Eric Tanner 28,572 14,286 14,286 0

Alphonso Tindall 6,286 3,143 3,143 0

Theodore L. Tolles 17,144 8,572 8,572 0

Leonard M. Toonkel &
      Janis G. Toonkel JTWROS 28,572 14,286 14,286 0

Philip D. Turits * 190,458 95,229 95,229 0

Tim T. Turner 14,286 7,143 7,143 0

Leonard Van Orden &
      Laura Van Orden JTWROS 28,572 14,286 14,286 0

James M. Walsh 14,286 7,143 7,143 0

William H. Warren 14,286 7,143 7,143 0

Melvin Weidner 28,572 14,286 14,286 0

Melvyn I. Weiss 63,486 31,743 31,743 0

Michael J. Weiss 14,286 7,143 7,143 0

Dale Wilson 57,144 28,572 28,572 0

Woodland Partners 126,972 63,486 63,486 0

Philip Woodworth &
      Linda Woodworth JTWROS 16,000 8,000 8,000 0

World Capital Corporation* 190,458 95,229 95,229 0

Joseph R. Wright, Jr. 14,286 7,143 7,143 0

Albert Yan 14,286 7,143 7,143 0

Nir Zuk & Tumar Zuk Trustees of the
      Zuk 2003 trust dated 2/24/03 28,572 14,286 14,286 0

A-8

[Alternate Page for Selling Securityholder Prospectus]

(1) Except as indicated by an *, no Selling Securityholder is an officer, director, affiliate or 5% shareholder of ours.

(2) Includes shares issuable upon exercise of the Selling Securityholder Warrants.

* Mr. Rosen beneficially owns an agreggate of 2,251,188 shares, Mr. Turits beneficially owns an aggregate of 1,940,388 shares, Mr. Bello beneficially owns an agreggate of 235,436 shares, Mr. Sununu beneficially owns an agreggate of 165,686 shares, Mr. Brumberger beneficially owns an aggregate of 237,524 shares and Mr. Hochberg beneficially owns an aggregate of 7,143 shares. Messrs. Rosen and Turits are officers and directors of our company and Messrs. Brumberger and Hochberg are directors. Messrs. Bello and Sununu are members of our Advisory Board. Mr. Eric Ram, our Executive Vice President, is the managing director and principal shareholder of World Capital Corporation and beneficially owns an aggregate of 96,429 shares.

A-9

[Alternate Page for Selling Securityholder Prospectus]

Where You Can Find More Information

We have filed with the SEC a registration statement of Form S-1 relating to the securities being offered through this prospectus. As permitted by the rules and regulations of the SEC, the prospectus does not contain all the information described in the registration statement. For further information about us and our securities, you should read our registration statement, including the exhibits and schedules. In addition, we will be subject to the requirements of the Securities Exchange Act of 1934, as amended, following the offering and thus will file annual, quarterly and special reports, proxy statements and other information with the SEC. These SEC filings and the registration statement are available to you over the Internet at the SEC’s web site at http://www.sec.gov/ . You may also read and copy any document we file with the SEC at the SEC’s public reference room in 450 Fifth Street, N.W., Washington, D.C. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. Statements contained in this prospectus as to the contents of any agreement or other document are not necessarily complete and, in each instance, you should review the agreement or document which has been filed as an exhibit to the registration statement.

Following the offering, we intend to furnish our stockholders with annual reports containing audited financial statements.

EXPERTS

Our consolidated financial statements as of December 31, 2002 and 2003, and for each of the three years in the period ended December 31, 2003, have been audited by Rothstein, Kass & Company, P.C., an independent registered public accounting firm, as set forth in their report appearing elsewhere herein, and are included in reliance upon such reports and given the authority of such firm as experts in accounting and auditing.

A-10

[Alternate Page for Selling Securityholder Prospectus]

FUSION TELECOMMUNICATIONS INTERNATIONAL INC.

3,141,838 PURCHASE WARRANTS

A-11

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth an estimate of the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the issuance and distribution of the Common stock being registered.

SEC registration fee $ 11,225.00

NASD filing fee 9,360.00

American Stock Exchange 70,000.00

Legal fees and expenses 250,000.00

Accountants’ fees and expenses 225,000.00

Printing and Engraving expenses 50,000.00

Blue Sky Fees and Expenses 2,500.00

Transfer Agent and Registration Fees 2,500.00

Miscellaneous 4,415.00

Total $625,000.00

All amounts except the SEC registration, NASD and AMEX fees are estimated. All of the expenses set forth above are being paid by us.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 102(b)(7) of the Delaware General Corporation Law, which we refer to as the “DGCL,” permits a provision in the certificate of incorporation of each corporation organized under the DGCL eliminating or limiting, with some exceptions, the personal liability of a director to corporation the or its stockholders for monetary damages for some breaches of fiduciary duty. Our Certificate of Incorporation eliminates the personal liability of directors to the fullest extent permitted by the DGCL.

Section 145 of the DGCL, which we refer to as “Section 145,” in summary, empowers a Delaware corporation to indemnify, within limits, its officers, directors, employees and agents against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement that they actually and reasonably incur in connection with any suit or proceeding, other than by or on behalf of the corporation, if they acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interest of the corporation and, with respect to a criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful.

With respect to any action by or on behalf of the corporation, Section 145 permits a corporation to indemnify its officers, directors, employees and agents against expenses (including attorneys' fees) they actually and reasonably incur in connection with the defense or settlement of the action or suit, provided that person meets the standard of conduct described in the preceding paragraph. No indemnification is permitted, however, in respect of any claim where that person has been found liable to the corporation, unless the Court of Chancery or court in which the action or suit was brought approves the indemnification and determines that the person is fairly and reasonably entitled to be indemnified.

Our Certificate of Incorporation contains a provision that eliminates the personal liability of our directors to us and our stockholders for monetary damages for breach of a director's fiduciary duty to us. This provision does not permit any limitation on, or elimination of the liability of a director for, disloyalty to us or our stockholders, for failing to acting good faith, for engaging in intentional misconduct or a knowing violation of law, for obtaining an improper personal benefit or for paying a dividend or approving a stock repurchase that would be illegal under the DGCL.

II-1

Our Certificate of Incorporation requires us to indemnify our directors and officers against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative, other than an action by or in our right (a “derivative action”), if they acted in good faith and in a manner they reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys’ fees) incurred in connection with defense or settlement of such an action. Moreover, the DGCL requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation.

Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter as been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following is a list of our securities that have been sold or issued by us during the past three years. Each of these securities were sold without registration under the Securities Act in reliance on Section 4(2) of the Securities Act. There were no underwriting discounts or commissions paid in connection with the sale of these securities, except as noted.

In March 2002, we issued pursuant to a private placement an aggregate of 83,500 shares of series B preferred stock at $10 per share for gross proceeds of $835,000. We did not pay commissions in connection with the sale of these shares. The offering was made to 4 accredited investors pursuant to Rule 506 of Regulation D of the Securities Act. We provided each purchaser with a private placement memorandum and required each purchaser to represent that they were accredited investors. In March of 2003 and 2004, dividends were issued in the form of common stock in the amounts of $82,013 and $84,525 respectively. In May of 2004, the series B Preferred shareholders elected to convert their preferred stock to common stock at $3.50 per share, as authorized by the Board of Directors in December of 2003. During September 2004, dividends from the period of March 2004 until the day of conversion were issued to shareholders, in the form of common stock for a total amount of $10,510.

In July 2002, we issued 2,358,956 shares of common stock at $2.28 per share pursuant to a rights offering to existing holders of record as of July 31, 2002. We received gross proceeds of $5,366,625, including $3,730,658 from the conversion of debt. In 2003, we issued an additional 1,546,540 shares for gross proceeds of $3,523,529, including $439,147 from the conversion of debt. We paid commissions of $42,875 to Joseph Stevens & Co. in connection with the sale of these shares. The offering was made to 83 accredited investors pursuant to Rule 506 of Regulation D of the Securities Act. We required each purchaser to represent that they were accredited investors.

II-2

In June 2003, we issued pursuant to a private placement 1,543,187 shares of common stock at $2.98 per share for gross proceeds of $4,590,980 including $596,000 from the conversion of debt. In 2004, we issued an additional 430,252 shares for aggregate proceeds of $1,280,000. We paid commissions of $68,000 to Joseph Stevens & Co. in connection with the sale of these shares. The offering was made to 29 accredited investors pursuant to Rule 506 of Regulation D of the Securities Act. We provided each purchaser with a private placement memorandum and required each purchaser to represent that they were accredited investors.

In November 2003, we issued pursuant to a private placement 43,988 shares of series C convertible preferred stock at $90 per share for gross proceeds of $3,958,920, including $940,140 from the conversion of debt. A pproximately $930,140 was converted into shares of the Company’s Series C Preferred Stock at a conversion rate of $90 per share, resulting in the issuance of 10,336 shares of Series C Preferred Stock. Also during December 2003, a $10,000 advance from a potential investor in a proposed Asian joint venture (which did not materialize) was converted into 111 shares of Series C Preferred Stock at a conversion rate of $90 per share. In 2004, we issued an additional 65,974 shares of series C convertible preferred stock for gross proceeds of $5,937,660, including $585,360 from the conversion of debt. The notes were converted into shares of our series C preferred stock at the conversion rate of $90 per share. The conversion resulted in the issuance of 6,504 additional shares of series C preferred stock. We paid commissions of $1,151,186 to Kirlin Securities, Inc. in connection with the sale of these shares. The offering was made to 178 accredited investors pursuant to Rule 506 of Regulation D of the Securities Act. We provided each purchaser with a private placement memorandum and required each purchaser to represent that they were accredited investors.

On December 24, 2003, Fusion and a large U.S. carrier entered into a settlement agreement, which included the issuance of 246,667 shares of common stock at $5.25 per share for the amount of $1,295,000 and a note payable of $555,000. The note payable is being repaid through a service agreement where the carrier is receiving a reduced rate for every minute of traffic that is passed through our network for a period of twenty-four (24) months, which will be through December 2005.

At various times during the year ended December 31, 2003, certain note holders elected to convert approximately $985,165 of their notes and accrued interest into common stock at conversion rates ranging between $2.28 and $5.25 per share. The conversions resulted in the issuance of an additional 376,567 shares of common stock. Also during 2003, the Company issued 16,807 shares of its common stock, at $2.98 per share for the assumption of a $50,000 letter of credit in the name of and secured by a shareholder of the Company.

In October 2004, we issued 19,048 shares of our common stock at $5.25 per share to the Saif Group in exchange for all outstanding obligations owed to them as of July 1, 2004. In connection with the issuance of such shares, we relied on Section 4(2) of the Securities Act.

On November 10, 2004, we issued convertible promissory notes to one individual in the aggregate amount of $2,508,333, representing $1,400,000 in cash and $1,108,333 to refinance certain debt and accrued interest owed to an existing related party. The promissory notes bear interest at 6.5% per annum and are due on November 2006. The notes will automatically convert into common shares at a conversion price of $3.85 per share upon the closing of the offering. The common stock is subject to a one-year lock up provision. We paid Kirlin Securities, Inc. $70,000 as an advisory fee in connection with this issuance.

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ITEM 16. EXHIBITS

(a) Exhibits

Exhibit No. Document

1.1 Form of Underwriting Agreement (1)

1.2 Form of Selected Dealer Agreement (1)

1.3 Form of Merger Fee Agreement (1)

1.4 Form of Agreement Among Underwriters (1)

1.5 Form of Warrant Agreement with Continental Stock Transfer & Trust Company (1)

1.6 Form of Common Stock Certificate (2)

1.7 Form of Redeemable Common Stock Purchase Warrant Certificate (2)

1.8 Form of Underwriter Warrant (1)

3.1 Certificate of Incorporation, as amended (1)

3.2 Bylaws (1)

5.1 Opinion of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP (2)

10.1 1998 Stock Option Plan (1)

10.2 Employment Agreement between registrant and Matthew Rosen (1)

10.3 Master Service Agreement between registrant and Terremark Worldwide, Inc., dated May 29, 2003 (2)

10.4 Agreement between registrant and Pakistan Telecommunications Company, Ltd, dated May 20, 2002 (2)

10.5 Joint Venture Agreement between registrant and Karamco, Inc., dated December 12, 2002 (2)

10.6 Agreement between Fusion registrant and Communications Ventures PVT. LTD, dated May 13, 2004 (2)

10.7 Form of Warrant to Purchase Common Stock (2)

10.8 Lease Agreement between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (2)

10.9 Lease Agreement between registrant and 67 Broad Street LLC for the 75 Broad Street, New York, NY office (2)

10.10 Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (2)

10.11 Agreement between registrant and Dennis Mehiel, dated November 10, 2004 and attached promissory note of even date therewith (1)

10.12 Shareholders Joint Venture Agreement between registrant and Communications Ventures Index Pvt. Ltd., dated March 11, 2000 (2)

10.13 Convertible Subordinated Note issued by registrant to Marvin Rosen, dated April 9, 1999 (2)

10.14 Demand note issued by registrant to Marvin Rosen, dated March 28, 2001 (2)

10.15 Demand note issued by registrant to Marvin Rosen, dated April 13, 2001 (2)

10.16 Demand note issued by registrant to Marvin Rosen, dated December 4, 2000 (2)

10.17 Demand note issued by registrant to Marvin Rosen, dated May 24, 2001 (2)

10.18 Warrant to Purchase Common Stock issued by registrant to Marvin Rosen, dated July 31, 2002 (2)

10.19 Convertible Subordinated Note issued by registrant to Philip Turits, dated April 9, 1999 (2)

10.20 Demand note issued by registrant to Philip Turits, dated January 31, 2003 (2)

10.21 Demand note issued by registrant to Philip Turits, dated October 14, 2002 (2)

10.22 Demand note issued by registrant to Philip Turits, dated December 31, 2002 (2)

10.23 Demand note issued by registrant to Philip Turits, dated July 31, 2002 (2)

10.24 Demand note issued by registrant to Philip Turits, dated September 24, 2002 (2)

10.25 Demand note issued by registrant to Evelyn Langlieb Greer, dated July 10, 2002 (2)

10.26 Non-Competition Agreement between registrant and Marvin Rosen (2)

21.1 List of Subsidiaries (1)

23.1 Consent of Rothstein, Kass & Company, P.C (1)

23.2 Consent of Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP (Contained in Exhibit (J)(2)

II-4

24.1
Powers of Attorney (included on signature page)

(1) Filed herewith.

(2) To be filed by Amendment

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the registrant pursuant to any provision of the certificate of incorporation, bylaw, contract arrangements, statute, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1) It will file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to:

(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act;

(ii)
Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

(iii)
Include any additional or changed material information on the plan of distribution.

(2) For determining liability under the Securities Act, it will treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering; and

(3) It will file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

(4) For determining any liability under the Securities Act, it will treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective.

(5) For determining any liability under the Securities Act, it will treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.

II-5

Signatures

In accordance with the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this amended registration statement to be signed on its behalf by the undersigned, in the City of New York, State of New York, on November 12, 2004.

Fusion Telecommunications International, Inc.

By: /s/ Marvin S. Rosen

Marvin S. Rosen

Chief Executive Officer

Power Of Attorney

Each person whose signature appears below hereby constitutes and appoints Marvin S. Rosen, his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this registration statements and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, as amended, granting into said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intends and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this amended registration statement has been signed below by the following persons in the capacities and on the dates indicated.

Name Title Date

/s/ Marvin S. Rosen Chief Executive Officer and Chairman of the Board November 12, 2004

Marvin S. Rosen

/s/ Joel Maloff Executive Vice President and Chief Technology November 12, 2004

Joel Maloff Officer

/s/ Eric D. Ram Executive Vice President November 12, 2004

Eric D. Ram

/s/ Matthew D. Rosen President and Chief Operating Officer November 12, 2004

Matthew D. Rosen

/s/ Barbara Hughes Vice President of Finance and Principal Accounting November 12, 2004

Barbara Hughes and Financial Officer

/s/ Philip Turits Treasurer, Secretary and Director November 12, 2004

Philip Turits

/s/ Cesar A. Baez Director November 12, 2004

Cesar A. Baez

/s/ E. Alan Brumberger Director November 12, 2004

E. Alan Brumberger

/s/ Evelyn Langlieb Greer Director November 12, 2004

Evelyn Langlieb Greer

/s/ Raymond E. Mabus Director November 12, 2004

Raymond E. Mabus

II-6

/s/ Manuel D. Medina Director November 12, 2004

Manuel D. Medina

/s/ Paul C. O’Brien Director November 12, 2004

Paul C. O’Brien

/s/ Kenneth I. Starr Director November 12, 2004

Kenneth I. Starr

/s/ Julius Erving Director November 12, 2004

Julius Erving

/s/ Michael J. Del Giudice Director November 12, 2004

Michael J. Del Giudice

/s/ Fred P. Hochberg Director November 12, 2004

Fred P. Hochberg

II-7

FORM OF

UNDERWRITING AGREEMENT

BETWEEN

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

AND

KIRLIN SECURITIES, INC.

DATED: ____________, 2004

TABLE OF CONTENTS

                                                                                       Page
                                                                                       ----

1.    Purchase and Sale of Securities....................................................1
      1.1      Firm Securities...........................................................1
               1.1.1    Purchase of Firm Securities......................................1
               1.1.2    Delivery and Payment.............................................1
      1.2      Over-Allotment Option.....................................................2
               1.2.1    Option Securities................................................2
               1.2.2    Exercise of Option...............................................2
               1.2.3    Payment and Delivery.............................................2
      1.3      Representative's Purchase Option..........................................3
               1.3.1    Purchase Option..................................................3
               1.3.2    Payment and Delivery.............................................3
2.    Representations and Warranties of the Company......................................3
      2.1      Filing of Registration Statement..........................................3
               2.1.1    Pursuant to the Act..............................................3
               2.1.2    Pursuant to the Exchange Act.....................................4
      2.2      No Stop Orders, Etc.......................................................4
      2.3      Disclosures in Registration Statement.....................................4
               2.3.1    Securities Act Representation....................................4
               2.3.2    Disclosure of Contracts..........................................4
               2.3.3    Prior Securities Transactions....................................5
      2.4      Changes After Dates in Registration Statement.............................5
               2.4.1    No Material Adverse Change.......................................5
               2.4.2    Recent Securities Transactions, Etc..............................5
      2.5      Independent Accountants...................................................5
      2.6      Financial Statements......................................................5
      2.7      Authorized Capital; Options; Etc..........................................5
      2.8      Valid Issuance of Securities; Etc.........................................6
               2.8.1    Outstanding Securities...........................................6
               2.8.2    Securities Sold Pursuant to this Agreement.......................6
      2.9      Registration Rights of Third Parties......................................7
      2.10     Validity and Binding Effect of Agreements.................................7
      2.11     No Conflicts, Etc.........................................................7
      2.12     No Defaults; Violations...................................................7
      2.13     Corporate Power; Licenses; Consents.......................................8
               2.13.1   Conduct of Business..............................................8
               2.13.2   Transactions Contemplated Herein.................................8
      2.14     Title to Property; Insurance..............................................8
      2.15     Litigation; Governmental Proceedings......................................8
      2.16     Good Standing.............................................................8
      2.17     Taxes.....................................................................9
      2.18     Employees' Options........................................................9
      2.19     Transactions Affecting Disclosure to NASD.................................9
               2.19.1   Finder's Fees....................................................9
               2.19.2   Payments Within Twelve Months....................................9
               2.19.3   Use of Proceeds.................................................10
               2.19.4   Insiders' NASD Affiliation......................................10

TABLE OF CONTENTS (CONT.)

                                                                                       Page
                                                                                       ----

      2.20     Foreign Corrupt Practices Act............................................10
      2.21     Bulletin Board Eligibility...............................................10
      2.22     Intangibles..............................................................10
      2.23     Relations With Employees.................................................11
               2.23.1   Employee Matters................................................11
               2.23.2   Employee Benefit Plans..........................................11
      2.24     Officers' Certificate....................................................11
      2.25     Warrant Agreement........................................................11
      2.26     Lock-Up Agreements.......................................................11
      2.27     Subsidiaries.............................................................12
      2.28     Environmental Matters....................................................12
      2.29     Product Liability Insurance..............................................12
      2.30     Conversion of 7 1/4% Notes...............................................12
      2.31     Related Party Transactions...............................................12
      2.32     Standard & Poor's Listing................................................12
      2.33     Regulatory Compliance....................................................12
      2.34     Board of Directors.......................................................13
      2.35     No Stop Orders...........................................................13
      2.36     Non Non-Competition Obligations..........................................13
      2.37     Sarbanes-Oxley Compliance................................................13
               2.37.1   Disclosure Controls.............................................13
               2.37.2   Compliance......................................................13
3.    Covenants of the Company..........................................................13
      3.1      Amendments to Registration Statement.....................................13
      3.2      Federal Securities Laws..................................................13
               3.2.1    Compliance......................................................13
               3.2.2    Filing of Final Prospectus......................................14
               3.2.3    Exchange Act Registration.......................................14
      3.3      Blue Sky Filings.........................................................14
      3.4      Delivery to the Underwriters of Prospectuses.............................14
      3.5      Events Requiring Notice to the Representative............................14
      3.6      Review of Financial Statements...........................................15
      3.7      Exchange Maintenance.....................................................15
      3.8      Standard & Poor's and Secondary Market Trading...........................15
      3.9      Warrant Solicitation and Registration of Common Stock
               Underlying the Warrants..................................................15
               3.9.1    Warrant Solicitation Fees.......................................15
               3.9.2    Registration of Common Stock....................................16
      3.10     Reports to the Representative............................................16
               3.10.1   Periodic Reports, Etc...........................................16
               3.10.2   Transfer Sheets and Weekly Position Listings....................16
               3.10.3   Secondary Market Trading Memorandum.............................16
      3.11     Agreements between the Representative and the Company....................16
               3.11.1   Merger and Acquisition Agreement................................16
               3.11.2   Representative's Purchase Option................................17
      3.12     Disqualification of Form SB-2 or Form S-1 (or other appropriate form)....17
      3.13     Payment of Expenses......................................................17

TABLE OF CONTENTS (CONT.)

                                                                                       Page
                                                                                       ----

               3.13.1   General Expenses................................................17
               3.13.2   Non-Accountable Expenses........................................18
      3.14     Application of Net Proceeds..............................................18
      3.15     Delivery of Earnings Statements to Security Holders......................18
      3.16     Key Person Life Insurance................................................18
      3.17     Stabilization............................................................18
      3.18     Internal Controls........................................................18
      3.19     Accountants and Lawyers..................................................19
      3.20     Transfer Agent...........................................................19
      3.21     NASD.....................................................................19
      3.22     Sale of Securities.......................................................19
      3.23     Form S-8.................................................................19
      3.24     Employee Benefit Plans...................................................19
4.    Conditions of the Underwriters' Obligations.......................................19
      4.1      Regulatory Matters.......................................................19
               4.1.1    Effectiveness of Registration Statement.........................19
               4.1.2    NASD Clearance..................................................20
               4.1.3    No Blue Sky Stop Orders.........................................20
      4.2      Company Counsel Matters..................................................20
               4.2.1    Effective Date Opinion of Counsel...............................20
               4.2.2    Closing Date and Option Closing Date Opinion of Counsels........20
               4.2.3    Reliance........................................................20
      4.3      Cold Comfort Letter......................................................20
      4.4      Officers' Certificates...................................................21
               4.4.1    Officers' Certificate...........................................21
               4.4.2    Secretary's Certificate.........................................22
      4.5      No Material Changes......................................................22
      4.6      Delivery of Agreements...................................................22
      4.7      Opinion of Counsel for the Underwriters..................................22
      4.8      Unaudited Financials.....................................................23
5.    Indemnification...................................................................23
      5.1      Indemnification of Underwriters..........................................23
               5.1.1    General.........................................................23
               5.1.2    Procedure.......................................................24
               5.1.3    Indemnification of the Company..................................24
      5.2      Contribution.............................................................24
               5.2.1    Contribution Rights.............................................24
               5.2.2    Contribution Procedure..........................................25
6.    Default by an Underwriter.........................................................25
      6.1      Default Not Exceeding 10% of Firm Securities or Option Securities........25
      6.2      Default Exceeding 10% of Firm Securities or Option Securities............26
      6.3      Postponement of Closing Date.............................................26
7.    Right to Appoint Representative...................................................26
8.    Additional Covenants..............................................................26
      8.1      Board Composition and Board Designations.................................26
      8.2      Employment and Compensation Matters......................................27
      8.3      Press Releases...........................................................27

iii

TABLE OF CONTENTS (CONT.)

                                                                                       Page
                                                                                       ----

9.    Representations and Agreements to Survive Delivery................................27
10.   Effective Date of This Agreement and Termination Thereof..........................27
      10.1     Effective Date...........................................................27
      10.2     Termination..............................................................27
      10.3     Notice...................................................................28
      10.4     Expenses.................................................................28
      10.5     Indemnification..........................................................28
11.   Miscellaneous.....................................................................28
      11.1     Notices..................................................................28
      11.2     Headings.................................................................29
      11.3     Amendment................................................................29
      11.4     Entire Agreement.........................................................29
      11.5     Binding Effect...........................................................29
      11.6     Governing Law, Jurisdiction..............................................29
      11.7     Execution in Counterparts................................................30
      11.8     Waiver, Etc..............................................................30

INDEX OF DEFINITIONS

Term                                                                  Section
----                                                                  -------

Act.....................................................................2.1.1
AMEX.....................................................................2.21
Closing Date............................................................1.1.2
Code ..................................................................2.23.2
Commission..............................................................2.1.1
Common Stock............................................................1.1.1
Company..........................................................Introductory
                                                                    Paragraph
Debentures...............................................................2.26
Effective Date..........................................................1.2.2
ERISA..................................................................2.23.2
ERISA Plans............................................................2.23.2
Exchange Act............................................................2.1.2
Filing Date............................................................2.19.2
Financial Consulting Agreement.........................................3.13.1
Firm Securities.........................................................1.1.1
Insiders.................................................................2.26
Intangibles..............................................................2.22
Merger and Acquisition Agreement.......................................3.12.1
NASD...................................................................2.19.1
Option Closing Date.....................................................1.2.2
Option Securities.......................................................1.2.1
Over-allotment Option...................................................1.2.1
Preferred Stock..........................................................2.26
Preliminary Prospectus..................................................2.1.1
Prospectus..............................................................2.1.1
Public Securities.......................................................1.2.1
Registration Statement..................................................2.1.1
Regulations.............................................................2.1.1
Secondary Market Trading Memorandum....................................3.11.3
Securities..............................................................1.3.1
Subsidiary(ies)..........................................................2.27
Transfer Agent...........................................................3.21
Unaudited Financials......................................................4.8
Underwriter......................................................Introductory
                                                                    Paragraph
Representative's Purchase Option........................................1.3.1
Representative's Securities.............................................1.3.1
Representative's Shares.................................................1.3.1
Representative's Warrants...............................................1.3.1
Warrant.................................................................1.1.1
Warrant Agreement........................................................2.25

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

[ ] SHARES OF COMMON STOCK

AND

[ ] REDEEMABLE COMMON STOCK PURCHASE WARRANTS

UNDERWRITING AGREEMENT

New York, New York

_________, 2004

Kirlin Securities, Inc.
6901 Jericho Turnpike
Syosset, New York 11791

Ladies and Gentlemen:

The undersigned, Fusion Telecommunications International, Inc., a Delaware corporation (the "Company"), hereby confirms its agreement with Kirlin Securities, Inc. (being referred to herein variously as "you," "Kirlin" or the "Representative") and with the other underwriters named on Schedule I hereto for which Kirlin is acting as Representative (the Representative and the other Underwriters being collectively called the "Underwriters" or, individually, an "Underwriter") as follows:

1. PURCHASE AND SALE OF SECURITIES.

1.1 FIRM SECURITIES.

1.1.1 PURCHASE OF FIRM SECURITIES. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell, severally and not jointly, to the several Underwriters an aggregate of [ ] shares of the Company's common stock, par value $[.01] per share ("Common Stock") at a purchase price (net of discounts and commissions) of $[ ] per share, and [ ] Redeemable Common Stock Purchase Warrants ("Warrant(s)") at a purchase price (net of discounts and commissions) of $[ ] per Warrant. Each Warrant will entitle the holder thereof to purchase one share of Common Stock at a purchase price of $[ ] per share during the period beginning on the Effective Date (as hereinafter defined) and ending on the fifth anniversary of the Effective Date. The foregoing shares of Common Stock and Warrants are referred to herein as the "Firm Securities." The Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Securities set forth opposite their respective names on Schedule I attached hereto and made a part hereof.

1.1.2 DELIVERY AND PAYMENT. Delivery and payment for the Firm Securities shall be made at 10:00 A.M., New York time, on or before the third business day following the date that the Firm Securities commence trading or at such earlier time as the Representative shall determine, or at such other time as shall be agreed upon by the

Representative and the Company, at the offices of counsel to the Representative or at such other place as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Securities are called the "Closing Date." Payment for the Firm Securities shall be made on the Closing Date by wire transfer in immediately available funds, payable to the order of the Company upon delivery to you by either electronic transfer of the Firm Securities or of certificates (in form and substance reasonably satisfactory to the Underwriters) representing the Firm Securities for the account of the Underwriters. Any certificates representing the Firm Securities shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two full business days prior to the Closing Date. The Company will permit the Representative to examine and package the Firm Securities for delivery at least one full business day prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Securities except upon tender of payment by the Representative for all the Firm Securities.

1.2 OVER-ALLOTMENT OPTION.

1.2.1 OPTION SECURITIES. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Securities, the Underwriters are hereby granted an option to purchase up to an additional [ ] shares of Common Stock from the Company ("Over-allotment Option"). Such additional [ ] shares of Common Stock are hereinafter referred to as the "Option Securities." The Firm Securities and the Option Securities, together with the shares of Common Stock issuable upon exercise of the Warrants, are hereinafter referred to collectively as the "Public Securities." The purchase price to be paid for the Option Securities will be the same price per Option Security as the price per Firm Security set forth in Section 1.1.1 hereof.

1.2.2 EXERCISE OF OPTION. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Securities within 45 days after the Effective Date. The Underwriters will not be under any obligation to purchase any Option Securities prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company by the Representative, which must be confirmed in writing by overnight mail or facsimile transmission setting forth the number of Option Securities to be purchased and the date and time for delivery of and payment for the Option Securities (the "Option Closing Date"), which will not be later than five full business days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of the Representative or at such other place as shall be agreed upon by the Company and the Representative. Upon exercise of the Over-allotment Option, the Company will become obligated to convey to the Underwriters, and, subject to the terms and conditions set forth herein, the Underwriters will become obligated to purchase, the number of Option Securities specified in such notice.

1.2.3 PAYMENT AND DELIVERY. Payment for the Option Securities will be at the Representative's election by wire transfer in immediately available funds, payable to the order of the Company at the offices of the Representative or at such other place as shall be agreed upon by the Representative and the Company upon delivery to you by either certificates representing such securities or electronic delivery of the securities for the Underwriters. The certificates representing the Option Securities to be delivered will be in such denominations and registered in such names as the Representative requests not less than two full business days prior

to the Closing Date or the Option Closing Date, as the case may be. The Company will permit the Representative to examine and package the Option Securities for delivery not less than one full business day prior to such Closing Date.

1.3 REPRESENTATIVE'S PURCHASE OPTION.

1.3.1 PURCHASE OPTION. The Company hereby agrees to issue and sell to the Representative (and/or its designees) on the Closing Date for an aggregate purchase price of $100, an option ("Representative's Purchase Option") for the purchase of an aggregate of [ ] shares of Common Stock ("Representative's Shares") at an initial exercise price of 110% of the initial offering price of a share of common stock (I.E, $[ ] per share of Common Stock) and [ ] Warrants ("Representative's Warrants") at an initial exercise price of 100% of the initial offering price of a Warrant (I.E., [ ] per Warrant). Each of the Representative's Shares and Representative's Warrants is identical to the Common Stock and Warrants constituting the Firm Securities. The Representative's Purchase Option shall be exercisable, in whole or part, for a period of four years commencing one year from the Effective Date. The Representative's Purchase Option, the Representative's Shares, the Representative's Warrants and the shares of Common Stock issuable upon exercise of the Representative's Warrants are hereinafter referred to collectively as the "Representative's Securities." The Public Securities and the Representative's Securities are hereinafter referred to collectively as the "Securities."

1.3.2 PAYMENT AND DELIVERY. Delivery and payment for the Representative's Purchase Option shall be made on the Closing Date. The Company shall deliver to the Underwriters, upon payment therefor, certificates for the Representative's Purchase Option in the name or names and in such authorized denominations as the Representative may request.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Underwriters as follows:

2.1 FILING OF REGISTRATION STATEMENT.

2.1.1 PURSUANT TO THE ACT. The Company has filed with the Securities and Exchange Commission ("Commission") a registration statement and an amendment or amendments thereto, on Form S-1 (No. 333-__________), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Public Securities under the Securities Act of 1933, as amended ("Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations ("Regulations") of the Commission under the Act. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430A of the Regulations), is hereinafter called the "Registration Statement," and the form of the final prospectus dated the Effective Date or such later date as may be determined by the Representative (or, if applicable, the form of final prospectus filed with the Commission pursuant to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The Registration Statement has been declared effective by the Commission on the date hereof.

2.1.2 PURSUANT TO THE EXCHANGE ACT. The Company has filed with the Commission a registration statement on Form 8-A (No. ____________) providing for the registration under the Securities Exchange Act of 1934, as amended ("Exchange Act"), of the Common Stock and Warrants. Such registration of the Common Stock and Warrants has been declared effective by the Commission on the date hereof.

2.2 NO STOP ORDERS, ETC. Neither the Commission nor, to the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or has instituted or, to the Company's knowledge, threatened to institute any proceedings with respect to such an order.

2.3 DISCLOSURES IN REGISTRATION STATEMENT.

2.3.1 SECURITIES ACT REPRESENTATION. At the time the Registration Statement becomes effective and at the Closing Date and the Option Closing Date, if any, the Registration Statement and the Prospectus and any amendment or supplement thereto, and will conform in all material respects to the requirements of the Act and the Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, will contain any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. When any Preliminary Prospectus was first filed with the Commission (whether filed as part of the Registration Statement or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations. The representation and warranty made in this Section 2.3.1 does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished (or not furnished in the case of an omission) to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement or Prospectus or any amendment thereof or supplement thereto.

2.3.2 DISCLOSURE OF CONTRACTS. The description in the Registration Statement and the Prospectus of contracts and other documents is accurate in all material respects and presents fairly the information required to be disclosed and there are no contracts or other documents required to be described in the Registration Statement or the Prospectus or to be filed with the Commission as exhibits to the Registration Statement that have not been so described or filed. Each contract or other instrument (however characterized or described) to which the Company is a party or by which its property or business is or may be bound or affected and that is (i) referred to in the Prospectus, or
(ii) material to the Company's business, has been duly and validly executed by the Company and, to the Company's knowledge, the other parties thereto, is in full force and effect and is enforceable against the Company and, to the Company's knowledge, the other parties thereto in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent transfer, fraudulent conveyance, reorganization or similar laws affecting creditors' rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. None of such contracts or instruments has been assigned by the Company, and neither the Company nor, to the Company's

knowledge, any other party is in default thereunder and, to the Company's knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates or will result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its assets or businesses, including, without limitation, those relating to environmental laws and regulations.

2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement.

2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.

2.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise specifically stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, or in the results of operations, business or business prospects of the Company and (ii) there have been no transactions entered into by the Company, other than those in the ordinary course of business, that are material with respect to the condition, financial or otherwise, or to the results of operations, business or business prospects of the Company.

2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.

2.5 INDEPENDENT ACCOUNTANTS. Rothstein, Kass & Company, P.C. ("RKC"), whose report is filed with the Commission as part of the Registration Statement, are independent accountants as required by the Act and the Regulations. RKC has not, during the periods covered by the financial statements included in the Prospectus, provided to the Company any prohibited non-audit services, as such term is used in Section 10A(g) of the Exchange Act.

2.6 FINANCIAL STATEMENTS. The financial statements, together with the notes thereto and supporting schedules included in the Registration Statement and Prospectus, present fairly the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with United States generally accepted accounting principles, consistently applied throughout the periods involved; and the supporting schedules, if any, included in the Registration Statement present fairly the information required to be stated therein. The pro forma financial information set forth in the Registration Statement and Prospectus reflects all significant assumptions and adjustments relating to the business and operations of the Company.

2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or dates indicated in the Prospectus duly authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions and adjustments stated

in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and on the Closing Date there will be no outstanding or authorized subscriptions, options, warrants or other rights to purchase or otherwise acquire, or preemptive rights with respect to the issuance or sale of any Common Stock of the Company, including any obligations to issue any shares pursuant to anti-dilution provisions, or any security convertible into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and on the Closing Date, the Company will not have any then current obligation to pay principal, interest, or other monetary obligation on any class of equity securities or debt obligation of the Company.

2.8 VALID ISSUANCE OF SECURITIES; ETC.

2.8.1 OUTSTANDING SECURITIES. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability solely by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The outstanding options and warrants to purchase shares of Common Stock constitute valid and binding obligations of the Company, enforceable in accordance with their terms. The authorized Common Stock and outstanding options and warrants to purchase shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement and the Prospectus. The offers and sales by the Company of the outstanding Common Stock, options and warrants to purchase shares of Common Stock, and securities convertible into shares of Common Stock, were at all relevant times registered under the Act and registered or qualified under the applicable state securities or Blue Sky laws or exempt from such registration or qualification requirements.

2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT. The Securities have been duly authorized and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability solely by reason of being such holders; the Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken. The Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement. When issued, the Representative's Purchase Option, the Representative's Warrants and the Warrants will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby and the Representative's Purchase Option, the Representative's Warrants and the Warrants will be enforceable against the Company in accordance with their respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific

performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the Prospectus, no holders of any securities of the Company or of any options or warrants of the Company or other rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Act or to include any such securities in the Registration Statement.

2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement and the Warrant Agreement (as hereinafter defined) have been duly and validly authorized by the Company and constitute, and the Representative's Purchase Option and the Merger and Acquisition Agreement, have been duly and validly authorized by the Company and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

2.11 NO CONFLICTS, ETC. The execution, delivery, and performance by the Company of this Agreement, the Representative's Purchase Option, the Warrant Agreement, the Merger and Acquisition Agreement, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both, (i) result in a breach of, or conflict with any of the terms and provisions of, or constitute a default under, or result in the creation, modification, termination or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any indenture, mortgage, deed of trust, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets of the Company is subject, except which could not reasonably be expected to have a material adverse effect on the Company; (ii) result in any violation of the provisions of the Certificate of Incorporation or the By-Laws of the Company; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or businesses, except where such violation could not reasonably be expected to have a material adverse effect on the Company; or (iv) have a material adverse effect on any permit, license, certificate, registration, approval, consent, license or franchise of or concerning the Company.

2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. Except as described in the Prospectus, the Company is not in violation of any term or provision of its Certificate of Incorporation or By-Laws or in violation of any material franchise, license,

permit, applicable law, rule, regulation, judgment or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its properties or businesses.

2.13 CORPORATE POWER; LICENSES; CONSENTS.

2.13.1 CONDUCT OF BUSINESS. The Company has all requisite corporate power and authority, and has all necessary and material authorizations, approvals, orders, licenses, certificates and permits of and from all applicable governmental regulatory officials and bodies to own or lease its properties and conduct its business as described in the Prospectus, and the Company is and has been doing business in compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all federal, state and local laws, rules and regulations. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation on the Company's business as currently contemplated are correct in all material respects and do not omit to state a material fact.

2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, approval, authorization or order of, and no filing with, any court, government agency or other body is required for the valid authorization, issuance, sale and delivery, of the Securities and the consummation of the transactions and agreements contemplated by this Agreement, the Warrant Agreement, the Representative's Purchase Option, the Merger and Acquisition Agreement and the Prospectus, except with respect to applicable federal and state securities laws.

2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property (tangible and intangible) owned or leased by it, free and clear of all liens, encumbrances, claims, security interests, defects and restrictions of any material nature whatsoever, other than (i) those referred to in the Prospectus, (ii) liens for taxes not yet due and payable or (iii) those which do not materially effect the value of such property and do not materially interfere with the use made of such property by the Company. The Company has adequately insured its properties against loss or damage by fire or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies engaged in the same or similar business.

2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the Prospectus, there is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company's knowledge, threatened against, or involving the properties or business of, the Company that might materially and adversely affect the financial position, value or the operation of the properties or the business of the Company, or that questions the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement. There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal, domestic or foreign, naming the Company and enjoining the Company from taking, or requiring the Company to take, any action, or to which the Company, its properties or business is bound or subject.

2.16 GOOD STANDING. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the state of its incorporation.

The Company is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to qualify would not have a material adverse effect on the financial position or value or the operation of the properties or the business of the Company.

2.17 TAXES. The Company has filed all returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. The Company has paid all undisputed portions of all taxes (as hereinafter defined) shown as due on such returns that were filed and, except as set forth on SCHEDULE 2.17, has paid all taxes imposed on or assessed against the Company. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriter, (i) to the Company's knowledge, no issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company. The term "taxes" mean all federal, state, local, foreign, and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments, or charges of any kind whatever, together with any interest and any penalties, additions to tax, or additional amounts with respect thereto. The term "returns" means all returns, declarations, reports, statements, and other documents required to be filed in respect to taxes.

2.18 EMPLOYEES' OPTIONS. Except as set forth on SCHEDULE 2.18, no shares of Common Stock (underlying outstanding options to purchase Common Stock) are eligible for sale pursuant to Rule 701 promulgated under the Act in the 12-month period following the Effective Date.

2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.

2.19.1 FINDER'S FEES. Except as set forth on SCHEDULE 2.19.1, the Company has not received any notice of claims, payments, issuances, arrangements or understandings for services in the nature of a finder's, consulting or origination fee with respect to the introduction of the Company to the Underwriters or the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuances with respect to the Company that may affect the Underwriters' compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD").

2.19.2 PAYMENTS WITHIN TWELVE MONTHS. Except as set forth on SCHEDULE 2.19.2, and other than payments to the Representative set forth in this Agreement, the Company has not made any direct or indirect payments (in cash, securities or otherwise) to (i) any person, as a finder's fee, investing fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who provided capital to the Company, (ii) any NASD member, or (iii) any person or entity that has any direct or indirect affiliation or association with any NASD member within the 12-month period prior to the date on which the Registration Statement was filed with the Commission ("Filing Date") or thereafter, assuming

the accuracy of the information contained in the NASD questionnaires received from each of the Company's security holders.

2.19.3 USE OF PROCEEDS. None of the net proceeds of the offering will be paid by the Company to any participating NASD member or any affiliate or associate of any participating NASD member, except as specifically authorized herein.

2.19.4 INSIDERS' NASD AFFILIATION. Except as set forth on SCHEDULE 2.19.4, no officer or director of the Company or owner of any of the Company's unregistered securities has any direct or indirect affiliation or association with any NASD member. The Company will advise the Representative and the NASD if prior to the Closing Date or Option Closing Date, if any, it learns that any officer, director or stockholder of the Company is or becomes an affiliate or associated person of an NASD member participating in the offering.

2.20 FOREIGN CORRUPT PRACTICES ACT. None of the Company or any of its officers, directors, or, to its knowledge, any of its employees, agents or any other person acting on behalf of the Company has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have had a material adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Prospectus or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended.

2.21 BULLETIN BOARD ELIGIBILITY. As of the Effective Date, the Public Securities will have been approved for quotation on the American Stock Exchange ("AMEX").

2.22 INTANGIBLES. The Company owns or possesses the requisite licenses or rights to use all trademarks, service marks, service names, trade names, patents and patent applications, copyrights and other rights (collectively, "Intangibles") described as being licensed to or owned by it in the Registration Statement. Except as described in the Prospectus, there is no claim or action by any person pertaining to, or proceeding pending or, to the Company's knowledge, threatened relating to, and the Company has not received any notice of conflict with the asserted rights of others, that challenges the exclusive right of the Company with respect to, any Intangibles used in the conduct of the Company's business. To the Company's knowledge, after due inquiry, the Intangibles and the Company's current products, services and processes do not infringe on any Intangibles held by any third party. To the Company's knowledge, no others have infringed upon the Intangibles of the Company.

2.23 RELATIONS WITH EMPLOYEES.

2.23.1 EMPLOYEE MATTERS. The Company is in compliance in all material respects with all federal, state and local laws and regulations respecting the employment of its employees and employment practices, terms and conditions of employment and wages and hours relating thereto. To the Company's knowledge, there are no pending investigations involving the Company by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state and local laws and regulations. Except as set forth in the Registration Statement and the Prospectus, to the Company's knowledge, there is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or any predecessor entity, and none has ever occurred. To the Company's knowledge, no question concerning representation exists respecting the employees of the Company and no collective bargaining agreement or modification thereof is currently being negotiated by the Company. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company, if any.

2.23.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the Registration Statement and the Prospectus, the Company neither maintains, sponsors nor contributes to, nor is it required to contribute to, any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a, "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to, and has at no time maintained or contributed to, a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), that could subject the Company to any material tax penalty for prohibited transactions and that has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan that is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multi-employer plan."

2.24 OFFICERS' CERTIFICATE. Any certificate signed by any duly authorized officer of the Company and delivered directly to you or to your counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby and as of the date given.

2.25 WARRANT AGREEMENT. The Company has entered into a warrant agreement with respect to the Warrants and the Representative's Warrants substantially in the form filed as an exhibit to the Registration Statement ("Warrant Agreement") with Continental Stock Transfer & Trust Company, providing for, among other things, (i) no redemption of the Warrants without the consent of the Representative and (ii) for the payment of a warrant solicitation fee as contemplated by Section 3.9 hereof.

2.26 LOCK-UP AGREEMENTS. Except as set forth on Schedule 2.26, the Company has caused to be duly executed legally binding and enforceable agreements pursuant to

which all of the officers and directors of the Company and all holders of the outstanding Common Stock of the Company or warrants or options to purchase, or other securities convertible into, shares of Common Stock (including their family members and affiliates) (collectively, the "Insiders"), agree not to sell any shares of Common Stock or warrants or options to purchase, or other securities convertible into Common Stock owned by them (either pursuant to Rule 144 of the Regulations or otherwise) for a period of 12 months following the Effective Date except with the prior written consent of the Representative, and provided further that the officers of the Company and their family members and affiliates have agreed to a lock-up period of 18 months, instead of the aforementioned 12 months.

2.27 SUBSIDIARIES. Except as set forth on SCHEDULE 2.27, the Company does not own, in whole or in part, an interest in any corporation, partnership, limited liability company, joint venture, trust or other business entity (each a "Subsidiary" and collectively the "Subsidiaries"). The Subsidiaries set forth on SCHEDULE 2.27 are each duly organized and validly existing under the laws of the jurisdiction of its incorporation or formation. The Company owns all of the capital stock or other ownership interest of the Subsidiaries free and clear of all liens, security interests and other encumbrances of any nature whatsoever, except as set forth on SCHEDULE 2.27 and in the Prospectus. The representations and warranties made by the Company in this Agreement shall also apply and be true with respect to each Subsidiary, taken as a whole with the Company and all other Subsidiaries, as if each representation and warranty contained herein made specific reference to the Subsidiaries each time the term "Company" is used.

2.28 ENVIRONMENTAL MATTERS. The Company has complied in all material respects with all applicable environmental laws.

2.29 PRODUCT LIABILITY INSURANCE. The Company maintains product liability insurance of the type and in the amounts typically maintained by similar companies operating in the industry in which the Company operates.

2.30 CONVERSION OF 7 1/4% NOTES. As of the Effective Date, all of the principal and interest due on the Company's outstanding 7 1/4% convertible promissory notes (the original aggregate principal amount of $300,000) held by Marvin Rosen, Philip Turits and Patrick Bello will have automatically converted into [ ] shares of Common Stock by such notes' terms.

2.31 RELATED PARTY TRANSACTIONS. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement and Prospectus that have not been described as required.

2.32 STANDARD & POOR'S LISTING. The Company has secured coverage in Standard & Poor's Corporation Records Corporate Description, effective as of the Effective Date.

2.33 REGULATORY COMPLIANCE. The Company's products, operations and ownership interests are in compliance in all material respects with all federal, state and agency standards, rules, regulations and requirements that are applicable to the Company as of the Effective Date, including but not limited to those promulgated by the Federal Communications Commission, and comparable standards and agencies in the countries in which the Company operates.

2.34 BOARD OF DIRECTORS. The Board of Directors of the Company is comprised of the persons set forth on SCHEDULE 2.33. The qualifications of the persons serving as Board members and the overall composition of the Board comply with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder and with the listing requirements of the American Stock Exchange (including those requirements that have been finalized or issued as of the date hereof with a date certain for effectiveness, but which are not yet effective). At least one member of the Board qualifies as a "financial expert" as such term is defined under the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

2.35 NO STOP ORDERS. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or Prospectus or any part thereof.

2.36 NON NON-COMPETITION OBLIGATIONS. No director, officer or other employee of the Company is subject to any noncompetition agreement or non-solicitation agreement with any employer or prior employer that could materially affect his ability to be an employee, officer and/or director of the Company.

2.37 SARBANES-OXLEY COMPLIANCE.

2.37.1 DISCLOSURE CONTROLS. The Company has developed and currently maintains disclosure controls and procedures that will comply with Rule 13a-15 or 15d-15 of the Exchange Act, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company's Exchange Act filings and other public disclosure documents.

2.37.2 COMPLIANCE. The Company and each of its directors and its senior financial officers has consulted with the Company's independent auditors and outside counsel with respect to, and is familiar in all material respects with, the requirements of the Sarbanes-Oxley Act of 2002. The Company is in, or will be on the Effective Date, compliance with the provisions of the Sarbanes-Oxley Act of 2002 applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company's future compliance (not later than the relevant statutory and regulatory deadlines therefore) with all the provisions of the Sarbanes-Oxley Act of 2002.

3. COVENANTS OF THE COMPANY. The Company covenants and agrees as follows:

3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.

3.2 FEDERAL SECURITIES LAWS.

3.2.1 COMPLIANCE. During the time when a Prospectus is required to be delivered under the Act, the Company will use all best efforts to comply with all requirements imposed upon it by the Act, the Regulations and the Exchange Act and by the regulations under the Exchange Act, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Public Securities in accordance with the provisions hereof, and

the Prospectus. If at any time when a Prospectus relating to the Public Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriters, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Representative promptly and prepare and file with the Commission, subject to Section 3.1 hereof, an appropriate amendment or supplement in accordance with Section 10 of the Act.

3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the Prospectus (in form and substance reasonably satisfactory to the Representative) with the Commission pursuant to the requirements of Rule 424 of the Regulations.

3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years from the Effective Date, the Company will use its best efforts to maintain the registration of the Common Stock and Warrants under the provisions of
Section 12 of the Exchange Act.

3.3 BLUE SKY FILINGS. The Company will endeavor in good faith, in cooperation with the Representative, at or prior to the time the Registration Statement becomes effective, to qualify the Public Securities for offering and sale under the securities laws of such jurisdictions as the Representative may reasonably designate, provided that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representative agrees that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction.

3.4 DELIVERY TO THE UNDERWRITERS OF PROSPECTUSES. The Company will deliver to each of the several Underwriters, without charge, from time to time during the period when the Prospectus is required to be delivered under the Act or the Exchange Act such number of copies of each Preliminary Prospectus and the Prospectus as such Underwriter may reasonably request.

3.5 EVENTS REQUIRING NOTICE TO THE REPRESENTATIVE. The Company will notify the Representative immediately and confirm the notice in writing (i) of the effectiveness of the Registration Statement and any amendment thereto, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding for that purpose, (iii) if it becomes aware of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus, (v) of the receipt of any comments or request for any additional information from the Commission, and (vi) of the happening of any event during the period described in Section 3.4 hereof that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If

the Commission or any state securities commission shall enter a stop order or suspend such qualification at any time, the Company will make every reasonable effort to obtain promptly the lifting of such order.

3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from the Effective Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to participate to review (as described in Statement on Audited Standards No. 71 -- Interim Financial Information) (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's Form 10-Q or Form 10-QSB quarterly reports and the mailing of any quarterly financial information to stockholders.

3.7 EXCHANGE MAINTENANCE. For a period of five years from the date hereof, the Company will use its best efforts to maintain the listing by the AMEX of the Common Stock, and, if outstanding, the Warrants.

3.8 STANDARD & POOR'S AND SECONDARY MARKET TRADING. The Company will take all necessary action to maintain coverage in Standard & Poor's Corporation Records Corporate Descriptions for a period of three years from the Effective Date, including the payment of any necessary fees and expenses and the delivery to Standard & Poor's of updated quarterly information. The Company shall take such action as may be reasonably requested by the Representative to obtain a secondary market trading exemption in such states as may be reasonably requested by the Representative, including the payment of any necessary fees and expenses and the filing of requisite forms (e.g., Form 25101(b) for secondary market trading in the State of California) on the Effective Date.

3.9 WARRANT SOLICITATION AND REGISTRATION OF COMMON STOCK UNDERLYING THE WARRANTS.

3.9.1 WARRANT SOLICITATION FEES. The Company hereby engages Kirlin, on a non-exclusive basis, as its agent for the solicitation of the exercise of the Warrants. The Company, at its cost, will (i) assist Kirlin with respect to such solicitation, if requested by Kirlin and will (ii) provide to Kirlin, and direct the Company's transfer and warrant agent to provide to Kirlin, lists of the record and, to the extent known, beneficial owners of the Company's Warrants. Commencing one year from the Effective Date, the Company will pay to Kirlin a commission of five (5%) percent of the Warrant exercise price for each Warrant exercised, payable on the date of such exercise, on the terms provided for in the Warrant Agreement, if allowed under the rules and regulations of the NASD and only if Kirlin has provided bona fide services to the Company in connection with the exercise of Warrants and has received written confirmation from the holder that Kirlin has solicited such exercise. In addition to soliciting the exercise of Warrants, either orally or in writing, such services also may include disseminating information supplied to Kirlin by the Company, either orally or in writing, to Warrantholders about the Company or the market for the Company's securities, and assisting in the processing of the exercise of Warrants. Kirlin may engage sub-agents reasonably acceptable to the Company in its solicitation efforts. The Company will disclose the arrangement to pay such solicitation fees to Kirlin in any prospectus used by the Company in connection with the registration of the shares of Common Stock underlying the Warrants.

3.9.2 REGISTRATION OF COMMON STOCK. The Company agrees that so long as the Warrants are exercisable, it shall file with the Commission post-effective amendments to the registration statement as necessary to maintain effectiveness of the Registration Statement (or new Registration Statements covering the Warrants and the Common Stock issuable upon exercise thereof) and it shall take such action as is necessary to qualify and/or maintain qualification for sale, in those states in which the Warrants were initially offered by the Company, the Common Stock issuable upon exercise of the Warrants. The Company shall maintain the effectiveness of such registration statement and keep current a prospectus thereunder and maintain such qualification until the expiration of the Warrants in accordance with the provisions of the Warrant Agreement. The provisions of this Section 3.9.2 may not be modified, amended or deleted without the prior written consent of the Underwriter.

3.10 REPORTS TO THE REPRESENTATIVE.

3.10.1 PERIODIC REPORTS, ETC. For a period of five years from the Effective Date, the Company will promptly furnish to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time files with any governmental authority or furnishes generally to holders of any class of its securities, and promptly furnish to the Representative (i) a copy of each periodic report the Company shall be required to file with the Commission, (ii) a copy of every press release and every news item and article with respect to the Company or its affairs that was released by the Company and (iii) a copy of each Form 8-K or Schedules 13D, 13G, 14D-1 or 13E-4 received or prepared by the Company.

3.10.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS. Until the earlier of (i) the date the Company's securities are listed on the New York Stock Exchange or the Nasdaq National Market, and (ii) the third anniversary of the Closing Date, the Company will furnish to the Representative at the Company's sole expense such transfer sheets and position listings of the Company's securities as the Representative may request, including the daily, weekly and monthly consolidated transfer sheets of the transfer agent of the Company and the weekly position listings of the Depository Trust Company.

3.10.3 SECONDARY MARKET TRADING MEMORANDUM. The Company hereby requests that the Underwriters' legal counsel deliver to the Underwriters, at the Effective Date, a written memorandum detailing those states in which the Common Stock and the Warrants may be traded in non-issuer transactions under the Blue Sky laws of the fifty states ("Secondary Market Trading Memorandum") and that such counsel update such memorandum as reasonably requested by the Representative. The Company shall pay to the Underwriters' legal counsel a one-time fee of $5,000 for such services.

3.11 AGREEMENTS BETWEEN THE REPRESENTATIVE AND THE COMPANY.

3.11.1 MERGER AND ACQUISITION AGREEMENT. On the Closing
Date, the Company will enter into a Merger and Acquisition Agreement with the Representative in the form filed with the Commission as an exhibit to the Registration Statement providing for a finder's fee to be paid to the Representative if the Company participates in any merger, consolidation, or other transaction in which the Representative introduced the Company to the other party for a period of three years from the Closing Date ("Merger and Acquisition Agreement").

3.11.2 REPRESENTATIVE'S PURCHASE OPTION. On the Closing Date, the Company will execute and deliver the Representative's Purchase Option to Kirlin or its designees in the form filed as an exhibit to the Registration Statement.

3.12 DISQUALIFICATION OF FORM SB-2 OR FORM S-1 (OR OTHER APPROPRIATE FORM). For a period equal to seven (7) years from the date hereof, the Company will not take any action or actions that may prevent or disqualify the Company's use of Form SB-2 or Form S-1 (or other appropriate form) for the registration of the Warrants and the Representative's Securities and the securities issuable upon exercise of those securities under the Act.

3.13 PAYMENT OF EXPENSES.

3.13.1 GENERAL EXPENSES. The Company hereby agrees to pay on the Closing Date and, to the extent not paid on the Closing Date, on the Option Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to (i) the preparation, printing, filing, delivery and mailing (including the payment of postage with respect to such mailing) of the Registration Statement, the Prospectus and the Preliminary Prospectuses and the printing and mailing of this Agreement and related documents, including the cost of all copies thereof and any amendments thereof or supplements thereto supplied to the Underwriters in quantities as may be reasonably required by the Underwriters, (ii) the printing, engraving, issuance and delivery of the shares of Common Stock, the Warrants and the Representative's Purchase Option, including any transfer or other taxes payable thereon, (iii) the qualification of the Public Securities under state or foreign securities or Blue Sky laws, including the filing fees under such Blue Sky laws, the costs of printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments and supplements thereto, the fees (equal to $15,000) and disbursements of the Underwriters' counsel, and fees and disbursements of local counsel, if any, retained for such purpose (provided that all such disbursements have been approved in advance by the Company) and a one-time fee of $5,000 payable to Underwriters' counsel for the preparation of the Secondary Market Trading Memorandum pursuant to Section 3.10.3 hereof, (iv) costs associated with applications for assignments of a rating of the Public Securities by qualified rating agencies, if applicable, (v) filing fees, costs and expenses (including fees (of $10,000) and disbursements for the Underwriters' counsel) incurred in registering the offering with the NASD, (vi) costs of placing "tombstone" advertisements in THE WALL STREET JOURNAL, THE NEW YORK TIMES and a third publication to be selected by the Representative, (vii) fees and disbursements of the transfer and warrant agent, (viii) the Company's expenses associated with "due diligence" meetings arranged by the Representative, (ix) the preparation, binding and delivery of two transaction "bibles" for the Representative, (x) fees and expenses for any listing of the Public Securities on any securities exchange or any coverage or listing in Standard & Poor's and (xi) all other costs and expenses incident to the performance of its obligations hereunder that are not otherwise specifically provided for in this Section 3.13.1. The Company also agrees to engage and pay for an investigative search firm of the Representative's choice (International Business Research (USA), Inc.) to conduct an investigation of the officers and directors of the Company, which amount will be credited against the Representative's non-accountable expense allowance if the offering is consummated as provided herein. The Representative may deduct from the net proceeds of the offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein and elsewhere in this Agreement to be paid by the Company to the Representative and/or to third parties.

3.13.2 NON-ACCOUNTABLE EXPENSES. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.13.1, it will pay to the Representative a non-accountable expense allowance equal to three (3%) percent of the gross proceeds received by the Company from the sale of the Firm Securities (but not the Option Securities), of which $100,000 has been paid to date, and the Company will pay the balance on the Closing Date by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein. If the offering contemplated by this Agreement is not consummated for any reason whatsoever then the following provisions shall apply: The Company's liability for payment to the Representative of the non-accountable expense allowance shall be equal to the sum of the Representative's actual out-of-pocket expenses (including, but not limited to, counsel fees, "road-show" and due diligence expenses). The Representative shall retain such part of the non-accountable expense allowance previously paid as shall equal such actual out-of-pocket expenses. If the amount previously paid is insufficient to cover such actual out-of-pocket expenses, the Company shall remain liable for and promptly pay any other actual out-of-pocket expenses. If the amount previously paid exceeds the amount of actual out-of-pocket expenses, the Representative shall promptly remit to the Company any such excess.

3.14 APPLICATION OF NET PROCEEDS. The Company will apply the net proceeds from the offering received by it in a manner consistent with the application described under the caption "Use of Proceeds" in the Prospectus. The Company hereby agrees that, without the express prior written consent of the Representative, the Company will not apply any net proceeds from the offering to pay (i) any debt for borrowed funds or (ii) any debt or obligation owed to any Insider, except as described in the "Use of Proceeds" section of the Prospectus.

3.15 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company will make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth full calendar month following the Effective Date, an earnings statement (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Rule 158(a) under
Section 11(a) of the Act) covering a period of at least twelve consecutive months beginning after the Effective Date.

3.16 KEY PERSON LIFE INSURANCE. The Company will maintain key person life insurance in an amount not less than $3,000,000 on the life of Marvin S. Rosen and $3,000,000 on the life of Matthew D. Rosen, to be in effect as of the Effective Date, and pay the annual premiums therefor and name the Company as the sole beneficiary thereof for at least three years following the Effective Date.

3.17 STABILIZATION. Neither the Company, nor, to its knowledge, any of its employees, directors or stockholders has taken or will take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.

3.18 INTERNAL CONTROLS. The Company maintains and will continue to maintain a system of internal accounting controls that comply with the requirements of the Sarbanes-Oxley Act of 2002 (and the rules promulgated thereunder) and which are sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary in order to permit

preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

3.19 ACCOUNTANTS AND LAWYERS. For a period of five years from the Effective Date, the Company shall retain independent public accountants and securities lawyers reasonably acceptable to the Representative. RKC and Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP ("Gersten, Savage") are acceptable to the Representative.

3.20 TRANSFER AGENT. For a period of five years from the Effective Date, the Company shall retain a transfer agent ("Transfer Agent") for the Common Stock and Warrants reasonably acceptable to the Representative. Continental Stock Transfer & Trust Company is acceptable to the Representative.

3.21 NASD. The Company shall advise the Representative if it is aware that any 5% or greater stockholder of the Company becomes an affiliate or associated person of an NASD member participating in the distribution of the Company's Public Securities.

3.22 SALE OF SECURITIES. Subject to Section 2.26 hereof, the Company agrees not to permit or cause a private or public sale or private or public offering of any of its securities (in any manner, including pursuant to Rule 144 under the Act) owned nominally or beneficially by the Insiders for the time periods set forth in Section 2.26 following the Effective Date without obtaining the prior written consent of the Representative.

3.23 FORM S-8. The Company shall not file a registration statement on Form S-8 (or successor form) for a period of two years after the Effective Date, without the prior written consent of the Representative.

3.24 EMPLOYEE BENEFIT PLANS. The Company shall not increase the number of shares of common stock eligible for awards under any general employee benefit plan or adopt a new employee benefit plan for stock-based awards for a period of two years after the Effective Date, without the prior written consent of the Representative.

4. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Securities, as provided herein, shall be subject to the continuing accuracy (in all material respects) of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof and to the performance by the Company of its obligations hereunder and to the following conditions:

4.1 REGULATORY MATTERS.

4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement has been declared effective on the date of this Agreement and, at each of the Closing Date and the Option Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for such purpose shall have been instituted

or shall be pending or, to the Company's knowledge, contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Graubard Miller, counsel to the Underwriters.

4.1.2 NASD CLEARANCE. By the Effective Date, the Representative shall have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.

4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale of the Securities in any jurisdiction designated by the Representative pursuant to Section 3.3 hereof shall have been issued on or before either the Closing Date or the Option Closing Date, and no proceedings for that purpose shall have been instituted or, to the Company's knowledge, shall be contemplated.

4.2 COMPANY COUNSEL MATTERS.

4.2.1 EFFECTIVE DATE OPINION OF COUNSEL. On the Effective Date, the Representative shall have received the opinions of Gersten, Savage, general counsel to the Company, dated the Effective Date, addressed to the Representative and in form and substance satisfactory to Graubard Miller, counsel to the Representative.

4.2.2 CLOSING DATE AND OPTION CLOSING DATE OPINION OF
COUNSELS. On each of the Closing Date and the Option Closing Date, if any, the Representative shall have received the opinion of Gersten, Savage, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Representative and in form and substance satisfactory to Graubard Miller, counsel to the Underwriters, confirming as of the Closing Date and, if applicable, the Option Closing Date, the respective statements made by it in its opinion delivered on the Effective Date.

4.2.3 RELIANCE. In rendering such opinion, such counsel may rely (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' counsel) of other counsel reasonably acceptable to Underwriter's counsel, familiar with the applicable laws, and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of departments of various jurisdiction having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' counsel if requested. The opinion of counsel for the Company shall include a statement to the effect that it may be relied upon by counsel for the Underwriters in its opinion delivered to the Underwriters.

4.3 COLD COMFORT LETTER. At the time this Agreement is executed, and at each of the Closing Date and the Option Closing Date, if any, you shall have received a letter, addressed to the Representative and in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to you and to Graubard Miller, counsel for the Underwriters, from RKC, dated, respectively, as of the date of this Agreement and as of the Closing Date and the Option Closing Date, if any:

(i) confirming that they are independent accountants with respect to the Company within the meaning of the Act and the applicable Regulations;

(ii) stating that, based on the performance of procedures specified by the American Institute of Certified Public Accountants for a review of the latest available unaudited interim financial statements of the Company (as described in Statement on Auditing Standards ("SAS") No. 100 -- "Interim Financial Information"), with an indication of the date of the latest available unaudited interim financial statements, a reading of the latest available minutes of the stockholders and board of directors and the various committees of the board of directors, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention that would lead them to believe that at a date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any change in the capital stock or long-term debt of the Company, or any decrease in the stockholders' equity of the Company as compared with amounts shown in the [June 30, 2004] balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any decrease, setting forth the amount of such decrease, and (c) during the period from [June 30, 2004] to a specified date not later than five days prior to the Effective Date, Closing Date or Option Closing Date, as the case may be, there was any decrease in revenues, net earnings or net earnings per share of Common Stock, in each case as compared with the corresponding period in the preceding year and as compared with the corresponding period in the preceding quarter, other than as set forth in or contemplated by the Registration Statement, or, in the case of clauses (b) and
(c), if there was any such change or decrease, setting forth the amount of such decrease;

(iii) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, and work sheets, of the Company with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and

(iv) statements as to such other matters incident to the transaction contemplated hereby as you may reasonably request and as are typically included in auditor's "comfort letters" to underwriters.

4.4 OFFICERS' CERTIFICATES.

4.4.1 OFFICERS' CERTIFICATE. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate, that is true and correct in fact, of the Company signed by the Chairman of the Board or the President and the Secretary of the Company, dated the Closing Date or the Option Closing Date, as the case may be, respectively, to the effect that the Company has performed all covenants and complied with all conditions (subject to any materiality qualifications in any such covenants and conditions and in the representations and warranties) required by this Agreement to be performed or complied with by the Company prior to and as of the Closing Date, or the Option Closing Date, as the case may be, and that the conditions set forth in Section 4.4 hereof have been satisfied as of such date and

that, as of Closing Date and the Option Closing Date, as the case may be, the representations and warranties of the Company set forth in Section 2 hereof are true and correct. In addition, the Representative will have received such other and further certificates of officers of the Company as the Representative may reasonably request, including a certificate certifying without any qualifications that no shareholder, officer or director of the Company has any affiliation with a member or affiliate of a member of the NASD, which certificate will be signed by each of the CEO, COO, CFO and Secretary of the Company.

4.4.2 SECRETARY'S CERTIFICATE. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation of the Company are true and complete, have not been modified and are in full force and effect, (ii) that the resolutions relating to the public offering contemplated by this Agreement are in full force and effect and have not been modified, (iii) all correspondence between the Company or its counsel and the Commission and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.

4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and the Option Closing Date, if any, (i) there shall have been no material adverse change or development involving a prospective material change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus, (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is materially adverse to the Company, taken as a whole, (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default would have a material adverse effect on the Company, (iv) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus, (v) no action suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Initial Stockholders or affecting any of the Company's property or business before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus, (vi) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated or threatened by the Commission, and (vii) the Registration Statement and the Prospectus and any amendments or supplements thereto contain all material statements that are required to be stated therein in accordance with the Act and the Regulations and conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

4.6 DELIVERY OF AGREEMENTS. The Company has delivered to the Representative an executed copy of the Representative's Purchase Option.

4.7 OPINION OF COUNSEL FOR THE UNDERWRITERS. All proceedings taken in connection with the authorization, issuance or sale of the Securities as herein contemplated shall

be reasonably satisfactory in form and substance to you and to Graubard Miller, counsel to the Underwriters, and you shall have received from such counsel a favorable opinion, dated the Closing Date and the Option Closing Date, if any, with respect to such of these proceedings as you may reasonably require. On or prior to the Effective Date, the Closing Date and the Option Closing Date, as the case may be, counsel for the Underwriters shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this
Section 4.7, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained.

4.8 UNAUDITED FINANCIALS. The Company shall have furnished to the Underwriter a copy of the latest available unaudited interim financial statements for the period ended June 30, 2004 ("Unaudited Financials") of the Company which have been read by RKC as stated in their letter dated as of the Closing Date to be furnished pursuant to Section 4.3 hereof.

5. INDEMNIFICATION.

5.1 INDEMNIFICATION OF UNDERWRITERS.

5.1.1 GENERAL. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each of the Underwriters, their respective directors, officers and employees and each person, if any, who controls any such Underwriter ("controlling person") within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriters and the Company or between any of the Underwriters and any third party or otherwise) to which they or any of them may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement or the Prospectus (as from time to time each may be amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Representative's Purchase Option; or (iii) any application or other document or written communication (in this Section 5 collectively called "application") executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Units under the securities laws thereof or filed with the Commission, any state securities commission or agency, Nasdaq or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished (or not furnished in the case of an omission) to the Company with respect to an Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in any application, as the case may be. The Company agrees promptly to notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or controlling persons in connection with the issue and sale of the Securities or in connection with the Registration Statement or Prospectus.

5.1.2 PROCEDURE. If any action is brought against an Underwriter or controlling person in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter) and payment of actual expenses. Such Underwriter or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter and/or controlling person shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if the Underwriter or controlling person shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, except where such settlement provides for the full release of the Company.

5.1.3 INDEMNIFICATION OF THE COMPANY. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, officers and employees and agents who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, written information furnished (or not furnished in the case of an omission or alleged omission) to the Company with respect to such Underwriter by or on behalf of the Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or in any such application. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2.

5.2 CONTRIBUTION.

5.2.1 CONTRIBUTION RIGHTS. In order to provide for just and equitable contribution under the Act in any case in which (i) any person entitled to indemnification under this Section 5 makes claim for indemnification pursuant hereto but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in

such case, or (ii) contribution under the Act, the Exchange Act or otherwise may be required on the part of any such person in circumstances for which indemnification is provided under this Section 5, then, and in each such case, the Company and the Underwriters shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by said indemnity agreement incurred by the Company and the Underwriters, as incurred, in such proportions that the Underwriters are responsible for that portion represented by the percentage that the underwriting discount appearing on the cover page of the Prospectus bears to the initial offering price appearing thereon and the Company is responsible for the balance; provided, that, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 5.2.1, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Public Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay in respect of such losses, liabilities, claims, damages and expenses. For purposes of this Section, each director, officer and employee of an Underwriter or the Company, as applicable, and each person, if any, who controls an Underwriter or the Company, as applicable, within the meaning of
Section 15 of the Act shall have the same rights to contribution as the Underwriters or the Company, as applicable.

5.2.2 CONTRIBUTION PROCEDURE. Within fifteen days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party ("contributing party"), notify the contributing party of the commencement thereof, but the omission to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid fifteen days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section are intended to supersede, to the extent permitted by law, any right to contribution under the Act, the Exchange Act or otherwise available. The Underwriters' obligations to contribute pursuant to this Section 5.2 are several and not joint.

6. DEFAULT BY AN UNDERWRITER.

6.1 DEFAULT NOT EXCEEDING 10% OF FIRM SECURITIES OR OPTION SECURITIES. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Securities or the Option Securities, if the over-allotment option is exercised, hereunder, and if the number of the Firm Securities or Option Securities with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Securities or Option Securities that all Underwriters have agreed to purchase hereunder, then such Firm Securities or Option Securities to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.

6.2 DEFAULT EXCEEDING 10% OF FIRM SECURITIES OR OPTION SECURITIES. In the event that the default addressed in Section 6.1 above relates to more than 10% of the Firm Securities or Option Securities, you may in your discretion arrange for yourself or for another party or parties to purchase such Firm Securities or Option Securities to which such default relates on the terms contained herein. If within one business day after such default relating to more than 10% of the Firm Securities or Option Securities you do not arrange for the purchase of such Firm Securities or Option Securities, then the Company shall be entitled to a further period of one business day within which to procure another party or parties satisfactory to you to purchase said Firm Securities or Option Securities on such terms. In the event that neither you nor the Company arrange for the purchase of the Firm Securities or Option Securities to which a default relates as provided in this Section 6, this Agreement may be terminated by you or the Company without liability on the part of the Company (except as provided in Sections 3.15 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Securities, this Agreement will not terminate as to the Firm Securities; and provided further that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other several Underwriters and to the Company for damages occasioned by its default hereunder.

6.3 POSTPONEMENT OF CLOSING DATE. In the event that the Firm Securities or Option Securities to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement or the Prospectus that in the opinion of counsel for the Underwriter may thereby be made necessary. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such Securities.

7. RIGHT TO APPOINT REPRESENTATIVE. For a period of five years from the Effective Date, upon notice from Kirlin to the Company, Kirlin shall have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors of the Company; provided that such representative shall sign a Regulation FD compliant confidentiality agreement which is reasonably acceptable to Kirlin and its counsel in connection with such representative's attendance at meetings of the Board of Directors; and provided further that upon written notice to Kirlin, the Company may exclude the representative from meetings (i) for the portions of the meeting held in "executive session" and (ii) where, in the written opinion of counsel for the Company, the representative's presence would jeopardize the attorney-client privilege. The Company agrees to give Kirlin written notice of each such meeting and to provide Kirlin with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the other directors, and reimburse the representative of Kirlin for its reasonable out-of-pocket expenses incurred in connection with its attendance at the meeting, including but not limited to, food, lodging and transportation.

8. ADDITIONAL COVENANTS.

8.1 BOARD COMPOSITION AND BOARD DESIGNATIONS. For a period of five years from the Effective Date, the Company shall ensure that (i) the qualifications of the persons

serving as board members and the overall composition of the board comply with the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder and with the listing requirements of the AMEX and (ii) at least one member of the board of directors qualifies as a "financial expert" as such term is defined under the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder.

8.2 EMPLOYMENT AND COMPENSATION MATTERS. Prior to the Effective Date, the Company will have entered into a three-year employment agreement with Matthew D. Rosen, including a covenant not to compete for a period of two years after termination of employment, the terms of which shall be satisfactory to the Representative, and will have entered into a six-month employment agreement and five-year non-competition agreement with Marvin S. Rosen, the terms of which will be satisfactory to the Representative. The Company agrees that for a period of three years from the Effective Date, all compensation and other arrangements between the Company and its officers, directors and affiliates shall be approved by the Compensation Committee of the Company's Board of Directors, a majority of the members of which shall have no affiliation or other relationship with the Company other than as directors.

8.3 PRESS RELEASES. The Company will not issue a press release or engage in any other publicity until 25 days after the Effective Date without the Representative's prior written consent.

9. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the context otherwise requires, all representations, warranties and agreements contained in this Agreement shall be deemed to be representations, warranties and agreements at the Closing Dates and such representations, warranties and agreements of the Underwriters and Company, including the indemnity agreements contained in Section 5 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Underwriters, the Company or any controlling person, and shall survive termination of this Agreement or the issuance and delivery of the Securities to the several Underwriters until the earlier of the expiration of any applicable statute of limitations and the seventh anniversary of the later of the Closing Date or the Option Closing Date, if any, at which time the representations, warranties and agreements shall terminate and be of no further force and effect.

10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.

10.1 EFFECTIVE DATE. This Agreement shall become effective on the Effective Date at the time that the Registration Statement is declared effective.

10.2 TERMINATION. The Underwriters shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative's opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction, or (iii) if the United States shall have become involved in a war other than in Afghanistan or Iraq or there are other major hostilities in or outside those countries, or
(iv) if a banking moratorium has been declared

by a New York State or federal authority, or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities market, or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Securities, or (vii) if either Marvin S. Rosen or Matthew D. Rosen shall no longer serve the Company in his present capacity, or (viii) if the Company has breached any of its representations, warranties or obligations hereunder (subject to any materiality qualifications contained therein), or (ix) if the Underwriter shall have become aware after the date hereof of such a material adverse change in the condition (financial or otherwise), business, or prospects of the Company, or such adverse material change in general market conditions as in the Representative's reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Securities or to enforce contracts made by the Underwriters for the sale of the Securities.

10.3 NOTICE. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10, the Company shall be notified on the same day as such election is made by you by telephone or telecopy, confirmed by letter.

10.4 EXPENSES. In the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms hereof, the obligations of the Company to pay the expenses related to the transactions contemplated herein shall be governed by Section 3.13 hereof.

10.5 INDEMNIFICATION. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall not be in any way effected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.

11. MISCELLANEOUS.

11.1 NOTICES. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed, delivered or telecopied and confirmed

If to the Representative:

Kirlin Securities, Inc.
6901 Jericho Turnpike
Syosset, New York 11791
Attention: David O. Lindner
Telecopier: (516) 364-5199

Copy to:

Graubard Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
Telecopier: (212) 818-8881

If to the Company:

Fusion Telecommunications International, Inc.
420 Lexington Avenue, Suite 518
New York, New York 10170
Attention: Matthew D. Rosen
Telecopier: (212) 972-7884

Copy to:

Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 East 52nd Street, 9th Floor
New York, New York 10022
Attention: Arthur S. Marcus, Esq.
Telecopier: (212) 980-5192

11.2 HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

11.3 AMENDMENT. This Agreement may be amended only by a written instrument executed by each of the parties hereto.

11.4 ENTIRE AGREEMENT. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

11.5 BINDING EFFECT. This Agreement shall inure solely to the benefit of and shall be binding upon, the Representative, the other Underwriter, the Company and the controlling persons, directors and officers referred to in
Section 5 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained.

11.6 GOVERNING LAW, JURISDICTION. This Agreement shall be governed by and construed and enforced in accordance with the law of the State of New York, without giving effect to conflicts of law. The Company hereby agrees that any action, proceeding or claim against it arising out of or relating in any way to this Agreement shall be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 11.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The parties agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor.

11.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto.

11.8 WAIVER, ETC. The failure of any of the parties hereto at any time to enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any provision hereof or the right of any of the parties hereto thereafter to enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.

Very truly yours,

FUSION TELECOMMUNICATIONS
INTERNATIONAL, INC.

By:

Name:
Title:

Accepted as of the date first above written.

New York, New York

KIRLIN SECURITIES, INC.

By:
Name: David O. Lindner
Title: Co-Chief Executive Officer

SCHEDULE I

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

Underwriter Number of Firm Securities to be Purchased

Kirlin Securities, Inc.

THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN PROVIDED.

VOID AFTER 5:00 P.M. EASTERN TIME, ____________ ___, 2009.

PURCHASE OPTION

FOR THE PURCHASE OF UP TO

[ ] SHARES OF COMMON STOCK

AND/OR

[ ] COMMON STOCK PURCHASE WARRANTS

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

(A DELAWARE CORPORATION)

1. PURCHASE OPTION.

THIS CERTIFIES THAT, in consideration of $100.00 duly paid by or on behalf of ____________________________ ("Holder"), as registered owner of this Purchase Option, to Fusion Telecommunications International, Inc. ("Company"), Holder is entitled, at any time or from time to time at or after __________ ____, 2005 ("Commencement Date"), and at or before 5:00 p.m., Eastern Time, ___________ ____, 2009 ("Expiration Date"), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ ] ([ ]) shares of Common Stock of the Company, $.01 par value ("Common Stock") and/or [ ] ([ ]) Redeemable Common Stock Purchase Warrants, each to purchase one share of Common Stock ("Warrants"). Each Warrant is the same as the Redeemable Common Stock Purchase Warrants ("Public Warrants") that have been registered by the Company for sale to the public pursuant to the Registration Statement on Form SB-2 (No.333-___________) ("Registration Statement"), which was declared effective on _________ ____, 2004 ("Effective Date"). The shares of Common Stock and Warrants are sometimes collectively referred to herein as the "Securities." The Holder can purchase, upon exercise of the Purchase Option, either shares of Common Stock or Warrants or both. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Option may be exercised on the next succeeding day that is

not such a day in accordance with the terms herein. This Purchase Option is initially exercisable at $[ ] per share of Common Stock and $[ ] per Warrant purchased; provided, however, that upon the occurrence of any of the events specified in Section 6 hereof, the rights granted by this Purchase Option, including the exercise price and the number of shares of Common Stock and Warrants to be received upon such exercise, shall be adjusted as therein specified. The term "Exercise Price" shall mean the initial exercise price or the adjusted exercise price, depending on the context of a share of Common Stock or a Warrant.

2. EXERCISE.

2.1 EXERCISE FORM. In order to exercise this Purchase Option, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Option and payment of the Exercise Price in cash or by certified check or official bank check for the Securities being purchased. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Option shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.

2.2 LEGEND. Each certificate for Securities purchased under this Purchase Option shall bear a legend as follows (or a substantially similar legend) unless such Securities have been registered under the Securities Act of 1933, as amended:

"The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act") or applicable state law. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act and applicable state law."

2.3 CONVERSION RIGHT.

2.3.1 DETERMINATION OF AMOUNT. In lieu of the payment of the Exercise Price in the manner required by Section 2.1, the Holder shall have the right (but not the obligation) to convert any exercisable but unexercised portion of this Purchase Option into Common Stock and/or Warrants ("Conversion Right") as provided in this Section 2 below.

2.3.2 COMMON STOCK. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price in cash) that number of shares of Common Stock equal to the quotient obtained by dividing (x) the "Stock Value" (as defined below), at the close of trading on the next to last trading day immediately preceding the exercise of the Conversion Right, of the portion of the Purchase Option being converted by (y) the Market Price at that same time. The "Stock Value" of the portion of the Purchase Option being converted shall equal the remainder derived from subtracting (a) the

Exercise Price multiplied by the number of shares of Common Stock underlying that portion of the Purchase Option being converted from (b) the Market Price of the Common Stock multiplied by the number of shares of Common Stock underlying that portion of the Purchase Option being converted. As used in this Section 2.3.2, the term "Market Price" at any date shall be deemed to be the average of the last reported sale price of the Common Stock for the three consecutive trading days ending on such date, as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any national securities exchange or if any such exchange on which the Common Stock is listed is not its principal trading market, the last reported sale price for the three consecutive trading days ending on such date as furnished by the NASD through the Nasdaq National Market or SmallCap Market, or, if applicable, the American Stock Exchange, or if the Common Stock is not listed or admitted to trading on any of the foregoing markets, or similar organization, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it.

2.3.3 WARRANTS. Upon exercise of the Conversion Right, the Company shall deliver to the Holder (without payment by the Holder of any of the Exercise Price in cash) that number of Warrants equal to the quotient obtained by dividing (x) the "Warrant Value" (as defined below), at the close of trading on the next to last trading day immediately preceding the exercise of the Conversion Right, of the portion of the Purchase Option being converted by (y) the Market Price at that same time. The "Warrant Value" of the portion of the Purchase Option being converted shall equal the remainder derived from subtracting (a) the Exercise Price multiplied by the number of Warrants underlying that portion of the Purchase Option being converted from (b) the Market Price of the Warrants multiplied by the number of Warrants underlying that portion of the Purchase Option being converted. As used in this Section 2.3.3, the term "Market Price" at any date shall be deemed to be the last reported sale price of the Warrants for the three consecutive trading days ending on such date, or, in case no such reported sale takes place on such day, the last reported sale price for the immediately preceding trading day, in either case as officially reported by the principal securities exchange on which the Warrants are listed or admitted to trading, or, if the Warrants are not listed or admitted to trading on any national securities exchange or if any such exchange on which the Warrants are listed is not its principal trading market, the last reported sale price for the three consecutive trading days ending as furnished by the NASD through the Nasdaq National Market or SmallCap Market, or, if applicable, the American Stock Exchange, or if the Warrants are not then traded on any of the foregoing markets, or similar organization, then the "Market Price" shall equal the remainder derived from subtracting (a) the exercise price of the underlying Warrant from (b) the "Market Price" of the Common Stock as determined in Section 2.3.2.

2.3.4 MECHANICS OF CONVERSION. The Conversion Right may be exercised by the Holder on any business day on or after the Commencement Date and not later than the Expiration Date by delivering the Purchase Option with a duly executed exercise form attached hereto with the conversion right section completed to the Company, exercising the Conversion Right and specifying the total number of shares of Common Stock and/or Warrants that the Holder will purchase pursuant to such Conversion Right.

3. TRANSFER.

3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase Option, by its acceptance hereof, agrees that it will not sell, transfer or assign or hypothecate this Purchase Option prior to the Commencement Date to anyone other than (i) an officer or partner of such Holder, (ii) an officer of Kirlin Securities, Inc. ("Underwriter") or an officer or partner of any Selected Dealer or member of the underwriting syndicate in connection with the Company's public offering with respect to which this Purchase Option has been issued, or
(iii) any Selected Dealer or member of the underwriting syndicate. On and after the Commencement Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Option and payment of all transfer taxes, if any, payable in connection therewith. The Company shall immediately transfer this Purchase Option on the books of the Company and shall execute and deliver a new Purchase Option or Purchase Options of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of shares of Common Stock and Warrants purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.

3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and the Securities underlying this Purchase Option shall not be transferred unless and until (i) the Company has received the opinion of counsel for the Holder that this Purchase Option or the Securities, as the case may be, may be transferred pursuant to an exemption from registration under the Act and applicable state law, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that an opinion of Graubard Miller in form and substance reasonably satisfactory to the Company or its counsel shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement relating to such Purchase Option or Securities, as the case may be, has been filed by the Company and declared effective by the Securities and Exchange Commission and compliance with applicable state law.

4. NEW PURCHASE OPTIONS TO BE ISSUED.

4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in
Section 3 hereof, this Purchase Option may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Option for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax, the Company shall cause to be delivered to the Holder without charge a new Purchase Option of like tenor to this Purchase Option in the name of the Holder evidencing the right of the Holder to purchase the aggregate number of shares of Common Stock and Warrants purchasable hereunder as to which this Purchase Option has not been exercised or assigned.

4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Option and of reasonably satisfactory indemnification, the Company shall execute and deliver a new Purchase Option of like tenor and date. Any such new Purchase Option executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.

5. REGISTRATION RIGHTS.

5.1 DEMAND REGISTRATION.

5.1.1 GRANT OF RIGHT. The Company, upon written demand ("Initial Demand Notice") of the Holder(s) of at least 51% of the Purchase Options and/or the underlying shares of Common Stock and Warrants ("Majority Holders"), agrees to register on one occasion, all of the Securities underlying such Purchase Options, including the Common Stock, the Warrants and the Common Stock underlying the Warrants (collectively the "Registrable Securities"). On such occasion, the Company will file a registration statement covering the Registrable Securities within sixty (60) days after receipt of the Initial Demand Notice and use its reasonable best efforts to have the registration statement declared effective promptly thereafter. If the Company fails to comply with the provisions of this Section 5.1.1, the Company shall, in addition to any other equitable or other relief available to the Holder(s), be liable for any and all incidental, special and consequential damages sustained by the Holder(s). The demand for registration may be made at any time during a period of four years beginning one year from the Effective Date; provided that the Registrable Securities are not already covered by an effective registration statement. The Company covenants and agrees to give written notice of its receipt of any Initial Demand Notice by any Holder(s) to all other registered Holders of the Purchase Options and/or the Registrable Securities within ten days from the date of the receipt of any such Initial Demand Notice.

5.1.2 TERMS. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, but the Holders shall pay any and all underwriting and brokerage commissions discounts and fees, the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. The Company agrees to use its reasonable best efforts to cause the filing required herein to become effective promptly and to qualify or register the Registrable Securities in such States as are reasonably requested by the Holder(s); provided, however, that in no event shall the Company be required to register the Registrable Securities in a State in which such registration would cause (i) the Company to be obligated to register or license to do business in such State or submit to general service of process in such State, or (ii) the principal stockholders of the Company to be obligated to escrow their shares of capital stock of the Company. The Company shall cause any registration statement filed pursuant to the demand right granted under Section 5.1.1 to remain effective for a period of at least twelve consecutive months from the date that the Holders of the

Registrable Securities covered by such registration statement are first given the opportunity to sell all of such securities.

5.2 "PIGGY-BACK" REGISTRATION.

5.2.1 GRANT OF RIGHT. In addition to the demand right of registration, the Holders of the Purchase Options shall have the right for a period of six (6) years commencing one year from the Effective Date, to include the Registrable Securities as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, in the determination of the Company's managing underwriter or underwriters, if any, for such offering, the inclusion of the Registrable Securities, when added to the securities being registered by the Company or the selling stockholder(s), will exceed the maximum amount of the Company's securities which can be marketed (i) at a price reasonably related to their then current market value, or (ii) without adversely affecting the entire offering, the Company shall not be obligated to register such Registrable Securities.

5.2.2 TERMS. The Company shall bear all fees and expenses attendant to registering the Registrable Securities, but the Holders shall pay any and all underwriting and brokerage commissions, discounts and fees and the expenses of any legal counsel and other experts selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than ten (10) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as the Holder has sold all of the Registrable Securities. The holders of the Registrable Securities shall exercise the "piggy-back" rights provided for herein by giving written notice, within ten (10) days of the receipt of the Company's notice of its intention to file a registration statement.

5.3 GENERAL TERMS.

5.3.1 INDEMNIFICATION. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriter contained in Section 5 of the Underwriting Agreement between the Underwriter and the Company, dated the Effective Date (but not with respect to information furnished (or not furnished in the case of an omission) by the Holders). The Holder(s) of the Registrable Securities to be sold pursuant to

such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, against all loss, claim, damage, expense or liability (including all reasonable attorneys' fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished (or not furnished in the case of an omission or alleged omission) by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5 of the Underwriting Agreement pursuant to which the Underwriter has agreed to indemnify the Company.

5.3.2 EXERCISE OF WARRANTS. Nothing contained in this Purchase Option shall be construed as requiring the Holder(s) to exercise their Purchase Options or Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.

5.3.3 DOCUMENTS DELIVERED TO HOLDERS. Subject to the execution of appropriate confidentiality agreements, the Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request, provided that all such persons sign a confidentiality agreement.

5.3.4 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling securityholders as a condition to the inclusion of such Holder's Registrable Securities in any registration statement.

6. ADJUSTMENTS.

6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The Exercise Price and the number of shares of Common Stock underlying the Purchase Option and underlying the Warrants underlying the Purchase Option shall be subject to adjustment from time to time as hereinafter set forth:

6.1.1 STOCK DIVIDENDS - RECAPITALIZATION, RECLASSIFICATION, SPLIT-UPS. If after the date hereof, and subject to the provisions of Section 6.3 below, the number of outstanding

shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up, recapitalization or reclassification of shares of Common Stock or other similar event, then, on the effective date thereof, the number of shares of Common Stock issuable on exercise of the Purchase Option and the Warrants underlying the Purchase Option shall be increased in proportion to such increase in outstanding shares; provided, however, that nothing in this
Section 6.1 is intended to provide for an adjustment with respect to the Warrants beyond that provided for in the Warrant Agreement between the Company and Continental Stock Transfer & Trust Company. [For example, if the Company declares a two-for-one stock dividend and at the time of such dividend the Purchase Option is for the purchase of 1,000 shares of Common Stock at $5.555 per share and 1,000 Warrants at $0.055 per Warrant (each Warrant exercisable for $5.05 per share), upon effectiveness of the dividend, the Purchase Option will be adjusted (disregarding for purposes of this example that adjustments shall be rounded to the nearest cent, as provided in Section 6.1.3) to allow for the purchase of 2,000 shares at $2.7775 per share and 2,000 Warrants at $0.0275 (each Warrant exercisable for $2.525 per share).]

6.1.2 AGGREGATION OF SHARES. If after the date hereof, and subject to the provisions of Section 6.3, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date thereof, the number of shares of Common Stock issuable on exercise of the Purchase Option and the Warrants underlying the Purchase Option shall be decreased in proportion to such decrease in outstanding shares.

6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of shares of Common Stock purchasable upon the exercise of this Purchase Option is adjusted, as provided in this Section 6.1, the Exercise Price shall be adjusted (to the nearest cent) by multiplying such Exercise Price immediately prior to such adjustment by a fraction (x) the numerator of which shall be the number of shares of Common Stock purchasable upon the exercise of this Purchase Option immediately prior to such adjustment, and (y) the denominator of which shall be the number of shares of Common Stock so purchasable immediately thereafter. If it is determined that such Exercise Price and number of shares of Common Stock must be adjusted, then the Exercise Price of the Purchase Option with respect to the underlying Warrants and the number of Warrants purchasable hereunder shall also be similarly adjusted.

6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. In case of any reclassification or reorganization of the outstanding shares of Common Stock other than a change covered by Section 6.1.1 hereof or which solely affects the par value of such shares of Common Stock, or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or reorganization of the outstanding shares of Common Stock), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Option shall have the right thereafter (until the expiration of the right of exercise of this Purchase Option) to receive upon

the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon a dissolution following any such sale or other transfer, by a Holder of the number of shares of Common Stock of the Company obtainable upon exercise of this Purchase Option immediately prior to such event; and if any reclassification also results in a change in shares of Common Stock covered by Section 6.1.1, then such adjustment shall be made pursuant to Sections 6.1.1, 6.1.3 and this Section 6.1.4. The provisions of this Section 6.1.4 shall similarly apply to successive reclassifications, reorganizations, mergers or consolidations, sales or other transfers.

6.1.5 CHANGES IN FORM OF PURCHASE OPTION. This form of Purchase Option need not be changed because of any change pursuant to this Section, and Purchase Options issued after such change may state the same Exercise Price and the same number of shares of Common Stock and Warrants as are stated in the Purchase Options initially issued pursuant to this Agreement. The acceptance by any Holder of the issuance of new Purchase Options reflecting a required or permissive change shall not be deemed to waive any rights to a prior adjustment or the computation thereof.

6.2 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not be required to issue certificates representing fractions of shares of Common Stock or Warrants upon the exercise or transfer of the Purchase Option, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down to the nearest whole number of Warrants, shares of Common Stock or other securities, properties or rights.

7. RESERVATION AND LISTING. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon exercise of the Purchase Options or the Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Options and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. The Company further covenants and agrees that upon exercise of the Warrants underlying the Purchase Options and payment of the respective Warrant exercise price therefor, all shares of Common Stock and other securities issuable upon such exercises shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any stockholder. As long as the Purchase Options shall be outstanding, the Company shall use its reasonable best efforts to cause all (i) shares of Common Stock issuable upon exercise of the Purchase Options and the Warrants, and (ii) the Warrants underlying the Purchase Options to be listed (subject to official notice of issuance) on all securities exchanges (or, if applicable on Nasdaq) on which the Common Stock or the Public Warrants issued to the public in connection herewith are then listed and/or quoted.

8. CERTAIN NOTICE REQUIREMENTS.

8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Purchase Options and their exercise, any of the events described in Section 8.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least ten (10) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be.

8.2 EVENTS REQUIRING NOTICE. The Company shall be required to give the notice described in this Section 8 upon one or more of the following events:
(i) if the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, or (ii) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business shall be proposed.

8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 6 hereof, send notice to the Holders of such event and change ("Price Notice"). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company's President and Chief Financial Officer.

8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and other communications under this Purchase Option shall be in writing and shall be deemed to have been duly made on the date of delivery if delivered personally or sent by overnight courier, with acknowledgement of receipt to the party to which notice is given, or on the fifth day after mailing if mailed to the party to whom notice is to be given, by registered or certified mail, return receipt requested, postage prepaid and properly addressed as follows: (i) if to the registered Holder of the Purchase Option, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to its principal executive office.

9. MISCELLANEOUS.

9.1 AMENDMENTS. The Company and the Underwriter may from time to time supplement or amend this Purchase Option without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of the party against whom enforcement of the modification or amendment is sought.

9.2 HEADINGS. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Option.

9.3 ENTIRE AGREEMENT. This Purchase Option (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Option) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

9.4 BINDING EFFECT. This Purchase Option shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Option or any provisions herein contained.

9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase Option shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Option shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 8 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder, by acceptance hereof, agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys' fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor.

9.6 WAIVER, ETC. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Option shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Option or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Option. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Option shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.

IN WITNESS WHEREOF, the Company has caused this Purchase Option to be signed by its duly authorized officer as of the ____ day of _____, 2004.

FUSION TELECOMMUNICATIONS
INTERNATIONAL, INC.

By:

Marvin S. Rosen Chief Executive Officer

Form to be used to exercise Purchase Option:

Fusion Telecommunications International, Inc.

Date:_________________, 200__

The undersigned hereby elects irrevocably to exercise the within Purchase Option and to purchase ____ shares of Common Stock and/or Warrants to purchase shares of Common Stock of Fusion Telecommunications International, Inc. and hereby makes payment of $____________ (at the rate of $_________ per share of Common Stock and $ per Warrant) in payment of the Exercise Price pursuant thereto. Please issue the Common Stock and Warrants as to which this Purchase Option is exercised in accordance with the instructions given below.

The undersigned hereby elects irrevocably to exercise the within Purchase Option and to purchase _________ shares of Common Stock by surrender of the unexercised portion of the within Purchase Option (with a "Stock Value" of $_______ based on a "Market Price" of $__________. Please issue the Common Stock as to which this Purchase Option is exercised in accordance with the instructions given below.

Signature

NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.

INSTRUCTIONS FOR REGISTRATION OF SECURITIES

Name

(Print in Block Letters)

Address

Form to be used to assign Purchase Option:

ASSIGNMENT

(To be executed by the registered Holder to effect a transfer of the within Purchase Option):

FOR VALUE RECEIVED,__________________________________ does hereby sell, assign and transfer unto _______________________ the right to purchase _______________________ shares of Common Stock and/or Warrants to purchase ______ shares of Common Stock of Fusion Telecommunications International, Inc. ("Company") evidenced by the within Purchase Option and does hereby authorize the Company to transfer such right on the books of the Company.

Dated:___________________, 200_

Signature

Signature Guaranteed

NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.

KIRLIN SECURITIES, INC.

6901 JERICHO TURNPIKE
SYOSSET, NEW YORK 10106

FORM OF SELECTED DEALERS AGREEMENT

Dear Sirs:

1. Registration under the Securities Act of 1933, as amended ("Act"), of the [ ] shares of Common Stock and [ ] Redeemable Common Stock Purchase Warrants (collectively, the "Securities")* of Fusion Telecommunications International, Inc. ("Company"), as more fully described in the Preliminary Prospectus, dated ________ __, 2004, and in the final prospectus ("Prospectus") that will be forwarded to you, will become effective in the near future. We, as the Underwriters, are offering certain of the Securities for purchase by a selected group of dealers ("Selected Dealers") on the terms and conditions stated herein.

Authorized Public Offering Price:   $[  ] per Share

                                    $[  ] per Warrant

Dealers' Selling Concession:        Not to exceed $      per Share and $     per

Warrant payable upon termination of this Agreement, except as provided below. We reserve the right not to pay such concession on any of the Securities purchased by any of the Selected Dealers from us and repurchased by us at or below the price stated above prior to such termination.

Reallowance: You may reallow not in excess of $ per Share and $ per Warrant as a selling concession to dealers who are members in good standing of the National Association of Securities Dealers, Inc. ("NASD") or to foreign dealers who are not eligible for membership in the NASD and who have agreed
(i) not to sell the Securities within the United States of America, its territories or possessions or to persons who are citizens thereof or residents therein, and (ii) to abide by the applicable Conduct Rules of the NASD.

* Plus the over-allotment option available to the Underwriters to purchase up to an additional [ ] Shares and [ ] Warrants.

Delivery and Payment:               Delivery of the Securities  shall be made on
                                    or  about  __________________,  2004 or such
                                    later date as we may advise on not less than
                                    one day's  notice to you,  at the  office of
                                    Kirlin   Securities,   Inc.,   6901  Jericho
                                    Turnpike, Syosset, New York 11791 or at such
                                    other place as we shall  specify on not less
                                    than one day's  notice to you.  Payment  for
                                    the  Securities  is  to  be  made,   against
                                    delivery,  at the authorized public offering
                                    price  stated  above,  or,  if we  shall  so
                                    advise   you,  at  the   authorized   public
                                    offering  price  less the  dealers'  selling
                                    concession  stated above,  by a certified or
                                    official  bank  check in New  York  Clearing
                                    House  Funds  payable to the order of Kirlin
                                    Securities, Inc.

Termination:                        This Agreement  shall terminate at the close
                                    of  business on the 45th day  following  the
                                    effective date of the Registration Statement
                                    (of which the  enclosed  Prospectus  forms a
                                    part), unless extended at our discretion for
                                    a period  or  periods  not to  exceed in the
                                    aggregate  30   additional   days.   We  may
                                    terminate  this  Agreement,  whether  or not
                                    extended, at any time without notice.

2. Any of the Securities purchased by you hereunder are to be offered by you to the public at the public offering prices, except as herein otherwise provided and except that a reallowance from such public offering prices not in excess of the amounts set forth on the first page of this Agreement may be allowed as consideration for services rendered in distribution to dealers that (a) are actually engaged in the investment banking or securities business; (b) execute the written agreement prescribed by Rule 2740 of the NASD Conduct Rules; and (c) are either members in good standing of the NASD or foreign banks, dealers or institutions not eligible for membership in the NASD that represent to you that they will promptly reoffer such Securities at the public offering price and will abide by the conditions with respect to foreign banks, dealers and institutions set forth in paragraph 9 below.

3. You, by becoming a member of the Selected Dealers, agree
(a) upon effectiveness of the Registration Statement and your receipt of the Prospectus, to take up and pay for the number of Securities allotted and confirmed to you, (b) not to use any of the Securities to reduce or cover any short position you may have and (c) to make available a copy of the Prospectus to all persons who on your behalf will solicit orders for the Securities prior to the making of such solicitations by such persons. You are not authorized to give any information or to make any representations other than those contained in the Prospectus or any supplements or amendments thereto.

4. As contemplated by Rule 15c2-8 under the Securities Exchange Act of 1934, as amended, we agree to mail a copy of the Prospectus to any person making a written request therefor during the period referred to in the rules and regulations adopted under such Act, the mailing to be made to the address given in the request. You confirm that you have delivered all preliminary prospectuses and revised preliminary prospectuses, if any, required to be delivered under the provisions of Rule 15c2-8 and agree to deliver all copies of the Prospectus required to be delivered thereunder. We have heretofore delivered to you such preliminary prospectuses as have been required by you, receipt of which is hereby acknowledged, and will deliver such further prospectuses as may be requested by you.

5. You agree that until termination of this Agreement you will not make purchases or sales of the Securities except (a) pursuant to this Agreement, (b) pursuant to authorization received from us, or (c) in the ordinary course of business as broker or agent for a customer pursuant to any unsolicited order.

6. Additional copies of the Prospectus and any supplements or amendments thereto shall be supplied in reasonable quantity upon request.

7. The Securities are offered by us for delivery when, as and if sold to, and accepted by, us and subject to the terms herein and in the Prospectus or any supplements or amendments thereto, to our right to vary the concessions and terms of offering after their release for public sale, to approval of counsel as to legal matters and to withdrawal, cancellation or modification of the offer without notice.

8. Upon written application to us, you shall be informed as to the jurisdictions under the securities or blue sky laws of which we believe the Securities are eligible for sale, but we assume no responsibility as to such eligibility or the right of any member of the Selected Dealers to sell any of the Securities in any jurisdiction. We have caused to be filed a Further State Notice relating to such of the Securities to be offered to the public in New York in the form required by, and pursuant to, the provisions of Article 23A of the General Business Law of the State of New York. Upon the completion of the public offering contemplated herein, each member of the Selected Dealers agrees to promptly furnish to us, upon our request, territorial distribution reports setting forth each jurisdiction in which sales of the Securities were made by such member, the number of Securities sold in such jurisdiction, and any further information as we may request, in order to permit us to file on a timely basis any report that we as the Underwriters of the offering or manager of the Selected Dealers may be required to file pursuant to the securities or blue sky laws of any jurisdiction.

9. You, by becoming a member of the Selected Dealers, represent that you are actually engaged in the investment banking or securities business and that you are (a) a member in good standing of the NASD and will comply with NASD Conduct Rule 2740, or (b) a foreign dealer or institution that is not eligible for membership in the NASD and that has agreed (i) not to sell Securities within the United States of America, its territories or possessions or to persons who are citizens thereof or residents therein; (ii) that any and all sales shall be in compliance with Rule 2110-01 of the NASD's Conduct Rules;
(iii) to comply, as though it were a member of the NASD, with Rules 2730, 2740 and 2750 of the NASD's Conduct Rules, and to comply with Rule 2420 thereof as that Rule applies to a non-member broker or dealer in a foreign country.

10. Nothing herein shall constitute any members of the Selected Dealers partners with us or with each other, but you agree, notwithstanding any prior settlement of accounts or termination of this Agreement, to bear your proper proportion of any tax or other liability based upon the claim that the Selected Dealers constitute a partnership, association, unincorporated business or other separate entity and a like share of any expenses of resisting any such claim.

11. Kirlin Securities, Inc. shall be the Managing Underwriter of the offering and manager of the Selected Dealers and shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the offering or the Selected Dealers or any members of them. Except as expressly stated herein, or as may arise under the Act, we shall be under no liability to any member of the Selected Dealers as such for, or in respect of (i) the validity or value of the Securities (ii) the form of, or the statements contained in, the Prospectus, the Registration Statement of which the Prospectus forms a part, any supplements or amendments to the Prospectus or such Registration Statement, any preliminary prospectus, any instruments executed by, or obtained or any supplemental sales data or other letters from, the Company, or others, (iii) the form or validity of the Underwriting Agreement or this Agreement, (iv) the eligibility of any of the Securities for sale under the laws of any jurisdiction, (v) the delivery of the Securities, (vi) the performance by the Company, or others of any agreement on its or their part, or (vii) any matter in connection with any of the foregoing, except our own want of good faith.

12. If for federal income tax purposes the Selected Dealers, among themselves or with the Underwriters, should be deemed to constitute a partnership, then we elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and we agree not to take any position inconsistent with such selection. We authorize you, in your discretion, to execute and file on our behalf such evidence of such election as may be required by the Internal Revenue Service.

13. All communications from you shall be addressed to Kirlin Securities, Inc. at 6901 Jericho Turnpike, Syosset, New York 11791, Attention:
David O. Lindner. Any notice from us to you shall be deemed to have been fully authorized by the Underwriters and to have been duly given if mailed, telegraphed or sent by confirmed facsimile transmittal to you at the address to which this letter is mailed. This Agreement shall be construed in accordance with the laws of the State of New York without giving effect to conflict of laws. Time is of the essence in this Agreement.

If you desire to become a member of the Selected Dealers, please advise us to that effect immediately by facsimile transmission and sign and return to us the enclosed counterpart of this letter.

Very truly yours,

KIRLIN SECURITIES, INC.

By:

Name: David O. Lindner Title: Co-Chief Executive Officer

We accept membership in the Selected Dealers on the terms specified above.

Dated: ___________ __, 2004

(Selected Dealer)

By:
Name:
Title:

KIRLIN SECURITIES, INC.

6901 JERICHO TURNPIKE
SYOSSET, NEW YORK 111791

FORM OF MERGER, ACQUISITION AND
OTHER BUSINESS ARRANGEMENT
AGREEMENT

_________________ ___, 2004

Fusion Telecommunications International, Inc. 420 Lexington Avenue
Suite 518
New York, New York 10170
Attn: Marvin S. Rosen, Chief Executive Officer

Gentlemen:

This is to confirm our agreement whereby Fusion Telecommunications International, Inc. ("Company") will compensate Kirlin Securities, Inc. ("Kirlin") if the Company engages in transactions with persons introduced to it by Kirlin:

1. AGREEMENT REGARDING MERGERS, ACQUISITIONS AND OTHER BUSINESS ARRANGEMENTS

(a) In the event that any acquisition of and/or merger with other companies or joint ventures or other transaction with any third parties including, without limitation, (i) the sale of the business, assets or stock of the Company or any its subsidiaries or affiliates or any significant portion thereof, (ii) the purchase of the business, assets or stock of a third party or any significant portion thereof or (iii) entering into a commercial relationship with a third party not involving a transaction of the type referred to in clauses (i) or (ii) (collectively, a "Transaction"), occur which result from or are caused by introductions made by Kirlin within twelve (12) months prior thereto, the Company shall pay Kirlin 5% of Legal Consideration paid in any such Transaction.

For purposes of this Agreement, the phrase "Legal Consideration" shall mean the total value of the securities (valued as determined in the applicable agreement governing the terms of the Transaction or, if not so valued, at market on the day of closing, or if there is no public market, valued as set forth herein for other property), cash and assets and property or other benefits (including assumption, defeasance or repayment of debt and other obligations) exchanged or received by the Company or its shareholders as consideration as a result of or arising out of the Transaction, irrespective of the period of

payment or terms (all valued at fair market present value as agreed or, if not, by an independent appraiser selected by the Company in good faith).

(b) All fees payable under this Section 1 are due and payable to Kirlin, in cash or by certified check, at the closing or closings of any Transaction; provided, that if the Legal Consideration on any Transaction is other than all cash, the payment to Kirlin shall be, at the option of the Company, either the cash equivalent or such other consideration proportionate with the types of Legal Consideration paid on such Transaction; and PROVIDED, HOWEVER, that if any Legal Consideration is to be paid or received at a future date or is contingent upon a future event, the related fees shall be due and payable on the business day after receipt or payment by the Company. No fees shall be payable under this Section 1 or otherwise if, for any reason, the Transaction is not consummated.

2. TERM OF AGREEMENT

This Agreement shall be for a term of three years from the date hereof.

3. EXPENSES

Kirlin shall bear all costs and expenses incurred by Kirlin directly in connection with the introduction or attempted introduction(s) made by Kirlin in connection with Transactions and otherwise in connection with the performance of its services hereunder, unless otherwise agreed to by the Company.

4. USE OF NAME AND REPORTS

Use of Kirlin's name in annual reports or any other reports of the Company or press releases issued by the Company shall require the prior written approval of Kirlin, which shall not be unreasonably withheld or delayed.

5. STATUS AS INDEPENDENT CONTRACTOR

Kirlin shall perform its services as an independent contractor and not as an employee of the Company or affiliate thereof. It is expressly understood and agreed to by the parties that Kirlin, and any individual or entity that Kirlin shall employ in order to perform its services hereunder, shall have no authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be expressly agreed to by the Company in writing from time to time.

6. ENTIRE AGREEMENT

This Agreement constitutes the entire understanding between the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect thereto. This Agreement may not be modified or terminated orally or in any manner other than by an agreement in writing signed by the parties hereto.

7. NOTICES

Any notices required or permitted to be given hereunder shall be in writing and shall be deemed given when mailed by certified mail or private courier service, return receipt requested, addressed to each

party at its respective addresses set forth above, or such other address as may be given by either party in a notice given pursuant to this Section 7.

8. SUCCESSORS AND ASSIGNS

This Agreement may not be assigned by either party without the written consent of the other. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and, except where prohibited, to their successors and assigns.

9. NON-EXCLUSIVITY

Nothing herein shall be deemed to restrict or prohibit the engagement by the Company of other
consultants providing the same or similar services or the payment by the Company of fees to such parties.

10. APPLICABLE LAW

This Agreement shall be construed and enforced in accordance with the laws of the State of New York without giving effect to conflict of laws.

11. ARBITRATION

In the event of any dispute under this Agreement, then and in such event, each party hereto agrees that the dispute shall be submitted to the American Arbitration Association in New York County, New York, for its decision and determination in accordance with its rules and regulations then in effect. Each of the parties agrees that the decision and/or award made by the Association may be entered as judgment of the courts of the State of New York, as shall be enforceable as such.

If the foregoing correctly sets forth the understanding between Kirlin and the Company with respect to the foregoing, please so indicate your agreement by signing in the place provided below, at which time this letter shall become a binding contract.

KIRLIN SECURITIES, INC.

By:

Name: David O. Lindner Title: Co-Chief Executive Officer

AGREED AND ACCEPTED BY:

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:
Name: Marvin: S. Rosen
Title: Chief Executive Officer

EX-1.4

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

[ ] SHARES OF COMMON STOCK
AND
[ ] REDEEMABLE COMMON STOCK PURCHASE WARRANTS

FORM OF AGREEMENT AMONG UNDERWRITERS

, 2004

Kirlin Securities, Inc.
6901 Jericho Turnpike
Syosset, New York 11791

Ladies and Gentlemen:

We understand that Fusion Telecommunications International, Inc., a Delaware corporation ("Company"), desires to enter into an agreement, substantially in the form of Exhibit A hereto ("Underwriting Agreement"). The Underwriting Agreement provides for the sale by the Company to you and the other prospective Underwriters named in Schedule I to the Underwriting Agreement, severally and not jointly, of an aggregate of [ ] shares of Common Stock ("Shares") and [ ] Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase one Share of Common Stock commencing on the effective date of the Registration Statement (as hereinafter defined) and expiring on the fifth year anniversary of the effective date of the Registration Statement. The Warrant is initially exercisable at $[ ] per Share and provides for the exercise price to increase to one and one-third (1-1/3), rounded up to the nearest penny of the initial exercise price (as adjusted) upon the 18-month anniversary of its issuance, if the Company has had a registration statement effective for the exercise of the Warrants for the sixty days immediately prior thereto. The Warrants are redeemable at any time, in whole and not in part, at any time once they become exercisable, with Kirlin Securities Inc.'s prior consent, at a price of $.01 per Warrant, upon not less than 30 days' prior written notice, if the last sale price of the Shares has been at least 200% of the initial exercise price (as adjusted) on all of the 20 trading days ending on the third business day prior to the date on which notice of redemption is given. The foregoing Shares and Warrants are referred to herein as the "Firm Securities." Pursuant to the Underwriting Agreement between the Company and Kirlin Securities, Inc., as representative of the several Underwriters ("Representative"), the Company will grant to the Underwriters an option to purchase up to an additional [ ] Shares ("Option Shares") and/or [ ] Warrants ("Option Warrants" and, together with the Option Shares, the "Option Securities"). The Firm Securities and Options Securities are referred to herein as the "Securities."

We understand that changes may be made in those who are to be Underwriters and in the respective number of Securities to be purchased by them, but that the number of Securities to be purchased by us as set forth in said Schedule I will not be changed without our consent, except as provided herein or in the Underwriting Agreement. The parties on whose behalf you execute the Underwriting Agreement are herein called the "Underwriters."

We desire to confirm the agreement among you, the undersigned, and the other Underwriters with respect to the purchase of the Securities by the Underwriters, severally and not jointly, from the Company. The aggregate number of Securities which any Underwriter will be obligated to purchase from the Company pursuant to the terms of the Underwriting Agreement is herein called the "Underwriting Obligation" of that Underwriter.

1. AUTHORITY AND COMPENSATION OF REPRESENTATIVE. We hereby authorize you, as our representative and on our behalf, (a) to enter into an agreement with the Company, in substantially the form attached hereto as Exhibit A, but with such changes therein as in your judgment will not be materially adverse to the Underwriters, providing for the purchase by us, severally and not jointly, from the Company, at the purchase price per Security determined as set forth in said Exhibit A, of the number of Securities set forth opposite our name in Schedule I to said Exhibit A, and our proportionate share of the Option Securities which you determine to be purchased; (b) to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement; (c) to take all such action as you in your discretion may deem necessary or advisable in order to carry out the provisions of the Underwriting Agreement and of this Agreement, and the sale and distribution of the Securities; and (d) to determine all matters relating to the public advertisement of the Securities.

As our share of the compensation for your services hereunder, we will pay to you, and we authorize you to charge to our account on the Closing Dates referred to in the Underwriting Agreement, $____ per Share and $____ per Warrant in respect of the aggregate number of Shares and Warrants which we shall agree to purchase pursuant to the Underwriting Agreement.

2. PUBLIC OFFERING OF SECURITIES. The sale of Securities to the public is to be made, as herein provided, as soon after the Registration Statement relating to the Securities becomes effective as in your judgment is advisable. The purchase price to be paid by the Underwriters for the Securities and the initial public offering price have been determined by agreement between you and the Company. The Securities shall be first offered to the public at the initial public offering price as so determined ("Initial Public Offering Price") and shall be offered and sold only on the basis of one share and one warrant (I.E., Underwriters will not be permitted to sell the common stock and warrants separately. You will advise us by facsimile or telephone when the Securities shall be released for offering and when the Registration Statement relating to the Securities shall become effective. We agree not to sell any of the Securities until you have released them for that purpose. We authorize you, after the initial public offering, to change the public offering price, the concession, and the re-allowance if, in your sole discretion, such action becomes desirable by reason of changes in general market conditions or otherwise. As used herein, the terms "Registration Statement," "Preliminary Prospectus," and "Prospectus" shall have the meanings ascribed thereto in the Underwriting Agreement. The public offering price at the time in effect is herein called the "Offering Price." After notice from you that the Securities are released for public sale, we will offer to the public in conformity with the provisions hereof and with the terms of offering set forth in the Prospectus such of our Securities as you advise us are not reserved. We agree not to offer or sell any of the Securities to persons over whose accounts we exercise investment discretion without their specific advance consent.

3. OFFERING TO DEALERS AND RETAIL SALES. We authorize you to reserve for offering and sale, and on our behalf to sell, to retail purchasers (such sales being herein called "Retail Sales") and to dealers selected by you (such dealers, among whom any Underwriter may be included, being herein called "Selected Dealers") all or any part of our Securities as you, in your sole discretion, shall determine. Such sales, if any, shall be made (a) in the case of Retail Sales, at the Offering Price, and (b) in the case of sales to Selected Dealers, at the Offering Price less such concession as you, in your sole discretion, shall determine. Except for such sales as are designated by a purchaser to be for the account

of a particular Underwriter or Selected Dealer, any sales to Selected Dealers made for our account shall be as nearly as practicable in the ratio that the Securities reserved for our account for offering to Selected Dealers bears to the aggregate of all Securities of all Underwriters so reserved.

You agree to notify us promptly on the date of the public offering as to the number, if any, of the Securities which we may retain for direct sale by us. Prior to the termination of the provisions referred to in Section 13 hereof, you may reserve for offering and sale as hereinbefore provided any Securities theretofore retained by us remaining unsold, and we may, with your consent, retain any Securities theretofore reserved by you remaining unsold.

We agree that, from time to time prior to the termination of the provisions referred to in Section 13 hereof, we shall furnish to you such information as you may request in order to determine the number of Securities purchased by us under the Underwriting Agreement which then remain unsold, and we shall upon your request sell to you for the account of any Underwriter as many of such unsold Securities as you may designate at the Offering Price, less all or any part of the concession to Selected Dealers as you, in your sole discretion, shall determine. The provisions of Section 4 hereof shall not be applicable in respect of any such sale.

We authorize you to determine the form and manner of any communications or agreements with Selected Dealers. In the event that there shall be any agreements with Selected Dealers, you are authorized to act as manager thereunder and we agree, in such event, to be governed by the terms and conditions of such agreements. The form of Selected Dealer Agreement attached hereto as Exhibit B is satisfactory to us.

It is understood that any Selected Dealer to whom an offer may be made as hereinbefore provided shall be actually engaged in the investment banking or securities business and shall be either (a) a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") or (b) a foreign dealer or institution which is not eligible for membership in the NASD and which agrees not to make any sales within the United States of America, its territories or its possessions or to persons who are citizens thereof or residents therein. Each Selected Dealer shall agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules and with Rule 2110-01 of the NASD's Conduct Rules ("Free-Riding Interpretation"). Each foreign Selected Dealer who is not a member of the NASD also shall agree to comply with the NASD's Free-Riding Interpretation and to comply, as though it were a member of the NASD, with Rules 2730, 2740 and 2750 of the NASD's Conduct Rules, and to comply with Rule 2420 thereof as that Rule applies to a non-member broker or dealer in a foreign country. The several Underwriters may allow, and the Selected Dealers, if any, may re-allow, such concession or concessions as you may determine from time to time on sales of Securities to any qualified dealer, all subject to the NASD's Conduct Rules.

You, and any of the several Underwriters with your prior consent, may make purchases or sales of the Securities from or to any of the other Underwriters, at the Offering Price, less all or any part of the gross spread, and from or to any of the Selected Dealers at the Offering Price, less all or any part of the concession to Selected Dealers.

Upon your request, we will advise you of the identity of any dealer to whom we allow such a discount and any Underwriter or Selected Dealer from whom we receive such a discount.

4. REPURCHASE IN THE OPEN MARKET. Any Securities sold by us (otherwise than through you) which shall be contracted for or purchased in the open market by you on behalf of any Underwriter or

Underwriters shall be repurchased by us on demand at a price equal to the cost of such purchase plus commissions and taxes on redelivery. Any Securities delivered on such repurchase need not be the identical certificates originally sold by us. In lieu of delivery of such Securities to us, you may sell such Securities in any manner for our account and charge us with the amount of any loss or expense or credit us with the amount of any profit, less any expense resulting from such sale, or charge our account with an amount not in excess of the concession to Selected Dealers.

5. DELIVERY AND PAYMENT. Upon your request, we shall deliver to you payment for the Securities to be purchased by us under the Underwriting Agreement in an amount equal to the Initial Public Offering Price for such Securities, less the concession to Selected Dealers. Such payment shall be made in such form and at such time and place as may be specified in such request, and we authorize you to make payment for such Securities against delivery thereof for our account hereunder. If any Underwriter is a member of, or clears through a member of, The Depository Trust Company ("DTC"), you may, in your discretion, deliver such Underwriter's Securities through the facilities of DTC.

You shall remit to us, as promptly as practicable, the amounts received by you from Selected Dealers and retail purchasers as payment in respect of Securities sold by you for our account pursuant to Section 3 hereof for which payment has been received. Securities purchased by us under the Underwriting Agreement and not reserved or sold by you for our account pursuant to Section 3 hereof shall be delivered to us as promptly as practicable after receipt by you. Any Securities purchased by us and so reserved which remain unsold at any time prior to the settlement of accounts hereunder may, in your discretion, and shall, upon your request, be delivered to us, but, until termination of the Selected Dealer Agreement pursuant to the terms thereof and of other selling arrangements, such delivery shall be for carrying purposes only. In case any Securities reserved for sale in Retail Sales or to Selected Dealers shall not be purchased and paid for in due course as contemplated hereby, we agree (a) to accept delivery when tendered by you of any Securities so reserved for our account and not so purchased and paid for, and (b) in case we shall have received payment from you in respect of any such Securities, to reimburse you on demand for the full amount which you shall have paid us in respect of such Securities.

In the event of our failure to tender payment for Securities as provided in the Underwriting Agreement, you shall have the right under the provisions thereof to arrange for other persons, who may include you and any other Underwriter, to purchase such Securities which we had agreed to purchase, but without relieving us from liability for our default.

6. AUTHORITY TO BORROW. We authorize you to advance your funds for our account (charging current interest rates) and to arrange loans for our account or the account of the Underwriters for the purpose of carrying out this Agreement, and in connection therewith to execute and deliver any notes or other instruments, and to handle or pledge as security therefor all or any part of our Securities purchased hereunder for our account. Any lender is hereby authorized to accept your instructions in all matters relating to such loans. Any part of our Securities so held by you may be delivered to us for carrying purposes and, if so delivered, will be redelivered to you upon demand.

7. ALLOCATION OF EXPENSES AND LIABILITY. We authorize you to charge our account with and we agree to pay (a) all transfer taxes on sales made by you for our account, except as herein otherwise provided; and (b) our proportionate share (based on our Underwriting Obligation) of all expenses incurred by you in connection with the purchase, carrying, sale and distribution of the Securities and all other expenses arising under the terms of the Underwriting Agreement or this Agreement. Your determination of all such expenses and your allocation thereof shall be final and conclusive. You may at any time make partial distributions of credit balances or call for payment of debit balances. Funds for our account at any time in your hands may be held in your general funds without accountability for

interest. As soon as practicable after the termination of this Agreement, the net credit or debit balance in our account after proper charge and credit for all interim payments and receipts, shall be paid to or by us, provided that you may establish such reserve as you, in your sole discretion, shall deem advisable to cover possible additional expenses chargeable to the several Underwriters. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account and for our proportionate share (based on our Underwriting Obligations) of all expenses and liabilities that may be incurred for the accounts of the Underwriters.

8. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you of any credit or debit balance in our account, nor any reservation from distribution to cover possible additional expenses relating to the Securities, shall constitute any representation by you as to the existence or nonexistence of possible unforeseen expenses of liabilities of, or charges against, the several Underwriters. Notwithstanding the distribution of any net credit balance to us or the termination of this Agreement or both, we shall be and remain liable for, and will pay on demand, (a) our proportionate share (based on our Underwriting Obligation) of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters if they are deemed to constitute an association, unincorporated business, partnership or any separate entity, and (b) any transfer taxes paid after such settlement on account of any sale or transfer for our account.

9. STABILIZATION AND OVER-ALLOTMENT. We authorize you (a) to make purchases and sales of Securities in the open market or otherwise, for long or short account, and on such terms and at such prices as you, in your sole discretion, shall deem advisable; (b) in arranging for sales of the Securities, to over-allot; and (c) either before or after the termination of this Agreement, to cover any short position or liquidate any long position incurred pursuant to this Section 9; subject, however, to the applicable rules and regulations of the Securities and Exchange Commission ("Commission") under the Securities Exchange Act of 1934, as amended ("1934 Act"). All such purchases and sales and over-allotments shall be made for the accounts of the several Underwriters as nearly as practicable in proportion to their respective Underwriting Obligations; provided, however, that our net position resulting from such purchases and sales and over-allotment shall not exceed, for either long or short account, 15% of the aggregate amount which we shall become obligated to pay in respect of the total number of Securities purchased for our account. We agree to take up at cost on demand any Securities or Securities purchased for our account pursuant to this Section 9, and to deliver on demand any such Securities over-allotted for our account pursuant to this Section 9.

If you effect any stabilizing purchase pursuant to this Section 9, you will promptly notify us of the date and time when the first stabilizing purchase was effected, and the date and time when stabilizing was terminated. You will retain such information as is required to be retained by you "as manager" pursuant to Rule 17a-2 under the 1934 Act. We will furnish to you not later than three business days following the date on which stabilizing was commenced such information as is required by Rule 17a-2(d) and notify you of the date and time when stabilizing was terminated.

10. OPEN MARKET TRANSACTIONS. We agree that we will not make bids or offers, or make or induce purchases or sales for our own account or the accounts of customers, in the open market or otherwise, either before or after the purchase of the Securities and for either long or short account of any Securities or any security of the same class and series, or any right to purchase any such security except (a) as provided in this Agreement, the Underwriting Agreement, and the Selected Dealer Agreements or otherwise approved by you; (b) in brokerage transactions not involving solicitation of the customer's order; and (c) in connection with option and option-related transactions that are consistent with the "no-action" position set forth in Release No. 17609, as amended in Release No. 19565, of the Commission under the 1934 Act. We further agree that we will not lend, either before or after the

purchase of the Securities, to any customer, Underwriter, Selected Dealer, or to any other securities broker or dealer, any Securities. Before the completion of our participation in the distribution (as defined in Regulation M), we will otherwise comply with Regulation M.

11. BLUE SKY. Before the initial offering by the Underwriters, you will inform us as to the states and other jurisdictions under the respective securities or blue sky laws of which it is believed that the Securities have been qualified for sale or are exempt from such qualification, but you do not assume any responsibility or obligation as to the accuracy of such information or as to the right of any Underwriter or dealer to offer or sell the Securities in any state or other jurisdiction. You agree to file or cause to be filed, on behalf of the Underwriters, a Further State Notice in respect of the Securities pursuant to Article 23-A of the General Business Law of the State of New York, if necessary.

12. DEFAULT BY UNDERWRITERS. Default by one or more Underwriters in respect of their obligations under the Underwriting Agreement shall not release us from any of our obligations, or in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. In the event of such default by one or more Underwriters, you are authorized to increase, pro rata with the other non-defaulting Underwriters, the amount of Securities which we shall be obligated to purchase from the Company; provided, however, that the aggregate amount of all such increases for all non-defaulting Underwriters shall not exceed 10% of the Securities and, if the aggregate amount of the Securities not taken up by such defaulting Underwriters exceeds such 10%, you are further authorized, but shall not be obligated, to arrange for the purchase by other persons, who may include you and other non-defaulting Underwriters, of all or a portion of the Securities not taken up by such Underwriters. In the event any such increases or arrangements are made, the respective amounts of the Securities to be purchased by the non-defaulting Underwriters and by any such other person or persons shall be taken as the basis for the Underwriter's Obligations under this Agreement, but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default.

In the event of default by one or more Underwriters in respect of their obligations under this Agreement to take and pay for any Securities purchased by you for their respective accounts pursuant to Section 9 hereof, or to deliver any such Securities sold or over-allotted by you for their respective accounts pursuant to any provision of this Agreement, and to the extent that arrangements shall not have been made by you for other persons to assume the obligations of such defaulting Underwriter or Underwriters, each non-defaulting Underwriter shall assume its proportionate share of the aforesaid obligations of each such defaulting Underwriter without relieving any such defaulting Underwriter of its liability therefor.

13. TERMINATION. Section 2, the second paragraph and the first sentence of the third paragraph of Section 3, Section 4, the first sentence of Section 9 (other than clause (c) thereof) and Section 10 hereof will terminate at the close of business on the forty-fifth calendar day after the effective date of the Registration Statement, unless extended or sooner terminated as hereinafter provided. You may extend such provisions, or any of them, for a period not to exceed thirty additional calendar days by notice to us to such effect. You may terminate any of such provisions at any time by notice to us, and you may terminate all such provisions at any time by notice to us to the effect that the offering provisions of this Agreement are terminated.

14. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this Agreement, you shall act only as agent of the several Underwriters. Your authority shall include the taking of such action as you may deem advisable in respect of all matters pertaining to any and all offers and sales of the Securities, including the right to make any modifications which you consider necessary or desirable in

the arrangements with Selected Dealers or others. You shall be under no liability for or in respect of the value of the Securities or the validity or form thereof, the Registration Statement, the Prospectus, or agreements or other instruments executed by the Company or others; or for or in respect of the delivery of the Securities; or for the performance by the Company or others of any agreement on its or their part; nor shall you as Representative or otherwise be liable under any of the provisions hereof or for any matters connected herewith, except for want of good faith, and except for any liability arising under the Securities Act of 1933, as amended ("1933 Act"); and only obligations expressly assumed by you as Representative herein shall be implied from this Agreement. In representing the Underwriters hereunder, you shall act as the Representative of each of them, respectively. Nothing herein contained shall constitute the several Underwriters as partners with you or with each other, or render any Underwriter liable for the commitments of any other Underwriter, except as otherwise provided in Section 12 hereof and in section 6 of the Underwriting Agreement. If the Underwriters shall be deemed to constitute a partnership for Federal income tax purposes, it is the intent of each Underwriter to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended. Each Underwriter elects to be so excluded and agrees not to take any position inconsistent with such election. Each Underwriter authorizes you, in your discretion, to execute and file on behalf of the Underwriters such evidence of election as may be required by the Internal Revenue Service. The commitments and liabilities of each of the several Underwriters are several in accordance with their respective Underwriting Obligations, and are not joint.

15. ACKNOWLEDGMENT OF RECEIPT OF REGISTRATION STATEMENT, ETC. We hereby confirm that we have examined the Registration Statement relating to the Securities as heretofore filed by the Company with the Commission and each amendment thereto, if any, filed through the date hereof, including any documents filed under the 1934 Act through the date hereof and incorporated by reference into the Prospectus, that we are willing to be named as an Underwriter therein and to accept the responsibilities of an Underwriter thereunder, and that we are willing to proceed as therein contemplated. We confirm that we have authorized you to advise the Company on our behalf (a) as to the statements to be included in any Preliminary Prospectus and in the Prospectus under the heading "Underwriting" insofar as they relate to us; and (b) that there is no other information about us required to be stated in the Registration Statement or Prospectus. We understand that the aforementioned documents are subject to further change and that we will be supplied with copies of any further amendments or supplements to the Registration Statement, of any document filed under the 1934 Act after the effective date of the Registration Statement and before termination of the offering of the Securities by the Underwriters, if such document is deemed to be incorporated by reference into the Prospectus, and of any amended or supplemented Prospectus promptly, if and when received by you, but the making of such changes, amendments and supplements shall not release us or affect our obligations hereunder or under the Underwriting Agreement.

16. (a) INDEMNITY. We agree to indemnify and hold harmless each other Underwriter and any person who controls any such Underwriter within the meaning of Section 15 of the 1933 Act, to the extent that, and upon the terms on which, we agree to indemnify and hold harmless the Company and other specified persons as set forth in the Underwriting Agreement. Our indemnity agreement contained in this Section 16 shall remain in full force and effect, regardless of any investigation made by or on behalf of such other Underwriter or controlling person, and shall survive the delivery of and payment for the Securities and the termination of this Agreement and the similar agreements entered into with the other Underwriters.

(b) CLAIMS AGAINST UNDERWRITERS. Each Underwriter (including you) will pay, upon request, as contribution, its proportionate share, based upon its underwriting obligation, of any loss, claim, damage, or liability, joint or several, paid or incurred by any Underwriter (including you) to any

person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus, any amendment or supplement thereto or any Preliminary Prospectus or any other selling or advertising material approved by you for use by the Underwriters in connection with the sale of the Securities, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in conformity with written information furnished to the Company through you by or on behalf of an Underwriter expressly for use therein) or relating to any transaction contemplated by this Agreement; and will pay such proportionate share of any legal or other expense reasonably incurred by you or with your consent in connection with investigating or defending against any such loss, claim, damage, or liability, or any action in respect thereof. In determining the amount of our obligation under this paragraph, appropriate adjustment may be made by you to reflect any amounts received by any one or more Underwriters in respect of such claim from the Company pursuant to section 5 of the Underwriting Agreement or otherwise. There shall be credited against any amount paid or payable by us pursuant to this paragraph any loss, claim, damage, liability, or expense which is incurred by us as a result of any such claim asserted against us, and if such loss, claim, damage, liability, or expense is incurred by us subsequent to any payment by us pursuant to this paragraph, appropriate provision shall be made to effect such credit, by refund or otherwise. If any such claim is asserted, you may take such action in connection therewith as you deem necessary or desirable, including retention of counsel for the Underwriters, and in your discretion separate counsel for any particular Underwriter or group of Underwriters, and the fees and disbursements of any counsel so retained by you shall be included in the amounts payable pursuant to this paragraph. In determining amounts payable pursuant to this paragraph, any loss, claim, damage, liability or expense incurred by any person who controls any Underwriter within the meaning of
Section 15 of the 1933 Act which has been incurred by reason of such control relationship shall be deemed to have been incurred by such Underwriter. Any Underwriter may elect to retain, at its own expense, its own counsel. You may settle or consent to the settlement of any such claim on advice of counsel retained by you. Whenever you receive notice of the assertion of any claim to which the provisions of this paragraph would be applicable, you will give prompt notice thereof to each Underwriter. If any Underwriter or Underwriters default in its or their obligation to make any payments under this paragraph, each non-defaulting Underwriter shall be obligated to pay its proportionate share of all defaulted payments, based upon the proportion such non-defaulting Underwriter's Underwriting Obligation bears to the Underwriting Obligations of all non-defaulting Underwriters. Nothing herein shall relieve a defaulting Underwriter from liability for its default.

17. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our obligations under this Agreement and under the Underwriting Agreement will not place us in violation of the net capital requirements of Rule 15c3-1 under the 1934 Act or of any applicable rules relating to capital requirements of any securities exchange to which we are subject.

18. UNDERTAKING TO MAIL PROSPECTUS. We represent to you that we have taken all action on our part required to have been taken to satisfy the policy set forth in Release No. 4968 of the Commission under the 1933 Act, including the distribution in the manner and at or prior to the time set forth in such release, of copies of the Preliminary Prospectus relating to the Securities (or if you have so requested, copies of any revised Preliminary Prospectus) to all persons to whom we expect to mail confirmation of sale.

As contemplated by Rule 15c2-8 under the 1934 Act, you agree to mail a copy of the Prospectus mentioned in the Underwriting Agreement to any person making a written request therefor during the period referred to in said rule, the mailing to be made to the address given in the request. We confirm that we have delivered all Preliminary Prospectuses and revised Preliminary Prospectuses, if any,

required to be delivered under the provisions of Rule 15c2-8 and agree to deliver all Prospectuses required to be delivered thereunder. We acknowledge that the copies of the Preliminary Prospectus furnished to us have been distributed to dealers who have been notified of the foregoing requirements pertaining to the delivery of Preliminary Prospectuses and Prospectuses. You have heretofore delivered to us such number of copies of Preliminary Prospectuses as have been reasonably requested by us, receipt of which is hereby acknowledged, and will deliver such number of copies of Prospectuses as will be reasonably requested by us.

19. MISCELLANEOUS. Any notice hereunder from you to us or from us to you shall be deemed to have been duly given if sent by registered mail, telegram or facsimile transmission, to us at our address as set forth in our Underwriters' Questionnaire previously delivered to you, or to you c/o Kirlin Securities, Inc., 6901 Jericho Turnpike, Syosset, New York 11791.

We understand that you are a member in good standing of the NASD. We hereby confirm that we are actually engaged in the investment banking or securities business and are either (a) a member in good standing of the NASD and will comply with Rule 2740 of the NASD Conduct Rules and the Free-Riding Interpretations or (b) a foreign dealer or institution which is not eligible for membership in the NASD and which agrees (i) not to make any sales within the United States of America, its territories, or its possessions, or to persons who are citizens thereof or residents therein (except that we may participate in sales to Selected Dealers and others under Section 3 of this Agreement); (ii) that any and all sales shall be in compliance with the NASD's Free-Riding Interpretations; (iii) to comply, as though it were a member of the NASD, with Rules 2730, 2740 and 2750 of the NASD's Conduct Rules, and to comply with Rule 2420 thereof as that Rule applies to a non-member broker or dealer in a foreign country. In connection with sales and offers to sell Securities made by us outside the United States, its territories, and possessions (a) we will either furnish to each person to whom any such sale or offer is made a copy of the then current Preliminary Prospectus or the Prospectus, as the case may be, or inform such person that such Preliminary Prospectus or Prospectus will be available upon request, and (b) we will furnish to each person to whom any such sale or offer is made such prospectus, advertisement, or other offering document containing information relating to the Securities or the Company as may be required under the law of the jurisdiction in which such sale or offer is made. Any prospectus, advertisement, or other offering document furnished by us to any person in accordance with the preceding sentence and any such additional offering material as we may furnish to any person shall (i) comply in all respects with the law of the jurisdiction in which it is so furnished, (ii) be prepared and so furnished at our sole risk and expense and (iii) not contain information relating to the Securities or the Company which is inconsistent in any respect with the information contained in the then current Preliminary Prospectus or in the Prospectus, as the case may be. This instrument may be signed by or on behalf of the Underwriters in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement among all the Underwriters, and shall become effective at such time as all the Underwriters shall have signed or have had signed on their behalf such counterparts and you shall have confirmed all such counterparts. You may confirm such counterparts by facsimile signature.

This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the choice of law or conflicts of laws principles thereof.

Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart.

Very truly yours,

As Attorney-in-Fact for each of the Several Underwriters named in Schedule I to the Underwriting Agreement

Confirmed as of the date first above written:

As Representative

Kirlin Securities, Inc.

By:

Title:

EXHIBIT A
Form of Underwriting Agreement
between
Fusion Telecommunications International, Inc.
and
Kirlin Securities, Inc.

EXHIBIT B
Form of Selected Dealer Agreement

EX-1.5

WARRANT AGREEMENT

Agreement made as of _________________, 2004, between Fusion Telecommunications International, Inc., a Delaware corporation with offices at 420 Lexington Avenue, Suite 518, New York, New York 10170 ("Company"), and Continental Stock Transfer & Trust Company, a New York corporation with offices at 17 Battery Place, New York, New York 10004, a New York corporation, (herein called "Warrant Agent").

WHEREAS, the Company is engaged in a public offering of Common Stock and Warrants ("Public Offering") and in connection therewith, has determined to issue and deliver up to (i) 3,325,000 (including up to 498,750 that may be issued pursuant to the underwriter's over-allotment option) Redeemable Common Stock Purchase Warrants ("Public Warrants") to the public investors and (ii) an aggregate of 332,500 Warrants to Kirlin Securities, Inc. Representative of the underwriters ("Representative") or its designees ("Representative's Warrants" and together with the Public Warrants, the "Warrant(s)"), each of such Warrants evidencing the right of the holder thereof to purchase one share of the Company's common stock, $.01 par value per share ("Common Stock"), for an initial exercise price of $________; and

WHEREAS, the Company has filed with the Securities and Exchange Commission a Registration Statement (No. 333-____) on Form SB-2 ("Registration Statement"), for the registration under the Securities Act of 1933, as amended, of, among others, the Warrants and the Common Stock issuable upon exercise of the Warrants; and

WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange, redemption and exercise of the Warrants; and

WHEREAS, the Company desires to provide for the form and provisions of the Warrants, the terms upon which they shall be issued and exercised, and the respective rights, limitation of rights, and immunities of the Company, the Warrant Agent, and the holders of the Warrants; and

WHEREAS, all acts and things have been done and performed which are necessary to make the Warrants, when executed on behalf of the Company and countersigned by or on behalf of the Warrant Agent, as provided herein, the valid, binding and legal obligations of the Company, and to authorize the execution and delivery of this Agreement.

NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows:

1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as agent for the Company for the Warrants, and the Warrant Agent hereby accepts such appointment and agrees to perform the same in accordance with the terms and conditions set forth in this Agreement.

2. WARRANTS.

2.1 FORM OF WARRANT. Each Warrant certificate shall be issued in registered form only, shall be in substantially the form of EXHIBIT A hereto, the provisions of which are incorporated herein and shall be signed by, or bear the facsimile signature of, the Chairman of the Board or President and Secretary or Assistant Secretary of the Company and shall bear a facsimile of the Company's seal. In the event the person whose facsimile signature has been placed upon any Warrant certificate shall have ceased to be Chairman of the Board or President and Secretary or Assistant Secretary of the Company before such Warrant certificate is issued, it may be issued with the same effect as if he or she had not ceased to be such at the date of issuance. The Warrants represented by a Warrant certificate may not be exercised until such certificate has been countersigned by the Warrant Agent as provided in Section 2.3 hereof.

2.2 EFFECT OF COUNTERSIGNATURE. Unless and until countersigned by the Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid and of no effect.

2.3 EVENTS FOR COUNTERSIGNATURE. The Warrant Agent shall countersign a Warrant certificate only upon the occurrence of either of the following events:

(a) if the Warrant certificate is to be issued in exchange or substitution for one or more previously countersigned Warrant certificates, as hereinafter provided, or

(b) if the Company instructs the Warrant Agent to do so.

2.4 REGISTRATION.

2.4.1 WARRANT REGISTER. The Warrant Agent shall maintain books ("Warrant Register") for the registration of original issuance and the registration of transfer of the Warrants. Upon the initial issuance of the Warrants, the Warrant Agent shall issue and register the Warrants in the names of the respective holders thereof in such denominations and otherwise in accordance with instructions delivered to the Warrant Agent by the Company.

2.4.2 REGISTERED HOLDER. Prior to due presentment for registration of transfer of any Warrant certificate, the Company and the Warrant Agent may deem and treat the person in whose name such Warrant certificate shall be registered upon the Warrant Register ("registered holder"), as the absolute owner of such Warrant and of each Warrant represented thereby (notwithstanding any notation of ownership or other writing on the Warrant certificate made by anyone other than the Company or the Warrant Agent), for the purpose of any exercise thereof, and for all other purposes, and neither the Company nor the Warrant Agent shall be affected by any notice to the contrary.

2.5 DETACHABILITY OF WARRANTS. The Warrants may be purchased and sold and are separately transferable from the Common Stock immediately upon issuance.

3. TERMS AND EXERCISE OF WARRANTS.

3.1 WARRANT PRICE. Each Warrant certificate shall, when countersigned by the Warrant Agent, entitle the registered holder thereof, subject to the provisions of such Warrant certificate and of this Warrant Agreement, to purchase from the Company the number of shares of Common Stock stated therein, at the initial price of $_____ per whole share, subject to the adjustments provided in Section 4 hereof. The term "Warrant Price" as used in this Warrant Agreement refers to the price per share at which Common Stock may be purchased at the time a Warrant is exercised.

3.2 DURATION OF WARRANTS. A Warrant may be exercised only during the period ("Exercise Period") commencing on __________, 2004 ("Commencement Date"), and terminating on the earlier of ___________, 2009 or the date fixed for redemption of the Warrant as provided in Section 6 of this Agreement ("Expiration Date"). Each Warrant not exercised on or before its Expiration Date shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease at the close of business on its Expiration Date. The Company in its sole discretion may extend the duration of the Warrants by delaying the Expiration Date.

3.3 EXERCISE OF WARRANTS.

3.3.1 PAYMENT. A Warrant, when countersigned by the Warrant Agent, may be exercised by the registered holder thereof by surrendering the certificate representing such Warrant, at the office of the Warrant Agent, or at the office of its successor as Warrant Agent, in the Borough of Manhattan, City and State of New York, with the purchase form, as set forth on the Warrant certificate and in substantially the form of EXHIBIT A hereto, duly executed, and by paying in full, in lawful money of the United States, in cash, good certified check or bank draft payable to the order of the Company, the Warrant Price for each full share of Common Stock as to which the Warrant is exercised and any and all applicable taxes due in connection with the exercise of the Warrant, the exchange of the Warrant for the Common Stock, and the issuance of the Common Stock.

3.3.2 ISSUANCE OF CERTIFICATES. As soon as practicable after the exercise of any Warrant and the clearance of the funds in payment of the Warrant Price, the Company shall issue to the registered holder of such Warrant a certificate or certificates for the number of full shares of Common Stock to which he is entitled, registered in such name or names as may be directed by him, and if such Warrant shall not have been exercised in full, a new countersigned Warrant certificate for the number of shares as to which such Warrant shall not have been exercised. Notwithstanding the foregoing, the Company shall not be obligated to deliver any securities pursuant to the exercise of a Warrant unless a registration statement under the Securities Act of 1933 with respect to the securities is effective. Warrants may not be exercised by, or securities issued to, any registered holder in any state in which such exercise would be unlawful.

3.3.3 VALID ISSUANCE. All shares of Common Stock issued upon the proper exercise of a Warrant in conformity with this Agreement shall be validly issued.

3.3.4 DATE OF ISSUANCE. Each person in whose name any such certificate for shares of Common Stock is issued shall for all purposes be deemed to have become the holder of record of such shares on the date on which the Warrant certificate was surrendered and payment of the Warrant Price was made, irrespective of the date of delivery of such certificate, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are closed, such person shall be deemed to have become the holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open.

3.3.5 WARRANT SOLICITATION AND WARRANT SOLICITATION FEE.

(a) The Company has engaged the Representative, on a non-exclusive basis, as its agent for the solicitation of the exercise of the Warrants. The Company, at its cost, will (i) assist the Representative with respect to such solicitation, if requested by the Representative, and (ii) provide to the Representative, and direct the Company's transfer and warrant agent to deliver to the Representative, lists of the record, and to the extent known, beneficial owners of the Company's Warrants. Accordingly, the Company hereby instructs the Warrant Agent to cooperate with the Representative in every respect in connection with the Representative's solicitation activities, including, but not limited to, providing to the Representative, at the Company's cost, a list of record and beneficial holders of the Warrants and circulating a prospectus or offering circular disclosing the compensation arrangements referenced in Section 3.3.5(b) to holders of the Warrants at the time of exercise of the Warrants. In addition to the conditions set forth in Section 3.3.5(b), the Representative shall accept payment of the warrant solicitation fee provided in Section 3.3.5(b) only if it has provided bona fide services in connection with the exercise of the Warrants. In addition to soliciting, either orally or in writing, the exercise of Warrants by a Warrant holder, such services also may include disseminating information, either orally or in writing, to Warrant holders about the Company or the market for the Company's securities, or assisting in the processing of the exercise of Warrants.

(b) In each instance in which a Warrant is exercised, the Warrant Agent shall promptly give written notice of such exercise to the Company and the Representative ("Warrant Agent's Exercise Notice"). If, upon the exercise of any Warrant after the first anniversary of the effective date of the Registration Statement, (i) the market price of the Company's Common Stock is greater than the Warrant Price, (ii) disclosure of compensation arrangements was made both at the time of the original offering and at the time of exercise (by delivery of the Prospectus or as otherwise required by applicable law, rule or regulation), (iii) the exercise of the Warrant was solicited by the Representative, (iv) the Warrant was not held in a discretionary account, and
(v) the solicitation of the exercise of the Warrant was not in violation of Regulation M (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, then the Warrant Agent, simultaneously with the issuance of the common stock underlying the Warrant(s), shall, on behalf of the Company, pay from the proceeds received upon exercise of the Warrant(s), a fee of 5% of the Warrant Price to the Representative in accordance with its actual solicitation of a Warrant holder, provided that the Representative delivers to the Warrant Agent within three (3) business days

from the date on which the Representative received the Warrant Agent's Exercise Notice, a certificate that the conditions set forth in the preceding clauses
(iii), (iv) and (v) have been satisfied. The Representative and the Company may, at any time during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant certificates returned to the Warrant Agent upon exercise of Warrants.

(c) The provisions of this Section 3.3.5 may not be modified, amended or deleted without the prior written consent of the Representative.

4. ADJUSTMENTS.

4.1 STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and subject to the provisions of Section 4.6, the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock or by a split-up of shares of Common Stock or other similar event, then, on the effective date thereof, the number of shares issuable on exercise of each Warrant shall be increased in proportion to such increase in outstanding shares and the then applicable Warrant Price shall be correspondingly decreased.

4.2 AGGREGATION OF SHARES. If after the date hereof, and subject to the provisions of Section 4.6, the number of outstanding shares of Common Stock is decreased by a consolidation, combination or reclassification of shares of Common Stock or other similar event, then, upon the effective date of such consolidation, combination or reclassification, the number of shares issuable on exercise of each Warrant shall be decreased in proportion to such decrease in outstanding shares and the then applicable Warrant Price shall be correspondingly increased.

4.3 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If after the date hereof any capital reorganization or reclassification of the Common Stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation or other similar event shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, or sale, lawful and fair provision shall be made whereby the Warrant holders shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in the Warrants and in lieu of the shares of Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented thereby, such shares of stock, securities, or assets as may be issued or payable with respect to or in exchange for the number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented by the Warrants, had such reorganization, reclassification, consolidation, merger, or sale not taken place and in such event appropriate provision shall be made with respect to the rights and interests of the Warrant holders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Warrant Price and of the number of shares purchasable upon the exercise of the Warrants) shall thereafter be applicable, as nearly as may be in relation to any share of stock, securities, or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger, or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing such assets, shall assume by written

instrument executed and delivered to the Warrant Agent the obligation to deliver to the Warrant holders such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase.

4.4 _______-MONTH INCREASE IN EXERCISE PRICE. On the ____-month anniversary of the Commencement Date, the exercise price of the Warrants will increase to one and one-third (1-1/3), rounded up to the nearest penny, of the exercise price, as it may be adjusted prior to the _____-month anniversary of the Commencement Date, if the Company has had a registration statement effective for the exercise of the Warrants for the sixty days immediately prior to the _____-month anniversary of the Commencement Date. The other adjustments provided for in this Section 4 and the other obligations of the Company hereunder will not be affected by the change in the exercise price. The provisions of this
Section 4.4 may not be modified, amended or deleted without the prior written consent of the Representative.

4.5 NOTICES OF CHANGES IN WARRANT. Upon every adjustment of the Warrant Price or the number of shares issuable on exercise of a Warrant, the Company shall give written notice thereof to the Warrant Agent, which notice shall state the Warrant Price resulting from such adjustment and the increase or decrease, if any, in the number of shares purchasable at such price upon the exercise of a Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Upon the occurrence of any event specified in Sections 4.1, 4.2, 4.3, or 4.4, the Company shall give written notice in the manner set forth above of the record date for such dividend, distribution, or subscription rights, or the effective date of such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up or issuance or the adjustment date of the increase in the exercise price. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution, or subscription rights, or shall be entitled to exchange their Common Stock for stock, securities, or other assets deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, winding up or issuance. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such event.

4.6 NO FRACTIONAL SHARES. Notwithstanding any provision contained in this Warrant Agreement to the contrary, the Company shall not issue fractional shares upon exercise of Warrants. If, by reason of any adjustment made pursuant to this Section 4, the holder of any Warrant would be entitled, upon the exercise of such Warrant, to receive a fractional interest in a share, the number of shares of Common Stock to be received shall be rounded up to the nearest whole number.

4.7 FORM OF WARRANT. The form of Warrant need not be changed because of any adjustment pursuant to this Section 4, and Warrants issued after such adjustment may state the same Warrant Price and the same number of shares as is stated in the Warrants initially issued pursuant to this Agreement. However, the Company may at any time in its sole discretion make any change in the form of Warrant that the Company may deem appropriate and that does not affect the substance thereof, and any Warrant thereafter issued or countersigned, whether in exchange or substitution for an outstanding Warrant or otherwise, may be in the form as so changed.

5. TRANSFER AND EXCHANGE OF WARRANTS.

5.1 REGISTRATION OF TRANSFER. The Warrant Agent shall register the transfer, from time to time, of any outstanding Warrant upon the Warrant Register, upon surrender of a Warrant certificate for transfer, properly endorsed with signatures properly guaranteed and accompanied by appropriate instructions for transfer. Upon any such transfer, a new Warrant certificate representing an equal aggregate number of Warrants shall be issued and the old Warrant certificate shall be canceled by the Warrant Agent. The Warrant certificate so canceled shall be delivered by the Warrant Agent to the Company from time to time upon request.

5.2 PROCEDURE FOR SURRENDER OF WARRANTS. Warrant certificates may be surrendered to the Warrant Agent, together with a written request for exchange, and thereupon the Warrant Agent shall issue in exchange therefor one or more new Warrant certificates as requested by the registered holder of the Warrant certificates so surrendered, representing an equal aggregate number of Warrants; provided, however, that in the event that a Warrant certificate surrendered for transfer bears a restrictive legend, the Warrant Agent shall not cancel such Warrant certificate and issue new Warrant certificates in exchange therefor until the Warrant Agent has received an opinion of counsel for the Company stating that such transfer may be made and indicating whether the new Warrant certificates also must bear a restrictive legend.

5.3 FRACTIONAL WARRANTS. The Warrant Agent shall not be required to effect any registration of transfer or exchange which will result in the issuance of a warrant certificate for a fraction of a warrant. The number of Warrants to be delivered shall be rounded up to the nearest whole number.

5.4 SERVICE CHARGES. No service charge shall be made for any exchange or registration of transfer of Warrants.

5.5 WARRANT EXECUTION AND COUNTERSIGNATURE. The Warrant Agent is hereby authorized to countersign and to deliver, in accordance with the terms of this Agreement, the Warrants required to be issued pursuant to the provisions hereof, and the Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant certificates duly executed on behalf of the Company for such purpose.

6. REDEMPTION.

6.1 REDEMPTION. Not less than all of the outstanding Warrants may be redeemed, at the option of the Company, after they become exercisable and prior to the Expiration Date, at the office of the Warrant Agent, upon the notice referred to in Section 6.2, at the price of $.01 per Warrant ("Redemption Price"), provided that (i) the last sale price of the Common Stock has been at least two hundred percent (200%) of the then effective exercise price of the Public Warrants on each of the twenty (20) consecutive trading days ending on the third business day prior to the date on which notice of redemption is given, the satisfaction of which condition shall be certified by the Company and (ii) the Company has obtained the prior written

consent of the Representative. The provisions of this Section 6.1 may not be modified, amended or deleted without the prior written consent of the Representative.

6.2 DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the Company shall elect to redeem all or any part of the outstanding Warrants, the Company shall fix a date for the redemption. Notice of redemption shall be mailed by first class mail, postage prepaid, by the Company or the Company's agent at its direction not less than 30 days from the date fixed for redemption to the registered holders of the outstanding Warrants to be redeemed at their last address as they shall appear on the registration books. Any notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the registered holder received such notice.

6.3 EXERCISE AFTER NOTICE OF REDEMPTION. The outstanding Warrants may be exercised in accordance with Section 3 of this Agreement at any time after notice of redemption shall have been given by the Company pursuant to
Section 6.2 hereof and prior to the date fixed for redemption. On and after the redemption date, the record holder of the outstanding Warrants shall have no further rights except to receive, upon surrender of the outstanding Warrants, the Redemption Price.

6.4 OUTSTANDING WARRANTS ONLY. The Company understands that the redemption rights provided for by this Section 6 apply only to outstanding Warrants. To the extent a person holds rights to purchase Warrants, such purchase rights shall not be extinguished by redemption. However, once such purchase rights are exercised, the Company may redeem the Warrants issued upon such exercise provided that the criteria for redemption is met. The provisions of this Section 6.4 may not be modified, amended or deleted without the prior written consent of the Representative.

7. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.

7.1 NO RIGHTS AS STOCKHOLDER. A Warrant does not entitle the registered holder thereof to any of the rights of a stockholder of the Company, including, without limitation, the right to receive dividends, or other distributions, exercise any preemptive rights to vote or to consent or to receive notice as stockholders in respect of the meetings of stockholders or the election of directors of the Company or any other matter.

7.2 LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If any Warrant certificate is lost, stolen, mutilated, or destroyed, the Company and the Warrant Agent may, on such terms as to indemnity or otherwise as they may in their discretion impose (which shall, in the case of a mutilated Warrant certificate, include the surrender thereof), issue a new Warrant certificate of like denomination, tenor, and date as the Warrant certificate so lost, stolen, mutilated, or destroyed. Any such new Warrant certificate shall constitute a substitute contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time enforceable by anyone.

7.3 RESERVATION OF COMMON STOCK. The Company shall at all times reserve and keep available a number of its authorized but unissued shares of Common Stock that will be sufficient to permit the exercise in full of all outstanding Warrants issued pursuant to this Agreement.

7.4 REGISTRATION OF COMMON STOCK. The Company agrees that prior to the date that the Warrants become exercisable (in addition to the provisions of Section 4.5) it shall file with the Securities and Exchange Commission a post-effective amendment to the Registration Statement, if possible, or a new registration statement, to register, under the Securities Act of 1933, and it shall take such action as is necessary to qualify for sale, in those states in which the Warrants were initially offered by the Company, the Common Stock issuable upon exercise of the Warrants. In either case, the Company shall cause the same to become effective at or prior to the date the Warrants become exercisable, and maintain the effectiveness of such registration statement and keep current a prospectus thereunder and maintain such qualification until the expiration of the Public Warrants and the Representative's Warrants in accordance with the provisions of this Agreement. The provisions of this Section 7.4 may not be modified, amended or deleted without the prior written consent of the Representative.

8. CONCERNING THE WARRANT AGENT AND OTHER MATTERS.

8.1 PAYMENT OF TAXES. The Company will from time to time promptly pay all taxes and charges that may be imposed upon the Company or the Warrant Agent in respect of the issuance or delivery of shares of Common Stock upon the exercise of Warrants, but the Company shall not be obligated to pay any transfer taxes in respect of the Warrants or such shares.

8.2 RESIGNATION, CONSOLIDATION, OR MERGER OF WARRANT AGENT.

8.2.1 APPOINTMENT OF SUCCESSOR WARRANT AGENT. The Warrant Agent, or any successor to it hereafter appointed, may resign its duties and be discharged from all further duties and liabilities (other than those incurred prior to such resignation or discharge) hereunder after giving sixty (60) days' notice in writing to the Company. If the office of the Warrant Agent becomes vacant by resignation or incapacity to act or otherwise, the Company shall appoint in writing a successor Warrant Agent in place of the Warrant Agent. If the Company shall fail to make such appointment within a period of 30 days after it has been notified in writing of such resignation or incapacity by the Warrant Agent or by a holder of Warrants (who shall, with such notice, submit his Warrant for inspection by the Company), then the holder of any Warrant may apply to the Supreme Court of the State of New York for the County of New York for the appointment of a successor Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or by such court, shall be a corporation organized, existing and in good standing and authorized under the laws of the state in which it was incorporated to exercise corporate trust powers, shall maintain an office in the Borough of Manhattan, City and State of New York for the transfer of the Warrants and, if not incorporated in the State of New York, shall be authorized to do business in the State of New York as a foreign corporation, and subject to supervision or examination by federal or state authority and shall be authorized to serve as Warrant Agent for the Warrants under the Securities Exchange Act of 1934, as amended. After appointment, any successor Warrant Agent shall be vested with all the authority, powers, rights, immunities,

duties, and obligations of its predecessor Warrant Agent with like effect as if originally named as Warrant Agent hereunder, without any further act or deed; but if for any reason it becomes necessary or appropriate, the predecessor Warrant Agent shall execute and deliver, at the expense of the Company, an instrument transferring to such successor Warrant Agent all the authority, powers, and rights of such predecessor Warrant Agent hereunder; and upon request of any successor Warrant Agent the Company shall make, execute, acknowledge, and deliver any and all instruments in writing for more fully and effectually vesting in and confirming to such successor Warrant Agent all such authority, powers, rights, immunities, duties, and obligations.

8.2.2 NOTICE OF SUCCESSOR WARRANT AGENT. In the event a successor Warrant Agent shall be appointed, the Company shall give notice thereof to the predecessor Warrant Agent and the transfer agent for the Common Stock not later than the effective date of any such appointment.

8.2.3 MERGER OR CONSOLIDATION OF WARRANT AGENT. Any corporation into which the Warrant Agent may be merged or with which it may be consolidated or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, if it shall be eligible to serve as Warrant Agent under Section 8.2.1, shall be the successor Warrant Agent under this Agreement without any further act.

8.3 FEES AND EXPENSES OF WARRANT AGENT.

8.3.1 REMUNERATION. The Company agrees to pay the Warrant Agent reasonable remuneration for its services as such Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for all expenditures that the Warrant Agent may reasonably incur in the execution of its duties hereunder.

8.3.2 FURTHER ASSURANCES. The Company agrees to perform, execute, acknowledge, and deliver or cause to be performed, executed, acknowledged, and delivered all such further and other acts, instruments, and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing of the provisions of this Agreement.

8.4 LIABILITY OF WARRANT AGENT.

8.4.1 RELIANCE ON COMPANY STATEMENT. Whenever in the performance of its duties under this Warrant Agreement, the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a statement signed by the President of the Company and delivered to the Warrant Agent. The Warrant Agent may rely upon such statement for any action taken or suffered in good faith by it pursuant to the provisions of this Agreement.

8.4.2 INDEMNITY. The Warrant Agent shall be liable hereunder only for its own negligence or willful misconduct. The Company agrees to indemnify the Warrant Agent

and save it harmless against any and all liabilities, including judgments, costs and reasonable counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Agreement except as a result of the Warrant Agent's negligence, willful misconduct, or bad faith.

8.4.3 EXCLUSIONS. The Warrant Agent shall have no responsibility with respect to the validity of this Agreement or with respect to the validity or execution of any Warrant (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Warrant; nor shall it be responsible to make any adjustments required under the provisions of Section 4 hereof or responsible for the manner, method, or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Warrant or as to whether any shares of Common Stock will when issued be valid and fully paid and nonassessable.

8.5 ACCEPTANCE OF AGENCY. The Warrant Agent hereby accepts the agency established by this Agreement and agrees to perform the same upon the terms and conditions herein set forth and among other things, shall account promptly to the Company with respect to Warrants exercised and concurrently account for, and pay to the Company, all moneys received by the Warrant Agent for the purchase of shares of the Company's Common Stock through the exercise of Warrants.

9. MISCELLANEOUS PROVISIONS.

9.1 SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns.

9.2 NOTICES. Any notice, statement or demand authorized by this Warrant Agreement to be given or made by the Warrant Agent or by the holder of any Warrant to or by the Company shall be sufficiently given or made if sent by certified mail, or private courier service, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent), as follows:

Fusion Telecommunications International, Inc. 420 Lexington Avenue, Suite 518 New York, New York 10170 Attn: Matthew Rosen, President

with a copy to:

Heitz & Associates, P.C.

345 Woodcliff drive
Fairport, New York 14450
Attn: William Heitz, Esq.
TEL: 585-387-____
Fax: 585-387-1030

Any notice, statement or demand authorized by this Agreement to be given or made by the holder of any Warrant or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by certified mail or private courier service, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company), as follows:

Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004

9.3 APPLICABLE LAW; JURISDICTION. The validity, interpretation, and performance of this Agreement and of the Warrants shall be governed in all respects by the law of the State of New York, without giving effect to principles of conflicts of law. The Company hereby agrees that any action, proceeding or claim against it arising out of or relating in any way to this Agreement shall be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenience forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.2 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim.

9.4 PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing in this Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the parties hereto and the registered holders of the Warrants and, for the purposes of Sections 3.3.5, 4.4, 6.1 through 6.4 and 7.4 hereof, the Representative, any right, remedy, or claim under or by reason of this Warrant Agreement or of any covenant, condition, stipulation, promise, or agreement hereof. The Representative shall be deemed to be a third-party beneficiary of this Agreement with respect to such Sections. All covenants, conditions, stipulations, promises, and agreements contained in this Warrant Agreement shall be for the sole and exclusive benefit of the parties hereto (and the Representative to the extent set forth above) and their successors and assigns and of the registered holders of the Warrants.

9.5 EXAMINATION OF THE WARRANT AGREEMENT. A copy of this Agreement shall be available at all reasonable times at the office of the Warrant Agent in the Borough of

Manhattan, City and State of New York, for inspection by the registered holder of any Warrant. The Warrant Agent may require any such holder to submit his or her Warrant for inspection by it.

9.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

9.7 EFFECT OF HEADINGS. The Section headings herein are for convenience only and are not part of this Warrant Agreement and shall not affect the interpretation thereof.

IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto under their respective corporate seals as of the day and year first above written.

Attest: FUSION TELECOMMUNICATIONS

INTERNATIONAL, INC.

                                           By:
----------------------------------            ----------------------------------
Name:                                         Name:  Matthew Rosen
Title:                                        Title: President

CONTINENTAL STOCK TRANSFER

Attest:                                    & TRUST COMPANY



                                           By:
----------------------------------            ----------------------------------
Name:                                         Name:

Title: Title:

FORM OF

WARRANT TO PURCHASE COMMON STOCK

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

This is to Certify That, FOR VALUE RECEIVED, [NAME], or assigns ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Fusion Telecommunications International, Inc., a Delaware corporation ("Company"), [NUMBER OF WARRANTS] (__________) fully paid, validly issued and non-assessable shares of Common Stock of the Company ("Common Stock") at a price equal to [PRICE] ($____) per share ("Exercise Price") at any time or from time to time from the date hereof until [DATE THE WARRANTS EXPIRE] (the "Exercise Period"), subject to adjustment as set forth herein. The number of shares of Common Stock to be received upon the exercise of this Warrant and the Exercise Price for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares".

(a) EXERCISE OF WARRANT; CANCELLATION OF WARRANT.

(1) This Warrant may be exercised in whole or in part at any time or from time to time during the Exercise Period, provided, however, that (i) if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, prior to the last day of the Exercise Period, the Holder shall have the right to exercise this Warrant commencing at such time through the last day of the Exercise Period into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant might have been exercisable immediately prior thereto. This warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of the Warrants, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the

Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder.

(2) At any time during the Exercise Period, the Holder may, at its option, exercise this Warrant on a cashless basis by exchanging this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section
(a)(2), by surrendering this Warrant at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the right of the Holder thereof to purchase the balance of the shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth in Section (c) below, except that for purposes hereof, the date of exercise, as used in such Section (c), shall mean the Exchange Date.

(b) RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of the Warrants.

(c) FRACTIONAL SHARES. No fractional shares or script representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows:

(1) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq National Market, the current market value shall be the last reported sale price of the Common Stock on such exchange or market on the last business day prior to the date of exercise of this Warrant or if no such sale is make on such day, the average closing bid and asked prices for such day on such exchange or market; or

(2) If the Common Stock is not so listed or admitted to unlisted trading privileges, but is traded on the Nasdaq SmallCap Market, the current market value shall be the average of the closing bid and asked prices for such day on such market and if the Common Stock is not so traded, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of the Warrant; or

(3) If the Common Stock is not so listed or admitted to unlisted trading privileges, and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company.

(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other warrants which carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof. The term "Warrant" as used herein includes any Warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone.

(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein.

(f) ANTI-DILUTION PROVISIONS. Subject to the provisions of Section (a) hereof the Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows:

(1) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur.

(2) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsection (f)(1) above, the number of Warrant Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Warrant Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted.

(3) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this Subsection (3) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (f) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section (f) to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section (f), as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants).

(4) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Agreement.

(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate

shall be made available at all reasonable times for inspection by the Holder or any holder of a Warrant executed and delivered pursuant to Section (a) and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder.

(h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distributions upon the Common Stock or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up.

(i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (i) shall similarly apply to successive reclassifications, capital reorganizations and changes or shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be

treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof.

(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.

(1) If the Company shall at any time during the period commencing on the date that the Company is first subject to the reporting requirements of Section 13 or Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and ending on the fifth anniversary of such date undertake to file a registration statement under the Securities Act of 1933 (the "`Act") covering the securities of the Company, the Company shall advise the Holder of this Warrant or of the Warrant Shares or any then holder of Warrants or Warrants Shares (such persons being collectively referred to herein as "holders") by written notice at lease four weeks prior to the filing and will, upon the request of any such holder, include in any such registration statement such information as may be required to permit a public offering of the Warrant Shares. The Company shall supply prospectuses and other documents as the holders may request in order to facilitate the public sale or other disposition of the Warrant Shares, qualify the Warrant Shares for sale in such states as any holder reasonably designates and do any and all acts and things which may be necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Warrant Shares, and furnish indemnification in the manner as set forth in Subsection (3)(C) of this Section (j). Such holders shall furnish information and indemnification as set forth in Subsection (3)(C) of this
Section (j), except that the maximum amount which may be recovered from each holder shall be limited to the amount of proceeds received by such holder from the sale of the Warrant Shares.

The obligation of the Company under this Subsection (1) shall not apply to Warrant Shares which are eligible for resale pursuant to the provisions of Rule 144(k) under the Act.

(2) If holders of a Majority of the Warrant Shares (as defined in Subsection (4) of this Section (j) below) shall give notice to the Company at any time during the period commencing six months after the date that the Company is first subject to the reporting requirements of Section 13 or Section 15 of the Exchange Act (or such earlier commencement date as the managing underwriter of the Company's initial public offering, if applicable, shall consent to) and ending on the filth anniversary of such date to the effect that such holder contemplates (i) the transfer of all or any part of his or its Warrant Shares, or (ii) the exercise and/or conversion of all or any part of his or its Warrants and the transfer of all or any part of the Warrant Shares under such circumstances that a public offering (within the meaning of the Act) of Warrant Shares will be involved, and desires to register under the Act the Warrants and/or the Warrant Shares, then the Company shall, within 20 days after receipt of such notice, file a registration statement pursuant to the Act, to the end that the Warrant Shares may be sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become effective and continue to be effective (current) (including the taking of such steps as are necessary to obtain the removal of any stop order) until the holder has advised that all of the Warrant Shares have been sold; provided that such holder shall furnish the Company with appropriate information

(relating to the intentions of such holders) in connection therewith as the Company shall (reasonably request in writing. The holder may, at its option, request the registration of the Warrant Shares in a registration statement made by the Company as contemplated by Subsection (1) of this Section (j) or in connection with a request made pursuant to Subsection (2) of this Section (j) prior to the acquisition of the Warrant Shares upon exercise of the Warrants and even though the holder has not given notice of exercise of the Warrants. The holder may thereafter at its option, exercise the Warrants at any time or from time to time subsequent to the effectiveness under the Act of the registration statement in which the Warrants Shares were included.

The obligation of the Company under this Subsection (2) is limited to one registration and shall not apply to Warrant Shares, which are eligible for resale pursuant to the provisions of Rule 144(k) under the Act.

(3) The following provision of this Section (j) shall also be applicable:

(A) Within ten days after receiving any such notice pursuant to Subsection (2) of this Section (j), the Company shall give notice to the other holders of Warrants and Warrant Shares, advising that the Company is proceeding with a registration statement and offering to include therein Warrant Shares of such other holders provided that they shall furnish the Company with such appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall reasonably request in writing. Following the effective date of registration, the Company shall upon the request of any owner of Warrants and/or Warrant Shares forthwith supply such a number of prospectuses meeting the requirements of the Act, as shall be requested by such owner to permit such holder to make a public offering of all Warrant Shares from time to time offered or sold to such holder, provided that such holder shall from time to time furnish the Company with such appropriate information (relating to the intentions of such holder) in connection therewith as the Company shall request in writing. The Company shall also use its best efforts to quality the Warrant Shares for sale in such states as such states as such majority holder shall designate.

(B) The Company shall bear the entire cost and expense of any registration of securities initiated by it under Subsection (1) of this Section (j) notwithstanding Warrant Shares subject to this Warrant may be included in any such registration. The Company shall also comply with one request for registration made by holders of a Majority of the Warrant Shares pursuant to Subsection (2) of this Section (j) at its own expense and without charge to any holder of any Warrants and/or Warrant Shares; and the Company shall comply with one additional request made pursuant to Subsection (2) of this
Section (j) (and not deemed to be pursuant to Subsection (1) of this
Section (j)) at the sole expense of such holders. Any holder whose Warrants and/or Warrant Shares are included in any such registration statement pursuant to this Section (j) shall, however, bear the fees of his own counsel, transfer taxes or underwriting discounts or commissions applicable to the Warrant Shares sold by him pursuant thereto.

(C) The Company shall indemnify and hold harmless each such holder and each underwriter, within the meaning of the Act, who may purchase from or sell for any such holder any Warrants and/or Warrants Shares from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereto or any registration statement wider the Act or any prospectus included therein required to be filed or furnished by reason of this Section (j) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such holder or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any such underwriter within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, and preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such holder or any other, specifically for use in the preparation thereof.

(D) Neither the giving of any notice by any holder nor the making of any request for prospectuses shall impose any upon such holder or owner making such request any obligation to sell any Warrant Shares, or exercise any Warrants.

(E) The Company shall not permit any securities other than the Warrant Shares to be included in any registration statement filed pursuant to Section (j) (2) hereof.

(F) The Company shall, as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, "make generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the date of the registration statement.

(G) The Company shall deliver promptly to each holder participating in the offering and requesting the correspondence and memoranda described below and the managing underwriter, if any, copies of all correspondence between the Securities and Exchange Commission (the "Commission") and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information

contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities, laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such holder shall reasonably request.

(H) The Company shall enter into an underwriting agreement with the managing underwriter selected for such underwriting by holders holding a Majority of the Warrant Shares requested to be included in such underwriting. Such agreement shall be satisfactory in form and substance to the Company, each holder and such managing underwriter, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by underwriters for offerings solely by selling security holders. The holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Shares.

(4) For purposes of this Agreement, the term "Majority" in reference to the holders of Warrant Shares shall mean in excess if fifty percent (50%) of outstanding Warrant Shares, assuming the exercise of all Warrants, that
(i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith and (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act.

(k) MISCELLANEOUS.

(1) This Warrant and the Warrant Shares issuable upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part without compliance with applicable federal and state securities laws by the transferor and the transferee.

(2) All notices and other communications from the Company to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company or the Holder, as the case may be, in writing by the Company or such holder from time to time.

(3) This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

(4) In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party

prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorney's fees.

(5) This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to its principles regarding conflicts of law.

FUSION TELECOMMUNICATIONS

INTERNATIONAL, INC.

By:
Marvin S. Rosen, Chief Executive Officer

Dated as of [DATE]

Attest:

Philip D. Turits, Treasurer and Secretary

PURCHASE FORM

Dated

The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing shares of Common Stock and hereby makes payment of in payment of the actual exercise price thereof.

INSTRUCTIONS FOR REGISTRATION OF STOCK

Name
(Please typewrite or print in block letters)

Address

Signature

ASSIGNMENT FORM

FOR VALUE RECEIVED, _______________________ hereby sells, assigns and transfers unto

Name
(Please typewrite or print in block letters)

Address

the right to purchase Common Stock represented by this Warrant to the extent of ________________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint _________________________ Attorney, to transfer the same on the books of the Company with full power of substitution in the premises.

Date

Signature

CERTIFICATE OF INCORPORATION

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto and known, identified, and referred to as the "General Corporation Law of the State of Delaware"), hereby certifies that:

FIRST. The name of the corporation (hereinafter called the corporation)
is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

SECOND. The address, including street, number, city, and county, of the registered office of the corporation in the State of Delaware is 1013 Centre Road, Cit of Wilmington 19805, County of New Castle; and the name of the registered agent of the corporation in the State of Delaware at such address is Corporation Service Company.

THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of stock which the corporation shall have authority to issue is two hundred, all of which are without par value. All such shares are of one class and are shares of common stock.

FIFTH: The name and address of the incorporator are as follows:

NAME                                    MAILING ADDRESS

Merryl Wiener                           375 Hudson Street, 11th Floor
                                        New York, New York 10014

SIXTH: The corporation is to have perpetual existence.

SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in summary way of this corporation or any of creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under ss. 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under ss. 279 of Title 8 of the Delaware Code order a meeting or creditors or class of creditors, and/or of the stockholders or a class of stockholders of this corporation, as the case may be, to be summoned in such a manner as the said court directs. If a majority in number representing three fourths in value of the creditors or class of creditors, and/or of the stockholders or a class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement, the said compromise and arrangement and the said reorganization shall, if sanction by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or of the stockholders or a class of stockholders of this corporation, as the case may be, and also on this corporation.

EIGHTH: For the management of business and for the conduct of the affairs of the corporation, and in further definition, limitation, and regulation of the powers of the corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided:

1. Management of the business and the conduct of affairs of the corporation shall be vested in the Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total directors" shall be deemed to have the same meaning, to wit, the total number of directors which the corporation would have if there were no vacancies. No election of directors need be by written ballot.

2. After the original or other Bylaws of the corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of ss. 109 of the General Corporation Law of the State of Delaware, and, after the corporation has received any payment for any of its stock, the power to adopt, amend or repeal the Bylaws of the corporation may be exercised by the Board of Directors of the corporation; provided however, that any provision for the classification of directors of the corporation for staggered terms pursuant to the provisions of subsection (d) of ss. 141 of the General Corporation Law of the State of Delaware shall be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the corporation unless provisions for such classification shall be set forth in this certificate of incorporation.

3. Whenever the corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of the stockholders. Whenever the corporation shall be authorized to issue more than once class of stock, no outstanding share of any class of stock which is denied voting power under the provision of the certificate of incorporation shall entitle the holder thereof the right to vote at any meeting of the stockholders except as the provisions of paragraph (2) of subsection (b) of ss. 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class.

NINTH: The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by the provision of paragraph
(7) of subsection (b) of ss. 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented.

TENTH: The corporation shall, to the fullest extent permitted by the provisions of ss. 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all of the expenses, liabilities, or other matters referred to or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer or employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such person.

ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered, or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be

added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the corporation by this certificate of incorporation are granted subject to the provisions of this Article Eleventh.

Signed on September 16, 1997.

/s/ Merryl Wiener
-------------------------------
    Merryl Wiener, Incorporator

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the "Corporation") is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2. The Certificate of Incorporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article:

"FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 115,000,000, of which 105,000,000 shares shall be common stock, par value $0.01 per share, and 10,000,000 shares shall be preferred stock, par value $0.01 per share."

1. COMMON STOCK REVERSE STOCK SPLIT: A reverse stock split of the shares of common stock of the Corporation subscribed for, accepted or issued by the Corporation prior to January 1, 1998 (the "Original Stock") was effected upon the filing and recording of a Certificate of Amendment of the Certificate of Incorporation of the Corporation on February 27, 1998 (the "Effective Time"), as follows:

(a) Each one hundred (100) shares of Original Stock, having a value of One Cent ($.01) per share on the Effective Date, were combined and converted automatically, and without further action by the holder thereof, into one (1) validly issued share of common stock of the Corporation (the "Split Stock"), having a par value of One Cent ($.01) per share and having all of the rights and benefits applicable to the Original Stock and any right, option, warrant or claim to acquire or receive one hundred (100) shares of Original Stock were converted automatically, and without any further action by the holder thereof, into the right to acquire or receive one
(1) share of Split Stock upon, and in compliance with, the terms of the right, option, warrant or claim, except that the purchase price per shall be proportionately increased; provided, however, that, with respect to such shares of Split Stock, an aggregate of One Dollar ($1.00) of the consideration paid to the Corporation for each such share of Split Stock shall continue to be treated as capital of the Corporation.

(b) From and after the Effective Time, subscriptions for or certificates representing shares of Original Stock are deemed to represent only the right to receive shares of Split Stock to which a stockholder would be entitled pursuant to the reverse stock split effected.

2. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The preferred stock authorized may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of preferred stock, and the number of shares constituting any such series and the designation thereof, or of any of them. The Board of Directors is authorized to increase or decrease the number of shares of any series, prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the

status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

3. The amendment of the certificate of incorporation has been duly adopted and written consent has been given in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.

4. The effective time of the amendment herein certified shall be the date of filing.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment as of May 21, 2004.

/s/ Philip D. Turits
-------------------------------
    Philip D. Turits, Secretary

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the "Corporation") is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2. The Certificate of Incorporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article:

"FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 80,000,000, of which 70,000,000 shares shall be common stock, par value $0.01 per share, and 10,000,000 shares shall be preferred stock, par value $0.01 per share."

status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

4. The effective time of the amendment herein certified shall be the date of filing.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment as of June, 2001.

/s/ Philip D. Turits
-------------------------------
    Philip D. Turits, Secretary

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the "Corporation") is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2. The Certificate of Incorporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article:

"FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 60,000,000, of which 50,000,000 shares shall be common stock, par value $0.01 per share, and 10,000,000 shares shall be preferred stock, par value $0.01 per share."

(a) Each one hundred (100) shares of Original Stock, having a value of One Cent ($.01) per share on the Effective Date, were combined and converted automatically, and without further action by the holder thereof, into one (1) validly issued share of common stock of the Corporation (the "Split Stock"), having a par value of One Cent ($.01) per share and having all of the rights and benefits applicable to the Original Stock and any right, option, warrant or claim to acquire or receive one hundred (100) shares of Original Stock were converted automatically, and without any further action by the holder thereof, into the right to acquire or receive one (1) share of Split Stock upon, and in compliance with, the terms of the right, option, warrant or claim, except that the purchase price per shall be proportionately increased; provided, however, that, with respect to such shares of Split Stock, an aggregate of One Dollar ($1.00) of the consideration paid to the Corporation for each such share of Split Stock shall continue to be treated as capital of the Corporation.

status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

3. The amendment of the certificate of incorporation has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.

4. The effective time of the amendment herein certified shall be the date of filing.

IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment on the 15th day of May, 2001.

/s/ Robert Nelson
-------------------------------------------
    Robert Nelson, Executive Vice President

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

Fusion Telecommunications International, Inc. (the "Corporation"), a corporation duly organized and existing under the General Corporation Law of the State of Delaware, does, by Clifford J. Preminger, its Assistant Secretary, under its corporate seal, hereby certify that:

I. The original Certificate of Incorporation of the Corporation was dated September 16, 1997 and recorded with the Office of the Secretary of State of Delaware on September 17, 1997.

II. Pursuant to Sections 141 and 242 of the General Corporation Law of the State of Delaware, the Directors of the Corporation resolved that amending Article FOURTH of the Certificate of Incorporation of the Corporation by adding the following provision was advisable and in the best interests of the Corporation and directed that the Certificate of Incorporation of the Corporation be amended by adding the following provision to the end of Article FOURTH:

"A reverse stock split of the shares of common stock of the Corporation subscribed for, accepted or issued by the Corporation prior to January 1, 1998 (the "Original Stock") shall be effected automatically upon the filing and recording of this Certificate of Amendment of the Certificate of Incorporation of the Corporation (the "Effective Time"), as follows:

(a) Each one hundred (100) shares of Original Stock, (having a current par value of One Cent ($.01) per share) shall be combined and converted automatically, and without further action by the holder thereof, into one (1) validly issued share of common stock of the Corporation (the "Split Stock"), having a par value of One Cent ($.01) per share and having all of the rights and benefits applicable to the Original Stock and any right, option, warrant or claim to acquire or receive one hundred (100) shares of Original Stock shall be converted automatically, and without any further action by the holder thereof, into the right to acquire or receive one (1) share of Split Stock upon, and in compliance with, the terms of the right, option, warrant or claim, except that the purchase price per share shall be proportionately increased; provided, however, that, with respect to such shares of Split Stock, an aggregate of One Dollar ($1.00) of the consideration paid to the Corporation for each such share of Split Stock shall continue to be treated as capital of the Corporation.

III. Pursuant to Section 242 of the General Corporation Law of the State of Delaware, a majority of the outstanding stock entitled to vote hereon voted in favor of, approved, and adopted the foregoing proposed amendment of the Certificate of Incorporation of the Corporation.

IV. The foregoing amendment of the Certificate of Incorporation of the Corporation was duly adopted in accordance with the provisions of Sections 141 and 242 of the General Corporation Law of the State of Delaware.

V. The undersigned, under penalties or perjury, acknowledges that the foregoing instrument dated February 27, 1998, is the act and deed of the Corporation, and that the facts stated therein are true.

/s/ Clifford J. Preminger
-------------------------
    Clifford J. Preminger,
    Assistant Secretary

(CORPORATE SEAL)

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the "Corporation") is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2. The Corporation was formed pursuant to a Certificate of Incorporation dated September 16, 1997 and recorded September 17, 1997 with the Office of the Secretary of State of Delaware.

3. The Certificate of Incorporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article:

"FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 50,000,000, all of which shares shall be Common Stock having a par value $0.01."

4. The amendment of the certificate of incorporation has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.

5. The effective time of the amendment herein certified shall be the date of filing.

IN WITNESS WHEREOF, the parties hereunto set our hands and the seal of the Corporation and affirm that the statements herein are true under penalty of perjury on this 18th day of February, 1998.

/s/ Steven M. Glazer
-----------------------------------------
    Steven M. Glazer, Assistant Secretary

CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1. The name of the corporation (hereinafter called the "Corporation") is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2. The certificate of incorporation of the Corporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article:

"FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 10,000,000, all of which shares shall be Common Stock having a par value $0.01."

3. The amendment of the certificate of incorporation has been duly adopted in accordance with the provisions of Sections 228 and 242 of the General Corporation Law of the State of Delaware.

4. The effective time of the amendment herein certified shall be the date of filing.

IN WITNESS WHEREOF, the parties hereunto set our hands and the seal of the Corporation and affirm that the statements herein are true under penalty of perjury on this 20th day of October, 1997.

/s/ Philip D. Turits
-------------------------------
    Philip D. Turits, President

BYLAWS

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

(A DELAWARE CORPORATION)

ARTICLE I

STOCKHOLDERS

1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in the corporation shall be signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer of the Secretary of an Assistant Secretary of the corporation. Any and all the signatures on any such certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of its stock as partly paid stock, the certificates representing shares of any such class or series or of any such partly paid stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration or transfer of any shares of stock of any class of series shall be noted conspicuously on the certificate representing such shares.

The corporation may issue a new certificate of stock or uncertificated shares in place of any certificate therefore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of the lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction on any such certificate or the issuance of any such new certificate or uncertificated shares.

2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the General Corporation Law, the Board of Directors of the corporation may provide by resolution or resolutions that some of all of any or all classes or series of the stock of the corporation shall be uncertificated shares. Within a reasonable time after the issuance or transfer or any uncertificated shares, the corporation shall send to the registered owner thereof any written notice prescribed by the General Corporation Law.

3. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be required to, issue fractions of a share. If the corporation does not issue fractions of a share, it shall (1) arrange for the disposition of fractional interests by those entitled thereto, (2) pay in cash the fair market value of fractions of a share as of the time when those entitled to receive such fractions are determined, or (3) issue scrip or warrants in registered form (either represented by a certificate or uncertificated) or bearer form (represented by a certificate) which shall entitle the holder to receive a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate for a fractional share or an uncertificated fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if any exchanged for certificates representing the full shares or uncertificated full shares before a specified date, or subject to the conditions that the shares for such scrip or warrants are

exchangeable may be sold by the corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose.

4. STOCK TRANSFERS. Upon compliance with the provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration or transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and, in the case of shares represented by certificates, on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxed due thereon.

5. RECORD DATE FOR STOCKHOLDERS. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders of an adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at any meeting of stockholders shall be at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to the corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law, the record date for determining the stockholders entitled to received payment of any divided or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange or stock, or for the purpose of any other lawful action the Board of Directors may fix a record date is adopted, and which record date shall not be more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and said reference is also intended to include any outstanding share or shares of stock and any holder or holders of record of outstanding shares of stock of any class upon which more upon whom the certificate of incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the certificate of incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the certificate of incorporation, except any provision of law may otherwise require.

7. STOCKHOLDER MEETINGS.

TIME. The annual meeting should be held on the date and at the time fixed, from time to time, by the directors, provided, that the first annual meeting should be held any date within 13 months after the organization of the corporation, and each successive annual meeting shall be held on a date within 13 months after the date of the preceding annual meeting. A special meeting should be held on the date and at the time fixed by the directors.

PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors me, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the registered office of the corporation in the State of Delaware.

CALL. Annual meetings and special meetings may be called by the directors or by any officer instructed by the directors to call the meeting.

NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be given, stating the place, date, and hour of the meeting and stating the place within the city more of a municipality of community and which the list of stockholders of the corporation may be examined. Notice at no meeting for a State that the meeting is about where the election of directors and for the transaction of other business which may properly, before the meeting, and shall (if any other axle which they be taken at a special meeting is to be taken at such annual meeting) state the purpose or purposes. The notice of a special meeting shall in all instances state the purpose of purpose is to which the meeting is called. The notice of any meeting shall also include, or be accompanied by any additional statements, information, or documents prescribed by the General Corporation. Except as otherwise provided by the General Corporation Law, a copy of the notice of any meeting shall be given, personally or by mail, not less than 10 days nor more than 60 days before the date of the meeting, unless the lapse of the prescribed of time shall have been waived that directed to each stockholder at his record address or at such other address which he may have furnished by request in writing to the Secretary of the corporation. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If you meeting is adjourned to another time, not more than 30 days hence, and/or to another place, and if an announcement of the adjourned time and/or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the directors, after adjournment, fix a new record date for the adjourned meeting. Notice need not be given to any stockholder who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of a stockholder at a meeting of stockholders shall constitute it waiver of notice of such meeting, except when the stockholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice.

STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least 10 days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, in showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place with a meeting is to be held. The list shall also be produced kept at the time and place of the meeting during the whole time

thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders.

CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting - the Chairman of the Board, if any, the Vice - Chairman of the Board, if any, the President, a Vice - President, or, in none of the foregoing is in office and present and acting, by chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting.

PROXY REPESENTATION. Every stockholder may authorize another person or persons to act for him by proxy in all matters in which a stockholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meaning, or expressing consent or dissent without a meeting. Every proxy must be signed by the stockholder or by his attorney in fact. The proxy shall be voted or acted upon after three years from its date unless such proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and, if, and only as long as it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.

INSPECTORS. The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or an adjournment thereof. If an inspector or inspectors is not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon discharge of his duties, sell take and sing an oath faithfully to execute the duties of inspectors at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and voting power of each, the shares of stock represented at the meeting, the existence of a guorum, the validity and effect of proxies, and shall receive votes, ballots, or consents, determine the result, and do such acts as are proper to conduct the election or a vote with fairness to all stockholders. On request of the person presiding at the meeting, inspector or inspectors, if any, shall make a report in writing of any challenge, question, or matter determined by him or them and execute a certificate of any fact found by him or them. Except as otherwise required by subsection (e) of Section 231 of the General Corporation Law, the provisions of that Section shall not apply to the corporation.

QUORUM. The holders of a majority of the outstanding shares of stock shall constitute a quorum at a meeting of stockholders for the transaction of any business. The stockholders present may adjourn the meeting despite the absence of a quorum.

VOTING. Each share of stock shall entitle the holder thereof to one vote. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law prescribes a different percentage of votes and/or a different exercise of voting power, and except as may be otherwise prescribed by the provisions of the certificate of incorporation and these Bylaws. In the election of directors, and any other action, voting need not be by ballot.

8. STOCKHOLDER ACTION WITHOUT MEETINGS. Except as any provision of the General Corporation Law might otherwise require, any action required by the General Corporation Law to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of stockholders, may be taken without a meaning, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of a taking of the corporate action without a meeting by less than unanimous written consent should be given to those stockholders who have not consented in writing. Action taken pursuant to this paragraph shall be subject to the provisions of Section 228 of the General Corporation Law.

ARTICLE II

DIRECTORS

1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof. The use of the phrase "whole board" herein refers to the total number of directors which the corporation would have if there were no vacancies.

2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware. The initial Board of Directors shall consist of one person. Thereafter the number of directors constituting the whole board shall be at least one. Subject to the foregoing limitation and except for the first Board of Directors, such number may be fixed from time to time by action of the stockholders or of the directors, or, if is not fixed, the number shall be one. The number of directors may be increased or decreased by action of the stockholders or of the directors.

3. ELECTION AND TERM. The first Board of Directors, unless the members thereof shall have been named in the certificate of incorporation, shall be elected by the incorporator or incorporators and shall hold office until the first annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. Thereafter, directors who are elected at any annual meeting of stockholders, and directors who are elected in the interim to fill vacancies and newly created directorships, shall hold office until the next annual meeting of stockholders and until their successors are elected and qualified or until earlier resignation or removal. Except as the General Corporation Law may otherwise require, in the interim between annual meetings of stockholders or of special meetings of stockholders called for the election of directors and/or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director.

4. MEETINGS.

TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble.

PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board.

CALL. No call shall be required for regular meetings for which the time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, of the President, or of a majority of the directors in office.

NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral or any other mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice need not be given to any director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written waiver of notice.

QUORUM AND ACTION. A majority of the whole board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and these Bylaws which govern a meeting of the directors held to fill vacancies and newly created directorships in the Board or action of disinterested directors.

Any member or members of the Board of Directors or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.

CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the vice-chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside.

5. REMOVAL OF DIRECTORS. Except as many otherwise be provided by the General Corporation Law, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors.

6. COMMITTEES. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board and designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of any member of any such committee or committees, the member or members thereof present at any meaning and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting and place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation with the exception of any power or authority the delegation of which is prohibited by section 141 of the General Corporation Law, and may authorize the seal of the corporation to be affixed to papers which may require it.

7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

ARTICLE III

OFFICERS

The officers of the corporation shall consist of the President, a Secretary, and Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, an Executive Vice President, one or more other Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers with such titles as the resolution of the Board of Directors choosing them shall designate. Except as many otherwise be provided in resolution of the Board of Directors choosing him, no officer other than Chairman or Vice-Chairman of the Board, if any, need be director. Any number of the offices will be held to the same person, as the directors may determine.

Unless otherwise provided in resolution choosing him, each officer shall be chosen for a term which shall continue until the meeting of the Board of Directors following in the next annual meeting of stockholders and until his successor shall be chosen and qualified.

All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolutions of the Board of Directors designating and choosing such officers and prescribing the authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. The Secretary or an assistant Secretary of the corporation shall record all of the proceedings of all meetings and actions in writing of stockholders, directors, and committees of directors, and shall exercise such additional authority and perform such additional duties as the Board shall assign to him. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in an office may be filled by the Board of Directors.

ARTICLE IV

CORPORATE SEAL

The corporate seal shall be in such form as the Board of Directors shall prescribe.

ARTICLE V

FISCAL YEAR

The fiscal year of the corporation shall be fixed, and shall be subject to change, but Board of Directors.

ARTICLE VI

CONTROL OVER BYLAWS

Subject to provisions of the certificate of incorporation and any provisions of the General Corporation Law, the power to amend, alter, or repeal these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors or by the stockholders.

I hereby certify that the foregoing is a full, true, correct copy of the Bylaws of Fusion Telecommunications International, Inc., a Delaware corporation come as in effect on the date hereof.

Dated:

                                   ____________/s/___________________
                                   Philip D. Turits
                                   Secretary of
                                   Fusion Telecommunications International, Inc.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

1998 STOCK OPTION PLAN

1. PURPOSE.

The purpose of this plan (the "Plan") is to secure for Fusion Telecommunications International, Inc. (the "Company") and its stockholders the benefits arising from capital stock ownership by employees, officers and directors of, and consultants or advisors to, the Company who are expected to contribute to the Company's future growth and success. Except where the context otherwise requires, the term "Company" shall include all present and future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to time (the "Code"). Those provisions of the Plan which make express reference to Section 422 shall apply only to Incentive Stock Options (as that term is defined in the Plan).

2. TYPE OF OPTIONS AND ADMINISTRATION.

(a) TYPES OF OPTIONS. Options granted pursuant to the Plan shall be authorized by action of the Board of Directors of the Company (or a Committee designated by the Board of Directors) and may be either incentive stock options ("Incentive Stock Options") meeting the requirements of Section 422 of the Code or non-statutory options which are not intended to meet the requirements of Section 422 of the Code.

(b) ADMINISTRATION. The Plan will be administered by the Board of Directors or a committee appointed by the Board of Directors of the Company, whose construction and interpretation of the terms and provisions of the Plan shall be final and conclusive. Unless the context otherwise requires, references in this Plan to the term "Committee" refer to either the Company's Board of Directors or such committee. The delegation of powers to the Committee shall be consistent with applicable laws or regulations (including, without limitation, applicable state law and Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor rule ("Rule 16b-3")). The Committee may in its sole discretion grant options to purchase shares of the Company's Common Stock, $0.01 par value per share ("Common Stock") and issue shares upon exercise of such options as provided in the Plan. The Committee shall have authority, subject to the express provisions of the Plan, to construe the respective option agreements and the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective option agreements, which need not be identical, and to make all other determinations in the judgment of the Committee necessary or desirable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. No director or person acting pursuant to authority delegated by the Board of Directors shall be liable for any action or determination under the Plan made in good faith. Subject to adjustment as provided in Section 15 below, the aggregate number of shares of Common Stock that may be subject to Options granted to any person in a calendar year shall not exceed 35% of the maximum number of shares which may be issued and sold under the Plan, as set forth in
Section 4 hereof, as such section may be amended from time to time.

(c) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan which make express reference to Rule 16b-3 shall apply to the Company only at such time as the Company's Common Stock is registered under the Exchange Act, subject to Section 3(b), and then only to such persons as are required to file reports under Section 16(a) of the Exchange Act (a "Reporting Person").

3. ELIGIBILITY.

(a) GENERAL. Options may be granted to persons who are, at the time of grant, employees, officers or directors of, or consultants or advisors to, the Company or any subsidiaries of the Company as defined in Sections 424(e) and 424(f) of the Code ("Participants") PROVIDED, that Incentive Stock Options may only be granted to individuals who are employees of the Company (within the meaning of Section 3401(c) of the Code). A person who has been granted an option may, if he or she is otherwise eligible, be granted additional options if the Committee shall so determine.

(b) GRANT OF OPTIONS TO REPORTING PERSONS. The selection of a director or an officer who is a Reporting Person (as the terms "director" and "officer" are defined for purposes of Rule 16b-3) as a recipient of an option, the timing of the option grant, the exercise price of the option and the number of shares subject to the option shall be determined either (i) by the Board of Directors or (ii) by a committee consisting of two or more directors having full authority to act in the matter, each of whom shall be an "Independent Director" as defined by Rule 1.62-27 of the Code.

4. STOCK SUBJECT TO PLAN.

The stock subject to options granted under the Plan shall be shares of authorized but unissued or reacquired Common Stock. Subject to adjustment as provided in Section 15 below, the maximum number of shares of Common Stock of the Company which may be issued and sold under the Plan is 6,000,000 shares. If an option granted under the Plan shall expire, terminate or is cancelled for any reason without having been exercised in full, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan.

5. FORMS OF OPTION AGREEMENTS.

As a condition to the grant of an option under the Plan, each recipient of an option shall execute an option agreement in such form not inconsistent with the Plan as may be approved by the Board of Directors. Such option agreements may differ among recipients.

6. PURCHASE PRICE.

(a) GENERAL. The purchase price per share of stock deliverable upon the exercise of an option shall be determined by the Board of Directors at the time of grant of such option; PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the exercise price shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such stock, at the time of grant of such option, or less than 110% of such Fair Market Value in the case of options described in Section 11(b). "Fair Market Value" of a share of Common Stock of the Company as of a specified date for the purposes of the Plan shall mean the closing price of a share of the Common Stock on the principal securities exchange (including the Nasdaq National Market) on which such shares are traded on the day immediately preceding the date as of which Fair Market Value is being determined, or on the next preceding date on which such shares are traded if no shares were traded on such immediately preceding day, or if the shares are not traded on a securities exchange, Fair Market Value shall be deemed to be the average of the high bid and low asked prices of the shares in the over-the-counter market on the day immediately preceding the date as of which Fair Market Value is being determined or on the next preceding date on which such high bid and low asked prices were recorded. If the shares are not publicly traded, Fair Market Value of a share of Common Stock (including, in the case of any repurchase of shares, any distributions with respect thereto which would be repurchased with the shares) shall be determined in

good faith by the Board of Directors. In no case shall Fair Market Value be determined with regard to restrictions other than restrictions which, by their terms, will never lapse.

(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide for the payment of the exercise price by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or by any other means which the Board of Directors determines are consistent with the purpose of the Plan and with applicable laws and regulations (including, without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by the Federal Reserve Board).

7. OPTION PERIOD.

Subject to earlier termination as provided in the Plan, each option and all rights thereunder shall expire on such date as determined by the Board of Directors and set forth in the applicable option agreement, PROVIDED, that such date shall not be later than (10) ten years after the date on which the option is granted.

8. EXERCISE OF OPTIONS.

Each option granted under the Plan shall be exercisable either in full or in installments at such time or times and during such period as shall be set forth in the option agreement evidencing such option, subject to the provisions of the Plan. Subject to the requirements in the immediately preceding sentence, if an option is not at the time of grant immediately exercisable, the Board of Directors may (i) in the agreement evidencing such option, provide for the acceleration of the exercise date or dates of the subject option upon the occurrence of specified events, and/or (ii) at any time prior to the complete termination of an option, accelerate the exercise date or dates of such option.

9. NONTRANSFERABILITY OF OPTIONS.

No option granted under this Plan shall be assignable or otherwise transferable by the optionee except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder. An option may be exercised during the lifetime of the optionee only by the optionee. In the event an optionee dies during his employment by the Company or any of its subsidiaries, or during the three-month period following the date of termination of such employment, his option shall thereafter be exercisable, during the period specified in the option agreement, by his executors or administrators to the full extent to which such option was exercisable by the optionee at the time of his death during the periods set forth in Section 10 or Section 11(d).

10. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.

Except as provided in Section 11(d) with respect to Incentive Stock Options and except as otherwise determined by the Committee at the date of grant of an Option, and subject to the provisions of the Plan, an optionee may exercise an option at any time within three months following the termination of the optionee's employment or other relationship with the Company or within one
(1) year if such termination was due to the death or disability of the optionee but, except in the case of the optionee's death, in no event later than the expiration date of the Option. If the termination of the optionee's employment is for cause or is otherwise attributable to a breach by the optionee of an employment or confidentiality or non-disclosure agreement, the option shall expire immediately upon such termination. The Board of Directors shall have the power to determine what constitutes a termination for cause or a breach of an employment or confidentiality or non-disclosure agreement,

whether an optionee has been terminated for cause or has breached such an agreement, and the date upon which such termination for cause or breach occurs. Any such determinations shall be final and conclusive and binding upon the optionee.

11. INCENTIVE STOCK OPTIONS.

Options granted under the Plan which are intended to be Incentive Stock Options shall be subject to the following additional terms and conditions:

(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan shall, at the time of grant, be specifically designated as such in the option agreement covering such Incentive Stock Options.

(b) 10% STOCKHOLDER. If any employee to whom an Incentive Stock Option is to be granted under the Plan is, at the time of the grant of such option, the owner of stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (after taking into account the attribution of stock ownership rules of Section 424(d) of the Code), then the following special provisions shall be applicable to the Incentive Stock Option granted to such individual:

(i) The purchase price per share of the Common Stock subject to such Incentive Stock Option shall not be less than 110% of the Fair Market Value of one share of Common Stock at the time of grant; and

(ii) The option exercise period shall not exceed five years from the date of grant.

(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options granted to any employee under the Plan (and any other incentive stock option plans of the Company) which are intended to constitute Incentive Stock Options shall not constitute Incentive Stock Options to the extent that such options, in the aggregate, become exercisable for the first time in any one calendar year for shares of Common Stock with an aggregate Fair Market Value, as of the respective date or dates of grant, of more than $100,000.

(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock Option may be exercised unless, at the time of such exercise, the optionee is, and has been continuously since the date of grant of his or her option, employed by the Company, except that:

(i) an Incentive Stock Option may be exercised within the period of three months after the date the optionee ceases to be an employee of the Company (or within such lesser period as may be specified in the applicable option agreement), PROVIDED, that the agreement with respect to such option may designate a longer exercise period and that the exercise after such three-month period shall be treated as the exercise of a non-statutory option under the Plan;

(ii) if the optionee dies while in the employ of the Company, or within three months after the optionee ceases to be such an employee, the Incentive Stock Option may be exercised by the person to whom it is transferred by will or the laws of descent and distribution within the period of one year after the date of death (or within such lesser period as may be specified in the applicable option agreement); and

(iii) if the optionee becomes disabled (within the meaning of Section 22(e)(3) of

the Code or any successor provisions thereto) while in the employ of the Company, the Incentive Stock Option may be exercised within the period of one year after the date the optionee ceases to be such an employee because of such disability (or within such lesser period as may be specified in the applicable option agreement).

For all purposes of the Plan and any option granted hereunder, "employment" shall be defined in accordance with the provisions of Section 1.421-7(h) of the Income Tax Regulations (or any successor regulations). Notwithstanding the foregoing provisions, no Incentive Stock Option may be exercised after its expiration date.

12. ADDITIONAL PROVISIONS.

(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its sole discretion, include additional provisions in option agreements covering options granted under the Plan, including without limitation restrictions on transfer, repurchase rights, rights of first refusal, commitments to pay cash bonuses, to make, arrange for or guaranty loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Board of Directors; PROVIDED, that such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code.

(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole discretion, (i) accelerate the date or dates on which all or any particular option or options granted under the Plan may be exercised or (ii) extend the dates during which all, or any particular, option or options granted under the Plan may be exercised; PROVIDED, HOWEVER, that no such extension shall be permitted if it would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 (if applicable).

13. GENERAL RESTRICTIONS.

(a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option or award, for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws, or with covenants or representations made by the Company in connection with any public offering of its Common Stock, including any "lock-up" or other restriction on transferability.

(b) COMPLIANCE WITH SECURITIES LAW. Each option shall be subject to the requirement that if, at any time, counsel to the Company shall determine that the listing, registration or qualification of the shares subject to such option upon any securities exchange or automated quotation system or under any state or federal law, or the consent or approval of any governmental or regulatory body, or that the disclosure of non-public information or the satisfaction of any other condition is necessary as a condition of, or in connection with the issuance or purchase of shares thereunder, such option may not be exercised, in whole or in part, unless such listing, registration, qualification, consent or approval, or satisfaction of such condition shall have been effected or obtained on conditions acceptable to the Board of Directors. Nothing herein shall be deemed to require the Company to apply for or to obtain such listing, registration or qualification, or to satisfy such condition.

14. RIGHTS AS A STOCKHOLDER.

The holder of an option shall have no rights as a stockholder with respect to any shares covered by the option (including, without limitation, any rights to receive dividends or non-cash distributions with respect to such shares) until the date of issue of a stock certificate to him or her for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued.

15. ADJUSTMENT PROVISIONS FOR RECAPITALIZATIONS, REORGANIZATION, AND RELATED TRANSACTIONS.

(a) RECAPITALIZATIONS AND RELATED TRANSACTIONS. If, through or as a result of any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, (i) the outstanding shares of Common Stock are increased, decreased or exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other non-cash assets are distributed with respect to such shares of Common Stock or other securities, an appropriate and proportionate adjustment shall be made in (x) the maximum number and kind of shares reserved for issuance under or otherwise referred to in the Plan, (y) the number and kind of shares or other securities subject to any then outstanding options under the Plan, and (z) the price for each share subject to any then outstanding options under the Plan, without changing the aggregate purchase price as to which such options remain exercisable. Notwithstanding the foregoing, no adjustment shall be made pursuant to this Section 15 if such adjustment (i) would cause the Plan to fail to comply with Section 422 of the Code or with Rule 16b-3 or (ii) would be considered as the adoption of a new plan requiring stockholder approval.

(b) REORGANIZATION, MERGER AND RELATED TRANSACTIONS. All outstanding options under the Plan shall become fully exercisable for a period of sixty (60) days following the occurrence of any Trigger Event, whether or not such Options are then exercisable under the provisions of the applicable agreements relating thereto. For purposes of the Plan, a "Trigger Event" is any one of the following events:

(i) the date on which shares of Common Stock are first purchased pursuant to a tender offer or exchange offer (other than such an offer by the Company, any subsidiary, any employee benefit plan of the Company or of any subsidiary or any entity holding shares or other securities of the Company for or pursuant to the terms of such plan), whether or not such offer is approved or opposed by the Company and regardless of the number of shares purchased pursuant to such offer;

(ii) the date the Company acquires knowledge that any person or group deemed a person under Section 13d-3 of the Exchange Act (other than the Company, any subsidiary, any employee benefit plan of the Company or of any subsidiary or any entity holding shares of Common Stock or other securities of the Company for or pursuant to the terms of any such plan or any individual or entity or group or affiliate thereof which acquired its beneficial ownership interest prior to the date the Plan was adopted by the Board), in a transaction or series of transactions, has become the beneficial owner, directly or indirectly (with beneficial ownership determined as provided in Rule 13d-3, or any successor rule, under the Exchange Act), of securities of the Company entitling the person or group to 50% or more of all votes (without consideration of the rights of any class or stock to elect directors by a separate class vote) to which all stockholders of the Company would be entitled in the election of the Board of Directors were an election held on such date;

(iii) the date of approval by the stockholders of the Company of an agreement (a

"reorganization agreement") providing for:

(A) The merger or consolidation of the Company with another corporation where the stockholders of the Company, immediately prior to the merger or consolidation, do not beneficially own, immediately after the merger or consolidation, shares of the corporation issuing cash or securities in the merger or consolidation entitling such stockholders to 80% or more of all votes (without consideration of the rights of any class of stock to elect directors by a separate class vote) to which all stockholders of such corporation would be entitled in the election of directors or where the members of the Board of Directors of the Company, immediately prior to the merger or consolidation, do not, immediately after the merger or consolidation, constitute a majority of the Board of Directors of the corporation issuing cash or securities in the merger or consolidation; or

(B) The sale or other disposition of all or substantially all the assets of the Company.

(c) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section 15 will be made by the Board of Directors, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued under the Plan on account of any such adjustments.

16. MERGER, CONSOLIDATION, ASSET SALE, LIQUIDATION, ETC.

(a) GENERAL. In the event of any sale, merger, transfer or acquisition of the Company or substantially all of the assets of the Company in which the Company is not the surviving corporation, and provided that after the Company shall have requested the acquiring or succeeding corporation (or an affiliate thereof), that equivalent options shall be substituted and such successor corporation shall have refused or failed to assume all options outstanding under the Plan or issue substantially equivalent options, then any or all outstanding options under the Plan shall accelerate and become exercisable in full immediately prior to such event. The Committee will notify holders of options under the Plan that any such options shall be fully exercisable for a period of fifteen (15) days from the date of such notice, and the options will terminate upon expiration of such notice.

(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of another corporation who become employees of the Company, or a subsidiary of the Company, as the result of a merger or consolidation of the employing corporation with the Company or a subsidiary of the Company, or as a result of the acquisition by the Company, or one of its subsidiaries, of property or stock of the employing corporation. The Company may direct that substitute options be granted on such terms and conditions as the Board of Directors considers appropriate in the circumstances.

17. NO SPECIAL EMPLOYMENT RIGHTS.

Nothing contained in the Plan or in any option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company or interfere in any way with the right of the Company at any time to terminate such employment or to increase or decrease the compensation of the optionee.

18. OTHER EMPLOYEE BENEFITS.

Except as to plans which by their terms include such amounts as compensation, the amount of any compensation deemed to be received by an employee as a result of the exercise of an option or the sale of shares received upon such exercise will not constitute compensation with respect to which any other employee benefits of such employee are determined, including, without limitation, benefits under any bonus, pension, profit-sharing, life insurance or salary continuation plan, except as otherwise specifically determined by the Board of Directors.

19. AMENDMENT OF THE PLAN.

(a) The Board of Directors may at any time, and from time to time, modify or amend the Plan in any respect; provided, however, that if at any time the approval of the stockholders of the Company is required under Section 422 of the Code or any successor provision with respect to Incentive Stock Options, the Board of Directors may not effect such modification or amendment without such approval.

(b) The modification or amendment of the Plan shall not, without the consent of an optionee, affect his or her rights under an option previously granted to him or her. With the consent of the optionee affected, the Board of Directors may amend outstanding option agreements in a manner not inconsistent with the Plan. The Board of Directors shall have the right to amend or modify (i) the terms and provisions of the Plan and of any outstanding Incentive Stock Options granted under the Plan to the extent necessary to qualify any or all such options for such favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code and (ii) the terms and provisions of the Plan and of any outstanding option to the extent necessary to ensure the qualification of the Plan under Rule 16b-3.

20. WITHHOLDING.

(a) The Company shall have the right to deduct from payments of any kind otherwise due to the optionee any federal, state or local taxes of any kind required by law to be withheld with respect to any shares issued upon exercise of options under the Plan. Subject to the prior approval of the Company, which may be withheld by the Company in its sole discretion, the optionee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company to withhold shares of Common Stock otherwise issuable pursuant to the exercise of an option or (ii) by delivering to the Company shares of Common Stock already owned by the optionee. The shares so delivered or withheld shall have a Fair Market Value equal to such withholding obligation as of the date that the amount of tax to be withheld is to be determined. An optionee who has made an election pursuant to this Section 20(a) may only satisfy his or her withholding obligation with shares of Common Stock which are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements.

(b) The acceptance of shares of Common Stock upon exercise of an Incentive Stock Option shall constitute an agreement by the optionee (i) to notify the Company if any or all of such shares are disposed of by the optionee within two years from the date the option was granted or within one year from the date the shares were issued to the optionee pursuant to the exercise of the option, and (ii) if required by law, to remit to the Company, at the time of and in the case of any such.disposition, an amount sufficient to satisfy the Company's federal, state and local withholding tax obligations with respect to such disposition, whether or not, as to both (i) and (ii), the optionee is in the employ of the Company at the time of such disposition.

(c) Notwithstanding the foregoing, in the case of a Reporting Person whose options have been granted in accordance with the provisions of
Section 3(b) herein, no election to use shares for the payment of withholding taxes shall be effective unless made in compliance with any applicable requirements of Rule 16b-3.

21. CANCELLATION AND NEW GRANT OF OPTIONS, ETC.

The Board of Directors shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, (i) the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or different numbers of shares of Common Stock and having an option exercise price per share which may be lower or higher than the exercise price per share of the cancelled options or (ii) the amendment of the terms of any and all outstanding options under the Plan to provide an option exercise price per share which is higher or lower than the then-current exercise price per share of such outstanding options.

22. EFFECTIVE DATE AND DURATION OF THE PLAN.

(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted under the Plan shall become exercisable unless and until the Plan shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months after the date of the Board's adoption of the Plan, no options previously granted under the Plan shall be deemed to be Incentive Stock Options. Amendments to the Plan not requiring stockholder approval shall become effective when adopted by the Board of Directors; amendments requiring stockholder approval (as provided in Section 19(a)) shall become effective when adopted by the Board of Directors, but no Incentive Stock Option granted after the date of such amendment shall become exercisable (to the extent that such amendment to the Plan was required to enable the Company to grant such Incentive Stock Option to a particular optionee) unless and until such amendment shall have been approved by the Company's stockholders. If such stockholder approval is not obtained within twelve months of the Board's adoption of such amendment, any Incentive Stock Options granted on or after the date of such amendment shall terminate to the extent that such amendment to the Plan was required to enable the Company to grant such option to a particular optionee. Subject to this limitation, options may be granted under the Plan at any time after the effective date and before the date fixed for termination of the Plan.

(b) TERMINATION. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate upon the earlier of (i) the close of business on the day next preceding the tenth anniversary of the date of its adoption by the Board of Directors, or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise or cancellation of options granted under the Plan. If the date of termination is determined under (i) above, then options outstanding on such date SHALL continue to have force and effect in accordance with the provisions of the instruments evidencing such options.

23. PROVISION FOR FOREIGN PARTICIPANTS.

The Board of Directors may, without amending the Plan, modify awards or options granted to participants who are foreign nationals or employed outside the United States to recognize differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.

24. GOVERNING LAW.

The provisions of this Plan shall be governed and construed in accordance with the laws of the State of Delaware without regard to the principles of conflicts of laws.

Adopted by the Board of Directors on May 31,1998 and November 16, 1999.
Approved by the Stockholders on February 17, 2000.

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 11th day of November, 2004 by and between Fusion Telecommunications International, Inc., a Delaware corporation (hereinafter called the "Company"), and Matthew Rosen (hereinafter called the "Executive").

RECITALS

A. The Board of Directors of the Company (the "Board") desires to assure the Company of the Executive's continued employment as President and Chief Operating Officer and to compensate him therefor.

B. The Board has determined that this Agreement will reinforce and encourage the Executive's continued attention and dedication to the Company.

C. The Executive is willing to make his services available to the Company on the terms and conditions hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, the parties agree as follows:

1. EMPLOYMENT.

1.1 EMPLOYMENT AND TERM. The Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company, on the terms and conditions set forth herein, for the period commencing on the date hereof and expiring on January 31, 2007 (the "Initial Term") unless sooner terminated as hereinafter set forth; provided, however, that commencing on January 1, 2007 the Initial Term of this Agreement shall automatically be extended for one additional year unless at least ninety (90) days prior to such date, the Company shall have delivered to the Executive or the Executive shall have delivered to the Company written notice that the term of the Executive's employment hereunder will not be extended.

1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the President and Chief Operating Officer of the Company and shall have powers and authority superior to any other officer or employee of the Company or of any subsidiary of the Company other than the Company's Chief Executive Officer (the "CEO"). Subject to the preceding sentence, during the term of Employment, the Executive shall diligently perform all services as may be reasonably assigned to him by the CEO, and shall exercise such power and authority as may from time to time be delegated to him by the CEO. The Executive shall be required to report solely to, and shall be subject solely to the supervision and direction of the CEO and no other person or group shall be given authority to supervise or direct Executive in the performance of his duties. In addition, the Executive shall regularly consult with the Chairman of the Board with respect to the Company's business and affairs. The Executive shall devote substantially all his working time and attention to the business and affairs of the Company (excluding any vacation and sick leave to which the Executive is entitled), render such services to the best of his ability, and use his reasonable best efforts to promote the interests of the Company. It shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions, and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement.

1.3 PLACE OF PERFORMANCE. In connection with his employment by the Company, the Executive shall be based at the Company's principal executive offices except for travel reasonably necessary in connection with the Company's business.

2. COMPENSATION.

2.1 BASE SALARY. Commencing on the effective date of this Agreement, the Executive shall receive a base salary at the annual rate of not less than $250,000 (the "Base Salary") during the term of this Agreement, with such Base Salary payable in installments consistent with the Company's normal payroll schedule, subject to applicable withholding and other taxes. The Base Salary shall also be reviewed, every six months, for merit increases and may, by action and in the discretion of the Compensation and Nominating Committee established by the Board, be increased at any time or from time to time. The Base Salary shall also be increased at any time and from time to time as shall be substantially consistent with increases in base salary awarded in the ordinary course of business to other key executives of the Company and its subsidiaries. The Base Salary, if increased, shall not thereafter be decreased for any reason.

2.2 INCENTIVE COMPENSATION. The Executive shall be entitled to receive such bonus payments or incentive compensation as may be determined at any time or from time to time by the Board (or any authorized committee thereof) in its discretion. Such potential bonus payments and/or incentive compensation shall be considered at least annually by the Board or committee. In no event shall Executive's annual bonus be less than 25% of Executive's annual salary then in effect. In the event that the Company achieves positive Earnings Before Income Tax, Depreciation and Amortization ("EBITDA") for two successive fiscal quarters, Executive will be immediately paid a one time bonus equal to 50% of his annual salary then in effect. Thereafter, the Compensation Committee shall review Executive's bonus at least annually; provided , however that for each successive fiscal year that the Company achieves positive EBITDA, the Executive's minimum annual bonus will not be less than 50% of his annual salary then in effect. In addition to the bonus discussed immediately above, the Executive shall be entitled to a one-time bonus of $25,000 in the event that the Company consummates an initial public offering of its securities, which $25,000 payment shall be in addition to the minimum bonus otherwise discussed immediately above.

2.3 STOCK OPTION.

(a) The Executive shall be entitled to participate in all stock option plans (the "Plans") in effect during the term of this Agreement.

(b) The Company hereby agrees that all existing stock options held by the Executive are hereby amended to provided for a three year vesting schedule, as opposed to the four year vesting schedule now in effect.

(c) Notwithstanding the preceding clause (b), the Option shall become immediately exercisable as to 100% of the shares of Common Stock not otherwise vested upon any termination of Executive's employment pursuant to Section 4.5 hereof, it being agreed that the Company shall cooperate in good faith to afford the Executive the right to exercise the Option in full immediately prior to any "Change in Control" (as hereinafter defined). In the event that Executive is terminated pursuant to Section 4.5, Executive shall have the greater of (i) five years after termination, or (ii) the remaining term of the option, in order to exercise his options.

(d) The Company shall take all action reasonably requested by the Executive to permit any "cashless" exercise of the Option that is permitted under the Plan.

(e) Upon proper exercise of an Option, the Executive shall be deemed for all purposes the owner of the shares of Common Stock that are purchasable upon such exercise.

(f) The provisions of the Plan shall not be adversely modified as to the Executive without the Executive's prior written consent.

3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.

3.1 EXPENSE REIMBURSEMENT. During the term of Executive's employment hereunder, the Company, upon the submission of reasonable supporting documentation by the Executive, shall reimburse the Executive for all reasonable expenses actually paid or incurred by the Executive in the course of and pursuant to the business of the Company, including expenses for travel and entertainment.

3.2 INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Initial Term, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable to other key executives of the Company and its subsidiaries, in each case comparable to those currently in effect or as subsequently amended. Such plans, practices, policies and programs, in the aggregate, shall provide the Executive with compensation, benefits and reward opportunities at least as favorable as the most favorable of such compensation, benefits and reward opportunities provided at any time hereafter with respect to other key executives.

3.3 WELFARE BENEFIT PLANS. During the Initial Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its subsidiaries (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs), at least as favorable as the most favorable of such plans, practices, policies and programs in effect at any time hereafter with respect to other key executives.

3.4 WORKING FACILITIES. During the term of Executive's employment hereunder, the Company shall furnish the Executive with an office, a secretary and such other facilities and services suitable to his position and adequate for the performance of his duties hereunder.

3.5 VACATION. During the Initial Term, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its subsidiaries as in effect at any time hereafter with respect to other key executives of the Company and its subsidiaries; PROVIDED, HOWEVER, that in no event shall Executive be entitled to fewer than five weeks paid vacation per year.

4. TERMINATION.

4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained to the contrary in this Agreement, this Agreement may be terminated by the Company for Cause. As used in this Agreement, "Cause" shall only mean (i) an act or acts of personal dishonesty taken by the Executive and intended to result in substantial personal enrichment of the Executive at the expense of the Company, (ii) subject to the following sentences, repeated violation by the Executive of the Executive's material obligations under this Agreement which are demonstrably willful and deliberate on the Executive's part and which are not remedied in a reasonable period of time after receipt of written notice from the Company, or (iii) the conviction of the Executive for any criminal act which is a felony. Upon any determination by the Company's Board of Directors that Cause exists under clauses (i) and (ii) of the preceding sentence, the Company shall cause a special meeting of the Board to be called and held at a time mutually convenient to the Board and Executive, but in no event later than ten (10) business days after Executive's receipt of the notice contemplated by clauses
(i) and (ii). Executive shall have the right to appear before such special meeting of the Board with legal counsel of his choosing to refute any determination of Cause specified in such notice, and any termination of Executive's employment by reason of such Cause determination shall not be effective until Executive is afforded such opportunity to appear. Any termination for Cause pursuant to clause (i) or (iii) of the first sentence of this Section 4.1 shall be made in writing to Executive, which notice shall set forth in detail all acts or omissions upon which the Company is relying for

such termination. Upon any termination pursuant to this Section 4.1, the Executive shall be entitled to be paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination).

4.2 DISABILITY. Notwithstanding anything contained in this Agreement to the contrary, the Company, by written notice to the Executive, shall at all times have the right to terminate this Agreement, and the Executive's employment hereunder, if the Executive shall, as the result of mental or physical incapacity, illness or disability, fail to perform his duties and responsibilities provided for herein for a period of more than one hundred twenty (120) consecutive days in any 12-month period. Upon any termination pursuant to this Section 4.2, the Executive shall be entitled to be paid his Base Salary for the remaining term of the Agreement. In the event that the Agreement has less than six months remaining at such time, Executive shall be entitled to a payment equal to six months of his Base Salary. In addition, Executive shall be entitled to reimbursement for all business expenses incurred prior to his disability.

4.3 DEATH. In the event of the death of the Executive during the term of his employment hereunder, the Company shall pay to the estate of the deceased Executive an amount equal to the Base Salary for the remaining term of this Agreement. In the event that the Agreement has less than six months remaining at such time, Executive shall be entitled to a payment equal to six months of his Base Salary. In addition, Executive shall be entitled to reimbursement for all business expenses incurred prior to his death.

4.4 OPTIONAL TERMINATION Notwithstanding anything contained in this Agreement to the contrary, the Executive, by giving thirty days notice to the Company, shall one year after the date of this Agreement, have the right to terminate this Agreement at his sole discretion. Upon any termination pursuant to this Section 4.4, the Execution shall be entitled to be paid his Base Salary to the date of termination and the Company shall have no further liability hereunder (other than for reimbursement for reasonable business expenses incurred prior to the date of termination), unless the Executive and the Company agree to a different arrangement.

4.5 TERMINATION WITHOUT CAUSE. At any time the Company shall have the right to terminate Executive's employment hereunder by written notice to Executive; provided, however, that the Company shall (i) pay to Executive any unpaid Base Salary accrued through the effective date of termination specified in such notice, and any pro-rata bonus that would be payable had Executive completed a full year of employment, and (ii) pay to the Executive in a lump sum, in cash within 30 days after the date of employment termination, an amount equal to 150% of his Base Salary then in effect and 150% of his highest annual bonus for the three years preceding Executive's termination. The Company shall be deemed to have terminated the Executive's employment pursuant to this Section 4.4 if such employment is terminated (i) by the Company without Cause, or (ii) by the Executive voluntarily for "Good Reason." For purposes of this Agreement, "Good Reason" means

(a) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.2 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(b) any failure by the Company to comply with any of the provisions of Section 2, Section 3, or Section 16 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive;

(c) the Company's requiring the Executive to be based at any office or location more than 25 miles from Grand Central Station in New York, New York, except for travel reasonably required in the performance of the Executive's responsibilities;

(d) any change in the designation of the particular executive that the Executive is obligated to report to under Section 1.2 hereof;

(e) in the event of any change in the current CEO where the Executive is not first offered the position as CEO on terms that are at least as favorable as those in place (at such time) for Executive as President and Chief Operating Officer;

(f) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement;

(g) any failure by the Company to comply with and satisfy Section 10(c) of this Agreement; or

(h) any termination by the Executive for any reason during the three-month period following the effective date of any "Change in Control".

For purposes of this Section 4.5, any good faith determination of "Good Reason" made by the Executive shall be conclusive.

5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean:

(a) The acquisition (other than by or from the Company), at any time after the date hereof, by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either the then outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors; or

(b) All or any of the fourteen (14) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the directors of the Company, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or

(c) Approval by the shareholders of the Company of (A) a reorganization, merger or consolidation with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 75% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Company, or (C) the sale of all or substantially all of the assets of the Company, unless the approved reorganization, merger, consolidation, liquidation, dissolution or sale is subsequently abandoned.

(d) The approval by the Board of the sale, distribution and/or other transfer or action (and/or series of sales, distributions and/or other transfers or actions from time to time or over a period of time), that results in the Company's ownership of less than 50% of the Company's current assets.

6. RESTRICTIVE COVENANTS.

6.1 NONDISCLOSURE. During his employment and for twelve
(12) months thereafter, Executive shall not divulge, communicate, use to the detriment of the Company or for the benefit of any other person or persons, or misuse in any way, any Confidential Information (as hereinafter defined) pertaining to the business of the Company. Any Confidential Information or data now or hereafter acquired by the Executive with respect to the business of the Company shall be deemed a valuable, special and unique asset of the Company that is received by the Executive in confidence and as a fiduciary, and Executive shall remain a fiduciary to the Company with respect to all of such information. For purposes of this Agreement, "Confidential Information" means all material information about the Company's business disclosed to the Executive or known by the Executive as a consequence of or through his employment by the Company (including information conceived, originated, discovered or developed by the Executive) after the date hereof, and not generally known.

6.2 NONSOLICITATION OF EMPLOYEES. While employed by the Company and for a period of twelve (12) months thereafter, Executive shall not directly or indirectly, for himself or for any other person, firm, corporation, partnership, association or other entity, attempt to employ or enter into any contractual arrangement with any employee or former employee of the Company, unless such employee or former employee has not been employed by the Company for a period in excess of six months.

6.3 COVENANT NOT TO COMPETE. Executive will not, at any time, during the term of this Agreement, and for one (1) year thereafter, either directly or indirectly, engage in, with or for any enterprise, institution, whether or not for profit, business, or company, competitive with the business (as identified herein) of Employer as such business may be conducted on the date thereof, as a creditor, guarantor, or financial backer, stockholder, director, officer, consultant, advisor, employee, member, or otherwise of or through any corporation, partnership, association, sole proprietorship or other entity; provided, that an investment by Employee, his spouse or his children is permitted if such investment is not more than four percent (4%) of the total debt or equity capital of any such competitive enterprise or business. As used in this Agreement, the business of Employer shall be deemed to include any business which directly competes with the Company in the provision of traditional voice services, VoIP services, private network services, Internet access services and Internet based video conferencing services. The covenant not to compete for one year after termination shall only be effective if the Executive has received all compensation due to him pursuant to this Agreement. The Company shall have the right in its sole discretion to waive the non-compete.

6.4 INJUNCTION. It is recognized and hereby acknowledged by the parties hereto that a breach by the Executive of any of the covenants contained in Section 6.1, 6.2 or 6.3 of this Agreement will cause irreparable harm and damage to the Company, the monetary amount of which may be virtually impossible to ascertain. As a result, the Executive recognizes and hereby acknowledges that the Company shall be entitled to an injunction from any court of competent jurisdiction enjoining and restraining any violation of any or all of the covenants contained in this Section 6 by the Executive or any of his affiliates, associates, partners or agents, either directly or indirectly, and that such right to injunction shall be cumulative and in addition to whatever other remedies the Company may possess.

7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

8. NOTICES: Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered by hand or when deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Company:     Fusion Telecommunications Intl, Inc.
                       420 Lexington Avenue - Suite 518
                       New York, New York 10170
                       Attention:  CEO

If to the Executive:   Matthew Rosen
                       420 Lexington Avenue, Suite 518
                       New York, New York 10170

      WITH A COPY TO:  Gersten, Savage, Kaplowitz, Wolf &
                       Marcus, LLP
                       600 Lexington Avenue
                       New York, New York 10022
                       Attention:  Jay M. Kaplowitz

or to such other addresses as either party hereto may from time to time give notice of to the other in the aforesaid manner.

9. SUCCESSORS.

(a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives.

(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise.

10. SEVERABILITY. The invalidity of any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall not affect the enforceability of the remaining portions of this Agreement or any part thereof, all of which are inserted conditionally on their being valid in law, and, in the event that any one or more of the words, phrases, sentences, clauses or sections contained in this Agreement shall be declared invalid, this Agreement shall be construed as if such invalid word or words, phrase or phrases, sentence or sentences, clause or clauses, or section or sections had not been inserted. If such invalidity is caused by length of time or size of area, or both, the otherwise invalid provision will be considered to be reduced to a period or area which would cure such invalidity.

11. WAIVERS. The waiver by either party hereto of a breach or violation of any term or provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation.

12. DAMAGES. Nothing contained herein shall be construed to prevent the Company or the Executive from seeking and recovering from the other damages sustained by either or both of them as a result of its or his breach of any term or provision of this Agreement.

13. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this Agreement is intended, or shall be construed, to confer upon or give any person (other than the parties hereto and, in the case of Executive, his heirs, personal representative(s) and/or legal representative) any rights or remedies under or by reason of this Agreement.

14. FULL SETTLEMENT. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to Section 15 of this Agreement), plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code.

15. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.

(d) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of amounts payable or distributable to or for the benefit of the Executive pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. Anything to the contrary notwithstanding, if the Reduced Amount is zero and it is determined further that any Payment which is not an Agreement Payment would nevertheless be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Code, then the aggregate present value of Payments which are not Agreement Payments shall also be reduced (but not below zero) to an amount expressed in present value which maximizes the aggregate present value of Payments without causing any Payment to be nondeductible by the Company because of Section 280G of the Code. For purposes of this Section 16, present value shall be determined in accordance with Section 280G(d)(4) of the Code. Any amount which is not paid in the taxable year in which it was originally scheduled to be paid as a result of the postponement thereof pursuant hereto shall be payable in the next succeeding taxable year in which such payment will not result in the disallowance of a deduction pursuant to either Section 162(m) or 280G of the Code; provided, however, that all postponed payments shall be placed in a Rabbi trust or similar vehicle for the benefit of the Executive in such a way that the amounts so transferred are not taxable to such person or deductible by the Company until payment from such vehicle to the Executive is made. In the event a payment has been made to the Executive, but then disallowed as a deduction by the Internal Revenue Service and return of the payment is required into the trust, said payment to the Executive shall be treated as a loan and said payment to the trust shall be treated as repayment of said loan. The Company shall not pledge, hypothecate or otherwise encumber any amounts held in the trust or other similar vehicle for the benefit of the Executive hereunder.

(e) All determinations required to be made under this Section 15 shall be made by Rothstein, Kass & Company, P.C. or, at the Executive's option, any other nationally or regionally recognized firm of independent public accountants selected by the Executive and approved by the Company, which approval shall not be unreasonably withheld or delayed (the "Accounting Firm"), which shall provide (i) detailed supporting calculations both to the Company and the Executive within twenty (20) business days of the termination of Executive's employment or such earlier time as is requested by the

Company, and (ii) an opinion to the Executive that he has substantial authority not to report any excise tax on his Federal income tax return with respect to any Payments. Any such determination by the Accounting Firm shall be binding upon the Company and the Executive. The Executive shall determine which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this Section 15, provided that, if the Executive does not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Company shall elect which and how much of the Payments shall be eliminated or reduced consistent with the requirements of this
Section 15 and shall notify the Executive promptly of such election. Within five business days thereafter, the Company shall pay to or distribute to or for the benefit of the Executive such amounts as are then due to the Executive under this Agreement. All fees and expenses of the Accounting Firm incurred in connection with the determinations contemplated by this Section 15 shall be borne by the Company.

(f) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Payments will have been made by the Company which should not have been made ("Overpayment") or that additional Payments which will not have been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against the Executive which the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Executive shall be treated for all purposes as a loan ab initio to the Executive which the Executive shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Executive is subject to tax under Section 1 and
Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.

16. REIMBURSEMENT OF LEGAL EXPENSES. The Company shall promptly reimburse Executive for all reasonable legal fees incurred by Executive in connection with the preparation, negotiation and execution of this Agreement and ancillary documents.

17. INDEMNIFICATION. The Company agrees to promptly execute and deliver to Executive an Indemnification Agreement in substantially the same form as set forth on EXHIBIT A.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:

Philip Turits Treasurer

EXECUTIVE:

Matthew Rosen

AGREEMENT

This AGREEMENT (this "Agreement") is made and entered into as of November 10, 2004 by and between Dennis Mehiel ("Assignee") and Fusion Telecommunications International, Inc., a Delaware corporation, with a principal place of business at 420 Lexington Avenue, Suite 518, New York, New York 10170 ("Debtor").

WHEREAS, on or about January 25, 2001, Evelyn Greer ("Assignor") entered into a Promissory Note and Security Agreement with Debtor ("Note 1") a copy of which is attached to and made a part of this Agreement as Exhibit A, Schedule A pursuant to which Assignor loaned Debtor $1,000,000 plus principal and interest; which interest is currently $108,333.45.

WHEREAS, Assignor desires to assign her rights and privileges under Note 1 and Assignee desires to accept such agreement in accordance with the terms and conditions of the Assignment (Exhibit "A"); and

WHEREAS, Debtor consents to Assignment of Note 1 under the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt, adequacy and sufficiency of which is acknowledged, the parties agree as follows:

1. The effective date of the Assignment shall be November 10, 2004 (the "Effective Date").

2. A copy of the Assignment Agreement is attached hereto as Exhibit A and incorporated herein.

3. Contemporaneous with the closing of the Assignment, Assignee and Debtor will amend Note 1 as follows: (i) release the security interest in 65% of the Debtor's accounts receivable; (ii) upon request of the Debtor and agreement of the Assignee, subordinate the security interest to any lender;
(iii) reduce the interest rate to 6.5%; (iv) extend the maturity date of Note 1 to November 1, 2006; and (v) increase the principal amount of Note 1 to $1,108,333.45.

4. Upon Debtor becoming a public entity, Note 1 will automatically convert into shares of common stock at the lesser of (i) $3.85 per share, or (ii) a price that is equal to 80% of the price of a share of common stock in an initial public offering of Debtor's securities (the "Conversion Price"). The common stock issued upon conversion will be subject to a one (1) year lock-up from the date that the Debtor becomes a public entity. In the event Debtor desires to pre-pay Note 1 or the New Note (as defined herein), Debtor shall give Assignee 30 days written notice that it intends to pre-pay Note 1 and the New Note, at which time Assignee shall have 30 days to convert all or a portion of the principal and accrued interest under Note 1 and the New Note into shares of common stock at the Conversion Price. Assignee shall have the right to convert all or a portion of the principal and accrued interest on Note 1 and the New Note at the Conversion Price at any time while they are outstanding.

5. Debtor consents to the assignment and transfer of Note 1 from Assignor to Assignee.

6. Marvin S. Rosen and Philip D. Turits hereby agree to subordinate their promissory notes with Debtor to Note 1 and the New Note until the later of (i) such time as Debtor becomes a public entity, or (ii) until such time as Assignee converts Note 1 and the New Note as set forth in paragraphs 4 and 8, or (iii) until Note 1 and the New note is paid in full. The Debtor agrees to cause Messrs. Rosen and Turits to execute a subordination agreement, in form acceptable to Assignee, to evidence this subordination, upon request of Assignee.

7. In the event that the Debtor does not consummate an initial public offering of its securities and a third party purchases more than 50% of Debtor's outstanding capital stock and all or a portion of the capital stock of Marvin S. Rosen and Philip D. Turits is included in such sale, Assignee shall have the right to convert all or any part of Note 1 and the New Note into common stock and include a pro rata portion of his capital stock in such third party sale on the same terms as Messrs. Rosen and Turits. The Debtor agrees to cause Messrs. Rosen and Turtis to execute an agreement to formalize this agreement, upon the request of Assignee.

8. In addition to Note 1, Assignee will purchase a convertible promissory note (the "New Note") in the amount of $1,400,000 (the "Principal Amount"). A form of the New Note is attached as Exhibit 2. The New Note shall have a maturity date of November 9, 2006 and accrue interest at a rate of 6.5% payable annually; however, if the Debtor becomes a public entity within one (1) year of the date of the New Note, no interest will be paid or be payable. If the Debtor becomes a public entity within the second (2nd) year from the date of the New Note, no interest accrued during the 2nd year will be paid or be payable. In the event the Company becomes a public entity, upon such date, the Principal Amount of this New Note shall be automatically converted into common stock, at the Conversion Price.

Debtor shall give Assignee 30 days written notice that it intends to pre-pay the New Note at which time Assignee shall have 30 days to convert all or a portion of the outstanding principal and accrued interest under the New Note into shares of common stock at the Conversion Price. The common stock will be subject to a one (1) year lock-up from the date the Debtor becomes a public entity should such act occur at a later date.

9. In the event that the Debtor intends to redeem all or any portion of the Series C preferred stock, the Debtor will first give the Assignee 30 days' notice of such intent and the maturity date of the New Note and Note 1 will accelerate to the date of such notice.

10. The Conversion Price for Note 1 will be subject to anti-dilution protection in the exact same manner as set forth in Section 4 of the New Note.

11. The parties agree that all covenants, agreements, and representations in this Assignment will survive execution of this Agreement.

12. This Agreement shall be binding upon the heirs, executors, administrators, successors, and assigns of the parties to this Agreement. Assignee and Debtor shall execute and deliver such further and additional instruments, agreements, and other documents as may be necessary to evidence or carry out the provisions of this Agreement.

13. This Agreement contains the entire understanding of the parties to this Agreement with respect to the transactions contemplated by this Agreement and may be amended, modified, supplemented or altered only by a writing duly executed by all of the parties to this Agreement and any prior agreements or understandings, whether oral or written are entirely superseded by this Agreement.

IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first written.

ASSIGNEE

DEBTOR

BY:_________________________
MATTHEW D. ROSEN
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

Solely with respect to paragraph 6:

By:_________________________
Marvin Rosen

By:_________________________
Philip Turits

FORM OF PROMISSORY NOTE

THIS NOTE HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATIONS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS NOTE SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE NOTE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.

THIS NOTE MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE 1933 ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

6.5% CONVERTIBLE PROMISSORY NOTE

US$1,400,000.00 November 10, 2004

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC., a Delaware corporation (the "Company"), the principal office of which is located at 420 Lexington Avenue, Suite 518, New York, New York 10170, for value received hereby promises to pay to the order of Dennis Mehiel or his assignee (the "Holder"), the sum of US$1,400,000.00 or such lesser amount as shall then equal the outstanding principal amount hereof (the "Principal Amount") and any unpaid accrued interest hereon (together with the Principal Amount, the "Outstanding Amount") as set forth below, on November 10, 2006, (the "Maturity Date"). Payment for all amounts due hereunder shall be made by mail to the registered address of the Holder.

The following is a statement of the rights of the Holder of this Note and conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. INTEREST.

(i) The Company shall pay interest (computed on the basis of a 365-day year) at a rate of six and 1/2 percent (6.5%) per annum on the Principal Amount during the period beginning on the date of issuance of this Note and ending on the later of the date the Outstanding Amount is paid in full or the date of the final conversion.

(ii) Notwithstanding the foregoing, if the Company becomes a public entity, with a class of securities registered under the Securities Exchange Act of 1934 within one (1) year of the date of the Note, no interest will be paid or be payable. If the Company becomes a public entity within the second (2nd) year from the date of this Note, no interest accrued during the second (2nd) year will be paid or be payable. The Company may pre-pay the Note without a penalty.

2. EVENTS OF DEFAULT. If one or more of the following described "Events of Default" shall occur,

a. The Company shall fail to perform or observe in any material respect any

covenant, term, provision, condition, agreement or obligation of the Company under this Note and such failure shall continue uncured for a period of ten (10) days after written notice from the Holder specifically describing such failure or, if such failure is by its nature curable but not curable within thirty (30) days from the date of such notice, if the Company shall have failed to commence within such thirty (30) day period in good faith to cure such failure and shall have failed to cure such failure within a reasonable time longer than thirty
(30) days; or

b. A trustee, liquidator or receiver shall be appointed by the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or

c. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within thirty (30) calendar days thereafter;

d. Bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief or debtors shall be instituted by or against the Company and, if instituted against the Company, the Company shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding or such proceedings shall not be dismissed within sixty (60) days thereafter.

e. Any Event of Default under the promissory note between the Company and Evelyn Greer as Trustee dated on or around January 25, 2001, which is being assigned to the Holder.

3. CONVERSION.

3.1 AUTOMATIC CONVERSION. In the event the Company becomes a public entity, with a class of securities registered under the Securities Exchange Act of 1934, upon such date, the Outstanding Amount of this Note shall be automatically converted into Common Stock, at the lesser of (i) $3.85 per share, or (ii) 80% of price of a share of common stock in an initial public offering (the "Conversion Price"). The Common Stock will be subject to a one (1) year lock-up.

3.2 OPTIONAL CONVERSION. The Holder shall have the right to convert the Outstanding Amount on this Note in whole or in part into common stock at the Conversion Price at any time until the Maturity Date.

3.3 DELIVERY OF STOCK CERTIFICATES. As promptly as practicable after the conversion of this Note (but in no case later than ten (10) business days after receipt of the Note and the signed Notice of Conversion), the Company, at its expense, will issue and deliver by express courier service for delivery to the Holder of this Note a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion, pursuant to
Section (4.1) of this Note.

The share certificates shall bear a restrictive legend in substantially the following form:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD,

TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. ACCORDINGLY, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS (i) PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OR (ii) IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. HEDGING TRANSACTIONS RELATED TO THESE SECURITIES ARE PROHIBITED UNLESS CONDUCTED IN COMPLIANCE WITH THE SECURITIES ACT. THE SECURITIES ARE SUBJECT TO A TRANSFER RESTRICTION.

3.4 MECHANICS AND EFFECT OF CONVERSION. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall pay to the Holder the amount of outstanding principal that is not so converted, such payment to be in the form as provided below. Upon conversion of this Note, the Company shall be forever released from all its obligations and liabilities under this Note, except that the Company shall be obligated to pay the Holder, upon conversion, any interest accrued and unpaid or unconverted to and including the date of such conversion, and no more.

3.5 The Company shall give Holder 30 days written notice that it intends to pre-pay this Note at which time Holder shall have 30 days to convert all or a portion of the outstanding principal and accrued interest under this Note into shares of common stock at the Conversion Price. The common stock issuable upon conversion will be subject to a one (1) year lock-up from the date the Company becomes a public entity should such act occur at a later date. The Company may otherwise pre-pay this Note without a penalty.

4. CONVERSION PRICE ADJUSTMENTS.

4.1 ADJUSTMENTS FOR STOCK SPLITS AND SUBDIVISIONS. In the event the Company should at any time or from time to time after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or the distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock' issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of this Note shall be appropriately decreased so that the number of shares of Common Stock issuable upon conversion of this Note shall be increased in proportion to such increase of outstanding shares.

4.2 ADJUSTMENTS FOR REVERSE STOCK SPLITS. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination of the outstanding shares of Common Stock, then following the record date of such combination, the Conversion Price for this Note shall be appropriately increased so that the number of shares of Common Stock issuable on conversion hereof shall be decreased in proportion to such decrease in outstanding shares.

5. ACCELERATION. In the event that the Company chooses to redeem its all or any portion of the outstanding Series C preferred stock, the Company will give the Holder 30 days' notice of its intention to redeem and the Maturity Date of this Note will accelerate to the date of such notice.

6. MERGER. If the Company merges or consolidates with another corporation or sells or transfers all or substantially all of its assets to another person and the Holders of the Common Stock are entitled to receive stock, securities or property in respect of or in exchange for Common Stock, then as a condition of such merger, consolidation, sale or transfer, the Company and any such successor, purchaser or transferee shall amend this Note to provide that it may thereafter be converted on the terms and subject to the conditions set forth above into the kind and amount of stock, entities or property receivable upon such merger, consolidation, sale or transfer by a Holder of the number of shares of Common Stock into which this Note might have been converted immediately before such merger, consolidation, sale or transfer, subject to adjustments which shall be as nearly equivalent as may be practicable to adjustments provided for in Section 4.

The Company shall not consolidate or merge into, or transfer all or substantially all of its assets to, any person, unless such person assumes the obligations of the Company under this Note and immediately after such transaction no Event of Default exists. Any reference herein to the Company shall refer to such surviving or transferee corporation and the obligations of the Company shall terminate upon such assumption.

7. ASSIGNMENT. Subject to the restrictions or transfer described below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators, and transferees of the parties.

8. WAIVER AND AMENDMENT. This Note and the Purchase Agreement constitute the full and entire understanding and agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements with respect to the subject matter hereof. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and Holder thereof.

9. RESTRICTIONS ON TRANSFER. This Note and the Common Stock issuable upon the conversion hereof have not been registered under the Securities Act of 1933, as amended, (the "Securities Act") and have been sold pursuant to an exemption from registration under the 1933 Act. The Common Stock issuable upon the conversion of this Note may only be offered or sold pursuant to registration under or an exemption from the Securities Act.

10. NOTICES. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if made by hand delivery, by an express courier company, by registered or certified mail, or by facsimile transmission, at the respective addresses and/or facsimile number of the parties as set forth herein.

11. GOVERNING LAW; INTERPRETATION. This Agreement, and all exhibits attached, shall be governed by and construed under the laws of the State of New York and the laws applicable therein without regard to its choice of law principles. All disputes should be determined and litigated in the courts of New York.

Any legal action or proceeding in connection with this Agreement or the performance hereof may be brought in the state courts located in New York, and the parties hereby irrevocably submit to the non-exclusive jurisdiction of such courts for the purpose of any such action or proceeding.

12. HEADING; REFERENCES. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

13. ATTORNEY'S FEES. Should any party bring an action to enforce the terms of this Note, then the prevailing party in the action shall be entitled to recovery of its attorney's fees from the other party.

IN WITNESS WHEREOF, the Company has caused this Note to be issued this 10th day of November 2004.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:

Name:
Title:
Address:
Facsimile:

HOLDER: DENNIS MEHIEL

By:

Name:
Title:
Address:

THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL
(i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE OR ANY SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE.

THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE COMPANY AND PAYEE HEREUNDER ARE SUBJECT TO THE SUBORDINATION PROVISIONS SET FORTH IN SECTION 2 HEREOF. IN THE EVENT OF A CONFLICT BETWEEN ANY TERMS OF THIS NOTE AND THE TERMS OF SUCH SECTION 2, THE TERMS OF SECTION 2 SHALL GOVERN.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

No. 2 $125,000.00 April 9, 1999

CONVERTIBLE SUBORDINATED NOTE

Fusion Telecommunications International, Inc., a Delaware corporation (the "Company"), for value received, hereby promises to pay to the order of Marvin Rosen (the "Payee") on April 9, 2004 (the "Maturity Date") at the offices of the Company, the principal sum of One Hundred Twenty-Five Thousand Dollars ($125,000.00) or such lesser principal amount as shall at such time be outstanding hereunder (the "Principal Amount"). Each payment by the Company pursuant to this Note shall be made without set-off or counterclaim and shall be made in lawful currency of the United States of America and in immediately available funds. Interest on this Note shall accrue on the Principal Amount outstanding from time to time at a rate per annum computed in accordance with Section 3 hereof.

The amount of all repayments of principal, interest rates applicable thereto and interest accrued thereon shall be recorded on the records of the Payee and, prior to any transfer of, or any action to collect, this Note shall be endorsed on this Note. Any such recordation or endorsement shall constitute PRIMA FACIE evidence of the accuracy of the information so recorded or endorsed, but the failure to record any such amount or rate shall not limit or otherwise affect the obligations of the Company hereunder to make payments of principal or interest when due. All payments by the Company hereunder shall be applied first to pay any interest which is due, but unpaid, then to reduce the Principal Amount.

The Company (i) waives presentment, demand, protest or notice of any kind in connection with this Note and (ii) agrees to pay to the holder hereof, on demand, all costs and

expenses (including reasonable legal fees and expenses) incurred in connection with the enforcement and collection of this Note.

This Note is issued in connection with a private placement of identical Notes (collectively, the "Notes"), the terms of which are more fully set forth in the Confidential Private Placement Memorandum dated February 8, 1999, as amended and restated on April 29, 1999, May 11, 1999 and May 27, 1999, and pursuant to a Subscription Agreement, between the Company and the Payee (the "Subscription Agreement"), a copy of which agreement is available for inspection at the Company's principal office. Notwithstanding any provision to the contrary contained herein, this Note is subject and entitled to certain terms, conditions, covenants and agreements contained in the Subscription Agreement. Any transferee of this Note, by its acceptance hereof, assumes the obligations of the Payee in the Subscription Agreement with respect to the conditions and procedures for transfer of this Note. Reference to the Subscription Agreement shall in no way impair the absolute and unconditional obligation of the Company to pay both principal hereof and interest hereon as provided herein.

1. PREPAYMENT. The Principal Amount of this Note may be prepaid, in whole or in part, without penalty, at any time or from time to time after the third anniversary of the date of this Note or earlier pursuant to the provisions of Section 6B hereof upon 10 business days' prior written notice (the "Prepayment Notice") to the Payee. Principal Amounts repaid may not be reborrowed.

2. SUBORDINATION. The Company, for itself, its successors and assigns, covenants and agrees, and the Payee and each successive holder of this Note, by its acceptance of this Note, likewise covenants and agrees (expressly for the benefit of the present and future holders of the Senior Debt (as hereinafter defined)), that the payment of principal of, and interest on, this Note is hereby expressly subordinated in right of payment to the prior payment in full of the principal of, premium (if any) and interest on, all Senior Debt of the Company (other than the Notes), whether outstanding on the date hereof or hereafter incurred or created. "Senior Debt" means, collectively, (i) all Indebtedness for Borrowed Money (and all renewals, extensions, refundings, amendments and modifications of any such Indebtedness for Borrowed Money); (ii) all other indebtedness incurred prior to the issuance of the Notes which by its terms is senior to the Notes; and (iii) all payment obligations of the Company pursuant to any capitalized lease with an entity that is not an affiliate of the Company, unless by the terms of the instrument creating or evidencing any such indebtedness it is expressly provided that such indebtedness is not superior in right of payment to the Notes.

"Indebtedness for Borrowed Money" means (i) all payment obligations of the Company to a bank, insurance company, finance company or other institutional lender or other entity regularly engaged in the business of extending credit in the form of borrowed money, provided such entity is not an affiliate of the Company (each of the foregoing, an "Institutional Lender") in respect of extensions of credit to the Company (or to a subsidiary of the Company to the extent such obligations are guaranteed by the Company pursuant to a written guarantee executed by the appropriate officers of the Company) and
(ii) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances, in each case

issued for the account of the Company (other than such as may be for the benefit of an affiliate of the Company).

The provisions of this Section 2 are not for the benefit of the Company, but are solely for the purpose of defining the relative rights of the holders of the Senior Debt, on the one hand, and the holders of the Notes, on the other hand. Nothing contained herein (i) shall impair, as between the Company and the holder of this Note, the obligations of the Company, which are absolute and unconditional, to pay to the holder hereof all amounts payable in respect of this Note as and when the same shall become due and payable in accordance with the terms hereof or (ii) is intended to or shall affect the relative rights of the holder of this Note and the creditors of the Company, or
(iii) shall prevent the holder of this Note from exercising all rights, powers and remedies otherwise permitted by applicable law or upon a default or Event of Default under this Note as set forth in these subordination provisions.

3. COMPUTATION OF INTEREST.

A. BASE INTEREST RATE. Subject to subsections B and C below, the outstanding Principal Amount shall bear interest at the rate of seven and one-quarter percent (7.25%) per annum.

B. PENALTY INTEREST. After the Maturity Date, the rate of interest applicable to the unpaid Principal Amount shall be 2% in excess of that otherwise applicable pursuant to subsection A above, but in no event in excess of the Maximum Rate provided in subsection C below.

C. MAXIMUM RATE. In the event that it is determined that, under the laws relating to usury applicable to the Company or the indebtedness evidenced by this Note ("Applicable Usury Laws"), the interest charges and fees payable by the Company in connection herewith or in connection with any other document or instrument executed and delivered in connection herewith cause the effective interest rate applicable to the indebtedness evidenced by this Note to exceed the maximum rate allowed by law (the "Maximum Rate"), then such interest shall be recalculated for the period in question and any excess over the Maximum Rate paid with respect to such period shall be credited, without further agreement or notice, to the Principal Amount outstanding hereunder to reduce said balance by such amount with the same force and effect as though the Company had specifically designated such extra sums to be so applied to principal and the Payee had agreed to accept such extra payment(s) as a premium-free prepayment. All such deemed prepayments shall be applied to the principal balance payable at maturity. In no event shall any agreed-to or actual exaction as consideration for this Note exceed the limits imposed or provided by Applicable Usury Laws in the jurisdiction in which the Company is resident applicable to the use or detention of money or to forbearance in seeking its collection in the jurisdiction in which the Company is resident.

D. INTEREST PAYMENT DATES. Accrued and unpaid interest shall be payable (i) semi-annually on January 31 and July 31, (ii) upon maturity (whether at the Maturity Date, by acceleration or otherwise), (iii) upon any prepayment, on the amount prepaid and (iv) after maturity until paid in

full (after as well as before judgment), on demand. Each of the dates referred to in clauses (i), (ii), (iii), and (iv) is sometimes hereinafter referred to as an "Interest Payment Date." All computations of interest hereunder shall be made based on the actual number of days elapsed in a year of 365 days (including the first day but excluding the last day during which any such Principal Amount is outstanding). The Principal Amount of this Note together with interest accrued and unpaid thereon shall be payable on the Maturity Date unless this Note is converted in accordance with Section 6 hereof.

4. COVENANTS OF COMPANY

A. AFFIRMATIVE COVENANTS. The Company covenants and agrees that, so long as this Note shall be outstanding, it will perform the obligations set forth in this Section 4A:

(i) TAXES AND LEVIES. The Company will file when due all federal, state and local income tax returns and will promptly pay and discharge all taxes, assessments, and governmental charges or levies imposed upon the Company or upon its income and profits, or upon any of its property, before the same shall become delinquent, except where the failure to file and/or make payment would not have a material adverse effect on the Company, as well as all claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon any material properties or any material part thereof; PROVIDED, HOWEVER, that the Company shall not be required to pay and discharge any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings and the Company shall set aside on its books adequate reserves in accordance with generally accepted accounting principles ("GAAP") with respect to any such tax, assessment, charge, levy or claim so contested;

(ii) MAINTENANCE OF EXISTENCE. The Company will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate existence, rights and franchises and comply with all laws applicable to the Company, except where the failure to comply would not have a material adverse effect on the Company;

(iii) MAINTENANCE OF PROPERTY. The Company will maintain, preserve, protect and keep its material property used or useful in the conduct of its business in good repair, working order and condition, and from time to time make all needful and proper repairs, renewals, replacements and improvements thereto as shall be reasonably required in the conduct of its business;

(iv) INSURANCE. The Company will, to the extent necessary for the operation of its business, keep adequately insured by financially sound reputable insurers, all property of a character usually insured by similar corporations and carry such other insurance as is usually carried by similar corporations;

(v) BOOKS AND RECORDS. The Company will at all times keep true and correct books, records and accounts reflecting all of its business affairs and transactions in

accordance with GAAP. Such books and records shall be open at reasonable times and upon reasonable notice to the inspection of the Payee or its agents;

(vi) NOTICE OF CERTAIN EVENTS. The Company will give prompt written notice (with a description in reasonable detail) to the Payee of:

(a) the occurrence of any Event of Default or any event which, with the giving of notice or the lapse of time, would constitute an Event of Default;

(b) the occurrence of any litigation, arbitration or governmental investigation or proceeding not previously disclosed by the Company to the Payee in writing which has been instituted or, to the knowledge of the Company, is threatened, against the Company or to which any of its properties, assets or revenues is subject which, if adversely determined, would reasonably be expected to have a material adverse effect on the Company;

(c) the occurrence of any event of default or any event which, with the giving of notice or the lapse of time, would constitute an event of default under any document or instrument evidencing or governing any indebtedness of the Company in the principal amount exceeding $1,000,000 and the delivery of any notice effecting the acceleration of any such indebtedness;

(d) any material adverse development which shall occur in any litigation, arbitration or governmental investigation or proceeding previously disclosed by the Company to the Payee; and

(e) the occurrence of any other circumstance which has a reasonable likelihood of having a material adverse effect on the Company;

(vii) COMPLIANCE WITH LAWS. The Company will comply in all material respects with all applicable federal, state and local laws, rules, regulations and orders.

B. NEGATIVE COVENANTS. The Company covenants and agrees that, so long as this Note shall be outstanding, it will perform the obligations set forth in this Section 4B:

(i) LIQUIDATION, DISSOLUTION. The Company will not liquidate or dissolve, consolidate with, or merge into or with, any other corporation or other entity, PROVIDED THAT this clause (i) shall not restrict any consolidation or merger with an entity which has a tangible net worth equal to or greater than the Company's at the time of transfer and such entity assumes the obligations under the Notes;

(ii) SALES OF ASSETS. The Company will not sell, transfer, lease or otherwise dispose of, or grant options, warrants or other rights with respect to, all or substantially all of its properties or assets to any person or entity, PROVIDED THAT this clause (ii) shall not restrict any disposition made to an entity which has a tangible net worth equal to or greater than the Company's at the time of transfer and such entity assumes the obligations under the Notes;

5. EVENTS OF DEFAULT

A. The term "EVENT OF DEFAULT" shall mean any of the events set forth in this Section 5A:

(i) NON-PAYMENT OF OBLIGATIONS. The Company shall default in the payment of principal on this Note when and as the same shall become due and payable, whether by acceleration or otherwise or, within 10 business days of its becoming due, accrued interest on this Note;

(ii) NON-PERFORMANCE OF AFFIRMATIVE COVENANTS. The Company shall default in the due observance or performance of any covenant set forth in Section 4A, which default shall continue uncured for 10 business days after it has been discovered or should have been discovered by the Company;

(iii) NON-PERFORMANCE OF NEGATIVE COVENANTS. The Company shall default in the due observance or performance of any covenant set forth in Section 4B;

(iv) NON-PERFORMANCE OF OTHER OBLIGATIONS. The Company shall default in the due observance or performance of any other material covenant or agreement on the part of the Company to be observed or performed pursuant to the terms hereof, which default shall continue uncured for 10 business days after written notice thereof specifying such default shall have been given to the Company by the holder of this Note (or its agent);

(v) BANKRUPTCY, INSOLVENCY, ETC. The Company shall:

(a) become insolvent or generally fail or be unable to pay, or admit in writing its inability to pay, its debts as they become due;

(b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its property, or make a general assignment for the benefit of creditors;

(c) in the absence of such application, consent or acquiesce in, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company or for any part of its property, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 30 days; or

(d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Company and, if such case or proceeding is not commenced by the Company or converted to a voluntary case, such case or proceeding shall be consented to or acquiesced in by the

Company or shall result in the entry of an order for relief or shall remain for 60 days undismissed.

(vi) BREACH OF WARRANTY. Any material representation or warranty of the Company contained in the Subscription Agreement is or shall be incorrect in any material respect when made.

B. ACTION IF BANKRUPTCY. If any Event of Default described in clauses (v)(a) through (d) of Section 5A shall occur, the outstanding Principal Amount of this Note and all other obligations hereunder shall automatically be and become immediately due and payable, without notice or demand.

C. ACTION IF OTHER EVENT OF DEFAULT. If any Event of Default (other than any Event of Default described in clauses (v)(a) through (d) of Section 5A) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Required Holders may, upon notice to the Company, declare all or any portion of the outstanding Principal Amount of this Note, together with interest accrued thereon, to be due and payable and any or all other obligations hereunder to be due and payable, whereupon the full unpaid Principal Amount (or any portion thereof so demanded), such accrued interest and any and all other such obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand, or presentment.

D. REMEDIES. Subject to the provisions of Section 5C and 7A hereof, in case any Event of Default shall occur and be continuing, the holders of not less than 25% of the outstanding aggregate Principal Amount of the Notes may proceed to protect and enforce its rights by a proceeding seeking the specific performance of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note or may proceed to enforce the payment of this Note or to enforce any other legal or equitable rights as such holder shall determine.

6. CONVERSION OF NOTE.

A. AUTOMATIC CONVERSION ON QUALIFIED PUBLIC OFFERING. In the event of a Qualified Public Offering (as hereinafter defined), the outstanding Principal Amount of this Note shall, at the sole discretion of the Company, be automatically converted at the closing of such Qualified Public Offering, without any action by the holder hereof, into shares of Common Stock of the Company at a price equal to $8.00 per share, subject to adjustment as provided in Section 6D below (the "Conversion Price"). A "Qualified Public Offering" means an underwritten public offering of the Common Stock of the Company registered under the Securities Act of 1933, as amended, in which the initial public offering price at which such stock is offered equals or exceeds 125% of the Conversion Price (i.e. $10.00 per share) and the aggregate gross proceeds, prior to deduction for underwriting discounts and commissions, equal or exceed $10,000,000. The shares of Common Stock issuable upon conversion of this Note at the Conversion Price are referred to herein as the "Conversion Shares."

B. PREPAYMENT OR AUTOMATIC CONVERSION UPON OTHER EVENTS. If (i) the average closing bid price of the Company's Common Stock for 30 consecutive trading days ending within 10 days of the date of the Conversion Notice (as defined in Section 6E) or Prepayment Notice, equals or exceeds 125% of the Conversion Price (i.e. $10.00 per share) and (ii) either a registration statement covering the Conversion Shares has been declared effective by the Securities and Exchange Commission or at least two years has elapsed since the issuance date of the Note, the outstanding Principal Amount of this Note may, at the sole discretion of the Company, be either (i) automatically converted, without any action by the holder hereof, into shares of Common Stock of the Company at the Conversion Price or (ii) prepaid, together with accrued interest. In addition, in the event the Company completes a merger or consolidation in which it is not the surviving entity, the outstanding Principal Amount of this Note may, at the sole discretion of the Company, be either (i) automatically converted, without any action by the holder hereof, into shares of Common Stock of the Company at the Conversion Price if the cash consideration paid in the merger or consolidation equals or exceeds 125% of the Conversion Price (i.e.$10.00 per share) or (ii) prepaid, together with accrued interest.

C. OPTIONAL CONVERSION. The Payee shall have the right, at its option, at any time up to and including the Maturity Date, to convert the outstanding Principal Amount of this Note into shares of the Company's Common Stock at the Conversion Price. The Payee's right to convert this Note may be exercised during the 10 business day period after receipt of a Prepayment Notice.

D. ADJUSTMENT OF CONVERSION PRICE. The Conversion Price in effect at any time and the number and kind of securities issuable upon conversion of the Notes shall be subject to adjustment from time to time upon the happening of certain events as follows:

(i) In case the Company shall (i) declare a dividend or make a distribution on its reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the applicable Conversion Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the number of shares determined by multiplying the Conversion Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur.

(ii) REORGANIZATION OF THE COMPANY. Subject to the provisions of Sections 1 and 6B hereof, in case of any reclassification or capital reorganization, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification or capital reorganization) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition

precedent to such transaction, cause effective provisions to be made so that the holder of this Note shall have the right thereafter upon conversion of this Note in accordance with the provisions of this Section 6, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been received upon conversion of this Note immediately prior to such reclassification, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Note. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition in which it is not exercising its options under Section 1 or Section 6B hereof, unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing or otherwise acquiring such properties shall assume, by written instrument executed and mailed or delivered to the holder of this Note at the last address of such holder appearing on the books of the Company, the obligation to deliver to such holder such shares of stock, securities, cash or properties as, in accordance with the foregoing provisions, such holder may be entitled to acquire. The above provisions of this paragraph shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. Nothing herein shall be construed as to require the consent of the holder to any such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition.

E. MECHANICS OF CONVERSION.

(i) AUTOMATIC CONVERSION. In the event the Company determines to force conversion of the Notes pursuant to the provisions of Sections 6A or 6B hereof, it shall deliver to the Payee at its address appearing on the records of the Company a written notice of the imminent conversion of this Note (the "Conversion Notice"), requesting surrender of this Note for cancellation and written instructions regarding the registration and delivery of certificates for the Conversion Shares. In the event the Payee receives a Conversion Notice, the Payee shall be required to surrender this Note for cancellation as of either the date of the closing of a Qualified Public Offering or, with respect to a conversion pursuant to Section 6B, within five business days of the Conversion Notice (the "Conversion Date"), but the failure of the Payee so to surrender this Note shall not affect the conversion of the outstanding Principal Amount into Conversion Shares, provided that if the Note is not surrendered, an affidavit of lost note shall be provided. No holder of this Note shall be entitled upon conversion of this Note to have the Conversion Shares registered in the name of another person or entity without first complying with all applicable restrictions on the transfer of this Note. In the event the Payee does not provide the Company with written instructions regarding the registration and delivery of certificates for the Conversion Shares, the Company shall issue such shares in the name of the Payee and shall forward such certificates to the Payee at its address appearing on the records of the Company. The person entitled to receive the Conversion Shares shall be deemed to have become the holder of record of such shares at the close of business on the Conversion Date and the person entitled to receive share certificates for the Conversion Shares shall be regarded for all corporate purposes after the Conversion Date as the record holder of the number of Conversion

Shares to which it is entitled upon the conversion. The Company may rely on record ownership of this Note for all corporate purposes, notwithstanding any contrary notice. After the Conversion Date, this Note shall, until surrendered to the Company, represent the right to receive the Conversion Shares plus accrued and unpaid interest on the Principal Amount of this Note through, but excluding the Conversion Date.

(ii) OPTIONAL CONVERSION. Before the Payee shall be entitled to convert this Note into Conversion Shares, the Payee shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company, and shall give written notice to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for the Conversion Shares are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver to the Payee, or to the nominee or nominees of Payee, a certificate or certificates for the number of Conversion Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the Note to be converted, and the person or persons entitled to receive the Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

F. CASH PAYMENTS. No fractional shares (or scrip representing fractional shares) of Common Stock shall be issued upon conversion of this Note. In the event that the conversion of the Principal Amount of this Note would result in the issuance of a fractional share of Common Stock, the Company shall pay a cash adjustment in lieu of such fractional share to the holder of this Note based upon the Conversion Price. Upon the surrender of this Note, accrued and unpaid interest on the Principal Amount of this Note converted pursuant to Section 5A, 5B or 5C shall be paid by the Company to the holder of this Note through but excluding the Conversion Date.

G. STAMP TAXES, ETC. The Company shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of this Note; provided, however, that the Company shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of this Note, and the Company shall not be required to issue or deliver any such certificate unless and until the person requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the Company's satisfaction that such tax has been paid.

H. VALIDITY OF STOCK. All shares of Common Stock which may be issued upon conversion of this Note will, upon issuance by the Company in accordance with the terms of this Note, be validly issued, free from all taxes and liens with respect to the issuance thereof (other than those created by the holders), free from all pre-emptive or similar rights and fully paid and non-assessable.

I. RESERVATION OF SHARES. The Company covenants and agrees that it will at all times have authorized and reserved, solely for the purpose of such possible conversion, out of its authorized but unissued shares, a sufficient number of shares of its Common Stock to provide for the exercise in full of the conversion rights contained in this Note.

J. NOTICE OF CERTAIN TRANSACTIONS. In case at any time:

(i) The Company shall declare any dividend upon, or other distribution in respect of, its Common Stock; or

(ii) The Company shall offer for subscription to the holders of its Common Stock any additional shares of stock of any class or any other securities convertible into shares of stock or any rights to subscribe thereto; or

(iii) There shall be any capital reorganization or reclassification of the capital stock of the Company, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification); or

(iv) There shall be a voluntary or involuntary dissolution; liquidation or winding-up of the Company;

then, in any one or more of said cases, the Company shall cause to be mailed to the registered holder of this Note at the earliest practicable time (and, in any event not less than 20 days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or such reorganization, reclassification, sale, consolidation, merger or dissolution, liquidation or winding-up shall take place, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the kind and amount of the shares of stock and other securities and property deliverable upon the conversion of this Note. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger or dissolution, liquidation or winding-up, as the case may be.

Nothing herein shall be construed as the consent of the holder of this Note to any action otherwise prohibited by the terms of this Note or as a waiver of any such prohibition.

7. AMENDMENTS AND WAIVERS.

A. The provisions of this Note may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Company and the holders of not less than 50% in principal amount of the Notes (the "Required Holders"); PROVIDED, HOWEVER, that no such amendment, modification or waiver:

(i) which would modify this Section 7A, change the definition of "Required Holders", extend the Maturity Date for more than 90 days, or subject the Payee under each Note to any additional obligations shall be made without the consent of the Payee of each Note, or

(iii) which would reduce the amount of any payment or prepayment of principal of or interest on any Principal Amount payable hereunder (or reduce the Principal Amount of or rate of interest payable hereunder) shall be made without the consent of the holder of each Note so affected.

B. No failure or delay on the part of the Payee in exercising any power or right under this Note shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Payee shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder.

C. INVALIDATION. To the extent that the Company makes a payment or payments to the Payee, and such payment or payments or any part thereof are subsequently for any reason invalidated, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

D. MAILING. After any waiver, amendment or supplement under this section becomes effective, the Company shall mail to the holders of the Notes a copy thereof.

8. MISCELLANEOUS

A. REGISTERED HOLDER. The Company may consider and treat the person in whose name this Note shall be registered as the absolute owner thereof for all purposes whatsoever (whether or not this Note shall be overdue) and the Company shall not be affected by any notice to the contrary. In case of transfer of this Note by operation of law, the transferee agrees to notify the Company of such transfer and of its address, and to submit appropriate evidence regarding such transfer so that this Note may be registered in the name of the transferee. This Note is transferable only on the books of the Company by the holder hereof, in person or by attorney, on the surrender hereof, duly endorsed. Communications sent to any registered owner shall be effective as against all holders or transferees of the Note not registered at the time of sending the communication.

B. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of New York. Sections 5-1401 and 5-1402 of the General Obligations Law

of the State of New York shall apply to this Note and the Company hereby waives any right to stay or dismiss on the basis of FORUM NON CONVENIENS any action or proceeding brought before the courts of the State of New York sitting in New York County or of United States of America for the Southern District of New York and hereby submits to the jurisdiction of such courts.

C. NOTICES. All notices required or permitted under this Note shall be given in accordance with the Subscription Agreement.

D. WAIVER OF JURY TRIAL. THE PAYEE AND THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE PAYEE OR THE COMPANY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PAYEE'S PURCHASING THIS NOTE.

IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By___________________________
Name: Dale M. Gregory
Title: President

EX-21.1

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
LIST OF SUBSIDIARIES

1. Telecommunications Overseas Fusion Ltd., a company formed under the laws of Mauritius.

2. Efonica, FL-LLC, a company formed under the laws of United Arab Emirates

3. Estel Communications Pvt. Ltd, a company formed under the laws of India.

4. Fusion Telco S.A, a company formed under the laws of Argentina.

5. African Communications Company S.A., a company formed under the laws of Senegal

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT

We consent to use in this Registration Statement, Form S-1 of Fusion Telecommunications International, Inc. of our report dated April 23, 2004, except for paragraph 3 of Note 12 which is as of August 24, 2004 and Note 21 which the date is November 10 2004, relating to the consolidated financial statements of Fusion Telecommunications International Inc. and Subsidiaries as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001. We consent to the reference to our Firm under the caption "Experts" in the Prospectus.

Rothstein, Kass & Company, P.C.
Roseland, New Jersey
November 11, 2004

Delaware	4813	58-2342021
(State or Other Jurisdiction of Employer	(Primary Standard Industrial	(I.R.S. Employer
Incorporation or Organization Number)	Classification Code Number)	Identification Number)

*Copies of all communications to:*
	Arthur Marcus, Esq.	David Alan Miller, Esq.	William R. Heitz, Esq.
	Gersten, Savage, Kaplowitz,	Graubard Miller	Heitz & Associates, P.C.
	Wolf & Marcus, LLP	600 Third Avenue	345 Woodcliff Drive
	101 East 52nd Street	New York, New York 10016	Fairport, New York 14450
	New York, New York 10022-6018	212-818-8800	585-387-0000
	212-752-9700	Fax: 212-818-8881	Fax: 585-387-0130
	Fax: 212-813-9768

		Proposed
		Maximum	Proposed	Amount of
Title of Each Class of Securities to be	Amount to be	Offering Price	Maximum	Registration
Registered (1)	Registered	Per Security (2)	Offering Price	Fee

Common Stock $.01 par value Per share, (the “Common Stock”) (3)	3,823,750	$7.00	$26,766,250	$ 3,391.28
Redeemable Common Stock Purchase Warrants (4)	3,823,750	$ .05	$ 191,188	$ 24.22
Common Stock Issuable Upon Exercise of Redeemable Warrants	3,823,750	$8.00	$30,590,000	$ 3,875.75
Representative’s Warrants	332,500	$ .0001	$38.24	$ .01
Common Stock Issuable Upon Exercise of the Representative’s Warrants	332,500	$7.00	$ 2,676,625	$ 339.13
Redeemable Warrants Underlying Representative’s Warrants	332,500	$ .05	$19,119	$ 2.42
Common Stock Issuable Upon Exercise of Redeemable Warrants
Underlying the Representative’s Warrants	332,500	$8.00	$ 3,059,000	$ 387.58
Selling Securityholder Redeemable Warrants (5)	3,141,838	$ .05	$ 157,092	$ 19.90
Common Stock Issuable Upon Exercise
of the Selling Securityholder
Redeemable Warrants	3,141,838	$8.00	$25,134,704	$ 3,184.57

Total Registration Fee:				$11,224.86

			Underwriting
	Initial public		discount and
	offering price		commissions		Proceeds to us

Per share of common stock	$	6.00	$	.54	$	5.46
Per purchase warrant		.05		.0045		.0455

Total	$	6.05	$	.5445	$	5.5055

Prospectus Summary		3
Summary Historical Financial Data		7
Risk Factors		9
Special Note Regarding Forward-Looking Statements		17
Use of Proceeds		17
Dividend Policy		18
Capitalization		19
Dilution		20
Management's Discussion and Analysis of Financial Condition and Results of Operations		23
Operating Expenses		25
Company Highlights		26
Business		38
History and Corporate Information		38
Growth Strategy		38
Services		40
Marketing		41
Network Strategy		42
Dynamics of the Global Communications Market		43
Competition		49
Government Regulation		50
Trademarks		51
Employees		51
Properties		52
Legal Proceedings		53
Management		54
Executive Officers and Senior Management		54
Board of Directors		56
Advisory Board		58
Board Committees		59
Certain Relationships and Related Transactions		63
Principal Stockholders		65
Description of Securities		66
Shares Eligible for Future Sale		69
Underwriting		71
Legal Matters		73
Experts		73
Where You Can Find More Information		73

•	VoIP: VoIP enables customers, typically for a lower cost than traditional telephony, to place voice calls anywhere in the world using their PC, IP phone or regular telephone 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 offered directly to corporations around the world, on a private label, co-branded or wholesale basis to ISPs, PTTs and cable operators who wish to market to corporations and consumers under their own brand name, or through our retail services company, Efonica F-Z, LLC (“Efonica”). Efonica offers PC-to-Phone and IP Phone-to-Phone services to customers located in Asia, the Middle East and Africa, and is currently expanding into Latin America. Advanced services that will shortly be available to customers include voicemail, call waiting and call forwarding.
	Additionally, we enter into VoIP interconnect agreements with PTTs or other carriers in our target markets. These agreements enable us to terminate traffic into a country and in some cases originate traffic from that country through the PTT or other carrier. We use capacity on these networks to carry our own retail traffic in addition to selling capacity to other carriers desiring voice termination to that specific destination. As we grow, we intend to use an increasing percentage of our capacity for higher margin, retail traffic.
•	Managed private networks: We offer managed end-to-end networks that typically connect multinational corporations or government facilities in emerging markets with locations in other countries. We also market this service to software developers, call centers, and telemarketing facilities, all of which rely on high quality, reliable service. In markets where we do not have network facilities deployed, we utilize other carriers’ networks, allowing us to provide an integrated global network that can connect a customer to virtually anywhere in the world. We also offer services on a private label basis as a subcontractor for other communication carriers that are seeking network connectivity to countries that they do not otherwise service.
•	Internet Access: We offer peering with multiple tier-one Internet backbone providers utilizing an intelligent routing capability. This ensures efficiency, speed and reliability. The tier-one providers we utilize own or control a national network that trades traffic with other national providers. This traffic trading is referred to as “peering.” A tier-one provider can carry its own Internet traffic across the country and hand it off at any one of the public or private hand-off locations known as "peering points," metropolitan access points or national access points. In select locations such as India, we have established Internet points of presence (PoPs) that are then connected to our New York facility. This, in turn, provides interconnectivity with the Internet and peering with the top Internet backbone networks. In regions where we do not own network facilities, we utilize other carriers’ facilities. We also provide services on a private label basis as a sub contractor for other communication carriers that are seeking Internet access in countries that they do not otherwise service.
•	Internet video conferencing: We offer an Internet-based video conferencing service that can be initiated instantly on a personal computer (similar to popular instant messaging services) and can handle from two to two hundred participants per conference, of which six can be visually displayed. The service can be installed in a matter of minutes and only requires a standard camera and headset to operate. We are marketing our desktop video conferencing service directly to multinational corporations seeking to enhance face-to-face communications without the costly inefficiencies of business travel, and to our international partners to distribute within their country.
•	Co-location: 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.

Securities Offered				3,325,000 shares of our common stock and 3,325,000 purchase warrants. Each purchase warrant will entitle you to purchase one share of our common stock for $6.00 (100% of the offering price of one share of our common stock) during the four-year period beginning on the first anniversary of the date of this prospectus. The warrant exercise price will increase to $8.00 (133% of the offering price of one share of our common stock) on the eighteen month anniversary date of issuance provided that the registration statement covering the shares of common stock underlying the purchase warrants has been effective for at least sixty (60) days prior to the exercise price reset date. We may redeem the purchase warrants, at any time after they become exercisable, for $.01 per purchase warrant, on not less than thirty (30) days’ prior written notice if the last sale price of our common stock has been at least 200% of the then-current exercise price of the purchase warrants (initially $6.00) for the twenty (20) consecutive trading days ending on the third day prior to the date on which notice is given.

Common equity outstanding prior to the offering Class A common stock				17,480,333 shares

Common stock				0 shares

Common equity to be outstanding after the offering Class A common stock				17,480,333 shares

Common stock				7,118,353 shares

Purchase warrants to be outstanding after the offering				6,466,838 purchase warrants

Use of proceeds				At an assumed initial offering price of $6.00 per share of common stock and $.05 per warrant we estimate that we will receive approximately $17,066,250 in net proceeds after deducting commissions and offering expenses. We intend to use approximately $6,466,250 of the net proceeds of the offering for working capital and general corporate purposes; $2,100,000 for repayment of certain indebtedness; $2,000,000 to fund the purchase of equipment for expanded capacity and service offerings; $500,000 for marketing and advertising; and $6,000,000 for international deployment, including the purchase of business licenses, network equipment and securing letters of credit and bonds, all as more particularly described herein. Any net proceeds from the exercise of the Underwriter’s over allotment will be added to working capital.

Proposed American Stock Exchange symbols				Common Stock: FSN

				Purchase Warrants: FSNW

Corporate information				Fusion was incorporated in Delaware in September 1997. Our principal executive offices are located at 420 Lexington Avenue, Suite 518, New York, NY 10170. The main telephone number is (212) 972-2000. Our web site is www.fusiontel.com . The information contained in our web site is not part of this prospectus.

Certain terms used in this Prospectus				In this prospectus “common stock” refers to our common stock, par value $.01 per share and “purchase warrants” refers to the redeemable common stock purchase warrants being sold in this offering. We refer sometimes to our common stock and purchase warrants as our “securities.”

				(unaudited)
	Years Ended December 31,			Six Months Ended June 30,

	2001	2002	2003	2003	2004 (1)

Consolidated Statement of Operations:
Revenues	$ 29,614,565	$ 28,422,149	$33,725,275	$ 16,945,832	$26,978,042
Loss from operations	(11,629,584)	(10,014,342)	(7,541,513)	(3,523,069)	(2,164,157)
Loss from continuing operations	(12,112,228)	(9,358,524)	(4,385,191)	(2,729,703)	(930,553)
Income/(loss) from discontinued operations	(7,029,511)	0	208,620	0	0
Net loss	(19,141,739)	(9,358,524)	(4,176,571)	(2,729,703)	(930,553)
Operating Data:
EBITDA (2)	$ (6,622,602)	$ (6,980,268)	$(4,519,932)	$ (2,189,190)	$ (971,263)
Capital expenditures	501,882	533,610	645,340	85,094	739,479
Consolidated Balance Sheet Data:
Cash and cash equivalents	$ 0	$ 768,898	$ 3,240,652	$ 264,760	$ 4,017,260
Restricted cash	784,000	1,250,793	961,536	994,232	1,057,866
Total assets	14,273,723	12,287,532	13,033,913	11,842,131	16,206,957
Total debt	12,211,878	9,640,955	5,176,861	9,990,081	4,449,330
Preferred shares subject to mandatory redemption	0	0	3,466,538	0	9,368,249
Total stockholders’ deficit	(11,537,659)	(14,800,981)	(9,774,002)	(13,477,348)	(9,417,514)

	(unaudited)
	As of June 30, 2004

		Pro Forma
	Actual	As Adjusted (3)


Cash and cash equivalents	$ 4,017,260	$20,346,510
Restricted cash	1,057,866	1,057,866
Total assets	16,206,957	32,536,207
Total debt	4,449,330	1,894,330
Preferred shares subject to mandatory redemption	9,368,249	0
Total stockholders’ (deficit) equity	(9,417,514)	19,455,318

		ing useful information, EBITDA should not be considered in isolation or as a substitute for consolidated statement of operations and cash flows data prepared in accordance with generally accepted accounting principles. See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

(3)		The proforma as adjusted column of this consolidated balance sheet data table reflects (a) the conversion of all outstanding series C preferred shares into common stock upon completion of this offering, (b) the repayment of $1,555,000 in debt and $512,000 in interest payable to certain officers and directors, and (c) a transaction that occurred subsequent to June 30, 2004, whereby the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible note. These two notes aggregate $2,508,333 and automatically convert upon the completion of this Offering into 651,515 shares of common stock based upon a conversion price of $3.85 per share and (d) the issuance and sale by us of 3,325,000 shares of common stock and common stock purchase warrants in this offering at an assumed initial public offering price of $6.00 and $0.05, respectively, a fter deducting estimated underwriting discounts and commissions and estimated offering expenses, as if these events had occurred as of June 30, 2004.

•		our ability to obtain securities analyst coverage;
•		changes in securities analysts’ recommendations or estimates of our financial performance;
•		changes in market valuations of companies similar to us; and announcements by us or our competitors of significant contracts, new offerings, acquisitions, commercial relationships, joint ventures or capital commitments; and
•		the failure to meet analysts’ expectations regarding financial performances.

•		general economic and business conditions;
•		our business strategy for expanding our presence in our industry;
•		anticipated trends in our financial condition and results of operations;
•		the impact of competition and technological change;
•		existing and future regulations effecting our business; and
•		other risk factors set forth under “Risk Factors” in this prospectus.

	Application of	Percentage of
	Net Proceeds	Net Proceed

To fund the purchase of equipment for expanded capacity and service offerings	$ 2,000,000	11.7	%
Payment of certain indebtedness ⁽¹⁾	2,100,000	12.3
International deployment including purchase of business license, network equipment and securing letters of credit and bonds.	6,000,000	35.2
Marketing and Advertising	500,000	2.9
Working capital and general corporate purposes	6,466,250	37.9

Total	$17,066,250	100	%

•		On an actual basis, as of June 30, 2004.
•		On a pro forma basis to reflect (1) the automatic conversion of all of our outstanding series C preferred stock into an aggregate of 3,141,838 shares of common stock, which will occur upon completion of the offering, (2) the repayment of $1,555,000 in debt and $512,000 in interest payable to certain officers and directors and (3) a transaction that occurred subsequent to June 30, 2004, whereby the Company received net cash proceeds of $1,330,000 ($1,400,000 for a convertible note net of a $70,000 advisory fee) and refinanced $1,108,333 of existing notes payable and accrued interest in exchange for a convertible note. The two notes aggregate $2,508,333 and automatically convert upon the completion of this Offering into 651,515 shares of common stock based upon a conversion price of $3.85 per share.
•		On a pro forma as adjusted basis to give effect to the receipt of the net proceeds from the sale by us in this offering of shares of common stock and purchase warrants at an assumed initial public offering price of $6.00 per common share and $.05 per purchase warrant, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

	June 30, 2004

			Proforma
	Actual	Pro Forma	as adjusted

	(unaudited)	(unaudited)	(unaudited)
Cash and cash equivalents	$ 4,017,260	$ 3,280,260	$ 20,346,510

Long-term debt, including current portion:
Notes payable to related parties	2,794,100	239,100	239,100
Notes payable	150,000	150,000	150,000
Short-term borrowing obligations	536,450	536,450	536,450
Capital leases	968,780	968,780	968,780
Convertible preferred stock, series C, subject to mandatory redemption (a)	9,368,249	—	—
Stockholders’ deficit:
Common Stockholders’ equity (deficit):
Common stock, $0.01 par value: 105,000,000 shares authorized, 0 shares issued and outstanding, actual; 105,000,000 shares authorized, 3,793,353 shares issued and outstanding pro forma; 105,000,000 shares authorized, 7,118,353 shares issued and outstanding proforma, as adjusted		37,934	71,184
Common stock, class A $0.01 par value: 21,000,000 shares authorized, 17,338,273 shares issued and outstanding, actual; 21,000,000 shares authorized, 17,338,273 shares issued and outstanding pro forma; 21,000,000 shares authorized, 17,338,273 shares issued and outstanding, pro forma as adjusted	173,383	173,383	173,383
Capital in excess of par value	64,434,718	76,203,366	93,236,366
Stock dividend distributable	365,961	365,961	365,961
Accumulated other comprehensive income	100,825	100,825	100,825
Accumulated deficit	(74,492,401)	(74,492,401)	(74,492,401)

Total stockholders’ (deficit) equity	(9,417,514)	2,389,068	19,455,318

Total capitalization	$ 4,400,065	$ 4,283,398	$ 21,349,648


( a)		Each share of series C preferred stock is convertible into our common stock at a conversion price equal to the lesser of (i) 75% of the initial public offering price of common stock, or (ii) the voluntary conversion price then in effect.
(b)		The table above excludes the following: 1,660,772 shares of class A common stock issuable upon the exercise of options outstanding at June 30, 2004, at a weighted average exercise price of $8.61 per share; and 286,567 shares of class A common stock issuable upon the exercise of warrants outstanding at June 30, 2004, at a weighted average exercise price of $3.19 per share.

Initial public offering price per share		$6.00
Net tangible book value per share available to common stockholder as of June 30, 2004	$(0.54)
Increase attributable to pro forma adjustments before offering	$ 0.65

Pro forma net tangible book value per share before offering	$ 0.11
Increase per share attributable to new investors in the offering	$ 0.69

Pro forma net tangible book value per share after the offering		$0.80

Dilution per share to new investors in the offering		$5.20

	Shares purchased		Total consideration
					Average
	Number	Percent	Amount	Percent	price/share

Existing securityholders	21,131,626	86.40%	78,040,428	79.64%	$3.69
New investors	3,325,000	13.60%	19,950,000	20.36%	$6.00

Total	24,456,626	100.00%	97,990,428	100.00%

	Years Ended December 31,					Six months ended June 30,

	1999	2000	2001	2002	2003	2003	2004

Revenues	$ 3,714,290	$24,806,641	$ 29,614,565	$ 28,422,149	$33,725,275	$16,945,832	$26,978,042
Operating expenses:
Cost of revenues	3,926,451	16,886,171	24,591,188	25,443,863	29,246,014	14,518,282	23,179,782
Depreciation and amortization	1,647,904	745,145	2,069,361	2,546,869	2,128,610	1,083,818	1,075,375
Loss on impairment	—	6,861,412	2,825,149	467,765	735,354	194,001	—
Selling, general and administrative expenses	5,893,989	9,614,610	11,758,451	9,977,994	9,156,810	4,672,800	4,887,042

Operating loss	(7,754,054)	(9,300,697)	(11,629,584)	(10,014,342)	(7,541,513)	(3,523,069)	(2,164,157)

Other income (expense)
Interest expense, net	(63,120)	(113,436)	(595,116)	(1,175,714)	(919,590)	(458,988)	(860,510)
Forgiveness of debt	—	—	—	1,812,092	3,918,295	1,196,294	1,976,595
Other	—	—	—	—	—	—	37,980
Minority interests	531,317	2,017,389	112,472	19,440	157,617	56,060	79,539

	468,197	1,903,953	(482,644)	655,818	3,156,322	793,366	1,233,604

Loss from continuing operations	(7,285,857)	(7,396,744)	(12,112,228)	(9,358,524)	(4,385,191)	(2,729,703)	(930,553)
Discontinued operations:
Income (loss) from discontinued operations (1)	(25,949,828)	7,588,938	(7,029,511)	—	208,620	—	—

Net income (loss)	$(33,235,685)	$ 192,194	$(19,141,739)	$ (9,358,524)	$ (4,176,571)	$ (2,729,703)	$ (930,553)

Losses applicable to common stockholders:
Loss from continuing operations	$ (7,285,857)	$ (7,396,744)	$(12,112,228)	$ (9,358,524)	$ (4,385,191)	$ (2,729,703)	$ (930,553)

Preferred stock dividends	—	—	—	(642,552)	(635,254)	(82,016)	(385,918)
Net loss applicable to common stockholders from continuing operations	(7,285,857)	(7,396,744)	(12,112,228)	(10,001,076)	(5,020,445)	(2,811,719)	(1,316,471)
Income (loss) from discontinued operations	(25,949,828)	7,588,938	(7,029,511)	—	208,620	—	—
Net income (loss) applicable to common stockholders	$(33,235,685)	$ 192,194	$(19,141,739)	$(10,001,076)	$ (4,811,825)	$(2,811,719)	$(1,316,471)

•		*Capital fund-raising –* We raised $4.6 million to complete the second traunche of a series C convertible preferred stock offering that had been initiated in November of 2003. Additionally, we raised $1.3 million from a common stock offering that was initiated in 2003.
•		*Revenue Growth –* Revenue grew 59% in the first half of 2004 over the first half of 2003.
•		*Debt Reduction –* We further reduced debt by negotiating $2.0 million in reductions of outstanding vendor obligations through settlements, and by another $0.4 million that was paid off in outstanding vendor obligations and notes. In addition, the Company converted $0.6 million of debt to series C convertible preferred stock.
•		*Purchase of Veraz Switch –* In April of 2004, we purchased a Veraz softswitch which is now operational. Management believes that compared to older infrastructure, this switch is easier to expand with reduced deployment time. Management also believes this will further enhance our service offerings, flexibility and will allow us to size the network equipment to the traffic as the volume grows, rather than requiring heavy capital investments in anticipation of future revenue growth.

•		*Capital fund-raising –* In November 2003, we initiated a series C convertible preferred stock offering, with the first of two stock closings occurring in December 2003. In the first closing, the Company raised $2.5 million. We also raised $3.0 million from common stock purchases in 2003 initiated with the private placement from 2002, and we raised an additional $3.8 million from common stock purchases in 2003 associated with an equity offering initiated in 2003.
•		*Revenue Growth –* Revenue grew $5.3 million, or 18.7%, from the prior year, excluding discontinued operations.
•		*Debt Reduction –* We further reduced debt by negotiating $3.9 million in reduction of outstanding vendor obligations through settlements. We also converted $3.2 million in debt to preferred and common stock.
•		*Addition of San Jose Point of Presence –* In November of 2003, we added network equipment and a PoP in San Jose, California, to support service to Asia.
•		*Successful bid of Government Contracts –* We were awarded a subcontractor bid to be the provider for Internet access for seventeen U.S. Embassies and Consulates located in Asia and the Middle East, and we also were awarded a bid to supply a private network for the U.S. Department of Defense in the Persian Gulf.
•		*Reduced SG&A –* We reduced SG&A by $0.8 million, or 8%, from the prior year, while total revenues increased 18.7%.

•		*Revenue –* Revenue decreased $1.2 million, or 4%, from the prior year, excluding discontinued operations. This decrease was primarily attributable to the loss of two large voice networks.
•		*Pakistan J.V. –* We established a joint venture in mid 2002 that gave us a 75% equity interest in an entity which provides VoIP service to Pakistan.
•		*Efonica FC-LLC –* We established a joint venture in December of 2002 that gave us a 50.2% equity interest in a company that provides VoIP services to consumers and corporations throughout emerging markets in the Middle East, Africa, Asia and Latin America.
•		*Reduced SG&A –* SG&A decreased $1.8 million or 15.1% from 2001.

•		*Capital fund-raising –* We raised $4.2 million in an equity offering for series A preferred stock that was initiated in June of 2001, and closed in November of 2001. Additionally, we raised $0.8 million from a common stock offering.
•		*Revenue growth –* Revenue grew $4.8 million, or 19%, from the prior year, excluding discontinued operations.
•		*Divestiture of Domestic Retail Services –* In mid-2001, we divested the domestic retail telecommunications service by selling three different lines of business to three non-affiliated parties. This resulted in a loss from discontinued operations of approximately $7.0 million during 2001.

	Six Months Ended	Six Months Ended
	June 30, 2004	June 30, 2003

Net loss	$ (930,553)	$(2,729,703)
Adjustments:
Interest expense, net	860,510	458,988
Depreciation and amortization	1,075,375	1,083,818
Forgiveness of debt	(1,976,595)	(1,196,294)
Loss on impairment	0	194,001

EBITDA	$ (971,263)	$(2,189,190)

	Year Ended	Year Ended
	December 31, 2003	December 31, 2002

Net loss	$(4,176,571)	$(9,358,524)
Income from discontinued operations	(208,620)	0

Loss from continuing operations	(4,385,191)	(9,358,524)
Adjustments
Interest expense, net	919,590	1,175,714
Depreciation and amortization	2,128,610	2,546,869
Forgiveness of debt	(3,918,295)	(1,812,092)
Loss on impairment	735,354	467,765

EBITDA	$(4,519,932)	$(6,980,268)

Revenues		$ 4,274,000
Cost of revenues		(4,407,000)
Depreciation and amortization		(424,000)
Selling, general and administrative expenses		(5,049,000)
Interest expense		(60,000)
Accrual of office lease expenses		(1,073,000)
Write-off of leasehold improvements		(291,000)

Net loss		$(7,030,000)


(1)		These figures include an aggregate of approximately $2.2 million that was paid during the period to satisfy past obligations.

	Less than			More than
	1 year	1-3 years	3-5 years	5 years	Total

Contractual obligations:
Debt maturing within one year	$ 3,480,550	$ 0	$ 0	$ 0	$ 3,480,550
Preferred shares subject to mandatory redemption (1)		9,368,249	0	0	9,368,249
Capital leases	833,780	135,000	0	0	968,780
Operating leases	1,040,000	2,143,000	2,106,000	790,000	6,079,000
Minimum purchase commitments (2)	6,119,313	2,624,400	0	0	8,743,713

Total contractual cash obligations	$11,473,643	$14,270,649	$2,106,000	$790,000	$28,640,292

		.
•		*Managed private networks:* We offer managed end-to-end networks that typically connect multinational corporations or government facilities in emerging markets with locations in other countries. We also market this service to software developers, call centers, and telemarketing facilities, all of which rely on high quality, reliable service. In markets where we do not have network facilities deployed, we utilize other carriers’ networks, allowing us to provide an integrated global network that can connect a customer to virtually anywhere in the world. We also offer services on a private label basis as a subcontractor for other communication carriers that are seeking network connectivity to countries that they do not otherwise service.
•		Internet Access: We offer peering with multiple tier-one Internet backbone providers utilizing an intelligent routing capability. This ensures efficiency, speed and reliability. The tier-one providers we utilize own or control a national network that trades traffic with other national providers. This traffic trading is referred to as “peering.” A tier-one provider can carry its own Internet traffic across the country and hand it off at any one of the public or private hand-off locations known as “peering points,” metropolitan access points or national access points. In select locations such as India, we have established Internet PoPs that are then connected to our New York facility. This, in turn, provides interconnectivity with the Internet and peering with the top Internet backbone networks. In regions where we do not own network facilities, we utilize other carriers’ facilities. We also provide services on a private label basis as a subcontractor for other communication carriers that are seeking Internet access in countries that they do not otherwise service.
•		Internet video conferencing: We offer an Internet-based video conferencing service that can be initiated instantly on a personal computer (similar to popular instant messaging services) and can handle from two to two hundred participants per conference, of which six can be visually displayed. The service can be installed in a matter of minutes and only requires a standard camera and headset to operate. We are marketing our desktop video conferencing service directly to multinational corporations seeking to enhance face-to-face communications without the costly inefficiencies of business travel, and to our international partners to distribute within their country.
•		Co-location: 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.