Forward-Looking Statements

The discussion in this quarterly report regarding our business and operations includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "intend," "estimate" or "continue" or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. This disclosure highlights some of the important risks regarding our business. The number one risk of the Company is its ability to attract fresh and continued capital to execute its comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of the Company's significant contracts or partnerships, the Company's inability to maintain working capital requirements to fund future operations or the Company's inability to attract and retain highly qualified management, technical and sales personnel, and the other factors identified by us from time to time in our filings with the SEC. However, the risks included should not be assumed to be the only things that could affect future performance. We may also be subject to disruptions, delays in collections, or facilities closures caused by potential or actual acts of terrorism or government security concerns.

All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements.

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

                    Three Months Ended March 31, (unaudited)

                                                              2009           2008
Revenues                                                $    9,002,300 $   11,207,002
Operating expenses:
Cost of revenues, exclusive of depreciation and
amortization, shown separately below                         8,467,891     10,481,360
Depreciation and amortization                                  489,471        447,680
Selling, general, and administrative expenses (includes
approximately $35,000 and $114,000, non-cash
compensation for 2009 and 2008, respectively)                2,470,280      2,953,464
Advertising and marketing                                        7,496         11,452
Total operating expenses                                    11,435,138     13,893,956
Operating loss                                             (2,432,838)    (2,686,954)
Other income (expenses):
Interest income                                                    159          1,731
Interest expense                                              (95,940)       (17,390)
Gain on settlement of debt                                           -        634,991
Other                                                            2,215        (1,237)
Total other income (expenses)                                 (93,566)        618,095
Income (loss) from continued operations                    (2,526,404)    (2,068,859)
Discontinued operations:
Income (loss) from discontinued operations                   (479,811)      (294,130)
Net loss                                                $  (3,006,215) $  (2,362,989)

         FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

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


                    Three Months Ended March 31, (unaudited)

                                                                     2009     2008
Revenues                                                             100.0 %  100.0 %
Operating expenses:
Cost of revenues, exclusive of depreciation and amortization, shown
separately below                                                      94.1 %   93.5 %
Depreciation and amortization                                          5.4 %    4.0 %
Selling, general, and administrative expenses (includes
approximately $35,000 and $114,000 non-cash compensation for 2009
and 2008, respectively)                                               27.4 %   26.4 %
Advertising and marketing                                              0.1 %    0.1 %
Total operating expenses                                             127.0 %  124.0 %
Operating loss                                                      (27.0) % (24.0) %
Other income (expenses):
Interest income                                                        0.0 %    0.0 %
Interest expense                                                     (1.1) %  (0.2) %
Gain on settlement of debt                                             0.0 %    5.7 %
Other                                                                  0.0 %    0.0 %
Total other income (expenses)                                        (1.1) %    5.5 %
Income (loss) from continuing operations                            (28.1) % (18.5) %
Discontinued operations:
Income (loss) from discontinued operations                           (5.3) %  (2.6) %
Net loss                                                            (33.4) % (21.1) %

Revenues

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

The Company initiated its exit from the Consumer segment in the first quarter of 2009 that had previously been announced, and the Consumer revenues that have historically been reported with that segment have now been reclassified to discontinued operations.

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

Operating Expenses

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

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

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

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

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

Three Months Ended March 31, 2009 Compared with three months Ended March 31, 2008.

Revenues

Consolidated revenues were $9.0 million during the three months ended March 31, 2009, compared to $11.2 million during the three months ended March 31, 2008, a decrease of $2.2 million or 19.7%. Revenues for Carriers was $8.8 million during the three months ended March 31, 2009, compared to $11.2 million during the three months ended March 31, 2008, a decrease of $2.3 million or 20.7%, this decrease was primarily caused by a decrease in the blended rate per minute and a decrease in the number of minutes.
Revenues for Voice to Corporations and Other increased $0.1 million or 256.0%, to $153K during the three months ended March 31, 2009 from $43K during the three months ended March 31, 2008. This increase of $0.1 million or 218.9% is primarily caused by an increase in our retail business due to a larger customer base.

Cost of Revenues

Consolidated cost of revenues was $8.5 million during the three months ended March 31, 2009, compared to $10.5 million during the three months ended March 31, 2008, a decrease of $2.0 million or 19.2%. Cost of Revenues for Carriers was $8.4 million during the three months ended March 31, 2009, compared to $10.5 million during the three months ended March 31, 2008. A decrease of $2.1 million or 19.8%; this was the result of a decrease in the number of minutes consistent with the decrease in revenues.
Cost of revenues for VoIP to Corporations and Other during the three months ended March 31, 2009 were $100K, compared with $31K during the three months ended March 31, 2008, an increase of $57K or 185.3%. This increase is primarily due to an increase in our retail business, as we had to support a larger customer base during the first quarter of 2009 compared to the same period of 2008.

Operating Expenses

Depreciation and Amortization: Depreciation and amortization increased $42K or 9.3% to $0.49 million during the three months ended March 31, 2009, from $0.45 million during the three months ended March 31, 2008. The depreciation expense increased as more assets were placed into service during the first quarter of 2009 compared to the same period of 2008.

Selling, General and Administrative: Selling, general, and administrative expenses decreased $0.5 million or 16.4% during the three months ended March 31, 2009. This decrease is primarily attributable to decreases in the areas of communication, occupancy, consulting and travel and entertainment as the company focused in cost containment.

Operating Loss: Operating Loss: Our operating loss decreased $0.3 million or 9.5% to a loss of $2.4 million during the three months ended March 31, 2009, from a loss of $2.7 million during the three months ended March 31, 2008. The decrease in operating loss was primarily attributable to lower selling, general, and administrative expenses as a result of the company focus on cost curtailment.

Other Income (Expense): Total other income (expense) decreased $0.7 million from a gain of $0.6 million in the first quarter of 2008 to a loss of $0.1 million during the same period of 2009. During the quarter ended March 31, 2008, the company recorded $0.6 million associated with the extinguishment of debt with a foreign vendor. This vendor went into liquidation in 2005 and as of March 31, 2008 the balance had been outstanding for over 5 years and the Statue of Limitations of the foreign country's jurisdiction for any claims by the vendor had expired, resulting in a $0.6 million gain. In addition, during the quarter ended March 31, 2009, higher amounts of financing interest expense were charged from a non-related party.

Net Loss: Net loss increased $0.6 million, or 27.2% to $3.0 million during the three months ended March 31, 2009, from $2.4 million during the three months ended March 31, 2008. The main factors contributing to this decrease were decreased gross margin, increased interest expenses and the loss in discontinued operations experienced during the first quarter of 2009. Also, during the first quarter of 2008 the company had recorded a gain associated with the settlement of a debt.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating and net losses. In addition, we are not generating positive cash flow from operations. As of March 31, 2009, we had Stockholders' deficit of approximately $(7.1) million as compared to $(4.8) million at December 31, 2008, and a working capital deficit of approximately $10.9 million as compared to $8.6 million at December 31, 2008. During the three months ended March 31, 2009, we raised approximately $0.7 million from the sale of its securities through private placement financing (See Note 8 to the Condensed Consolidated Interim Financial Statements contained in this quarterly report on Form 10-Q). The proceeds have been and will continue to be used for working capital and general corporate purposes, international deployment, and to fund the development of our retail service offerings. We may seek further financing through the sale of debt or equity securities, although we have no commitments from any prospective purchaser of our securities..

Below is a summary of our cash flow 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:

                                                         THREE MONTHS ENDED MARCH 31,
                                                                  (unaudited)
                                                             2009              2008
Cash from continuing operations:
Cash used in operating activities                     $     (1,524,189)  $    (734,343)
Cash provided by (used in) investing activities                (12,010)       (171,958)
Cash provided by financing activities                         1,320,996       1,504,066
Increase(decrease) in cash and cash equivalents from
continuing operations                                         (215,203)         597,765
Cash from discontinued operations:
Cash provided by operating activities of
discontinuing operations                                         29,434          25,065
Cash provided by operating activities from
discontinued operations                                               -           7,470
Net increase in cash and cash equivalents from
discontinuing operations                                         29,434          32,535
Net increase (decrease) in cash and equivalents from
continuing and discontinuing operations                       (185,769)         630,300
Cash and cash equivalents, beginning of period                  427,433          70,883
Cash and cash equivalents, end of period              $         241,664 $       701,183

Sources of Liquidity

As of March 31, 2009, we had cash and cash equivalents of approximately $0.2 million. In addition, as of March 31, 2009 we had approximately $0.4 million of cash restricted from withdrawal and held by banks as certificates of deposits securing letters of credit (equal to the amount of the certificates of deposit).

From our inception through March 31, 2009, we financed our operations from cash provided from financing activities. These activities provided through net proceeds of approximately $23.3 million from our initial public offering (IPO), and the private placement of approximately $64.2 million of equity securities, $1.6 million from the exercise of Stock Options and Warrants, and $26.8 million from the issuance of notes. In addition, since inception we have financed the acquisition of $8.2 million of fixed assets through capital leases.

Uses of Liquidity

Our short-term and long-term liquidity needs arise primarily from principal and interest payments related to our capital lease/equipment financing obligations, capital expenditures, and 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 $38,000 thousand and $0.2 million for the three months ended March 31, 2009 and 2008, respectively. We expect our cash capital expenditures to be approximately $170,000 for the next nine months ending December 31, 2009. The 2009 estimated capital expenditures primarily consist of additional wholesale and corporate retail infrastructure development.

Cash used in operations was approximately $1.5 million and $0.7 million during the three months ended March 31, 2009 and 2008, respectively. The cash used in our operations has historically been a function of our net losses, expenses for property and equipment, and changes in working capital as a result of the timing of receipts and disbursements As we focus in our corporate and carrier sales, we expect our net cash used in operating activities to improve during future periods.

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

Debt Service Requirements

At March 31, 2009, we had approximately $4.1 million of current and long-term debt. This balance relates to notes payable and our capital leases. Of this amount, the portion of debt that is collateralized by a security interest in accounts receivable is $3,832,992.

Capital Instruments

In January 2009, the Company entered into subscription agreements with four (4) accredited investors, including two (2) directors, Marvin S. Rosen and Philip D. Turits for the sale of an aggregate 2,106,213 shares of Common Stock and five-year warrants to purchase 842,491 shares of Common Stock, in consideration for an aggregate of $0.4 million. The warrants are exercisable at prices that range from $0.20 to $0.22, which is equal to the respective closing price of the Company's Common Stock on the business day before each closing. Following these transactions, the Private Placement entered into in July of 2008 was closed.

In February 2009, the Company commenced a new private placement to raise working capital for the Company's operations. This private placement provides for the sale of up to $6 million of the Company's Common Stock. As of March 31, 2009, the Company has sold 2,112,672 shares of Common Stock for which proceeds of approximately $0.3 million were received, net of expenses of approximately $4,000. In addition, the Company issued five-year warrants to purchase 845,073 shares of Common Stock at an exercise price of 120% of the closing price of the Company's Common Stock the day before closing.

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 U.S., with no need for management 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, 2008, included in our Annual Report on Form 10-K. Our preparation of our Condensed Consolidated Interim 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 Condensed Consolidated Interim Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.

Revenue Recognition

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

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

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

Accounts Receivable and Allowance for Doubtful Accounts

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

Cost of Revenues and Cost of Revenues Accrual

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

Intangible Assets and Goodwill Impairment Testing

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

Income Taxes

We account for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires companies to recognize deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in our Condensed Consolidated Interim Financial Statements. Deferred tax liabilities and assets are determined based on the temporary differences between the Condensed Consolidated Interim 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 . . .