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In this paper we look at the problem of multi-sensor data fusion when data is being communicated over channels that drop packets randomly. We are motivated by the use of wireless links for communication among nodes in upcoming sensor networks. We wish to identify the information that should be communicated by each node to others given that some of the information it had transmitted earlier might have been lost. We solve the problem exactly for the case of two sensors and study the performance of the algorithm when more sensors are present. For the two-sensor case, the performance of our algorithm is optimal in the sense that if a packet is received from the other sensor, it is equivalent to receiving all previous measurements, irrespective of the packet drop pattern.