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





FORM
10-K


(mark
one)


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


For the
fiscal year ended July 31, 2010


or





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


For the
transition period from _______to _________





Commission
File Number:  001-15687





ATSI
COMMUNICATIONS, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
                  (State
      or Other Jurisdiction of Incorporation or Organization)
                
                74-2849995
                  (IRS
      Employer Identification No.)3201
      Cherry Ridge, Building C, Suite 300
                  San
      Antonio, Texas
                  (Address
      of Principal Executive Offices)
                
                78230
                  (Zip
      Code)





Registrant’s
Telephone Number, Including Area Code: (210) 614-7240





Securities
registered pursuant to Section 12(b) of the Act:  NONE





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





Common
Stock, Par Value $0.001 Per Share


(Title of
Class)





Indicate
by check mark if the registrant is a well-know seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈ Yes  x
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈ Yes  x
No





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.


x Yes   ̈ No





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


x Yes   ̈ No





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


x





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





Large
      accelerated filer   ̈
                
                Accelerated
      filer
                 ̈Non-accelerated
      filer     ̈
                
                Smaller
      reporting company
                x





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





The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the issuer
was $1,365,123 based on the closing price of $0.03 per share on January 31,
2010, as reported on the over-the-counter bulletin board.


There
were 45,504,120 shares of issuer’s Common Stock outstanding as of October 8,
2010.





TABLE
OF CONTENTS





PagePART
      IItem
      1.
                      Business
                      
                      3Item
      1A.
                      Risk
      Factors
                      
                      10Item
      1B.
                      Unresolved
      Staff Comments
                      
                      12Item
      2.
                      Properties
                      
                      12Item
      3.
                      Legal
      Proceedings
                      
                      12Item
      4.
                      (Removed
      and Reserved)
                      
                      12PART
      IIItem
      5.
                      Market
      for Registrant’s Common Equity; Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      13Item
      6.
                      Selected
      Financial Data
                      
                      13Item
      7.
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      14Item
      7A.
                      Quantitative
      and Qualitative Disclosures about Market Risk
                      
                      17Item
      8.
                      Financial
      Statements and Supplementary Data
                      
                      18Item
      9.
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
                      
                      35Item
      9A.
                      Controls
      and Procedures
                      
                      36Item
      9B.
                      Other
      Information
                      
                      36PART
      IIIItem
      10.
                      Directors,
      Executive Officers and Corporate Governance
                      
                      36Item
      11.
                      Executive
      Compensation
                      
                      38Item
      12.
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      42Item
      13.
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      43Item
      14.
                      Principal
      Accountant Fees and Services
                      
                      44PART
      IVItem
      15.
                      Exhibits,
      Financial Statement Schedules
                      
                      44SIGNATURES





PART I





ITEM
      1.
            BUSINESS.





Overview





We are an
international telecommunications carrier that utilizes the Internet to provide
cost-efficient and economical international telecommunication
services.  Our current operations consist primarily of providing
digital voice communications over the Internet using
Voice-over-Internet-Protocol (“VoIP”).  We provide high quality voice
and enhanced telecommunication services to carriers, telephony resellers and
other VoIP carriers through various agreements with service providers in the
United States, Mexico, Asia, the Middle East and Latin America.  Typically,
these telecommunications companies offer their services to the public for
domestic and international long distance services.  In addition, we
provide enhanced VoIP services, including fully hosted IP/PBX services, IP
trunking, call center applications, prepaid services, interactive voice response
auto attendant, call recording, simultaneous calling, voicemail to email
conversion, and multiple customized IP/PBX features in a hosted environment for
specialized applications.





History





ATSI Communications, Inc., a Nevada
corporation, was formed in 2004 as the successor to the business originally
incorporated in 1994 as a Canadian holding company, Latcomm International, Inc.,
with a Texas operating subsidiary, Latin America Telecomm, Inc.  We
operate through our wholly owned subsidiary, Digerati Networks, Inc.
(“Digerati”).  Digerati is a premier global VoIP carrier providing
international communication services that consist primarily of transporting
voice traffic across the world via the Internet.  Additionally, we own
49% of ATSI Comunicaciones S.A de C.V. (ATSICOM), a Mexican corporation that
holds a 30-year concession allowing for the sale of voice and data services,
long distance transport, and the operation of a telecommunications network in
Mexico.





Voice
over Internet Protocol Networks





The basic
technology of traditional telecommunications systems was designed for slow
mechanical switches.  Communications over the traditional telephone
network are routed through circuits that must dedicate all circuit resources to
each call from its inception until the call ends, regardless of whether anyone
is actually talking on the circuit.  This circuit-switching technology
incurs a significant cost per call and does not efficiently support the
integration of voice with data services.  Data networks, however, were
designed for electronic switching.  They break the data stream into
small, individually addressed packages of data (“packets”) that are routed
independently of each other from the origin to the
destination.  Therefore, they do not require a fixed amount of
bandwidth to be reserved between the origin and destination of each call and
they do not waste bandwidth when it is not being used for actual transmission of
information.  This allows multiple voice or voice and data calls to be
pooled, resulting in these networks being able to carry more calls with an equal
amount of bandwidth.  Moreover, they do not require the same complex
switching methods required by traditional voice telephone networks, instead
using a multiplicity of routers to direct each packet to its destination and
they automatically route packets around blockages, congestion or
outages.





Packet
switching can be used within a data network or across networks, including the
public Internet.  The Internet itself is not a single data network
owned by any single entity, but rather a loose interconnection of networks
belonging to many owners that communicate using the Internet Protocol
(“IP”).  By converting voice signals to digital data and handling the
voice signals as data, it can be transmitted through the more efficient
switching networks designed for data transmissions and through the Internet
using the IP.  The transmission of voice signals as digitalized data
streams over the Internet is known as Voice over Internet Protocol or
“VoIP”.  A VoIP network has the following advantages over traditional
networks:





·
            Simplification:An
      integrated infrastructure that supports all forms of communication allows
      more standardization, a smaller equipment complement, and less equipment
      management.


3


·
            Network
      Efficiency:  The integration of voice and data fills up
      the data communication channels efficiently, thus providing bandwidth
      consolidation and reduction of the costs associated with idle
      bandwidth.  This combined infrastructure can support dynamic
      bandwidth optimization and a fault tolerant design.  The
      differences between the traffic patterns of voice and data offer further
      opportunities for significant efficiency
  improvements.





·
            Co-existence with traditional
      communication mediums:IP telephony can be used in
      conjunction with existing PSTN switches, leased and dial-up lines, PBXs
      and other customer premise equipment (CPE), enterprise LANs, and Internet
      connections.  IP telephony applications can be implemented
      through dedicated gateways, which in turn can be based on open standards
      platforms for reliability and
scalability.





·
            Cost reduction: Under
      the VoIP network, the connection is directly to the Internet backbone and
      as a result the telephony access charges and settlement fees are
      avoided.





The
growth of voice over the Internet was limited in the past due to poor sound
quality caused by technical issues such as delays in packet transmission and by
bandwidth limitations related to Internet network capacity and local access
constraints.  However, the continuing addition of data network
infrastructure, improvements in packet switching and compression technology, new
software algorithms and improved hardware have substantially reduced delays in
packet transmissions and resulted in better sound
quality.  Nevertheless, certain VoIP routes into countries with
limited or poor Internet infrastructure continue to lack the consistent quality
required for voice transport and termination.





A number
of large long distance carriers have announced Internet telephony service
offerings.  Smaller Internet telephony service providers have also
begun to offer low-cost Internet telephony services from personal computers to
telephones and from telephones to telephones.  Traditional carriers
have substantial investments in traditional telephone network technology, and
therefore have been slow to embrace Internet technology.





We
believe that the infrastructure required for a global network is too expensive
for most companies to acquire and deploy on their own.  As a result,
many companies use a network consisting of a combination of gateways owned by
different operators.  For a network to achieve optimal functionality
and quality, however, the gateways need to be interoperable, or able to
communicate with one another.  Technological solutions have emerged
that support interoperability between different protocols and/or
gateways.  Cisco Systems, Inc. has emerged as a dominant supplier of
VoIP gateways and other manufacturers often seek to make their equipment
interoperable with Cisco.





Long
distance telephone calls transported over the Internet are less expensive than
similar calls carried over the traditional telephone network primarily because
the cost of using the Internet is not determined by the distance those calls
need to travel.  Also, routing calls over the Internet is more
cost-effective than routing calls over the traditional telephone network because
the technology that enables Internet telephony is more efficient than
traditional telephone network technology.  The greater efficiency of
the Internet creates cost savings that can be passed on to the consumer in the
form of lower long distance rates or retained by the carrier as higher
margins.





By using
the public Internet, VoIP providers like ATSI are able to avoid direct payment
for transport of communications, instead paying for large “pipes” into the
public Internet, billed by bandwidth rather than usage, which transmits calls to
a distant gateway.  The Internet, which has its origins in programs
devised by the Department of Defense to provide multiple routes and therefore
redundancy which was largely immune from the failure of a single network
element, provides great redundancy and can be “self healing” in the event of an
outage in a particular network element or transmission
path.  Moreover, adding an additional entry or exit point (a Point of
Presence or “PoP”) does not require any expensive or time consuming
reconfiguration or reprogramming of existing network elements.  The
new element is simply installed with a specific IP address and it can send or
receive information to or from any other IP address on the
Internet.





Strategy
and Competitive Conditions





The long
distance telephony market and the Internet telephony market are highly
competitive.  Our competitors include major telecommunications
carriers in the U.S., foreign telecommunications carriers (which may be owned by
foreign governments), and numerous small competitors.  We expect to
face continuing competition based on price and service offerings from existing
competitors and new market entrants in the future.  The principal
competitive factors in our market include price, coverage, customer service,
technical response times, reliability, and network size/capacity.  The
competitive landscape is rapidly altering the number, identity and
competitiveness of the marketplace, and we are unable to determine with
certainty the impact of potential consolidation in our
industry.


4


A number
of large long distance carriers have introduced services that make Internet
telephony or voice services over the Internet available to other
carriers.  All major telecommunications companies either presently do
or could route traffic to destinations worldwide and compete directly with
us.  Smaller Internet telephony service providers have also begun to
offer low-cost Internet telephony services from personal computers to telephones
and from telephones to telephones.  In addition, Internet service
providers and other companies currently in related markets have begun to provide
voice over the Internet services or adapt their products to enable voice over
the Internet services.  These related companies may migrate into the
Internet telephony market as direct competitors.





Many of
our competitors have substantially greater financial, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we
have.  As a result, certain of these competitors may be able to adopt
more aggressive pricing policies that could hinder our ability to market our
services.  We believe that our key competitive advantages are our
ability to deliver reliable, high quality voice service over the Internet in a
cost-effective manner.  We cannot provide assurances, however, that
these advantages will enable us to succeed against comparable service offerings
from our competitors.





Our strategy is to take advantage of
the increasing demand for international communication services and the global
shift from the traditional circuit switched network to the Internet for
transporting voice traffic.  We target traditional telephone companies
migrating towards voice over Internet protocol and emerging VoIP service
providers seeking reliable and competitively priced worldwide
routes.  We are also capitalizing on the continued global trend of
demonopolization of foreign telecommunications markets.  Historically,
telecommunication services in most foreign countries have been provided by
state-run companies, operating as a legal orde facto
monopoly.  Although these companies historically failed to satisfy the
demand for services in their countries, the regulatory scheme effectively
precluded competition by foreign carriers.  As the demonopolization
trend continues in the telecommunications industry throughout the world, many
foreign countries are in various stages of migration toward a competitive,
multi-carrier market.  This has created an opportunity for emerging
operators, that typically “leap frog” to the most recent VoIP technology, to
enter their respective market.





The
worldwide demand for telecommunications services has been strengthened
by:





·
            An
      expanding global market for voice communications growing at approximately
      10% per year





·
            Deregulation
      and demonopolization of government-owned telecommunication companies in
      foreign countries





·
            Global
      proliferation of communications devices such as mobile and VoIP
      phones





·
            Growth
      in ethnic communities in the United States; approximately 90 million
      people belong to an ethnic minority
group





·
            Increase
      in global trade and travel





·
            Declining
      rates for communication services as a result of increased
      competition





We operate through our wholly owned
subsidiary, Digerati Networks, Inc., a premier global VoIP carrier providing
international communication services that consist primarily of transporting
voice traffic via the Internet.  Digerati owns and operates its own
VoIP network in San Antonio, Texas for processing voice communication traffic
between the United States and rapidly expanding markets in Asia, Europe, the
Middle East, and Latin America.  Through Digerati, we have established
numerous partnerships with foreign carriers and network operators to provide our
international voice services.  In our VoIP operations, Digerati
receives voice traffic from originating carriers who are interconnected to its
network via the Internet and routes that traffic over the Internet to local
service providers and carriers in the destination countries with whom the
Company has agreements or partnerships to manage the completion of the
call.  Our global VoIP service enables carriers and other
communications service providers to outsource international voice and fax
traffic.


5


Our
customers, while cost conscious, are increasingly demanding high reliability and
quality in service delivery.  Sustainability and growth in this
segment depends on specific competitive advantages including foreign
partnerships or presence of an in-country business infrastructure, network
reliability, and favorable termination agreements for voice
traffic.  We compete with other telecom operators, including dominant
providers such as Qwest, IBASIS, and AT&T, for transport and termination of
international voice services.  We believe that our low cost of
operations, international relationships, and cost competitive strategy utilizing
VoIP technology provides us with a competitive advantage.  Our
strengths include our in-depth knowledge of, and relationships within, the
telecommunications industry in the United States and select foreign
markets.





We are
also utilizing a platform developed by NetSapiens, Inc. that allows us to offer
additional VoIP applications including IP/PBX services, IP trunking, prepaid
calling, call center applications, conferencing, messaging and other innovative
IP telephony functionality necessary to offer standard and/or custom services to
the Residentialand
Enterprise markets.  We are currently marketing these VoIP services to
potential customers through established channel partners that includes data
network providers, value added resellers, telecom operators, and wireless
Internet service providers.   Our strategy is to enable our
channel partners to provide specialized VoIP services to their established base
of customers, thus creating an additional source of revenue for us and our
channel partner.




Due to
the potential cost savings and added features of VoIP, consumers, enterprises,
traditional telecommunication service providers and cable television providers
view VoIP as the future of telecommunications. This is accelerating the
migration from traditional telephone service to VoIP services.  The
recent growth in VoIP services is primarily due to:




·
            Demand
      for a lower cost alternative to traditional telephone
    service;




·
            Improved
      quality and reliability of VoIP calls due to technological advances,
      increased network development and greater bandwidth capacity;
      and




·
            New
      product innovations that can be provided by VoIP services providers, but
      not currently offered by traditional telephone
  companies.





Government
Regulation





Our operations are subject to federal,
state and foreign laws and regulations.  There is significant
uncertainty regarding the application of the Communications Act of 1934 and the
regulations adopted by the Federal Communications Commission to Internet
telephone and there is a risk that either the FCC or Congress will impose common
carrier restrictions and other requirements of traditional telecommunications
providers to providers of VoIP services.





U.S
Federal and State Regulation of Carrier Services





We believe that, under U.S. law, the
Internet-related services that we provide constitute information services as
opposed to regulated telecommunications services, and, as such, are not
currently regulated as telecommunications common carriers by the Federal
Communications Commission (FCC) or state agencies charged with regulating
telecommunications carriers.  Nevertheless, aspects of our operations
may be subject to state or federal regulation, including regulations governing
universal service funding, disclosure of confidential communications and excise
tax issues.  We cannot provide assurances that Internet-related
services will not be actively regulated in the future.  Several
efforts have been made in the U.S. to enact federal legislation that would
either regulate or exempt from regulation services provided over the
Internet.  Increased regulation of the Internet may slow its growth,
particularly if other countries also impose regulations.  Such
regulation may negatively impact the cost of doing business over the Internet
and materially adversely affect our business, operating results, financial
condition and future prospects.


6


To date, the FCC has declined to
classify VoIP providers as telecommunications carriers for regulatory
purposes.  However, the FCC has ruled that certain traffic carried in
part utilizing the Internet protocol format was nonetheless regulated
telecommunications for which certain regulatory obligations
applied.  The FCC has considered whether to impose surcharges or other
common carrier regulations upon certain providers of Internet telephony,
primarily those which, unlike us, provide Internet telephony services directly
to end users.  The FCC ruled that interconnected VoIP service
providers must make contributions to the Universal Service
Fund.  Additionally, the FCC has a pending proceeding to further
examine the question of whether certain forms of VoIP services are information
services or telecommunications services.  The two are treated
differently in several respects, with certain information services being
regulated to a lesser degree.  The FCC has noted that certain forms of
phone-to-phone VoIP services bear many of the same characteristics as more
traditional voice telecommunications services and lack the characteristics that
would render them information services.  The FCC has indicated that
the issues as to applicability of access charges and other matters will be
considered in that context.  Adverse rulings or rulemakings could
subject us to licensing requirements and additional fees and
subsidies.





If the FCC were to determine that
certain Internet-related services including Internet telephony services are
subject to FCC regulations as telecommunications services, the FCC could subject
providers of such services to traditional common carrier regulation, including
payment of access charges to local telephone companies.  A decision to
impose such charges could also have retroactive effect.  It is also
possible that the FCC may adopt a regulatory framework other than traditional
common carrier regulation that would apply to Internet telephony
providers.  Any such determinations could materially adversely affect
our business, financial condition, operating results and future prospects to the
extent that any such determinations negatively affect the cost of doing business
over the Internet or otherwise slow the growth of the Internet.





Other
regulations affecting the Internet in the United States.





Congress has enacted legislation that
regulates certain aspects of the Internet, including online content, user
privacy and taxation.  In addition, Congress and other federal
entities are considering other legislative and regulatory proposals that would
further regulate the Internet.  Congress has, for example, considered
legislation on a wide range of issues including Internet spamming, database
privacy, gambling, pornography and child protection, Internet fraud, privacy and
digital signatures.  Various states have adopted and are considering
Internet-related legislation.  Increased U.S. regulation of the
Internet may slow its growth, particularly if other governments follow suit,
which may negatively impact the cost of doing business over the Internet and
materially adversely affect our business, financial condition, results of
operations and future prospects.  Legislation has also been proposed
that would clarify the regulatory status of VoIP service.  The Company
has no way of knowing whether legislation will pass or what form it might
take.





Domestic
Service Regulation.





We are considered a non-dominant
domestic interstate carrier subject to minimal regulation by the
FCC.  We are not required to obtain FCC authority to initiate or
expand our domestic interstate operations, but we are required to obtain FCC
approval to transfer control or discontinue service and to file various reports
and pay various fees and assessments.  Among other things, interstate
common carriers must offer service on a nondiscriminatory basis at just and
reasonable rates.  In addition, as a non-dominant carrier, we are
subject to the FCC’s complaint jurisdiction.


7


All interstate telecommunications
carriers are required to contribute to the federal universal service
programs.  The FCC currently is considering revising its universal
service funding mechanism.  We cannot predict the outcome of these
proceedings or their potential effect on us.  Although we currently do
not provide VoIP services to the end users or consumers, VoIP services that we
may provide in the future are not currently subject to direct regulation by the
FCC or state regulatory commissions to the extent that they qualify as
“enhanced” or “information” services.  The FCC defines enhanced
services as services that (1) employ computer processing applications that act
on the format, content, code, protocol or similar aspects of the subscriber’s
transmitted information, (2) provide the subscriber additional, different or
restructured information, or (3) involve subscriber interaction with stored
information.  In 1998, in a non-binding report, the FCC observed that
“computer-to-computer” VoIP may be appropriately considered to be unregulated
but that “phone-to-phone” VoIP may lack the characteristics that would render
them unregulated “information” services.  In February 2004, the FCC
ruled that free computer-to-computer VoIP service is not “telecommunications
service” and that it is an interstate “information service.”  Although
this order clarifies some of the relevant VoIP issues, the FCC has not yet
issued a formal decision as to whether other variations of VoIP services should
be subject to traditional common carrier telecommunications service regulation,
such as access charge obligations.  In March 2004, the FCC released a
Notice of Proposed Rulemaking (“NPRM”) regarding VoIP service.  The
NPRM specifically addresses the regulatory classification and jurisdiction of
VoIP; the application of access charges; and how to preserve key public policy
objectives such as universal service, 911/emergency services, law enforcement
surveillance requirements, and the needs of persons with
disabilities.  In November 2004, the FCC ruled that services provided
by a particular VoIP provider are interstate in nature, and not subject to entry
regulations of the various state Public Service Commissions.  The FCC,
however, declined to rule on whether the service is a regulated
telecommunications service or an unregulated information service.  In
addition, in December 2004, the United States Court of Appeals for the 8th
Circuit ruled that such VoIP provider’s service is not subject to state
regulation.  Subsequently, in a series of orders, the FCC has decided
to apply universal service, 911/emergency services, law enforcement surveillance
requirements, customer privacy requirements, and requirements relating to the
provision of services to speech and hearing-impaired persons to providers of
“interconnected” VoIP services (i.e., those that are capable of both originating
calls from and terminating calls to users of the public switched telephone
network), but in each case the FCC has explicitly declined to decide whether
such services are “telecommunications” services subject to more comprehensive
regulation.  Instead, the FCC continues to examine the appropriate
regulatory treatment of VoIP on a piecemeal basis.  While initial
indications from the FCC suggest that regulation of VoIP will be limited in
nature, the future regulatory treatment of other variations of VoIP by the FCC
and state regulatory bodies continues to be uncertain.  Furthermore,
Congressional dissatisfaction with the FCC’s treatment of IP telephony could
result in legislation requiring the FCC to impose greater or lesser
regulation.  Changes to, and further clarifications of, the treatment
of VoIP services could result in the imposition of burdensome regulation and
fees on some of our services and/or increase certain of our operating
costs.





International
Regulation





The regulatory treatment of Internet
telephony outside of the U.S. varies widely from country to
country.  A number of countries that currently prohibit competition in
the provision of voice telephony also prohibit Internet
telephony.  Other countries permit but regulate Internet
telephony.  Some countries will evaluate proposed Internet telephony
service on a case-by-case basis and determine whether it should be regulated as
a voice service or as another telecommunications service.  In many
countries, Internet telephony has not yet been addressed by legislation or
regulation.  Increased regulation of the Internet and/or Internet
telephony providers or the prohibition of Internet telephony in one or more
countries could materially adversely affect our business, financial condition,
operating results and future prospects.





The International Settlements Policy
governs settlements between U.S. carriers’ and foreign carriers’ costs of
terminating traffic over each other’s networks.  The FCC recently
enacted certain changes in rules designed to allow U.S. carriers to propose
methods to pay for international call termination that deviate from traditional
accounting rates and the International Settlement Policy.  The FCC has
also established lower benchmarks for the rates that U.S. carriers can pay
foreign carriers for the termination of international services and these
benchmarks may continue to decline.  These rule changes have lowered
the costs of our competitors to terminate traffic in the United States and are
contributing to the downward pricing pressure facing us in the carrier
market.





Other
General regulations





The Telecommunications Act of 1996 (the
“Telecom Act”), which became law in February 1996, was designed to dismantle the
monopoly system and promote competition in all aspects of
telecommunications.  The FCC has promulgated and continues to
promulgate major changes to their telecommunications regulations.  One
aspect of the Telecom Act that is of particular importance to us is that it
allows Bell Operating Companies or BOCs to offer in-region long distance service
once they have taken certain steps to open their local service monopoly to
competition.  The FCC has now granted such in-region long distance
authorization to BOCs throughout the nation.  Given their extensive
resources and established customer bases, the entry of the BOCs into the long
distance market, specifically the international market, has created increased
competition for us.





Although we do not know of any other
specific new or proposed regulations that will affect our business directly, the
regulatory scheme for competitive telecommunications market is still evolving
and there could be unanticipated changes in the competitive environment for
communications in general.  For example, the FCC is currently
considering rules that govern how Internet providers compensate local telephone
companies.  These rules could affect the role that the Internet
ultimately plays in the telecommunications market.


8


Concession
License





The
Secretaría de Comunicaciones y Transportes and Comisión Federal de
Telecomunicaciones or Federal Telecommunications Comisión (“COFETEL”) issued
ATSICOM a 30-year license in June 1998 to install and operate a public
network.  Under this license, ATSICOM is required to:





General
requirements





·
            Maintain
      approximately $10 million in registered and subscribed
      capital.


·
            Install
      and operate a network in Mexico according to an operating plan approved by
      the Mexican government.


·
            Continuously
      develop and conduct training programs for its
  staff.


·
            Designate
      an individual responsible for the technical functions to operate the
      concession.





Concession services
requirements





·
            Provide
      continuous and efficient services at all times to its
      customers.


·
            Establish
      a complaint center and correction facilities center and report to the
      Mexican government on a monthly basis the complaints received and the
      actions taken to resolve the
problems.





Tariff
Requirements





·
            Invoice
      its customer only tariffs rates that have been approved by the Mexican
      government.





Verification and Information
requirements





·
            Provide
      audited financial statements on a yearly basis that include a detailed
      description of the fixed assets utilized in the network and reporting by
      region and location of where the services are being
    provided.


·
            Provide
      quarterly reports and updates on the expansion of the network in Mexico
      and a description of the training programs and research and development
      programs.


·
            Provide
      statistical reports of traffic, switching capacity and other parameters in
      the network.





Guarantee
requirements





·
            Post
      a bond/insurance policy for approximately $500,000 payable to the Mexican
      Federal Treasury Department in the event the concession is revoked for
      failure to perform any of the
requirements.





Under
this concession, we have the right to terminate voice and data communications in
Mexico.  The revocation or modification of this concession would not
have a material adverse effect on our business.





Customers
and Suppliers





We rely
on various suppliers to provide services in connection with our communication
services.  We use various global VoIP companies to complete our voice
over Internet traffic between US, Mexico, Asia, the Middle East and Latin
America.  Our customers include traditional carriers, telephony
resellers and other VoIP carriers.  We are not dependent upon any
single supplier or customer.





Employees





As of
July 31, 2010, we had 11 employees, all of whom performed operational, technical
and administrative functions.  We believe our future success will
depend to a large extent on our continued ability to attract and retain highly
skilled and qualified employees.  We consider our employee relations
to be good.  None of these aforementioned employees belong to labor
unions.


9


ITEM
      1A.
            RISK
      FACTORS.





Our
business is subject to various operational and financial risks that could have
an adverse effect on our financial condition or our results of
operations.  In addition the general economic risks associated with
operation of a small company in a regulated industry dominated by large
well-financed competitors, some of the risk factors that may apply specifically
to us are set forth below.





Our results of operations fluctuate
from period to period.Our revenue and results of operations
have fluctuated and will continue to fluctuate from quarter to quarter in the
future due to a number of factors over which we have no control,
including:





·
            Many
      of our customers are not obligated to route a minimum amount of traffic
      over our system and the amount of traffic we handle may decline if our
      customers elect to route traffic over systems they operate or systems
      operated by other providers;


·
            increased
      competition from other telecommunication service providers or from service
      companies in related fields that offer telecommunication services may
      adversely affect the amount we can charge for traffic routed over our
      system;


·
            we
      may be required to reduce our charges for routing traffic to maintain high
      utilization of our equipment;


·
            the
      termination fees, connection fees and other charges from our
      suppliers;


·
            fraudulently
      sent or received traffic for which we are obligated to pay but which we
      are unable to bill to any customer;


·
            changes
      in call volume among the countries to which we complete
    calls;


·
            technical
      difficulties or failures of our network systems or third party delays in
      expansion or provisioning system components;
and


·
            our
      ability to manage our traffic on a constant basis so that routes are
      profitable.





Werely on third parties to provideandmaintainthenetworks over which we transmit
traffic.Our business model
depends on the availability of the Internet and traditional telephone networks
to transmit voice and data.  Third parties own and maintain the
equipment that translates calls from traditional voice networks to the Internet
and vice versa.  If the owners of these systems fail to maintain their
lines properly, fail to maintain the ability to terminate calls, or otherwise
disrupt our ability to provide service to our customers, our ability to complete
calls or provide other services could be interrupted.





Our suppliers could increase the cost
of services they provide or deny us access to systems that they
operate.We maintain relationships with communications service
providers in many countries and with other carriers to carry traffic on their
systems.  There is no assurance that these services will continue to
be available to us on acceptable terms, if at all.  If we are unable
to replace any provider that ceases to provide services to us on acceptable
terms, or to identify and develop relationships with new service providers, our
ability to provide services in certain countries may be adversely
affected.





We are subject to downward pricing
pressures and a continuing need to renegotiate overseas
rates.As a result of numerous factors, including increased
competition and global deregulation of telecommunications services, prices for
international long distance calls have been decreasing.  This downward
trend of prices to end-users has caused us to lower the prices we charge
communication service providers for call completion on our
network.  If this downward pricing pressure continues, we may not be
able to offer VoIP services at costs lower than or competitive with, the
traditional voice network services with which we compete.  Moreover,
in order for us to lower our prices, we have to renegotiate rates with our
foreign service providers who complete calls for us.  We may not be
able to renegotiate these terms favorably enough, or fast enough, to allow us to
continue to offer services in a particular country on a cost-effective
basis.  The continued downward pressure on prices and our inability to
renegotiate favorable terms in a particular country could have a material
adverse effect on our ability to operate our network.





We are subject to risks relating tooperationsin foreign
countries.Because we provide many of our services
internationally, we are subject to additional risks related to providing
services into foreign countries.  Associated risks
include:


10


·
            unexpected
      changes in tariffs, trade barriers and regulatory requirements relating to
      Internet access or VoIP;


·
            economic
      weakness, including inflation, or political instability in particular
      foreign economies and markets;


·
            difficulty
      in collecting accounts receivable;


·
            tax,
      consumer protection, telecommunications, and other
  laws;


·
            foreign
      currency fluctuations, which could result in increased operating expenses
      and reduced revenues; and


·
            unreliable
      government power to protect our
rights.





International governmental regulation
and legal uncertainties and other laws could limit our ability to provide our
services, make them more expensive, or subject us to legal
liability.Many countries currently prohibit or limit
competition in the provision of traditional voice telephony
services.  In some of those countries, licensed telephony carriers as
well as government regulators and law enforcement authorities have questioned
the legal authority of VoIP services.  Our failure to qualify as a
properly licensed service provider, or to comply with other foreign laws and
regulations, could materially adversely affect our business, financial
condition, and results of operations.  It is also possible that
countries may apply to our activities laws relating to services provided over
the Internet, including laws governing:





·
            user
      privacy;


·
            pricing
      controls and termination costs;


·
            characteristics
      and quality of products and
services;


·
            qualification
      to do business;


·
            consumer
      protection;


·
            cross-border
      commerce, including laws that would impose tariffs, duties and other
      import restrictions;


·
            copyright,
      trademark and patent infringement;
and


·
            claims
      based on the nature and content of Internet materials, including
      defamation, negligence and the failure to meet necessary
      obligations.





If
foreign governments or other bodies begin to impose related restrictions on VoIP
or our other services or otherwise enforce other laws against us or our foreign
suppliers, such actions could have a material adverse effect on our
operations.





If we are not able to keep up with
rapid technological change in a cost-effective way, the relative quality of our
services could suffer.The technology upon
which our services depend is changing rapidly.  Significant
technological changes could render the hardware and software that we use
obsolete, and competitors may begin to offer new services that we are unable to
offer.  If we are unable to respond successfully to these developments
or do not respond in a cost-effective way, we may not be able to offer
competitive services and our business results may suffer.





We may not be able to expand and
upgrade our network adequately and cost-effectively to accommodate any future
growth.Our
VoIP business requires that we handle a large number of international calls
simultaneously.  As we expand our operations, we expect to handle
significantly more calls.  If we do not expand and upgrade our
hardware and software quickly enough, we will not have sufficient capacity to
handle the increased traffic and growth in our operating performance would
suffer as a result.  Even with such expansion, we may be unable to
manage new deployments or utilize them in a cost-effective manner.  In
addition to lost growth opportunities, any such failure could adversely affect
customer confidence in our network and services.





Single points of failure on our
network may make our business vulnerable.We operate one network
control center in San Antonio, Texas.  We have not yet designed a
redundant system, provided for excess capacity, or taken other precautions
against platform and network failures as well as facility failures relating to
power, air conditioning, destruction, or theft.  We are vulnerable to
a network failure that may prohibit us from offering services.





We depend on our current personnel
and may have difficulty attracting and retaining the skilled employees we need
to execute our business plan.Our future success will
depend, in large part, on the continued service of our key management and
technical personnel.  If any of these individuals or others we employ
are unable or unwilling to continue in their present positions, our business,
financial condition and results of operations could suffer.


11


If the Internet infrastructure is not
adequately maintained, we may be unable to maintain the quality of our services
and provide them in a timely and consistent manner.Our future success will
depend upon the maintenance of the Internet infrastructure, including a reliable
network backbone with the necessary speed, data capacity and security for
providing reliability and timely Internet access and services.  To the
extent that the Internet continues to experience increased numbers of users,
frequency of use or bandwidth requirements, the Internet may become congested
and be unable to support the demands placed on it and its performance or
reliability may decline thereby impairing our ability to complete calls and
provide other services using the Internet at consistently high
quality.  The Internet has experienced a variety of outages and other
delays as a result of failures of portions of its infrastructure or
otherwise.  Future outages or delays could adversely affect our
ability to complete calls and provide other services.  Moreover,
critical issues concerning the commercial use of the Internet, including
security, cost, ease of use and access, intellectual property ownership and
other legal liability issues, remain unresolved and could materially and
adversely affect both the growth of Internet usage generally and our business in
particular.  Finally, important opportunities to increase traffic on
our network will not be realized if the underlying infrastructure of the
Internet does not continue to be expanded to more locations
worldwide.





Vulnerability of the Internet to
malicious activity.The Internet, and certain components
thereof, is susceptible to malicious damage or destruction by the creation and
distribution of software designed to interrupt or corrupt the transmission of
data, by concerted efforts to cause congestion, and other malicious
activities.  If such activities are successful in interrupting the
transmission of data between our network and the destination of the
transmission, it could have an adverse effect on client confidence in our
ability to maintain a stable and reliable network.  Since we do not
control access to the servers, gateways, and other components of the Internet
that are used to transmit traffic, we are not able to protect such components
from attack.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS.





Not Applicable





ITEM
      2.
            PROPERTIES.





Our
executive office is located at 3201 Cherry Ridge, Building C, Suite 300, San
Antonio, Texas, in leased space consisting of 3,618 square feet.  The
lease for this facility will expire on November 15, 2011.  We pay
annual rent of $53,398.  We believe that our leased facilities are
suitable and adequate for their intended use.





ITEM
      3.
            LEGAL
      PROCEEDINGS.





On December 12, 2008 we were sued in
the 133rd Judicial District of Harris County, Texas by Christian & Smith,
LLP and John M. O’Quinn & Associates, LLP.  The plaintiffs claimed
that we are the company responsible for the payment of contingent fees in
connection with a suit filed by the plaintiffs as our lawyers against The Shaar
Fund.  We have denied any liability for the contingent fees because the
case filed against The Shaar Fund was dismissed without recovering any
damages.  In July 2010 the case was dismissed against the Company and
all claims were dropped or nonsuited "without prejudice"", but the plaintiffs
retain their rights to pursue such claims against us in the
future.  We intend to vigorously defend such claims if the plaintiffs
reassert such claims.  No suit is pending as of July 31,
2010.





ITEM
      4.
            (REMOVED
      AND RESERVED)


12


PART II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES.





Market
for Common Equity





Our
common stock is quoted on the OTC Bulletin Board under the symbol
“ATSX”.  The following table sets forth the high and low bid prices
for our common stock for the two most recently completed fiscal years, as
reported by Bloomberg, LP.  Price quotations on the OTC Bulletin Board
reflect inter-dealer prices, without retail mark-up, markdown or commission, and
may not necessarily represent actual transactions.





Fiscal 2009
                      
                      Low
                      
                      
                      HighFirst Quarter
                      
                      $
                      0.13
                      
                      
                      $
                      0.23Second
      Quarter
                      
                      $
                      0.07
                      
                      
                      $
                      0.15Third
      Quarter
                      
                      $
                      0.04
                      
                      
                      $
                      0.08Fourth
      Quarter
                      
                      $
                      0.04
                      
                      
                      $
                      0.06Fiscal 2010
                      
                      Low
                      
                      
                      HighFirst Quarter
                      
                      $
                      0.03
                      
                      
                      $
                      0.05Second
      Quarter
                      
                      $
                      0.03
                      
                      
                      $
                      0.05Third
      Quarter
                      
                      $
                      0.03
                      
                      
                      $
                      0.07Fourth
      Quarter
                      
                      $
                      0.03
                      
                      
                      $
                      0.05





Holders





As of October 1, 2010 we had
approximately 6,706 common stockholders.





Dividends





We have
not paid cash dividends on our common stock because we have not generated
sufficient earnings.  We do not anticipate paying a dividend in the
future and expect to use all available earnings to provide funds for growth of
our business.





Equity
Compensation Plans





The following table provides
information regarding securities that have been or are authorized to be issued
under our equity compensation plans as of July 31, 2010:





Number of Securities to be
                  Issued Upon Exercise of
                  Outstanding Options,
                  Warrants and Rights
                
                
                Weighted-Average Exercise
                  Price of Outstanding
                  Options, Warrants and
                  Rights
                
                
                Number of Securities
                  Remaining Available for
                  Future Issuance Under
                  Equity Compensation PlansEquity
      Compensation plans approved by security holders
                
                
                -0-
                
                
                
                N/A
                
                
                
                -0-Equity
      Compensation Plans not approved by security holders
                
                
                7,404,000
                
                
                $
                .04
                
                
                
                10,096,000Total
                
                
                7,404,000
                
                
                $
                .04
                
                
                
                10,096,000





The material features of each equity
compensation plan are described in Note 10 of the Notes to the Financial
Statements.





ITEM
      6.
            SELECTED
      FINANCIAL DATA.





Not Applicable


13


ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.





SPECIAL
NOTE: This Annual Report on Form 10-K contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities and Exchange Act of 1934, as
amended.  “Forward looking statements” are those statements that
describe management’s beliefs and expectations about the future.  We
have identified forward-looking statements by using words such as “anticipate,”
“believe,” “could,” “estimate,” “may,”  “expect,” and “intend,” or
words of similar import.  Although we believe these expectations are
reasonable, our operations involve a number of risks and uncertainties,
including those listed in Item 1A of this Annual Report on Form 10-K and actual
results may be materially different than our expectations.





The
following is a discussion of the consolidated financial condition and results of
operations of ATSI Communications, Inc., for the fiscal years ended July 31,
2010 and 2009.  It should be read in conjunction with our Consolidated
Financial Statements, the Notes thereto, and the other financial information
included elsewhere in this annual report on Form 10-K.  For purposes
of the following discussion, fiscal 2010 or 2010 refers to the year ended July
31, 2010 and fiscal 2009 or 2009 refers to the year ended July 31,
2009.





Sources of revenue and direct
cost





Sources
of revenue:





VoIP Services: We currently
provide VoIP communication services to U.S. and foreign telecommunications
companies that lack transmission facilities, require additional capacity or do
not have the regulatory licenses to terminate traffic in Mexico, Asia, the
Middle East and Latin America.  Typically, these telecommunications
companies offer their services to the public for domestic and international long
distance services





Enhanced VoIP
Services:  We provide enhanced VoIP services to resellers and
enterprise customers.  The service include fully hosted IP/PBX
services, IP trunking, call center applications, prepaid services, interactive
voice response auto attendant, call recording, simultaneous calling, voicemail
to email conversion, and multiple customized IP/PBX features in a hosted
environment for specialized applications.





Direct
Costs:





VoIP Services:We incur transmission
and termination charges from our suppliers and the providers of the
infrastructure and network.  The cost is based on rate per minute,
volume of minutes transported and terminated through the
network.  Additionally, we incur fixed Internet bandwidth charges and
per minute billing charges.  In some cases we incur installation
charges from certain carriers.  These installation costs are passed on
to our customers for the connection to our VoIP network.





Enhanced VoIP
Services:  We incur bandwidth and co-location charges in
connection with enhanced VoIP Services.  The bandwidth charges are
incurred as part of the connection between our customers to allow them access to
our services.





Results
of Operations





The
following table sets forth certain items included in our results of operations
in thousands of dollars amounts and variances between periods for the years
ended July 31, 2010 and 2009.


14





Year
Ended July 31, 2010 Compared to Year ended July 31, 2009





Years
      ended July 31,2010
                                      
                                      
                                      2009
                                      
                                      
                                      Variances
                                      
                                      
                                      %OPERATING
      REVENUES:VoIP
      services
                                      
                                      $
                                      20,939
                                      
                                      
                                      $
                                      19,891
                                      
                                      
                                      $
                                      1,048
                                      
                                      
                                      
                                      5
                                      %Total
      operating revenues
                                      
                                      
                                      20,939
                                      
                                      
                                      
                                      19,891
                                      
                                      
                                      
                                      1,048
                                      
                                      
                                      
                                      5
                                      %Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                                      
                                      
                                      19,379
                                      
                                      
                                      
                                      18,533
                                      
                                      
                                      
                                      846
                                      
                                      
                                      
                                      5
                                      %GROSS
      MARGIN
                                      
                                      
                                      1,560
                                      
                                      
                                      
                                      1,358
                                      
                                      
                                      
                                      202
                                      
                                      
                                      
                                      15
                                      %Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                                      
                                      
                                      1,398
                                      
                                      
                                      
                                      2,157
                                      
                                      
                                      
                                      (759
                                      )
                                      
                                      
                                      -35
                                      %Legal
      and professional fees
                                      
                                      
                                      272
                                      
                                      
                                      
                                      353
                                      
                                      
                                      
                                      (81
                                      )
                                      
                                      
                                      -23
                                      %Bad
      debt expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2
                                      
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      -100
                                      %Depreciation
      and amortization expense
                                      
                                      
                                      165
                                      
                                      
                                      
                                      152
                                      
                                      
                                      
                                      13
                                      
                                      
                                      
                                      9
                                      %OPERATING
      INCOME (LOSS)
                                      
                                      
                                      (275
                                      )
                                      
                                      
                                      (1,306
                                      )
                                      
                                      
                                      1,031
                                      
                                      
                                      
                                      -79
                                      %OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                                      
                                      
                                      -
                                      
                                      
                                      
                                      108
                                      
                                      
                                      
                                      (108
                                      )
                                      
                                      
                                      -100
                                      %Interest
      income (expense)
                                      
                                      
                                      (144
                                      )
                                      
                                      
                                      (196
                                      )
                                      
                                      
                                      52
                                      
                                      
                                      
                                      -27
                                      %Total
      other income (expense), net
                                      
                                      
                                      (144
                                      )
                                      
                                      
                                      (88
                                      )
                                      
                                      
                                      (56
                                      )
                                      
                                      
                                      64
                                      %NET
      LOSS
                                      
                                      $
                                      (419
                                      )
                                      
                                      $
                                      (1,394
                                      )
                                      
                                      $
                                      975
                                      
                                      
                                      
                                      -70
                                      %NET
      LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                                      
                                      
                                      24
                                      
                                      
                                      
                                      (114
                                      )
                                      
                                      
                                      138
                                      
                                      
                                      
                                      -121
                                      %NET
      LOSS ATTRIBUTABLE TO ATSI COMMUNICATIONS, INC.
                                      
                                      $
                                      (395
                                      )
                                      
                                      $
                                      (1,508
                                      )
                                      
                                      $
                                      1,113
                                      
                                      
                                      
                                      -74
                                      %





Operating
Revenues.VoIP services revenue increased by $1,048,000, or
5%, from fiscal 2009 to fiscal 2010.  VoIP minutes carried by our
network on which we generated revenues increased by 30% from approximately
391,925,140 minutes of voice traffic during fiscal 2009 to approximately
510,317,281 minutes of voice traffic during fiscal 2010.  Despite the
increase in traffic, our average revenue per minute (ARPM) decreased by 19% from
$0.05068 during fiscal 2009 to $0.04088 for fiscal 2010.  The decline
in the ARPM is a direct result of the price pressures in the global markets
encountered in our industry.  The majority of our customers seek
higher quality destinations at a lowest possible cost per minute, thus the
constant balance between quality and price among international
carriers.





Cost of Services (exclusive of
depreciation and amortization).  The consolidated cost of
services increased by $846,000, or 5%, from fiscal 2009 to fiscal
2010.  The increase in cost of services is a direct result of the
increase in VoIP services revenue.  Cost of services, as a percentage
of revenue decreased slightly between periods, from 93.19% of revenue during
fiscal 2009 to 92.55% of revenue during fiscal 2010.  The decrease in
cost of services as a percentage of revenue is a result of decreases received
from our vendors during the period.  As a result of the increase in
VoIP revenues, our gross margin increased by $202,000 or 15% to $1,560,000 for
fiscal 2010 compared to $1,358,000 for fiscal 2009.





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).SG&A expenses decreased by $759,000, or 35%, from
fiscal 2009 to fiscal 2010.  The decrease is primarily attributable to
the decrease in non-cash compensation expense to employees.  During
fiscal 2009 we recognized $389,000 in non-cash compensation expense to
employees.  In comparison, we only recognized $22,334 in non-cash
compensation expense to employees during fiscal 2010. Additionally, we
recognized between periods a decrease in salaries of approximately $188,000.
This reduction in salaries was primarily due to the expense control measures
implemented during fiscal 2010.





Legal and Professional
Fees.  Legal and professional fees decreased between periods by
approximately $81,000, or 23%, from fiscal 2009 to fiscal 2010.  The
decrease is attributable to the decrease in investor relations fees, audit fees
and attorney's fees related to litigation.





Bad Debt
Expense.  Bad debt expense improved by $2,000, or 100%, from
fiscal 2009 to fiscal 2010.  During fiscal 2009, we recognized $2,000
in bad debt expense associated with uncollectible accounts.  We did
not incur similar expenses during fiscal 2010.


15


Depreciation and
Amortization.  Depreciation and amortization increased by
$13,000 or 9%, from fiscal 2009 to fiscal 2010.  The increase is
attributed to additional amortization expense associated with the new computers
acquired during fiscal 2010.





Operating Income
(loss).  The Company’s operating loss improved by $1,031,000,
or 79%, from fiscal 2009 to fiscal 2010.  The improvement in operating
loss between periods is a result of the increase in margin, decrease in SG&A
expenses and decrease in legal and professional fees between
periods.





Other Income
(expense).  Other expense increased by $56,000 from fiscal 2009
to fiscal 2010.  Other expense during fiscal 2009 included a gain on
early extinguishment of debt of $108,000 which was attributed to a discount
recognized as part of a settlement of a promissory note with The Shaar
Fund.  However, the gain was offset by interest expense of $196,000
recognized during the period. We did not recognize a gain on early
extinguishment of debt during fiscal 2010.





Net Loss.  Net loss
improved by $975,000 or 70%, from fiscal 2009 to fiscal 2010.  The
improvement in net loss between periods is attributed to the improvement between
periods in operating income and the decrease between periods in other
expenses.





Net Loss Attributable to
Noncontrolling Interest.  Loss attributed to noncontrolling
interest improved by $138,000, or 121%, from fiscal 2009 to fiscal 2010. During
fiscal 2009, we recognized $114,000 associated to the losses incurred in Fiesta
and Telefamilia, however, during fiscal 2010 we only recognized $24,000
associated to the losses incurred in Fiesta and Telefamilia.





Net Loss Attributable to ATSI
Communications, Inc.The Company reported a net loss of $395,000 for
fiscal 2010 compared to a net loss to common stockholders of $1,508,000 for
fiscal 2010.  The improvement in net loss to common stockholders
between periods is attributed to the increase in margin and the decrease in
SG&A expenses and the decrease in legal and professional fees between
periods.





Liquidity
and Capital Resources





Cash Position:  We
had a cash balance of $73,000 as of July 31, 2010.  Net cash consumed
by operating activities during fiscal 2010 was approximately $301,000. Investing
activities during the fiscal 2010 generated $263,000, consisting of $325,000
from the sale of certificates of deposit.  This was slightly offset by
$62,000 associated with the acquisition of various servers and
computers.  Financing activities during fiscal 2010 consumed $526,000
in cash.  The cash consumed during the period is associated with the
debt principal payments of $775,000 related to various notes payable and
principal payments of $1,000 associated with a capital lease
obligation.  Additionally, we received proceeds of $250,000 from
various promissory notes during fiscal 2010.  Overall, our net
operating, investing and financing activities during fiscal 2010 consumed
$564,000 of our available cash.





We are currently utilizing our
available cash to fund any deficiencies in our cash flows from
operations.  During fiscal years ended July 31, 2010 we received
$250,000 from Texas Ventures under three 24 month promissory
notes.  On August 2, 2010, we entered into a $750,000 revolving credit
facility with Thermo Credit to finance our expected growth during the year
ending July 31, 2011.





Our
current cash expenses are expected to be approximately $180,000 per month,
including wages, rent, utilities, corporate professional fees and debt
service.  We are currently using $162,000 in cash generated from
operations and approximately $18,000 per month of our available cash to cover
all monthly cash outflows.  We anticipate that the July 31, 2010 cash
balance of $73,000, the $750,000 revolving credit facility with Thermo Credit,
combined with our ability to raise additional cash from our funding sources and
expected net cash flow generated from future operations, will be sufficient to
fund our operations and capital asset expenditures for the next twelve
months.





Our
working capital (deficit) was $590,000 as of July 31, 2010.  This
represents a deficiency of $16,000 from our working capital (deficit) at July
31, 2009 of $574,000.


16


Critical
Accounting Policies





Revenue Recognition.We derive our
revenue from VoIP Services and Network Services.  Revenue is
recognized when persuasive evidence of an arrangement exists, service or network
capacity has been provided, the price is fixed or determinable, collectibility
is reasonably assured and there are no significant obligations
remaining.





We record
and report our revenue on the gross amount billed to our customers in accordance
with the following “gross indicators”:





·
            ATSI
      is the primary obligor in its
arrangements,


·
            ATSI
      has latitude in establishing
pricing,


·
            ATSI
      changes the product or performs part of the service and is involved in the
      determination of the product or service
  specifications,


·
            ATSI
      has discretion in supplier selection;
and


·
            ATSI
      assumes credit risk for the amount billed to the
  customer





We
recognize revenue from VoIP Services in the period the service is provided, net
of revenue reserves for potential billing credits.  Such disputes can
result from disagreements with customers regarding the duration, destination or
rates charged for each call.  ATSI recognizes enhanced VoIP services
revenue during the period the services are provided.





Direct Cost of Revenue.We incur termination
charges in connection with providing VoIP services and Internet, co-location and
fiber optic charges in connection with providing enhanced VoIP
services.  Termination charges, connection charges and other direct
costs of revenue are recognized during the period incurred.





Stock-based Compensation. We account
for share-based compensation in accordance with provisions on share-based
payments which requires measurement of compensation cost for all stock-based
awards at fair value on date of grant and recognition of compensation over the
service period for awards expected to vest.  The fair value of stock
options is determined using the Black-Scholes valuation model.  We use
the following key assumptions in determining the fair market value of its
options:





For
      the Years Ended July 31,2010
                        
                        
                        2009Expected
      dividends yield
                        
                        
                        0.00
                        %
                        
                        
                        0.00
                        %Expected
      stock price volatility
                        
                        
                        0.00
                        %
                        
                        
                        126%
      - 296
                        %Risk-free
      interest rate
                        
                        
                        0.00
                        %
                        
                        
                        2.28%
      - 3.48
                        %Expected
      life of options
                        
                        
                        N/A
                        
                        
                        3.75
      - 4.5 years





Derivative financial
instruments.  We do not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.  However,
we evaluate the application of derivative accounting for all convertible
financial instruments and freestanding warrants.





For
derivative financial instruments that meet the definition of liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income.  For option-based derivative financial
instruments, we use the Black-Scholes option-pricing model to value the
derivative instruments.  The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as
equity, is re-assessed at the end of each reporting
period.  Derivative instrument liabilities are classified in the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months of
the balance sheet date.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.





Not Applicable


17


ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageConsolidated
      Financial Statements of ATSI Communications, Inc. and
      SubsidiariesReport
      of Independent Registered Public Accounting Firm
                
                19Consolidated
      Balance Sheets as of July 31, 2010 and 2009
                
                20Consolidated
      Statements of Operations for the Years Ended July 31, 2010 and
      2009
                
                21Consolidated
      Statement of Changes in Stockholders’ Equity (Deficit) for the Years Ended
      July 31, 2009 and 2010
                
                22Consolidated
      Statements of Cash Flows for the Years Ended July 31, 2010 and
      2009
                
                23Notes
      to Consolidated Financial Statements
                
                24


18


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


ATSI
Communications, Inc.


San
Antonio, Texas





We have
audited the accompanying consolidated balance sheets ofATSI Communications,
Inc. and subsidiaries as of July 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders’ deficit and cash flows for
each of the two years then ended. These consolidated financial statements are
the responsibility of ATSI’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 standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. ATSI is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of ATSI’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ATSIas of July 31, 2010 and
2009 and the consolidated results of their operations and its cash flows for
each of the two years then ended in conformity with accounting principles
generally accepted in the United States of America.





MALONEBAILEY,
LLP


www.malonebailey.com


Houston,
Texas





October
8, 2010


19





PART
1. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share amounts)





July
      31,
                                
                                
                                July
      31,2010
                                
                                
                                2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                
                                $
                                73
                                
                                
                                $
                                637Certificates
      of deposit
                                
                                
                                -
                                
                                
                                
                                325Accounts
      receivable, net of allowance for bad debt of $10 and $10,
      respectively
                                
                                
                                526
                                
                                
                                
                                337Prepaid
      and other current assets
                                
                                
                                48
                                
                                
                                
                                77Total
      current assets
                                
                                
                                647
                                
                                
                                
                                1,376LONG-TERM
      ASSETS:Intangible
      Assets, net of amortization of $31 and $16, respectively
                                
                                
                                119
                                
                                
                                
                                134Property
      and Equipment
                                
                                
                                856
                                
                                
                                
                                794Less
      - accumulated depreciation
                                
                                
                                (727
                                )
                                
                                
                                (576
                                )Net
      property and equipment
                                
                                
                                129
                                
                                
                                
                                218Total
      assets
                                
                                $
                                895
                                
                                
                                $
                                1,728LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIES:Accounts
      payable
                                
                                $
                                637
                                
                                
                                $
                                585Accrued
      liabilities
                                
                                
                                106
                                
                                
                                
                                192Notes
      payable, net of unamortized discount of $1 and $33,
      respectively
                                
                                
                                409
                                
                                
                                
                                1,173Derivative
      liability
                                
                                
                                85
                                
                                
                                
                                -Total
      current liabilities
                                
                                
                                1,237
                                
                                
                                
                                1,950LONG-TERM
      LIABILITIES:Notes
      payable
                                
                                
                                639
                                
                                
                                
                                291Derivative
      liability
                                
                                
                                -
                                
                                
                                
                                85Other
                                
                                
                                16
                                
                                
                                
                                3Total
      long-term liabilities
                                
                                
                                655
                                
                                
                                
                                379Total
      liabilities
                                
                                
                                1,892
                                
                                
                                
                                2,329STOCKHOLDERS'
      DEFICIT:Preferred
      stock, 16,063,000 shares authorized, none issued
      and  outstanding
                                
                                
                                -
                                
                                
                                
                                -Common
      stock, $0.001 par value, 150,000,000 shares authorized, 45,504,120 and
      45,504,120 shares issued and outstanding,
      respectively
                                
                                
                                46
                                
                                
                                
                                46Additional
      paid in capital
                                
                                
                                73,276
                                
                                
                                
                                73,253Accumulated
      deficit
                                
                                
                                (74,182
                                )
                                
                                
                                (73,787
                                )Other
      comprehensive income
                                
                                
                                1
                                
                                
                                
                                1Total
      ATSI Communications, Inc. stockholders' deficit
                                
                                
                                (859
                                )
                                
                                
                                (487
                                )Noncontrolling
      interest
                                
                                
                                (138
                                )
                                
                                
                                (114
                                )Total
      stockholders' deficit
                                
                                
                                (997
                                )
                                
                                
                                (601
                                )Total
      liabilities and stockholders' deficit
                                
                                $
                                895
                                
                                
                                $
                                1,728





See
accompanying notes to financial statements


20





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





Years
      ended July 31,2010
                  
                  
                  2009OPERATING
      REVENUES:VoIP
      services
                  
                  $
                  20,939
                  
                  
                  $
                  19,891Total
      operating revenues
                  
                  
                  20,939
                  
                  
                  
                  19,891OPERATING
      EXPENSES:Cost
      of services (exclusive of depreciation and amortization)
                  
                  
                  19,379
                  
                  
                  
                  18,533Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                  
                  
                  1,398
                  
                  
                  
                  2,157Legal
      and professional fees
                  
                  
                  272
                  
                  
                  
                  353Bad
      debt expense
                  
                  
                  -
                  
                  
                  
                  2Depreciation
      and amortization expense
                  
                  
                  165
                  
                  
                  
                  152Total
      operating expenses
                  
                  
                  21,214
                  
                  
                  
                  21,197OPERATING
      INCOME (LOSS)
                  
                  
                  (275
                  )
                  
                  
                  (1,306
                  )OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  108Interest
      expense
                  
                  
                  (144
                  )
                  
                  
                  (196
                  )Total
      other expense
                  
                  
                  (144
                  )
                  
                  
                  (88
                  )NET
      LOSS
                  
                  
                  (419
                  )
                  
                  
                  (1,394
                  )NET
      LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
                  
                  
                  24
                  
                  
                  
                  (114
                  )NET
      LOSS ATTRIBUTABLE TO ATSI COMMUNICATIONS, INC.
                  
                  $
                  (395
                  )
                  
                  $
                  (1,508
                  )LOSS
      PER SHARE - BASIC AND DILUTED
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.04
                  )WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING - BASIC AND DILUTED
                  
                  
                  45,504,120
                  
                  
                  
                  40,043,303





See
accompanying notes to financial statements


21


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT


FOR
THE YEARS ENDED JULY 31, 2010 AND 2009


(In
thousands, except share amounts)





AdditionalCommon
                    
                    
                    Paid-in
                    
                    
                    Noncontrolling
                    
                    
                    Accumulated
                    
                    
                    Other
      Comp.Shares
                    
                    
                    Par
                    
                    
                    Capital
                    
                    
                    interest
                    
                    
                    Deficit
                    
                    
                    Income/Loss
                    
                    
                    TotalsBALANCE,
      July 31, 2008
                    
                    
                    39,550,415
                    
                    
                    
                    39
                    
                    
                    $
                    72,747
                    
                    
                    $
                    -
                    
                    
                    $
                    (72,393
                    )
                    
                    $
                    1
                    
                    
                    $
                    394Repurchase
      of common shares
                    
                    
                    (295,981
                    )
                    
                    
                    -
                    
                    
                    
                    (48
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (48
                    )Stock
      issued for services to employees
                    
                    
                    5,611,963
                    
                    
                    
                    6
                    
                    
                    
                    219
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    225Stock
      option expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    164
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    164Shares
      issued for conversion of notes payable
                    
                    
                    637,723
                    
                    
                    
                    1
                    
                    
                    
                    171
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    172Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (114
                    )
                    
                    
                    (1,394
                    )
                    
                    
                    -
                    
                    
                    
                    (1,508
                    )BALANCE,
      July 31, 2009
                    
                    
                    45,504,120
                    
                    
                    $
                    46
                    
                    
                    $
                    73,253
                    
                    
                    $
                    (114
                    )
                    
                    $
                    (73,787
                    )
                    
                    $
                    1
                    
                    
                    $
                    (601
                    )Stock
      option expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    22Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (24
                    )
                    
                    
                    (395
                    )
                    
                    
                    -
                    
                    
                    
                    (419
                    )BALANCE,
      July 31, 2010
                    
                    
                    45,504,120
                    
                    
                    $
                    46
                    
                    
                    $
                    73,276
                    
                    
                    $
                    (138
                    )
                    
                    $
                    (74,182
                    )
                    
                    
                    1
                    
                    
                    $
                    (997
                    )





See
accompanying notes to financial statements


22


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands, except per share amounts)





Years
      ended July 31,2010
                          
                          
                          2009CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      LOSS
                          
                          $
                          (419
                          )
                          
                          $
                          (1,394
                          )Adjustments
      to reconcile net loss to cash used in operating
activities:Gain
      on early extinguishment of debt
                          
                          
                          -
                          
                          
                          
                          (108
                          )Depreciation
      and amortization
                          
                          
                          165
                          
                          
                          
                          152Issuance
      of stock grants and options, for services
                          
                          
                          22
                          
                          
                          
                          389Provisions
      for losses on accounts receivables
                          
                          
                          -
                          
                          
                          
                          2Amortization
      of debt discount
                          
                          
                          32
                          
                          
                          
                          60Changes
      in operating assets and liabilities:Accounts
      receivable
                          
                          
                          (189
                          )
                          
                          
                          609Prepaid
      expenses and other
                          
                          
                          29
                          
                          
                          
                          (21
                          )Accounts
      payable
                          
                          
                          52
                          
                          
                          
                          (1,041
                          )Wells
      Fargo Factoring Collateral
                          
                          
                          -
                          
                          
                          
                          (18
                          )Accrued
      liabilities
                          
                          
                          7
                          
                          
                          
                          109Net
      cash used in operating activities
                          
                          
                          (301
                          )
                          
                          
                          (1,261
                          )CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in certificates of deposit
                          
                          
                          325
                          
                          
                          
                          (7
                          )Purchases
      of property & equipment
                          
                          
                          (62
                          )
                          
                          
                          (115
                          )Net
      cash provided by / ( used in) investing activities
                          
                          
                          263
                          
                          
                          
                          (122
                          )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                          
                          
                          (775
                          )
                          
                          
                          (542
                          )Acquisition
      of common stock
                          
                          
                          -
                          
                          
                          
                          (48
                          )Proceeds
      from Notes payables
                          
                          
                          250
                          
                          
                          
                          1,275Principal
      payments on capital lease obligation
                          
                          
                          (1
                          )
                          
                          
                          (3
                          )Net
      cash (used in) / provided by financing activities
                          
                          
                          (526
                          )
                          
                          
                          682DECREASE
      IN CASH AND CASH EQUIVALENTS
                          
                          
                          (564
                          )
                          
                          
                          (701
                          )CASH
      AND CASH EQUIVALENTS, beginning of period
                          
                          
                          637
                          
                          
                          
                          1,338CASH
      AND CASH EQUIVALENTS, end of period
                          
                          $
                          73
                          
                          
                          $
                          637SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for interest
                          
                          $
                          86
                          
                          
                          $
                          117Cash
      paid for income tax
                          
                          
                          -
                          
                          
                          
                          -NON-CASH  INVESTING
      AND FINANCING TRANSACTIONSIssuance
      of common stock for conversion of debt
                          
                          $
                          -
                          
                          
                          $
                          172Put
      option classified as derivative liability
                          
                          
                          -
                          
                          
                          
                          85Acquisition
      of fixed assets, conversion of  prepaid and accounts receivable,
      respectively
                          
                          
                          -
                          
                          
                          
                          64





See
accompanying notes to financial statements


23


ATSI
COMMUNICATIONS, INC.


AND
SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Description of
Business.  ATSI Communications, Inc. was incorporated in Nevada
on May 24, 2004. ATSI is an international telecommunications carrier that
utilizes the Internet to provide economical international communication services
to carriers and telephony resellers around the world. ATSI’s continuing
operations consist of VoIP carrier services and network services. ATSI’s primary
business consists of providing VoIP communication services to U.S. and foreign
telecommunications companies that lack transmission facilities and require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America. ATSI recently installed a
VoIP technology platform that allows the Company to offer other VoIP
applications including IP/PBX services, IP trunking, prepaid calling, call
center applications, conferencing, messaging and other innovative IP telephony
functionality.





Principles of
Consolidation.The consolidated financial statements include the accounts
of the Company, and its subsidiaries, which are either majority owned or
controlled by the Company. In accordance with ASC 810-10-05 which sets out the
guidance on consolidation of  variable interest entities, the Company
identifies entities for which control is achieved through means other than
through voting rights (a "variable interest entity" or "VIE") and determines
when and which business enterprise, if any, should consolidate the VIE. In
addition, the Company discloses information pertaining to such entities wherein
the Company is the primary beneficiary or other entities wherein the Company has
a significant variable interest. All significant intercompany transactions and
balances have been eliminated.





Reclassifications.
Certain amounts in the consolidated financial statements of the prior year have
been reclassified to conform to the presentation of the current year for
comparative purposes.





Use of
Estimates. In preparing financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenue and expenses in the statement of expenses. Actual
results could differ from those estimates.





Concentration of
Credit Risk.Financial instruments that potentially subject ATSI to
concentration of credit risk consist primarily of trade receivables. In the
normal course of business, ATSI provides credit terms to its
customers.  Accordingly, ATSI performs ongoing credit evaluations of
its customers and maintains allowances for possible losses, which, when
realized, have been within the range of management’s expectations. ATSI
maintains cash in bank deposits accounts, which, at times, may exceed federally
insured limits. ATSI has not experienced any losses in such accounts and ATSI
does not believe ATSI is exposed to any significant credit risk on cash and cash
equivalents.





Revenue
Recognition.ATSI derives revenue from two product offerings VoIP Carrier
Services and Enhanced VoIP Services. Revenue is recognized when persuasive
evidence of an arrangement exists, services have been provided, the price is
fixed or determinable, collectibility is reasonably assured and there are no
significant obligations remaining.





ATSI
records and reports its revenue on the gross amount billed to its customers in
accordance with the following indicators:





·
            ATSI
      is the primary obligor in its
arrangements,


·
            ATSI
      has latitude in establishing
pricing,


·
            ATSI
      changes the product or performs part of the service and is involved in the
      determination of the product or service
  specifications,


·
            ATSI
      has discretion in supplier selection
and


·
            ATSI
      assumes credit risk for the amount billed to the
  customer.


24


VoIP Service: ATSI
provides VoIP communication services to U.S. and foreign telecommunications
companies, who lack transmission facilities, require additional capacity or do
not have the regulatory licenses to terminate traffic in Mexico, Asia, the
Middle East and Latin America. Typically these telecommunications companies
offer their services to the public for domestic and international long distance
services. Carrier service revenue is derived through transporting and
terminating minutes of telecommunications traffic over ATSI’s owned or leased
VoIP network (Voice over Internet Protocol). ATSI recognizes revenue in the
period the service is provided, net of revenue reserves for potential billing
credits. Such disputes can result from disagreements with customers regarding
the duration, destination or rates charged for each call.





Enhanced VoIP
Services:  ATSI provides enhanced VoIP services to resellers
and enterprise customers. The service include fully hosted IP/PBX services, IP
trunking, call center applications, prepaid services, interactive voice response
auto attendant, call recording, simultaneous calling, voicemail to email
conversion, and multiple customized IP/PBX features in a hosted environment for
specialized applications. Currently Enhanced VoIP services are less than 0.01%
of total revenue.





Direct
Cost of Revenue.





VoIP
Services:Under
carrier services, ATSI incurs termination charges. These charges are related to
the fees that ATSI is charged by carriers/vendors for the termination of phone
calls into their infrastructure and network to terminate traffic in Mexico,
Asia, the Middle East and Latin America. The cost is based on a per minute rate
and volume. ATSI also incurs installation charges from various carriers; this
cost is passed on to customers for the connection to the VoIP network from
ATSI’s carriers.





Enhanced
VoIP Services: ATSI incurs bandwidth
and co-location charges in connection with enhanced VoIP Services. The bandwidth
charges are incurred as part of the connection between our customers to allow
them access to our services.





Certificates
of Deposit.





On July 23, 2009 ATSI purchased a
$215,000 certificate of deposit, with a one month maturity and a variable
interest rate of return, from Wells Fargo Bank. The certificate of deposit
automatically renews on a monthly basis.  The certificate of deposit
was terminated during the fiscal year ended July 31, 2010.





On July 9, 2009 ATSI purchased a
$110,000 certificate of deposit, with a monthly maturity and a variable interest
rate of return, from Wells Fargo Bank.  The certificate of deposit is
pledged as collateral on a $100,000 promissory note with Wells Fargo
Bank. The certificate of deposit automatically renews on a monthly
basis.  The certificate of deposit was terminated during the fiscal
year ended July 31, 2010.





Allowance for
Doubtful Accounts. Bad debt expense is recognized based on management’s
estimate of likely losses each year based on past experience and an estimate of
current year uncollectible amounts. As of July 31, 2010 and 2009, ATSI’s
allowance for doubtful accounts balance was approximately $10,000.





Investment
in unconsolidated subsidiaries.





ATSI Comunicaciones S.A de
C.V., (ATSICOM)





On May 22, 2003 ATSI sold 51% of its
interest in ATSI Comunicaciones S.A de C.V., (ATSICOM) As of July 31, 2008, ATSI
has a 49% interest in the profits and equity of ATSICOM, a Mexican corporation
engaged in providing telecommunication services. During fiscal 2003, ATSI
recorded the investment in the unconsolidated subsidiary in conformity with the
equity method of accounting. During the year ended July 31, 2004, ATSI
determined that the estimated future cash flows expected from the concession
license were less than its carrying value. As a result ATSI recorded an
impairment loss of approximately $702,000 to reduce the recorded value of the
concession license to zero. Although there is no assurance of future value
appreciation, from time to time ATSI will conduct a valuation of its investment
in the concession license and record the determined value, if any, in its
financial statements. As of July 31, 2010, nothing has come to management’s
attention that would require ATSI to make any adjustment to its financial
statement.


25





Property and
equipment.Property and equipment is recorded at cost. Additions are
capitalized and maintenance and repairs are charged to expense as incurred.
Gains and losses on dispositions of equipment are reflected in operations.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, which are one to five years.





Impairment of
Long-Lived Assets. ATSI reviews the carrying value of its long-lived
assets annually or whenever events or changes in circumstances indicate that the
value of an asset may no longer be appropriate. ATSI assesses recoverability of
the carrying value of the asset by estimating the future net cash flows expected
to result from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset’s carrying value and fair
value.





Derivative
financial instruments. ATSI does not use derivative instruments to hedge
exposures to cash flow, market, or foreign currency risks.  However,
ATSI analyzes its convertible instruments and free-standing instruments such as
warrants for derivative liability accounting.





For
derivative financial instruments that are accounted for as liabilities, the
derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as
charges or credits to income. For option-based derivative financial instruments,
ATSI uses the Black-Scholes option-pricing model to value the derivative
instruments.





The classification of derivative
instruments, including whether such instruments should be recorded as
liabilities or as equity, is re-assessed at the end of each reporting period.
Derivative instrument liabilities are classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative
instrument could be required within 12 months of the balance sheet
date.As of July 31, 2010 and 2009, ATSI has derivative
instruments related to warrants issued with debt (see Note 5)





Income
taxes. ATSI recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. ATSI provides a
valuation allowance for deferred tax assets for which it does not consider
realization of such assets to be more likely than not.





Since
January 1, 2007, ATSI accounts for uncertain tax positions in accordance with
the authoritative guidance issued by the FASB on income taxes which addresses
how an entity should recognize, measure and present in the financial statements
uncertain tax positions that have been taken or are expected to be taken in a
tax return. Pursuant to this guidance, ATSI recognizes a tax benefit only if it
is “more likely than not” that a particular tax position will be sustained upon
examination or audit. To the extent the “more likely than not” standard has been
satisfied, the benefit associated with a tax position is measured as the largest
amount that is greater than 50% likely of being realized upon settlement. No
liability for unrecognized tax benefits was recorded as of July 31, 2010 and
2009.





Stock-based
compensation. ATSI accounts for share-based compensation in
accordance with the provisions on share-based payments which require measurement
of compensation cost for all stock-based awards at fair value on date of grant
and recognition of compensation over the service period for awards expected to
vest.  The fair value of stock options is determined using the
Black-Scholes valuation model.





Basic and diluted
net loss per share. The basic net loss per common share is computed by
dividing the net loss by the weighted average number of common shares
outstanding.  Diluted net loss per common share is computed by
dividing the net loss adjusted on an “as if converted” basis, by the weighted
average number of common shares outstanding plus potential dilutive securities.
For the year ended July 31, 2010, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.


26




Fair Value of
Financial Instruments.For certain of our
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, the carrying amounts approximate fair
value due to the short maturity of these instruments. The carrying value of our
long-term debt approximates its fair value based on the quoted market prices for
the same or similar issues or the current rates offered to us for debt of the
same remaining maturities.





Recently issued
accounting pronouncements.During the second quarter of the year ended
July 31, 2010, the Company adopted FASB Accounting Standards
Codificationand the Hierarchy of Generally Accepted
Accounting Principles (GAAP”)which establishes the Codification as the
sole source for authoritative U.S. GAAP and will supersede all accounting
standards in U.S. GAAP, aside from those issued by the SEC. The adoption of the
Codification did not have an impact on the Company’s results of operations, cash
flows or financial position. Since the adoption of the ASC, the Company’s notes
to the consolidated financial statements will no longer make reference to
Statement of Financial Accounting Standards (SFAS) or other U.S. GAAP
pronouncements.





In
January 2010, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2010-06, Improving Disclosures about Fair
Value Measurements. This update provides amendments to Subtopic 820-10
and requires new disclosures for 1) significant transfers in and out of Level 1
and Level 2 and the reasons for such transfers and 2) activity in Level 3 fair
value measurements to show separate information about purchases, sales,
issuances and settlements. In addition, this update amends Subtopic 820-10 to
clarify existing disclosures around the desegregation level of fair value
measurements and disclosures for the valuation techniques and inputs utilized
(for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06
are applicable to interim and annual reporting periods beginning subsequent to
December 15, 2009, with the exception of Level 3 disclosures of purchases,
sales, issuances and settlements, which will be required in reporting periods
beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact
the Company’s operating results, financial position or cash flows and related
disclosures.





In
February 2010, FASB issued ASU No. 2010-09, Amendments to Certain Recognition
and Disclosure Requirements. This update amends Subtopic 855-10 and gives
a definition to the Securities and Exchange Commission filer, and requires SEC
filers to assess for subsequent events through the issuance date of the
financial statements. This amendment states that an SEC filer is not required to
disclose the date through which subsequent events have been evaluated for a
reporting period. ASU 2010-09 becomes effective upon issuance of the final
update. The Company adopted the provisions of ASU 2010-09 for the year ended
July 31, 2010.





ATSI does
not expect the adoption of any other recently issued accounting pronouncements
to have a significant impact on ATSI’s results of operations, financial position
or cash flows.





NOTE
2 - ACCOUNTS RECEIVABLE





On December 12, 2007, ATSI entered into
a $3,000,000 accounts receivable financing agreement with Wells Fargo Business
Credit (“WFBC”), a division of Wells Fargo Bank, N.A.  On March 26,
2008, WFBC increased the accounts receivable financing to
$5,000,000.  ATSI may offer to sell with recourse not less than
$350,000 and no more than $5,000,000 of its accounts receivable to WFBC each
month.  WFBC pays to ATSI 85% of the aggregate amount of each account
transferred under the Account Transfer Agreement.  Once the account is
collected by WFBC, it retains the amount originally paid for the account plus a
daily factoring rate of 0.0349% for each day outstanding measured from the
funding date and until the account is paid by ATSI’s customer.  If an
account is not paid within 90 days, ATSI must repurchase the account for the
amount that it originally received for the account and pay the factor rate that
has accrued prior to repurchase.  The factoring agreement is for
twelve months and ATSI can terminate this agreement upon 30 days written notice,
subject to a $15,000 early termination fee.  As of July 31, 2010 ATSI
had approximately $93,789 in outstanding factored accounts.  On August
4, 2010, ATSI terminated its financing agreement with WFBC.


27





NOTE
3 – INTANGIBLE ASSETS





During fiscal 2008 ATSI loaned
$150,000 to NetSapiens Inc. The note receivable had a maturity date of June 26,
2008 with interest at 8% per year. The note was secured by NetSapiens’
proprietary Starter Platform License and SNAPsolution modules.  On
June 26, 2008 ATSI converted the outstanding interest and principal balance into
a lifetime and perpetual NetSapiens’ License. The License provides ATSI with the
ability to offer Hosted PBX (PrivateBrancheXchange), IP Centrex
application, prepaid calling, call center, conferencing, messaging and other
innovative telephony functionality necessary to offer standard and/or custom
services to the Residential and Enterprise markets. The NetSapiens’ License is
being amortized equally over a period of 10 years.





NOTE
4 - PROPERTY AND EQUIPMENT





Following
is a summary of ATSI’s property and equipment at July 31, 2010 and 2009 (in
thousands):





Useful lives
                      
                      2010
                      
                      
                      2009Telecom
      equipment & software
                      
                      1-5
      years
                      
                      $
                      856
                      
                      
                      $
                      794Less:
      accumulated depreciation
                      
                      
                      
                      
                      (727
                      )
                      
                      
                      (576
                      )Net–property
      and equipment
                      
                      
                      
                      $
                      129
                      
                      
                      $
                      218





For the
years ended July 31, 2010 and 2009, depreciation and amortization totaled
approximately $165,000 and $152,000, respectively.


28


NOTE 5 – DEBT





At July
31, 2010 and July 31, 2009, outstanding debt consisted of the following: (In
thousands, except per share amounts).




July 31,
                                                                  
                                                                  
                                                                  July 31,2010
                                                                  
                                                                  
                                                                  2009Note
      payable to Alfonso Torres, payable upon maturity, bearing interest of
      6.00% per annum,maturing
      October 31, 2011, unsecured.
                                                                  
                                                                  $
                                                                  537
                                                                  
                                                                  
                                                                  $
                                                                  460Note
      payable to Wells Fargo Bank payable in monthly installments, bearing
      interest at  7.25%per
      annum, maturing July 25, 2010, collateralized by ATSI's certificates of
      deposit.
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  72Note
      payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
      payable in monthlyinstallments,
      bearing interest at 10.00% per annum, maturing September 10, 2010,
      collateralizedby
      ATSI's accounts receivables (other than accounts factored with Wells
      Fargo), $100,000certificate
      of deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally,
      weissued
      425,000 warrants to the note holders, at an exercise price per warrant of
      $0.19.The
      warrants have the following “Put” and “Call” rights: Put
      right. From and after thesecond
      anniversary of the notes payable, the holder shall have the right to
      request from ATSI,upon
      five (5) Business days prior notice, to acquire from the holders the
      warrants at a price$0.39
      per warrant. Call
      right.  At any time any warrants are outstanding, if the
      last sale price of ATSI’scommon
      stock is greater than $.80 per share for ten (10) consecutive trading
      days, ATSI shallbe
      entitled to require the purchaser to exercise the warrants and pay the
      exercise price thereforeupon
      five (5) business days written notice. Net of unamortized discount of $1
      and $33, respectively
                                                                  
                                                                  
                                                                  133
                                                                  
                                                                  
                                                                  
                                                                  604Note
      payable to San Antonio National Bank payable in monthly installments,
      bearing interestat
      8.00% per annum, maturing October 25, 2011, collateralized by ATSI's
      assets.
                                                                  
                                                                  
                                                                  189
                                                                  
                                                                  
                                                                  
                                                                  328Note
      payable to ATV Texas Ventures payable in monthly installments, bearing
      interestat
      12.00% per annum, maturing November 10, 2011, collateralized by ATSI's
      assets.
                                                                  
                                                                  
                                                                  69
                                                                  
                                                                  
                                                                  
                                                                  -Note
      payable to ATV Texas Ventures payable in monthly installments, bearing
      interestat
      12.00% per annum, maturing January 10, 2012, collateralized by ATSI's
      assets.
                                                                  
                                                                  
                                                                  77
                                                                  
                                                                  
                                                                  
                                                                  -Note
      payable to ATV Texas Ventures payable in monthly installments, bearing
      interestat
      12.00% per annum, maturing March 10, 2012, collateralized by ATSI's
      assets.
                                                                  
                                                                  
                                                                  43
                                                                  
                                                                  
                                                                  
                                                                  -Total
      outstanding debt long-term debt
                                                                  
                                                                  
                                                                  1,048
                                                                  
                                                                  
                                                                  
                                                                  1,464Current
      portion of long-term debt
                                                                  
                                                                  
                                                                  (409
                                                                  )
                                                                  
                                                                  
                                                                  (1,173
                                                                  )Long-term
      debt, net of current portion
                                                                  
                                                                  $
                                                                  639
                                                                  
                                                                  
                                                                  $
                                                                  291Payments
      on long-term debt of ATSI are due as follows:(in
      thousands)Fiscal
      2011
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  409Fiscal
      2012
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  639Total
      payments
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  1,048





ATSI analyzed these instruments for
derivative accounting consideration and determined that the warrants issued to
ATVF, Scott Crist, Roderick Ciaccioa & Vencore Solutions qualify as
derivative instruments, due to the put right.  ATSI estimated the fair
market value of the put to be the difference between the potential cash
settlement price per share and the exercise price, or approximately $85,000
which is the maximum amount of potential cash settlement by
ATSI.  Because the maximum cash settlement was greater than the fair
value of the warrants, ATSI recorded the maximum cash settlement of $85,000 as a
liability.  Additionally, ATSI analyzed the rest of the instruments
for derivative accounting and determined that liability treatment was not
applicable.


29


NOTE
6 – GAIN ON EARLY EXTINGUISHMENT OF DEBT





In December 2007, ATSI entered into a
promissory note payable with The Shaar Fund, Ltd.  The promissory note
was entered into as a result of the settlement agreement reached in which all
parties agreed to release each other from all claims relating to the Series D
Preferred Stock. As part of the settlement ATSI agreed to pay to The Shaar Fund,
Ltd. the sum of $75,000 in cash in December 2007 and issue to The
Shaar Fund a promissory note in the original principal amount of $450,000,
bearing interest at the rate of 7.5% per annum and payable in 16 quarterly
payments over 48 months.  If paid in full within the first 18 months,
ATSI is entitled to a discount of 22.5% on the then outstanding principal
balance.  On October 30, 2008, ATSI entered into a note discharged
agreement and agreed to pay to The Shaar Fund, Ltd. $290,000 to satisfy the
principal and accrued interest outstanding of $390,625 and $7,534,
respectively.  As a result of the discharge agreement, ATSI recognized
a gain on early extinguishment of debt of $108,160 for the year ended July 31,
2009.





NOTE
7 - INCOME TAXES





At July
31, 2010, ATSI had a consolidated net operating loss carry-forward (“NOL”) of
approximately $18,512,697 expiring in 2020 through 2029. The loss carry forwards
are subject to certain limitations under the Internal Revenue Code including
Section 382 of the Tax Reform Act of 1986.





ATSI
conducts a periodic examination of its valuation allowance. Factors considered
in the evaluation include recent and expected future earnings and ATSI’s
liquidity and equity positions. As of July 31, 2010, ATSI has determined that a
valuation allowance is necessary for the entire amount of deferred tax
assets.





Deferred tax assets are comprised of
the following as of July 31, 2010 and 2009:





2010
                  
                  
                  2009Net
      operating loss carryover
                  
                  $
                  6,479,000
                  
                  
                  $
                  6,183,000Valuation
      allowance
                  
                  
                  (6,479,000
                  )
                  
                  
                  (6,183,000
                  )Total
      deferred tax asset, net
                  
                  $
                  -
                  
                  
                  $
                  -





NOTE
8 - COMMITMENTS AND CONTINGENCIES





Leases:





ATSI
leases its office space with monthly payments of $4,367; the lease expires in
November 2011. The annual rent expense under the operating lease was $50,937 and
$52,398 for 2009 and 2010, respectively. The future minimum lease payments under
the operating lease are as follows:





FY2011
                  
                  
                  52,404FY2012
                  
                  
                  13,101





NOTE
9 – EQUITY





Common
Stock





During
the year ended July 31, 2009 ATSI issued:





-
            637,723
      common shares to the holders of the Convertible Debentures in lieu of the
      conversion of notes payable in the principal amount of $166,400 and
      accrued interest of $5,785 at a conversion price of $0.27, in accordance
      with the original terms of the notes which allowed for voluntary
      conversion by the company at a conversion price at the higher of (a) $0.27
      per share or (b) the average closing price of ATSI’s common stock for the
      10 days immediately preceding the date of
  conversion.





-
            5,611,963
      common shares to its employees and Directors for services
      rendered.  ATSI recorded the fair value of $225,000 as the
      compensation expense in its statement of
  operations


30





Preferred
Stock





The terms
of ATSI’s preferred stock restrict ATSI from declaring and paying dividends on
ATSI’s common stock until such time as all outstanding dividends have been
fulfilled related to the preferred stock. The outstanding preferred stock have
liquidation preference prior to common stock and ratably with each
other.





Series D Preferred
Stock





Series D
Preferred Stock was issued in February 2000. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum payable quarterly. The
Series D Preferred Stock and any accumulated, unpaid dividends may be converted
into Common Stock for up to two years at the lesser of a) the market price on
the day prior to closing or b) 83% of the five lowest closing bid prices on the
ten days preceding conversion. The terms of ATSI’s Series D Preferred Stock
allow for mandatory redemption by the holder upon certain conditions. The Series
D Preferred Stock allows the holder to elect redemption upon the change of
control of ATSI at 120% of the sum of $1,300 per share and accrued and unpaid
dividends. Additionally, the holder may elect redemption at $1,270 per share
plus accrued and unpaid dividends if ATSI refuses to honor conversion notice or
if a third party challenges conversion. The Series D Preferred Stock holders are
not entitled to vote.





On December 10, 2007, ATSI and The
Shaar Fund entered into a settlement agreement relating to certain
litigation.  ATSI paid $75,000 on December 12, 2007 and agreed to pay
another $450,000 with interest at 7.5% per annum in quarterly payments of
$16,667 on each of January 31, 2008 and April 30, 2008, and in quarterly
payments of $26,042 commencing on July 31, 2008 and continuing until April 30,
2012.  If paid in full within the first 18 months, ATSI will be
entitled to a discount of 22.5% on the then outstanding principal
balance.  On October 30, 2008, ATSI entered into a note discharged
agreement and subsequently paid The Shaar Fund, Ltd. $290,000 to satisfy the
principal and accrued interest outstanding of $390,625 and $7,534,
respectively.  As a result of the discharge agreement ATSI recognized
a gain on early extinguishment of debt of $108,160 for the year ended July 31,
2009.





NOTE
10 – STOCK-BASED COMPENSATION TO EMPLOYEES





In
September 2005, ATSI adopted its 2005 stock compensation plan.  This plan,
as amended, authorizes the grant of up to 17.5 million warrants, stock options,
restricted common shares, non-restricted common shares and other awards to
employees, Directors, and certain other persons.  The plan is intended
to permit ATSI to retain and attract qualified individuals who will contribute
to the overall success of ATSI.  ATSI’s Board of Directors determines
the terms of any grants under the plan.  Exercise prices of all
warrants, stock options and other awards vary based on the market price of the
shares of common stock as of the date of grant.  The warrants, stock
options, restricted common stock, non-restricted common stock and other awards
vest based on the terms of the individual grant.





During the year ended July 31, 2009,
ATSI granted:





- an
option to an employee to purchase 75,000 common shares at an exercise price of
$0.16 per share, the closing price of ATSI’s common stock on the grant date,
September 23, 2008.  The options vest equally at each anniversary of
the grant date over a three year period.  All options expire if not
exercised on or before the seventh anniversary of the grant
date.  ATSI recognized over the relevant service periods $9,990 of
non-cash compensation expense related to these  options.





- an
option to an employee to purchase 200,000 common shares at an exercise price of
$0.13 per share, the closing price of ATSI’s common stock on the grant date,
October 13, 2008.  The options vest equally at each anniversary of the
grant date over a three year period.  All options expire if not
exercised on or before the seventh anniversary of the grant
date.  ATSI recognized over the relevant service periods $22,156 of
non-cash compensation expense related to these options.





- an
option to an employee to purchase 60,000 common shares at an exercise price of
$0.13 per share, the closing price of ATSI’s common stock on the grant date,
November 4, 2008.  The options vest equally at each anniversary of the
grant date over a three year period.  All options expire if not
exercised on or before the seventh anniversary of the grant
date.  ATSI recognized over the relevant service periods $6,681 of
non-cash compensation expense related to these options.


31





- options
to two (2) employees to purchase an aggregate of 520,000 common shares at an
exercise price of $0.08 per share, the closing price of ATSI’s common stock on
the grant date, January 30, 2009, 250,000 vests September 1, 2009, 10,000 vests
November 1, 2009, 250,000 vests September 1, 2010 and 10,000 vests November 1,
2010.  All options expire if not exercised on or before the seventh
anniversary of the grant date.  ATSI recognized over the relevant
service periods $35,564 of non-cash compensation expense related to these
options.





- On
January 30, 2009, ATSI’s Board of Directors approved the amendment of previously
awarded stock options and as a result ATSI cancelled 8,239,000 stock options and
reissued 7,619,000 stock options to various employees.  The new
exercise price of these options is set at $0.08 per share, the closing price as
of the date of the amendment of the terms.  The options vested upon
issuance and will expire if not exercised on or before the seventh anniversary
of the grant date.  Under the guidance on share-based
payments,  a modification of the terms of an award that makes it more
valuable shall be treated as an exchange of the original award for a new
award.  In substance, the entity repurchases the original instrument
by issuing a new instrument of greater value, incurring additional compensation
cost for that incremental value.  The incremental value shall be
measured by the difference between (a) the fair value of the modified option
determined in accordance with the provisions of this section and (b) the value
of the old option immediately before its terms are modified, determined based on
the shorter of (1) its remaining expected life or (2) the expected life of the
modified option. Upon issuance, ATSI recognized $46,038 of non-cash incremental
compensation expense. These options were subsequently canceled during fiscal
2009.





- On July
16, 2009, ATSI’s Board of Directors approved the amendment of previously awarded
stock options and as a result ATSI cancelled 7,619,000 stock options and
reissued 7,619,000 stock options to various employees.  The new
exercise price of these options is set at $0.04 per share, the closing price as
of the date of the amendment of the terms.  The options vested upon
issuance and will expire if not exercised on or before the seventh anniversary
of the grant date.  Under the guidance on share-based payments, a
modification of the terms of an award that makes it more valuable shall be
treated as an exchange of the original award for a new award.  In
substance, the entity repurchases the original instrument by issuing a new
instrument of greater value, incurring additional compensation cost for that
incremental value.  The incremental value shall be measured by the
difference between (a) the fair value of the modified option determined in
accordance with the provisions of this section and (b) the value of the old
option immediately before its terms are modified, determined based on the
shorter of (1) its remaining expected life or (2) the expected life of the
modified option. Upon issuance, ATSI recognized $9,747 of non-cash incremental
compensation expense.





- On July
16, 2009, ATSI’s Board of Directors approved the amendment of previously awarded
stock options and as a result ATSI reissued 520,000 stock options to two
employees at an exercise price of $0.04 per share, the closing price as of the
date of the amendment of the terms, 250,000 vest September 1, 2009, 10,000 vest
November 1, 2009, 250,000 vest September 1, 2010 and 10,000 vest November 1,
2010.  All options expire if not exercised on or before the seventh
anniversary of the grant date.  ATSI recognized over the relevant
service periods $19,439 of non-cash compensation expense related to these
options.





During
the year ended July 31, 2009:





-
            ATSI
      forfeited 720,000 options to purchase common shares to various employees
      that were terminated during fiscal 2009. None of the options had
      vested.




32


During
the year ended July 31, 2010:





-
            ATSI forfeited 780,000 options to
      purchase common shares to various employees that were terminated or
      departed during fiscal 2010, 260,000 had vested at an exercise price of
      $0.04, which was higher than the market price at the time of termination
      or departure.





The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:





July 31,2009Expected
      dividends yield
                  
                  
                  0.00
                  %Expected
      stock price volatility
                  
                  
                  126%
      - 296
                  %Risk-free
      interest rate
                  
                  
                  2.28%
      - 3.48
                  %Expected
      life of options
                  
                  3.75
      - 4.5 years





ATSI
recognized $22,000 and $$388,000 in stock based compensation expense to
employees during years ended July 31, 2010 and 2009,
respectively.  Unamortized compensation cost totaled $2,778 and
$27,960 at July 31, 2010 and July 31, 2009, respectively.





ATSI
estimates the expected life of its options using the “simplified method” allowed
for under SAB 107 which is the average between the contract term and the
weighted average vesting period of the options.





The aggregate intrinsic value for the
options outstanding as of July 31, 2010 and 2009 is $0 and $68,340,
respectively.





A summary of the options as of July 31,
2010 and 2009 and the changes during the years ended July 31, 2010 and 2009 are
presented below:





Weighted-averageWeighted-average
                  
                  
                  remaining contractual2005 Stock Compensation Plan
                  
                  Options
                  
                  
                  exercise price
                  
                  
                  term (years)Outstanding
      at July 31, 2008
                  
                  
                  8,239,000
                  
                  
                  
                  0.19
                  
                  
                  
                  6Granted
                  
                  
                  16,613,000
                  
                  
                  
                  0.06
                  
                  
                  
                  7Forfeited
                  
                  
                  (16,578,000
                  )
                  
                  
                  0.14
                  
                  
                  
                  4Outstanding
      at July 31, 2009
                  
                  
                  8,274,000
                  
                  
                  
                  0.04
                  
                  
                  
                  7Granted
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  (780,000
                  )
                  
                  
                  0.04
                  
                  
                  
                  4Outstanding
      at July 31, 2010
                  
                  
                  7,494,000
                  
                  
                  
                  0.04
                  
                  
                  
                  4Exercisable
      at July 31, 2010
                  
                  
                  7,404,000
                  
                  
                  $
                  0.04
                  
                  
                  
                  4





NOTE
11 – WARRANTS ISSUED FOR SERVICES





During the year ended July 31, 2009,
ATSI issued warrants to purchase 425,000 common shares to ATVF, Scott Crist,
Roderick Ciaccio & Vencore solutions.





These warrants have the following “Put”
and “Call” rights:





Put right.  From
and after the second anniversary of the warrants, the holder has the right to
require ATSI to redeem the warrants upon five (5) Business days prior notice at
price of $0.39 per share of common stock.


33


Call
right.  At any time any warrants are outstanding ATSI may
require the purchaser to exercise the warrants and pay the exercise price
therefore upon five (5) business days written notice if the last sale price of
ATSI’s common stock is greater than $.80 per share for ten (10) consecutive
trading days.





The fair
value of the warrants was estimated to be $70,760 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:





Expected
      dividend yield
                  
                  
                  0.00
                  %Expected
      stock price volatility
                  
                  
                  131.4
                  %Risk-free
      interest rate
                  
                  
                  3.37
                  %Contractual
      life of warrants
                  
                  7
      years





ATSI analyzed these warrants for
derivative accounting consideration and determined that the warrants qualify as
derivative instruments due to the put right.  ATSI estimated the fair
market value of the put to be the difference between the potential cash
settlement price per share and the exercise price, or approximately $85,000
which is the maximum amount of potential cash settlement by
ATSI.  Because the maximum cash settlement was greater than the fair
value of the warrants, ATSI recorded the maximum cash settlement of $85,000 as a
liability.





A summary of the warrants as of July
31, 2010 and 2009 and the changes during the years ended July 31, 2010 and 2009
are presented below:




Weighted-averageWeighted-average
                    
                    
                    remaining contractualWarrants
                    
                    
                    exercise price
                    
                    
                    term (years)Outstanding
      at July 31, 2008
                    
                    
                    375,000
                    
                    
                    $
                    0.18
                    
                    
                    
                    4Granted
                    
                    
                    425,000
                    
                    
                    
                    0.19
                    
                    
                    
                    7Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at July 31, 2009
                    
                    
                    800,000
                    
                    
                    $
                    0.19
                    
                    
                    
                    5.5Granted
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      at July 31, 2010
                    
                    
                    800,000
                    
                    
                    $
                    0.19
                    
                    
                    
                    4.5Exercisable
      at July 31, 2010
                    
                    
                    800,000
                    
                    
                    $
                    0.19
                    
                    
                    
                    4.5





The
warrants outstanding as of July 31, 2010 and 2009 have an intrinsic value of
zero.





NOTE
12 – NON-STANDARDIZED PROFIT SHARING PLAN





We
currently provide a Non-Standardized Profit Sharing Plan.  The Board
of Directors approved the plan on September 15, 2006. Under the plan our
employees qualified to participate in the plan after one year of employment.
Contributions under the plan are based on 25% of the annual base salary of each
eligible employee up to $46,000 per year. Contributions under the plan are fully
vested upon funding.  During fiscal 2010 and 2009, we contributed
under the plan $0 and $174,000, respectively.





NOTE
13 – FINANCIAL CONSOLIDATION OF FIESTA COMMUNICATIONS





On May 1, 2008, ATSI sold all of the
outstanding shares of Telefamilia Communications, Inc. to Fiesta Communications,
Inc. for 975,000 shares of common stock in Fiesta Communications and $30,000 in
cash to be paid through a promissory note in July 2008.  With the 975,000
shares obtained from Fiesta, ATSI owns approximately 19.5% of Fiesta. 
Additionally, on May 1, 2008, Fiesta entered into convertible promissory note
with ATSI for $52,984, with a maturity date of May 1, 2011 and an interest rate
of 9%.  Under the convertible promissory note, Fiesta agreed to pay twelve
(12) equal quarterly payments of $5,088 starting on August 1, 2008 and
continuing each quarterly period thereafter until all accrued and unpaid
interest has been paid.


34




On October 31, 2008, ATSI and Fiesta
agreed to extend the maturity date on the $30,000 promissory note to April 30,
2009 and all other terms remained the same.  On October 31, 2008, Fiesta
entered into a note payable with ATSI for $95,000, with a maturity date of April
30, 2009 and an interest rate of 10%. Additionally, on October 31, 2008, Fiesta
paid in full to ATSI a promissory note with a principal balance of $35,000 and
$1,467 in accrued interest. During the year ended July 31, 2009, ATSI also
advanced additional $80,000 to Fiesta; the promissory note has a maturity date
of January 31, 2010 and an interest rate of 8%. This note is secured by Fiesta’s
assets, including contracts and intangible assets.




During the year ended July 31, 2009,
ATSI reconsidered its investment in Fiesta under the guidance on consolidation
of VIE's and concluded that because of the additional funding provided to Fiesta
during fiscal 2009, ATSI became the primary beneficiary of Fiesta. ATSI will
absorb a majority of losses of Fiesta. During year ended July 31, 2009, ATSI
financially consolidated Fiesta. All significant intercompany transactions and
balances were eliminated.





During the year ended July 31, 2010,
ATSI reconsidered its investment with Fiesta and determined that it no longer
qualified as a primary beneficiary under the guidance on consolidation of VIE’s
subsequent to the first quarter of the year ended July 31,
2010.  Consequently, Fiesta was no longer consolidated with ATSI as of
such date and the related investment was written off.





NOTE
14 – MAJOR CUSTOMERS AND MAJOR VENDORS




ATSI generated 15 percent of its
revenues from three customers during the year ended July 31, 2010 and 20 percent
of its revenues from three customers during the year ended July 31, 2009
Although the Company believes that in the event of loss of such customers, the
Company will still be able to generate comparable sales, there can be no
assurance concerning such revenues.




ATSI incurred 20 percent of its cost of
revenues to three vendors during the year ended July 31, 2010 and 28 percent of
its cost of revenues to three vendors during the year ended July 31, 2009. 
The Company believes that there are potential alternative vendors and that it
will be necessary to establish relationships with new providers. However, there
can be no assurance that the Company can establish such relationships or that
they will result in increased revenues.





NOTE
15 – SUBSEQUENT EVENT





On August 2, 2010, ATSI entered into a
$750,000 revolving credit facility with Thermo Credit, LLC., with a maturity
date of August 2, 2012.  This credit facility is secured by ATSI's
accounts receivables; bears an annual interest rate equivalent to the lesser of
the maximum rate (the maximum rate permitted by the United States federal law or
Louisiana law, whichever is greater) and the greater of the prime rate plus
8.25% and 11.5%, a commitment fee of 2% and weekly monitoring fee of .05%. The
credit facility requires interest and weekly monitoring fee payments during the
first twenty-three months and a balloon payment on the twenty-fourth month. ATSI
can terminate this agreement upon 30 days written notice, subject to a 4%
prepayment fee, calculated using the unpaid principal balance times the
prepayment fee and prorated based on the months still remaining before maturity.
Under the revolving credit facility,  ATSI is required to maintain the
following financial covenants: 1) A consolidated debt service coverage ratio,
for the 12-month period, of not less than 1.0 as of the last day of each quarter
and 2) A consolidated operating income, for the 12-month period, of not less
than zero as of the last day of each fiscal year





ITEM
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.





None


35


ITEM
      9A.
            CONTROLS
      AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





In
accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report.  Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of July 31, 2010.





Management’s
Report on Internal Control over Financial Reporting





Our management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rule 13a-15(f). Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework inInternal
Control—Integrated Framework  issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).




Based on
our evaluation under the framework inInternal Control—Integrated
Framework issued by COSO, our management concluded that our internal
control over financial reporting was effective as of July 31, 2010 in providing
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.





ITEM
      9B.
            OTHER
      INFORMATION.





None





PART III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.





Business
Experience





The following table contains the name,
age of our Directors and executive officers.





Name
                              
                              Age
                              
                              Position Held
                              
                              Held Office SinceArthur
      L. Smith
                              
                              45
                              
                              President,
      Chief Executive Officer and Director
                              
                              2003Ruben
      R. Caraveo
                              
                              42
                              
                              Sr.
      Vice President, Operations and Technology
                              
                              2006Antonio
      Estrada Jr.
                              
                              35
                              
                              Sr.
      Vice President, Finance & Corporate Controller
                              
                              2007John
      R. Fleming
                              
                              56
                              
                              Director,
      Interim Executive Chairman of the Board
                              
                              2002Murray
      R. Nye
                              
                              56
                              
                              Director
                              
                              1996





Our
Directors are elected for a term of one year and until their successors are
elected and qualified.  Our officers serve at the pleasure of the
Board of Directors and may be removed at any time.  We do not have an
employment contract or other agreement under which any person was elected as one
of our officers or Directors.  There are no family relationships
between any of our Directors or officers.




Arthur L. Smith has served as
our Chief Executive Officer and Director since May 2003.  Mr. Smith
also served as the President of ATSI de Mexico S.A de C.V. from August 2002 to
April 2003, as our Chief Executive Officer and a Director from June 1996 to July
2002 and as our President since our formation in June 1996 to July 1998.
 Mr. Smith also served as President, Chief Operating Officer and a Director
of ATSI-Canada since its formation in May 1994.  From December 1993 until
May 1994, Mr. Smith served in the same positions with Latcomm International
Inc., which amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in
May 1994.  Mr. Smith also served as Chairman of the Board of ATSI’s
subsidiary, Globalscape, Inc. (NYSE:GSB), until its spin-off and subsequent sale
in June 2002.  From June 1989 to December 1993, Mr. Smith was employed
as Director of international sales by GeoComm Partners, a satellite-based
telecommunications company located in San Antonio, providing telecommunications
services to Latin America.  Mr. Smith has over 20 years’ experience in
the telecommunications industry.


36





Ruben R. Caraveo has served
as our Sr. Vice President of Operations and Technology since August 2006, and is
also the President for our wholly-owned subsidiary Digerati Networks, Inc. 
Prior to joining ATSI, Mr. Caraveo served as Vice President of Vycera
Communications where he was responsible for overseeing wholesale carrier sales,
and daily operations, including Engineering, Marketing, and the Network
Operations Center.  His prior experience also includes management
positions with Worldtel Interactive, Frontier, and WorldCom.  Mr. Caraveo
has more than 20 years’ telecommunications industry experience, specializing in
the areas of Carrier Sales, Network Operations, Engineering, Data and Systems
Analysis, Product Marketing, and Systems Development.  Mr. Caraveo attended
California State University, Northridge, School of Engineering.





Antonio Estrada Jr.hasserved as our Sr. Vice
President of Finance since August 2007.  From May 2003 to July 2007,
Mr. Estrada served as the Corporate Controller.  From January 2002
through January 2003, Mr. Estrada served as our Director of International
Accounting and Treasurer.  From January 2001 to January 2002, Mr.
Estrada served in various roles, including International Accounting Manager and
General Accountant.  Prior to joining ATSI in 1999 he served as a
Senior Accountant for the Epilepsy Association of San Antonio and South
Texas.  Mr. Estrada has more than 12 years’ experience in the
telecommunications industry, financial reporting, treasury management, internal
audit, SOX compliance, and accounting.  Mr. Estrada graduated from the
University of Texas at San Antonio, with a Bachelors of Business Administration,
with a concentration in Accounting.





John R. Fleming has served as
our Non-executive Chairman of the Board since August 2002 and as one of our
Directors since January 2001.  Mr. Fleming is the principal and founder of
Vision Corporation, an early-stage investment company that focuses on
communications technologies, service and hardware.  Mr. Fleming also sits
on the board of Mediaxstream Communications which is a high definition delivery
system that services major studios and sports venues throughout the
country.  Prior to forming Vision Corporation, Mr. Fleming served as
President, International of IXC Communications, Inc. from April 1998 to December
1999.  Immediately prior to that he served as IXC’s President of Emerging
Markets from December 1997, as Executive Vice President of IXC from March 1996
through November 1997 and as Senior Vice President of IXC from October 1994
through March 1996.  He served as Vice President of Sales and Marketing of
IXC from its formation in July 1992 until October 1994.  Prior to that, Mr.
Fleming served as Director of Business Development and Director of Carrier Sales
of CTI from 1986 to March 1990 and as Vice President of Marketing and Sales of
CTI from March 1990 to July 1992.  Mr. Fleming was a Branch Manager for
Satellite Business Systems from 1983 to 1986 (a unit of IBM).





Murray R. Nye has served as
one of our Directors since our formation in June 1996.  Mr. Nye also
served as the Chief Executive Officer and a Director of ATSI-Canada from its
formation in May 1994.  From December 1993 until May 1994, Mr. Nye served
in the same positions with Latcomm International Inc., which company amalgamated
with Willingdon Resources Ltd. to form ATSI-Canada in May 1994.  From 1992
to 1995, Mr. Nye served as President of Kirriemuir Oil & Gas Ltd.  From
1989 until 1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again
currently self-employed as a consultant.  Mr. Nye serves as a Director of
D.M.I. Technologies, Inc., an Alberta Stock Exchange-traded
company.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our Directors
and executive officers and persons who own more than 10% of a registered class
of our equity securities to file various reports with the Securities and
Exchange Commission concerning their holdings of, and transactions in,
securities we issued.  Each such person is required to provide us with
copies of the reports filed.  Based on a review of the copies of such
forms furnished to us and other information, we believe that, during the fiscal
year ended July 31, 2010, none of our officers, Directors or owners of 10% of
any class of our securities failed to report transactions in our securities or
reported transactions in our securities late.


37


Code
of Ethics





We adopted an Executive Code of Ethics
that applies to the Chief Executive Officer, Chief Financial Officer, Controller
and other members of our management team.  The Executive Code of
Ethics may be viewed on our Website, www.atsi.net.  A copy of the
Executive Code of Ethics will be provided without charge upon written request to
ATSI Communications, Inc., 3201 Cherry Ridge, Building C, Suite 300, San
Antonio, Texas 78230.





Nominating
Committee and Nomination of Directors





We do not
have a formal nominating committee because the size of our Board of Directors is
too small to establish separate standing committees.  Our Directors
perform the function of a nominating committee.





The
Directors consider candidates recommended by other members of the Board of
Directors, by executive officers and by one or more substantial, long-term
stockholders.  In addition, the Board of Directors may seek candidates
through a third person recruiter.  Generally, stockholders who
individually or as a group have held 5% of our shares for over one year will be
considered substantial, long-term stockholders.  In considering
candidates, the Directors take into consideration the needs of the Board of
Directors and the qualifications of the candidate.  The Board of
Directors has not established a set of criteria or minimum qualifications for
candidacy and each candidate is considered based on the demonstrated competence
and knowledge of the individual.  To have a candidate considered by
the Directors, a stockholder must submit the recommendation in writing and must
include the following information:





·
            The
      name of the stockholder and evidence of ownership of our shares, including
      the number of shares owned and the length of time of ownership;
      and





·
            The
      name of the candidate, the candidate’s resume or a listing of her or his
      qualifications to be one of our Directors and the person’s consent to be
      named as a Director if nominated by the
  Directors.





The
stockholder’s recommendation and information described above must be sent to us
at 3201 Cherry Ridge, Building C, Suite 300, San Antonio, TX 78230 and, if the
nominee is to be elected at a meeting of the stockholders, must be received by
the Chief Executive Officer at least 180 days prior to the anniversary date of
our most recent annual meeting of stockholders.





Audit
Committee and Audit Committee Financial Expert





We do not have an audit or other
committee of our Board of Directors that performs equivalent
functions.  Our Board of Directors performs all functions of the audit
committee.  We do not have an audit committee financial expert because
none of our current Directors have the necessary training or experience to
qualify as a financial expert.





ITEM
      11.
            EXECUTIVE
      COMPENSATION.





Compensation
Discussion and Analysis





Our
compensation programs are designed to meet the following
objectives:





·
            Offer
      compensation opportunities that attract highly qualified executives,
      reward outstanding initiative and achievement, and retain the leadership
      and skills necessary to build long-term stockholder
  value;





·
            Emphasize
      pay-for-performance by maintaining a portion of executives’ total
      compensation at risk, tied to both our annual and long-term financial
      performance and the creation of stockholder value;
  and





·
            Further
      our short and long-term strategic goals and values by aligning executive
      officer compensation with business objectives and individual
      performance.





Our Board
of Directors believes that an executive’s compensation should be tied to the
performance of the individual and the performance of the complete executive team
against both financial and non-financial goals, some of which are subjective and
within the discretion of the Board of Directors.


38





Our executive
compensation program is intended to be simple and clear, and consists of the
following elements (depending on individual performance):





·
            Base
      salary;


·
            Annual
      performance-based cash bonus;


·
            Long-term
      incentives in the form of stock options;
and


·
            Benefits
      that are offered to executives on the same basis as our non-executive
      employees.





Role
of Management in Determining Compensation Decisions





At the
request of our Board of Directors, our management makes recommendations to our
Board of Directors relating to executive compensation program design, specific
compensation amounts, bonus targets, incentive plan structure and other
executive compensation related matters for each of our executive officers,
including our Chief Executive Officer.  Our Board of Directors
maintains decision-making authority with respect to these executive compensation
matters.





Our Board
of Directors reviews the recommendations of our management with respect to total
executive compensation and each element of compensation when making pay
decisions.  In allocating compensation among compensation elements, we
emphasize incentive, not fixed compensation to ensure that executives only
receive superior pay for superior results.  We equally value short-
and long-term compensation because both short- and long-term results are
critical to our success.  In addition, our compensation program
includes various benefits provided to all employees, including life insurance,
health insurance and other customary benefits.  The objectives and
details of why each element of compensation is paid are described
below.





Base Salary.Our
objective for paying base salaries to executives is to reward them for
performing the core responsibilities of their positions and to provide a level
of security with respect to a portion of their compensation.  We
consider a number of factors when setting base salaries for executives,
including:





·
            Existing
      salary levels;


·
            Competitive
      pay practices;


·
            Individual
      and corporate performance; and


·
            Internal
      equity among our executives, taking into consideration their relative
      contributions to our success.





Annual Incentive
Awards.Our objective for offering annual cash bonus awards to
our named executive officers is to motivate them to achieve our annual financial
goals, while taking into account their individual goals and responsibilities.
 Our Board of Directors implemented our executive officer bonus plan,
effective as of the first quarter of fiscal 2009 pursuant to which our named
executive officers became eligible to receive cash bonus awards calculated and
paid on a quarterly basis.  The amounts payable under our executive officer
bonus plan were to be calculated based on our revenue, margin, cash balance and
net income for 2010 against the 2010 financial plan approved by our Board of
Directors.





Under our
executive officer bonus plan, we assigned a specific bonus target to each
executive for performance during the fiscal year.  Our Board of Directors
designed these bonus targets to allow for additional compensation in the event
we meet our targets set fort under the financial plan approved by our Board of
Directors.  Cash bonus targets were determined based on individual
responsibility levels and performance expectations and would be payable in a
proportionate amount representing the percentage of our targeted corporate net
income goal pursuant to our financial plan for the fiscal year.  After
discussion and deliberation, our Board of Directors ultimately approved our
management’s recommendations as detailed below:





Name
                                          
                                          Title
                                          
                                          BonusArthur
      L. Smith
                                          
                                          President,
      Chief Executive Officer and Director
                                          
                                          $
                                          82,500Ruben
      R. Caraveo
                                          
                                          Sr.
      Vice President, Operations and Technology
                                          
                                          $
                                          74,250Antonio
      Estrada Jr.
                                          
                                          Sr.
      Vice President & Corporate Controller
                                          
                                          $
                                          60,500




39





Payouts
under our executive officer bonus plan are dependent on our achievement towards
our revenue, margin, cash balance and net income goal such that 100% of the
bonus target amounts would be paid upon achievement of 100% of the net income
goal.  Above and below target performance methodologies were also
established





We
consider the specific performance goals established in the 2009 and 2010
financial plan to be our confidential information, the disclosure of which would
cause us to experience financial harm.  We believe that tying annual
bonus payments for each of our named executive officers to the achievement of
challenging revenue, margin, cash balance and net income goals best aligns the
interest of our executives with the interests of our stockholders and promotes a
unity of purpose among our key business leaders.  Regardless of our
actual financial performance under our 2009 and 2010 financial plan, our Board
of Directors retained the discretion to adjust bonuses payable under our 2009
and 2010 executive officer bonus plan up or down as it deemed
appropriate.





Long-term Incentive
Awards.We award long-term incentive compensation to focus our
executives on our long-term growth and stockholder return, as well as to
encourage our executives to remain with us for the
long-term.  Long-term incentive awards are primarily in the form of
grants of stock options and/or stock award pursuant to our 2005 Stock
Compensation Plan (the “Plan”).  We selected this form because of the
favorable accounting and tax treatment and the expectation of key employees in
our industry that they would receive stock options and/or stock
grants.  We do not have pre-established target award amounts for
long-term incentive grants.  In determining long-term incentive awards
for the named executive officers, our Board of Directors relies on
recommendations from our Chief Executive Officer, who considers the individual
performance of the executives, the relation of the award to base salary and
annual incentive compensation, and associated accounting expense.  The
terms of and amount of awards are made by our Board of Directors in accordance
with the Plan.





SUMMARY
COMPENSATION TABLE





Name and Principal
                                                Position
                                              
                                              Year
                                              
                                              Salary
                                                ($)
                                              
                                              
                                              Bonus (1)
                                                ($)
                                              
                                              
                                              Stock
                                                Awards (2)
                                                ($)
                                              
                                              
                                              Option
                                                Awards
                                                Awards (2)
                                                ($)
                                              
                                              
                                              All Other
                                                Compensation (3)
                                                ($)
                                              
                                              
                                              Total
                                                ($)Arthur
      L. Smith
                                              
                                              2010
                                              
                                              $
                                              165,000
                                              
                                              
                                              $
                                              31,908
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              196,908CEO
      & President
                                              
                                              2009
                                              
                                              $
                                              165,000
                                              
                                              
                                              $
                                              76,767
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              2,168
                                              
                                              
                                              $
                                              35,429
                                              
                                              
                                              $
                                              279,364Ruben
      R. Caraveo
                                              
                                              2010
                                              
                                              $
                                              148,500
                                              
                                              
                                              $
                                              29,511
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              178,011Senior
      Vice President of Operations and Technology
                                              
                                              2009
                                              
                                              $
                                              148,500
                                              
                                              
                                              $
                                              66,185
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              1,887
                                              
                                              
                                              $
                                              39,165
                                              
                                              
                                              $
                                              255,737Antonio
      Estrada Jr.
                                              
                                              2010
                                              
                                              $
                                              121,000
                                              
                                              
                                              $
                                              27,858
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              148,858Senior
      Vice President of Finance & Corporate Controller
                                              
                                              2009
                                              
                                              $
                                              121,000
                                              
                                              
                                              $
                                              74,590
                                              
                                              
                                              $
                                              -0-
                                              
                                              
                                              $
                                              1,851
                                              
                                              
                                              $
                                              46,000
                                              
                                              
                                              $
                                              243,441





(1)
            Bonus
      amounts paid during fiscal 2010 are based on achieving monthly margin
      requirements as stipulated in the annual compensation
      plan.  Bonus amounts during fiscal 2009 were paid for achieving
      profitability and positive working capital during fiscal 2008 and one-time
      bonus for services provided in previous fiscal years without
      compensation.


(2)
            A
      description of the assumptions made in valuation of options granted can be
      found in Note 10 to the Financial Statements, which is deemed to be a part
      of this Item.


(3)
            All
      other compensation consists of contributions to the Non-Standardized
      Profit Sharing Plan.





Equity-based
Compensation Plans





Our Board of Directors adopted the 2005
Stock Compensation Plan (the “Plan”).  Under the Plan the Board of
Directors may grant up to 17,500,000 shares of our common stock to our officers,
Directors, employees and consultants.  Grants may be in the form of
incentive stock options, non-statutory stock options, restricted stock awards,
and/or unrestricted stock awards.  The number and terms of each award
is determined by the Board of Directors, subject to the limitation that the
exercise price of any option may not be less than the fair market value of the
common stock on the date of grant.  The Board of Directors has not
retroactively granted options, but has repriced options under the
Plan.  The following tables set forth information about the number of
grants made during fiscal 2010 and 2009 and the number of outstanding stock
options held by each of our named executive officers as of July 31,
2010.


40





GRANTS
OF PLAN-BASED AWARDS




Number of
                        Shares of Stock
                        or Units
                      
                      
                      Number of
                        Securities
                        Underlying
                        Options
                      
                      
                      Exercise
                        or Base
                        Price of
                        Option
                        Awards
                      
                      
                      Grant Date
                        Fair Value
                        of Stock and
                        OptionName
                      
                      Grant Date
                      
                      (#)
                      
                      
                      (#)
                      
                      
                      ($/Sh)
                      
                      
                      AwardsArthur
      L. Smith
                      
                      7/16/2009
                      
                      
                      885,737
                      (1)
                      
                      
                      1,695,000
                      (2)
                      
                      $
                      0.04
                      
                      
                      $
                      103,230Ruben
      R. Caraveo
                      
                      7/16/2009
                      
                      
                      979,130
                      (1)
                      
                      
                      1,475,000
                      (2)
                      
                      $
                      0.04
                      
                      
                      $
                      98,165Antonio
      Estrada, Jr.
                      
                      7/16/2009
                      
                      
                      1,150,000
                      (1)
                      
                      
                      1,447,000
                      (2)
                      
                      $
                      0.04
                      
                      
                      $
                      103,880





(1)
            Contributions
      to the Non-Standardized Profit Sharing Plan during fiscal
    2009


(2)
              This
      represents the repricing of previously issued stock options.  A
      description of the assumptions made in valuation of options granted can be
      found in Note 10 to the Financial Statements, which is deemed to be a part
      of this Item.





OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END




Option Awards
                                        
                                        Stock AwardsName
                                        
                                        Number of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options
                                          (#)
                                          Exercisable
                                        
                                        
                                        Number of
                                          Securities
                                          Underlying
                                          Unexercised
                                          Options
                                          (#)
                                          Unexercisable
                                        
                                        
                                        Option
                                          Exercise
                                          Price
                                          ($)
                                        
                                        Option
                                          Expiration
                                          Date
                                        
                                        Number of
                                          Shares or
                                          Units of
                                          Stock That
                                          Have Not
                                          Vested
                                          (#)
                                        
                                        
                                        Market
                                          Value of
                                          Shares or
                                          Units of
                                          Stock That
                                          Have Not
                                          Vested
                                          ($)Arthur
      L. Smith
                                        
                                        
                                        420,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/29/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -525,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        10/3/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -300,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/25/2016
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -450,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        8/15/2017
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Ruben
      R. Caraveo
                                        
                                        
                                        375,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/29/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -475,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        10/3/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -250,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/25/2016
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -375,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        8/15/2017
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Antonio
      Estrada Jr.
                                        
                                        
                                        347,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/29/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -475,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        10/3/2015
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -250,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        9/25/2016
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -375,000
                                        
                                        
                                        
                                        -
                                        
                                        
                                        $
                                        0.04
                                        
                                        8/15/2017
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -





Non-Standardized
Profit Sharing Plan





We
currently provide a Non-Standardized Profit Sharing Plan.  The Board
of Directors approved the plan on September 15, 2006.  Under the plan
our employees qualified to participate in the plan after one year of
employment.  Contribution under the plan by us is based on 25% of the
annual base salary of each eligible employee up to $46,000 per
year.  Contributions under the plan are fully vested upon
funding.  The following table contains certain information relating to
the benefits accrued under the Non-Standardized Profit Sharing Plan for the
named executive officers.


41


NONQUALIFIED
DEFERRED COMPENSATION





Name
                  
                  Executive
                    Contribution in
                    Last FY
                    ($)
                  
                  
                  Registrant
                    Contribution in
                    Last FY
                    ($)(1)
                  
                  
                  Aggregate
                    Earnings in Last
                    FY
                    ($)
                  
                  
                  Aggregate
                    Withdrawals
                    /Distributions
                    ($)
                  
                  
                  Aggregate
                    Balance at Last
                    FYE
                    ($)(2)Arthur
      L. Smith
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  35,429Ruben
      R. Caraveo
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  39,165Antonio
      Estrada, Jr.
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  -0-
                  
                  
                  $
                  46,000





(1)
            All
      amounts reported in this column are included as Other Compensation for
      fiscal 2010 in the Summary Compensation
Table.


(2)
            All
      amounts reported in this column are included as Other Compensation for
      fiscal 2009 in the Summary Compensation
Table.





Compensation
of Directors





Each
Director that is not an officer of the Company receives $2,000 for each meeting
of the Board attended in person and $500 for each meeting attended by
telephone.  In addition to the foregoing, each Director is reimbursed
the reasonable out-of-pocket expenses in connection with their travel to an
attendance at meetings of the Board of Directors.





Compensation
Committee Interlocks and Insider Participation





We do not have a compensation committee
of our Board of Directors or other committee that performs the same
functions.  Mr. Arthur L. Smith is presently our Chief Executive
Officer and serves on our Board of Directors and participates in deliberations
concerning executive compensation.





Compensation
Committee Report





Our Board of Directors reviewed and
discussed the Compensation Discussion and Analysis with management and, based on
such discussion, included the Compensation Discussion and Analysis in this
Annual Report on Form 10-K.





ITEM 12.
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS.





Information
regarding securities authorized to be issued under equity compensation plans is
set forth under Item 5 of this Annual Report on Form 10-K.





The
following table lists the beneficial ownership of shares of our Common Stock (i)
each person know to the Company to own more than 5% of the outstanding voting
securities issued by the Company, (ii) each Director and nominee, (iii) the
named executive officers, and (iv) all Directors and officers as a
group.  Information with respect to officers, Directors and their
families is as of July 31, 2010 and is based on the books and records of the
Company and information obtained from each individual.  Information
with respect to other stockholders is based upon the Schedule 13D or Schedule
13G filed by such stockholders with the Securities and Exchange
Commission.  Unless otherwise stated, the business address of each
individual or group is the same as the address of the Company’s principal
executive office and all securities are beneficially owned solely by the person
indicated.


42





NAME OF
                                                            
                                                            COMMON
                                                            
                                                            
                                                            % OFINDIVIDUAL OR GROUP
                                                            
                                                            STOCK
                                                            
                                                            
                                                            CLASS (1)INDIVIDUAL
      OFFICERS,DIRECTORS
      AND NOMINEESArthur
      L. Smith
                                                            
                                                            
                                                            3,725,889
                                                            (2)
                                                            
                                                            
                                                            7.1
                                                            %President,
      Chief Executive OfficerDirectorRuben
      R. Caraveo
                                                            
                                                            
                                                            2,984,279
                                                            (3)
                                                            
                                                            
                                                            5.7
                                                            %Sr.
      Vice President, Sales and OperationsAntonio
      Estrada Jr.
                                                            
                                                            
                                                            3,169,828
                                                            (4)
                                                            
                                                            
                                                            6.1
                                                            %Sr.
      VP of Finance & Corporate ControllerJohn
      R. Fleming
                                                            
                                                            
                                                            2,350,090
                                                            (5)
                                                            
                                                            
                                                            4.5
                                                            %DirectorMurray
      R. Nye
                                                            
                                                            
                                                            2,350,090
                                                            (6)
                                                            
                                                            
                                                            4.5
                                                            %DirectorALL
      OFFICERS ANDDIRECTORS
      AS A GROUP
                                                            
                                                            
                                                            14,580,176
                                                            (7)
                                                            
                                                            
                                                            27.9
                                                            %





(1)
            Based
      upon 52,271,120 shares of common stock outstanding as of July 31,
      2010.  Any shares represented by options exercisable within 60
      days after July 31, 2010 are treated as being outstanding for the purpose
      of computing the percentage of the class for such person but not
      otherwise.


(2)
            Includes
      1,695,000 shares subject to options exercisable at July 31,
      2010.


(3)
            Includes
      1,475,000 shares subject to options exercisable at July 31,
      2010.


(4)
            Includes
      1,447,000 shares subject to options exercisable at July 31,
      2010.


(5)
            Includes
      1,075,000 shares subject to options exercisable at July 31,
      2010.


(6)
            Includes
      1,075,000 shares subject to options exercisable at July 31,
      2010.


(7)
            Includes
      6,767,000 shares subject to options exercisable at July 31,
      2010.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.





Our CEO and President, Arthur L Smith,
is a 16% stockholder of Fiesta Communications, Inc.On May 1,
2008, we sold all of the outstanding shares of Telefamilia Communications, Inc.
to Fiesta for 975,000 shares of common stock in Fiesta and a $30,000 promissory
note due in July 2008.  With the 975,000 shares obtained from Fiesta, we
owned approximately 19.5% of Fiesta.  Also on May 1, 2008, we lent Fiesta
$52,984 to Fiesta in return for a convertible promissory note with a maturity
date of May 1, 2011 and an interest rate of 9%.  Under the convertible
promissory note, Fiesta agreed to pay twelve (12) equal quarterly payments of
$5,088 starting on August 1, 2008 and continuing each quarterly period
thereafter until all accrued and unpaid interest has been paid.




On October 31, 2008, we agreed to
extend the maturity date on the $30,000 promissory note to April 30,
2009.  Also on October 31, 2008, we lent Fiesta $95,000 pursuant to a
secured promissory note due April 30, 2009 and an interest rate of 10%.  A
portion of the proceeds from the $95,000 promissory note was used to pay the
principal and accrued interest under the $30,000 promissory note received on May
1, 2008.  During the year ended July 31, 2009, we advanced Fiesta an
additional $80,000 in exchange for a promissory note due January 31, 2010 and
bearing an interest rate of 8%.  This note is secured by Fiesta’s
assets, including contracts and intangible assets.


43




During the year ended July 31, 2009, we
reconsidered its investment in Fiesta under the guidance of FIN46R and concluded
that because the additional funding provided to Fiesta during fiscal 2009, we
became the primary beneficial owner of Fiesta and Fiesta was fully
consolidated.  During the year ended July 31, 2010, we wrote-off our
investment in Fiesta and recognized a $24,000 net loss applicable to
noncontrolling interest.





Except as
set forth above, we have not engaged in any transactions in which a member of
the Board of Directors had an interest.  Our Board of Directors has
determined that the Directors other than Mr. Smith are independent as that term
is defined in New York Stock Exchange Rule 303A.02.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.





The
following table sets forth the aggregate fees paid to Malone & Bailey, PC
for audit services rendered in connection with the audits and reviews of ATSI’s
consolidated financial statements and reports for the years ended July 31, 2010
and 2009.





Year Ended July 31,Description of Fees
                  
                  2010
                  
                  
                  2009Audit
      Fees
                  
                  $
                  57,000
                  
                  
                  $
                  74,000Audit
      Related Fees
                  
                  
                  -0-
                  
                  
                  
                  -0-Tax
      fees
                  
                  
                  -0-
                  
                  
                  
                  -0-All
      Other Fees
                  
                  
                  -0-
                  
                  
                  
                  -0-





The Board
of Directors has instructed Malone and Bailey, PC that any fees for non-audit
services must be approved before being incurred.  We did not incur any
non-audit fees to Malone and Bailey, PC during fiscal 2010.





PART IV





ITEM
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





The
following documents are exhibits to this report.


2.1
              Plan and Agreement of Merger of ATSI
      Communications, Inc. with and into ATSI Merger Corporation, dated as of
      March 24, 2004. (Exhibit 2.1
      to Form 8-K of ATSI filed on May 24,
      2004)3.1
              Articles
      of Incorporation of ATSI Merger Corporation. (Exhibit 3.1 to Form 8-K of
      ATSI filed on May 24,
2004)





3.2
            Bylaws
      of ATSI Merger Corporation. (Exhibit 3.2 to Form 8-K of
      ATSI filed on May 24, 2004)





3.3
            Articles
      of Merger of ATSI Communications, Inc. with and into ATSI Merger
      Corporation. (Exhibit
      3.3 to Form 8-K of ATSI filed on May 24,
  2004)





4.1
            Promissory
      note payable to Alfonso Torres dated October 1, 2007 in the principal
      amount of $459,170. (Exhibit 10.4 to Form 10-QSB
      for the period ended October 31, 2006 filed December 1 4,
      2007)





4.2
            Promissory
      Notes payable to several holders dated September 26, 2008 in the principal
      amount of $850,000.(Exhibit4.6to Form 10-KSB for the period endedJuly31, 2008filed October 29,
      2008)





4.3
            Promissory
      note payable to San Antonio National Bank dated October 23, 2008 in the
      principal amount of $425,000. (Exhibit10.1to Form 10-KSB for the period endedOctober31,
      2008filedDecember 15, 2008)





4.4
            Promissory
      note payable and security agreement with ATV Texas Ventures III,
      LP., dated November 11, 2009 in the principal amount of
      $100,000.(Exhibit10.1to Form 10-Kfor the period endedOctober31, 2009filedDecember 12, 2009)


44





4.5
            Promissory
      note payable and security agreement with ATV Texas Ventures III,
      LP., dated January 10, 2010 in the principal amount of $100,000.(Exhibit10.1to Form 10-Kfor the period endedJanuary31, 2010filed
            March 12, 2010)





4.6
            Promissory
      note payable and security agreement with ATV Texas Ventures III,
      LP., dated March 16, 2010 in
            the
      principal amount of $50,000.(Exhibit10.1to Form 10-Kfor the period endedApril30, 2010filedJune 9, 2010)





4.7
            Loan
      and Security Agreement and Promissory Note dated August 2, 2010 between
      ATSI Communications, Inc. and Thermo Credit, LLC.  (Exhibits4.1 and 4.2to Form8-KforATSI filed August19, 2010)





10.1
            Interconnection
      Agreement TELMEX and ATSICOM (English summary) (Exhibit 10.26 to Annual Report
      on Form 10-K for year ended July 31, 2003 filed November 12,
      2003)





10.2
            Interconnection
      Agreement TELMEX and ATSICOM (English Translation) (Exhibit 10.27 to Amended
      Annual Report on Form 10-K/A for the year ended July 31, 2003 filed March
      2, 2004)





10.3
            Settlement
      Agreement dated December 10, 2007 between ATSI Communications, Inc. and
      The Shaar Fund, Inc.(Exhibit 10.3to Form 10-QSB for the period
      ended October 31, 2006 filed December 1 4,
  2007)





10.4
            Confidential
      Settlement Agreement dated August 27, 2007 between ATSI Communications,
      Inc. and RGC International Investors, LDC.(Exhibit 10.7 to Annual
      Report on Form 10-KSB for the period ended July 31, 2007 filed October 17,
      2007)





10.5
            Settlement
      Agreement dated October 20, 2008 between ATSI Communications, Inc. and the
      9% Convertible Debenture holders.(Exhibit10.4to Form 10-KSB for the period endedOctober31,
      2008filedDecember 15, 2008)





21.1
              Subsidiary
      List *31.1
              Certification
      of our President and Chief Executive Officer, under Section 302 of the
      Sarbanes-Oxley Act of 2002. *31.2
              Certification
      of our Corporate Controller and Principal Financial Officer, under Section
      302 of the Sarbanes-Oxley Act of 2002. *32.1
              Certification
      of our President and Chief Executive Officer, under Section 906 of the
      Sarbanes-Oxley Act of 2002.*32.2
              Certification
      of our Corporate Controller and Principal Financial Officer, under Section
      906 of the Sarbanes-Oxley Act of 2002.*




45




SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





ATSI
      COMMUNICATIONS, INC.Date:October 8,
      2010
            By:
            /s/ Arthur L. SmithArthur
      L. SmithPresident
      andChief
      Executive Officer





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacity and on the
dates indicated.





Signature
                        
                        Title
                        
                        Date/s/ Arthur L. Smith
                        
                        Principal
      Executive Officer and Director
                        
                        October
      8, 2010Arthur
      L. Smith/s/ Antonio Estrada Jr.
                        
                        Principal
      Accounting Officer
                        
                        October
      8, 2010Antonio
      Estrada Jr.
                        
                        Principal
      Finance Officer/s/ John R. Fleming
                        
                        Director
                        
                        October
      8, 2010John
      R. Fleming/s/ Murray R. Nye
                        
                        Director
                        
                        October
      8, 2010Murray
      R. Nye




46


EXHIBIT
INDEX





Number
              Description21.1
              Subsidiary
      List31.1
              Certification
      of our President and Chief Executive Officer, under Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              Certification
      of our Corporate Controller and Principal Financial Officer, under Section
      302 of the Sarbanes-Oxley Act of 2002.32.1
              Certification
      of our President and Chief Executive Officer, under Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
              Certification
      of our Corporate Controller and Principal Financial Officer, under Section
      906 of the Sarbanes-Oxley Act of
2002.




47