UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





[Mark One]


x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934For the
      quarterly period ended October 31,
2008





 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the
      transition period from ____________ to
  ___________





Commission
File Number 001-15687





ATSI
COMMUNICATIONS, INC.


(Exact
Name of Small Business Issuer as Specified in Its Charter)





Nevada
              74-2849995(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              (IRS
      Employer
                Identification
      No.)





3201
Cherry Ridge


Building
C, Suite 300


San
Antonio, Texas 78230


(Address
of Principal Executive Offices)





(210)
614-7240


(Issuer’s
Telephone Number, Including Area Code)





Check
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject  to such filing requirements for the past 90
days.  Yes x  No
 ̈





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





Large accelerated filet ̈
                          Accelerated Filer  ̈
                          Non-accelerated Filer o
                          Smaller reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes
 ̈  No
x





The aggregate market value of the
common equity held by non-affiliates of the issuer was $3,992,045 based on the
closing price of $0.10 per share on December 12, 2008 as reported on the
over-the-counter bulletin board.





There
were 39,920,457 shares of issuer’s Common Stock outstanding as of December 12,
2008.












ATSI
COMMUNICATIONS, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED OCTOBER 31, 2008





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      Balance Sheets as of October 31, 2008 and July 31, 2008
      (unaudited)
                    
                    
                    3Consolidated
      Statements of Operations for the Three Months Ended October 31, 2008 and
      2007 (unaudited)
                    
                    
                    4Consolidated
      Statement of Changes in Stockholders’ Equity for the Three Months Ended
      October 31, 2008 (unaudited)
                    
                    
                    5Consolidated
      Statements of Cash Flows for the Three Months Ended October 31, 2008 and
      2007 (unaudited)
                    
                    
                    6Notes
      to Consolidated Unaudited Financial Statements
                    
                    
                    7Item
      2. Management’s Discussions and Analysis and Plan of
      Operations
                    
                    
                    11Item
      3. Quantitative and qualitative disclosures about market
    risk
                    
                    
                    14Item
      4. Controls and Procedures
                    
                    
                    14PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                    
                    
                    15Item
      1A. Risk Factors
                    
                    
                    15Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    
                    
                    15Item
      3. Default Upon Senior Securities
                    
                    
                    15Item
      4. Submission of Matters to a Vote of Security Holders
                    
                    
                    15Item
      5. Other Information
                    
                    
                    16Item
      6. Exhibits
                    
                    
                    16




2




PART
1. FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share amounts)





October
      31,
                              
                              
                              July
      31,2008
                              
                              
                              2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                              
                              $
                              1,966
                              
                              
                              $
                              1,338Accounts
      receivable, net of allowance for bad debt of $40 and $60,
      respectively
                              
                              
                              564
                              
                              
                              
                              1,082Note
      receivable, related party
                              
                              
                              82
                              
                              
                              
                              25Prepaid
      & other current assets
                              
                              
                              201
                              
                              
                              
                              124Total
      current assets
                              
                              
                              2,813
                              
                              
                              
                              2,569LONG-TERM
      ASSETS:Certificates
      of deposit
                              
                              
                              321
                              
                              
                              
                              319Intangible
      Assets
                              
                              
                              145
                              
                              
                              
                              149PROPERTY
      AND EQUIPMENT
                              
                              
                              674
                              
                              
                              
                              611Less
      - accumulated depreciation
                              
                              
                              (478
                              )
                              
                              
                              (439
                              )Net
      property and equipment
                              
                              
                              196
                              
                              
                              
                              172Total
      assets
                              
                              $
                              3,475
                              
                              
                              $
                              3,209LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)CURRENT
      LIABILITIES:Accounts
      payable
                              
                              $
                              839
                              
                              
                              $
                              1,361Wells
      Fargo factoring collateral
                              
                              
                              41
                              
                              
                              
                              18Accrued
      liabilities
                              
                              
                              102
                              
                              
                              
                              116Current
      portion of obligation under capital leases
                              
                              
                              3
                              
                              
                              
                              3Notes
      payable
                              
                              
                              788
                              
                              
                              
                              566Convertible
      debentures, net of unamortized discount of $0 and $5,
      respectively
                              
                              
                              -
                              
                              
                              
                              78Total
      current liabilities
                              
                              
                              1,773
                              
                              
                              
                              2,142LONG-TERM
      LIABILITIES:Notes
      payable
                              
                              
                              1,013
                              
                              
                              
                              588Derivative
      liability
                              
                              
                              85
                              
                              
                              
                              -Convertible
      debentures, net of unamortized discount of $0 and $3,
      respectively
                              
                              
                              -
                              
                              
                              
                              81Obligation
      under capital leases, less current portion
                              
                              
                              -
                              
                              
                              
                              1Other
                              
                              
                              13
                              
                              
                              
                              3Total
      long-term liabilities
                              
                              
                              1,111
                              
                              
                              
                              673Total
      liabilities
                              
                              
                              2,884
                              
                              
                              
                              2,815STOCKHOLDERS'
      EQUITY:Common
      stock, $0.001 par value, 150,000,000 shares authorized, 39,920,457 and
      39,550,415 sharesissued
      and outstanding, respectively
                              
                              
                              40
                              
                              
                              
                              39Additional
      paid in capital
                              
                              
                              72,936
                              
                              
                              
                              72,747Accumulated
      deficit
                              
                              
                              (72,386
                              )
                              
                              
                              (72,393
                              )Other
      comprehensive income
                              
                              
                              1
                              
                              
                              
                              1Total
      stockholders' equity
                              
                              
                              591
                              
                              
                              
                              394Total
      liabilities and stockholders' equity
                              
                              $
                              3,475
                              
                              
                              $
                              3,209





Unaudited,
see accompanying summary of accounting policies and notes to financial
statements.




3




ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





Three
      months ended October 31,2008
                
                
                2007OPERATING
      REVENUES:VoIP
      services
                
                $
                7,136
                
                
                $
                9,427Total
      operating revenues
                
                
                7,136
                
                
                
                9,427OPERATING
      EXPENSES:Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                
                
                6,566
                
                
                
                8,785Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                
                
                533
                
                
                
                823Legal
      and professional fees
                
                
                67
                
                
                
                89Bad
      debt expense (recovery)
                
                
                (20
                )
                
                
                -Depreciation
      and amortization expense
                
                
                43
                
                
                
                40Total
      operating expenses
                
                
                7,189
                
                
                
                9,737OPERATING
      LOSS
                
                
                (53
                )
                
                
                (310
                )OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                
                
                108
                
                
                
                41Investment
      loss
                
                
                (14
                )
                
                
                -Interest
      income (expense)
                
                
                (34
                )
                
                
                (24
                )Total
      other income (expense), net
                
                
                60
                
                
                
                17NET
      INCOME (LOSS)
                
                
                7
                
                
                
                (293
                )LESS:
      PREFERRED DIVIDEND
                
                
                -
                
                
                
                (12
                )ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                
                
                -
                
                
                
                340NET
      INCOME TO COMMON  STOCKHOLDERS
                
                $
                7
                
                
                $
                35BASIC
      INCOME PER SHARE TO COMMON STOCKHOLDERS
                
                $
                0.00
                
                
                $
                0.00DILUTED
      INCOME PER SHARE TO COMMON STOCKHOLDERS
                
                $
                0.00
                
                
                $
                0.00WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
                
                
                39,677,598
                
                
                
                38,792,388DILUTED
      COMMON SHARES OUTSTANDING
                
                
                40,265,098
                
                
                
                38,796,275





Unaudited,
see accompanying summary of accounting policies and notes to financial
statements.




4




ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


(in
thousands, except share amounts)





AdditionalCommon
                          
                          
                          Paid-in
                          
                          
                          Accumulated
                          
                          
                          Other
      Comp.Shares
                          
                          
                          Par
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          Income/Loss
                          
                          
                          TotalsBALANCE,
      July 31, 2008
                          
                          
                          39,550,415
                          
                          
                          
                          39
                          
                          
                          $
                          72,747
                          
                          
                          $
                          (72,393
                          )
                          
                          $
                          1
                          
                          
                          $
                          394Repurchase
      of common shares
                          
                          
                          (267,681
                          )
                          
                          
                          (0
                          )
                          
                          $
                          (44
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (44
                          )Stock
      option expense
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          62
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          62Shares
      issued for conversion of notes payable
                          
                          
                          637,723
                          
                          
                          
                          1
                          
                          
                          
                          171
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          172Net
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          7
                          
                          
                          
                          
                          
                          
                          
                          7BALANCE,
      October 31, 2008
                          
                          
                          39,920,457
                          
                          
                          
                          40
                          
                          
                          $
                          72,936
                          
                          
                          $
                          (72,386
                          )
                          
                          $
                          1
                          
                          
                          $
                          591





Unaudited,
see accompanying summary of accounting policies and notes to the consolidated
financial statements.




5




ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands, except per share amounts)





Three
      months ended October 31,2008
                
                
                2007CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      INCOME (LOSS)
                
                $
                7
                
                
                $
                (293
                )Adjustments
      to reconcile net loss to cash used in operating
activities:Investment
      loss
                
                
                14
                
                
                
                -Gain
      on early extinguishment of debt
                
                
                (108
                )
                
                
                (41
                )Depreciation
      and amortization
                
                
                43
                
                
                
                40Issuance
      of stock grants and options, employees for services
                
                
                62
                
                
                
                440Issuance
      of common stock and warrants for services
                
                
                -
                
                
                
                15Provisions
      (recovery) for losses on accounts receivables
                
                
                (20
                )
                
                
                -Amortization
      of debt discount
                
                
                8
                
                
                
                2Amortization
      of derivative financial instrument
                
                
                3
                
                
                
                -Settlement
      litigation with RoseGlen
                
                
                -
                
                
                
                (175
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                538
                
                
                
                (113
                )Prepaid
      expenses and other
                
                
                (77
                )
                
                
                (13
                )Accounts
      payable
                
                
                (832
                )
                
                
                (106
                )Wells
      Fargo Factoring Collateral
                
                
                23
                
                
                
                -Accrued
      liabilities
                
                
                28
                
                
                
                (140
                )Net
      cash used by operating activities
                
                
                (311
                )
                
                
                (384
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in certificates of deposit
                
                
                (3
                )
                
                
                (4
                )Note
      receivable, related party
                
                
                (70
                )
                
                
                -Purchase
      of VoIP License
                
                
                -
                
                
                
                (100
                )Purchases
      of property & equipment
                
                
                (62
                )
                
                
                (1
                )Net
      cash used in investing activities
                
                
                (135
                )
                
                
                (105
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                
                
                (156
                )
                
                
                (47
                )Acquisition
      of common stock
                
                
                (44
                )
                
                
                -Proceeds
      from Notes payables
                
                
                1,275
                
                
                
                -Principal
      payments on capital lease obligation
                
                
                (1
                )
                
                
                (1
                )Net
      cash provided / (used in) financing activities
                
                
                1,074
                
                
                
                (48
                )INCREASE
      IN CASH
                
                
                628
                
                
                
                (537
                )CASH
      AND CASH EQUIVALENTS, beginning of period
                
                
                1,338
                
                
                
                1,050CASH
      AND CASH EQUIVALENTS, end of period
                
                $
                1,966
                
                
                $
                513SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for interest
                
                $
                20
                
                
                $
                13Cash
      paid for income tax
                
                
                -
                
                
                
                -NON-CASH  INVESTING
      AND FINANCING TRANSACTIONSIssuance
      of common stock for conversion of debt
                
                $
                172
                
                
                $
                30Conversion
      of preferred stock to common stock
                
                
                -
                
                
                
                1Preferred
      stock dividends
                
                
                -
                
                
                
                12Reversal
      of previously recorded preferred stock dividend
                
                
                -
                
                
                
                (340
                )





Unaudited,
see accompanying summary of accounting policies and notes to financial
statements.




6




ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited interim consolidated financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the United
States Securities and Exchange Commission.  In the opinion of
management, these interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented.  The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year.  Notes to the consolidated financial statements, which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ended July 31, 2008, as reported in
Form 10-K filed on October 29, 2008, have been omitted.





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.  Under the receivable financing agreement with WFBC,
ATSI is factoring approximately $200,000 of its monthly
receivables.  As of October 31, 2008, ATSI had approximately $41,000
of factored account receivables outstanding; ATSI will continue to factor its
receivables on a monthly basis as services are rendered to its
customers.




7




NOTE
3 – OUTSTANDING DEBT





At October 31, 2008 and July
31, 2008 outstanding debt consisted of the following: (In thousands, except per
share amounts)





October
      31,
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                July
      31,2008
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                20089%
      Convertible Subordinated Debenture, bering interest at 9.00% per annum
      maturing June 1, 2010, convertible into common stock annually at the
      higher of: A) $0.27 per share or B) the average closing price of ATSI
      common stock for the 10 days   immediately preceding the
      date of conversion, subject to a maximum number of 1,540,741 common shares
      issuable upon conversion, outstanding balance, net of unamortized discount
      of $0 and $5, respectively. On October 20, 2008  we reached a
      settlement agreement with  the Debenture holders, as result we
      converted the outstanding principal balance and accrued interest of $166
      and $6, respectively, into 637,723 shares of common
      stock.
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                -
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                159Note
      payable to CCA Financial Services payable in monthly installments bering
      interest at 13.50% per annum, maturing December 31, 2008, collateralized
      by ATSI's equipment, deposit of accounts and accounts receivables. On
      October 23, 2008, we paid in full the total outstanding principal balance
      and accrued interest of $54 and $1, respectively.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                101Note
      payable to Alfonso Torres, payable upon maturity, bearing interest of
      6.00% per annum, maturing
      October 1, 2009.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                460
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                460Note
      payable to The Shaar Fund, payable in quarterly installments bearing
      interest of 7.50%
      per annum, maturing April 12, 2012.  On October 30, 2008, we
      reached a settlement agreement,
      in which we agreed to pay $290 to fully satisfy the note. Additionally,
      the note
      holder agreed to provide us with a discount of
      $108.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                416Note
      payable to Wells Fargo bank payable in monthly installments, bering
      interest at 7.00% per
      annum, maturing April 1, 2009, collateralized by ATSI's certificates of
      deposit.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                26
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                39Note
      payable to Wells Fargo bank payable in monthly installments, bering
      interest at  7.25% per
      annum, maturing July 25, 2010, collateralized by ATSI's certificates of
      deposit.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                122
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                138Note
      payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
      payable in monthly installments,
      bering interest at 10.00% per annum, maturing September 10, 2010,
      collateralized by
      ATSI's accounts receivables (other than accounts factored with Wells
      Fargo), $100,000 certificate
      of deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally,
      we issued
      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 the second
      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’s common
      stock is greater than $.80 per share for ten (10) consecutive trading
      days, ATSI shall be
      entitled to require the purchaser to exercise the warrants and pay the
      exercise price therefore upon
      five (5) business days written notice. Net of unamortized discount of
      $82.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                768
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Note
      payable to San Antonio National Bank payable in monthly installments,
      bering interest at
      8.00% per annum, maturing October 25, 2011, collateralized by ATSI's
      assets.
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                425
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                -Total
      outstanding debt long-term debt
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,801
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                1,313Current
      portion of long-term debt
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                (788
                                                                                                                                                                )
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                (644
                                                                                                                                                                )Long-term
      debt, net of current portion
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                1,013
                                                                                                                                                                
                                                                                                                                                                
                                                                                                                                                                $
                                                                                                                                                                669




Payments on long-term debt
of ATSI are due as follows:





(in
      thousands)Fiscal
      2009
                  
                  $
                  788Fiscal
      2010
                  
                  
                  1,013Total
      payments
                  
                  $
                  1,801





ATSI analyzed these instruments for
derivative accounting consideration under SFAS 133 and EITF 00-19, and
determined that the warrants issued to ATVF, Scott Crist, Roderick Ciaccioa
& Vencore Solutions did not meet the definition of equity under SFAS 133 and
EITF 00-19, 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
consideration and determined that derivative accounting is not applicable for
the rest of the debt.





NOTE
4 – 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
agreement ATSI recognized gain on early extinguishment of debt
$108,160.




8




NOTE
5 – EQUITY





Common
Stock





During
the quarter ended October 31, 2008 ATSI issued:





-
            637,723
      common shares to the holders of the Convertible Debentures in lieu of the
      conversion of notes payable principal $166,400 and $5,785 in accrued
      interest 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.





NOTE
6 – STOCK-BASED COMPENSATION TO EMPLOYEES





In
September 2005, ATSI adopted its 2005 stock compensation plan. This plan
authorizes the grant of up to 7.5 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.





In August 2007, ATSI’s board of
directors approved an amendment to the plan.  Under the amendment,
ATSI’s board of directors increased the maximum aggregate number of shares of
Common Stock that may be issued under the Plan from 7.5 million shares to 17.5
million shares.





During
the quarter ended October 31, 2008, ATSI granted under the plan, the following
stock options





- ATSI
granted options to purchase 75,000 common shares to an employee with 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. Under the
fair value option method, ATSI will recognize over the relevant service periods
$9,990 of non-cash compensation expense related to un-vested
options.





- ATSI
granted options to purchase 200,000 common shares to an employee with 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. Under the
fair value option method, ATSI will recognize over the relevant service periods
$22,156 of non-cash compensation expense related to un-vested
options.





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





For the Quarters Ended October 31,2008
                    
                    
                    2007Expected
      dividends yield
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Expected
      stock price volatility
                    
                    
                    128
                    %
                    
                    
                    75
                    %Risk-free
      interest rate
                    
                    
                    3.44
                    %
                    
                    
                    4.65
                    %Expected
      life of options
                    
                    4.5
      years
                    
                    
                    6
      years




9




ATSI recognized $62,000 and $440,566 in
stock based compensation expense to employees during quarter ended October 31,
2008 and 2007, respectively.





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





A summary of the options as of October
31, 2008 and the changes during the quarter ended October 31, 2008 is 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
                                
                                
                                275,000
                                
                                
                                
                                0.14
                                
                                
                                
                                4.5Forfeited
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Outstanding
      at October 31, 2008
                                
                                
                                8,514,000
                                
                                
                                
                                0.18
                                
                                
                                
                                5Exercisable
      at October 31, 2008
                                
                                
                                7,007,332
                                
                                
                                $
                                0.18
                                
                                
                                
                                5





NOTE
7 – WARRANTS





During the quarter ended October 31,
2008, with the promissory notes obtained, ATSI issued 425,000 warrants 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 notes
payable, the holder shall have the right to request from ATSI, upon five (5)
Business days prior notice, to acquire from the holder the warrants at price of
$0.39 per warrant.





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





The fair
value of the warrant granted to the Note holders 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
                  
                  
                  126
                  %Risk-free
      interest rate
                  
                  
                  3.37
                  %Contractual
      life of warrants
                  
                  7
      years





ATSI analyzed these warrans for
derivative accounting consideration under SFAS 133 and EITF 00-19, and
determined that the warrants did not meet the definition of equity under SFAS
133 and EITF 00-19, 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.




10


A summary of the warrants as of October
31, 2008 and the changes during the quarter ended October 31, 2008 is 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
                        
                        
                        
                        4Exercised
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Outstanding
      at October 31, 2008
                        
                        
                        800,000
                        
                        
                        $
                        0.19
                        
                        
                        
                        4Exercisable
      at October 31, 2008
                        
                        
                        800,000
                        
                        
                        $
                        0.19
                        
                        
                        
                        4




NOTE
8 – SHARE REPURCHASE PROGRAM





On April 16, 2008, ATSI’s Board of
Directors approved a share buyback plan allowing ATSI to purchase up to $1
million of its common stock. The shares will be bought through the open market
through December 31, 2008 based on price and market conditions. During the
quarter ended October 31, 2008, ATSI repurchased 237,213 of its common stock at
an average purchase price of $0.16.





NOTE
9 – INVESTMENT IN FIESTA/TELEFAMILIA





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.





During the quarter ended 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%. Also 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.





For the quarter ended October 31, 2008,
ATSI recognized $14,184 loss from its investment in Fiesta under the equity
method. And as of October 31, 2008, the balance of the investment in Fiesta in
the amount of $82,000 was netted with the notes receivable from
Fiesta.





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATIONS





SPECIAL
NOTE: This Quarterly Report on Form 10-Q contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities 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,” ”plan,” and
“intend.”  Although we believe these expectations are reasonable, our
operations involve a number of risks and uncertainties. Some of these risks
include the availability and capacity of competitive data transmission networks
and or ability to raise sufficient capital to continue operations. Additional
risks are included in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission on October 29, 2008.





The
following is a discussion of the consolidated financial condition and results of
operations of ATSI for the three months ended October 31, 2008 and 2007. It
should be read in conjunction with our Consolidated Financial Statements, the
Notes thereto, and the other financial information included in the Company’s
Annual Report on Form 10-K for the year ended July 31, 2008.  For
purposes of the following discussion, fiscal 2009 or 2009 refers to the year
ended July 31, 2009 and fiscal 2008 or 2008 refers to the year ended July 31,
2008.




11




General





We are an
international telecommunications carrier that utilizes the internet to provide
cost-efficient and economical international telecommunications services. Our
current operations consist 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
utilizing VoIP technology.  Typically, these telecommunications
companies offer their services to the public for domestic and international long
distance services





Results
of Operations





The
following table sets forth certain items included in our results of operations
and variances between periods for the three months ended October 31, 2008 and
2007.  All dollar amounts are in thousands.





Three
      months ended October 31,2008
                          
                          
                          2007
                          
                          
                          Variances
                          
                          
                          %OPERATING
      REVENUES:VoIP
      services
                          
                          $
                          7,136
                          
                          
                          $
                          9,427
                          
                          
                          $
                          (2,291
                          )
                          
                          
                          -24
                          %Total
      operating revenues
                          
                          
                          7,136
                          
                          
                          
                          9,427
                          
                          
                          
                          (2,291
                          )
                          
                          
                          -24
                          %Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                          
                          
                          6,566
                          
                          
                          
                          8,785
                          
                          
                          
                          (2,219
                          )
                          
                          
                          -25
                          %GROSS
      MARGIN
                          
                          
                          570
                          
                          
                          
                          642
                          
                          
                          
                          (72
                          )
                          
                          
                          -11
                          %Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                          
                          
                          533
                          
                          
                          
                          823
                          
                          
                          
                          (290
                          )
                          
                          
                          -35
                          %Legal
      and professional fees
                          
                          
                          67
                          
                          
                          
                          89
                          
                          
                          
                          (22
                          )
                          
                          
                          -25
                          %Bad
      debt expense (recovery)
                          
                          
                          (20
                          )
                          
                          
                          -
                          
                          
                          
                          (20
                          )
                          
                          
                          100
                          %Depreciation
      and amortization expense
                          
                          
                          43
                          
                          
                          
                          40
                          
                          
                          
                          3
                          
                          
                          
                          8
                          %OPERATING  (LOSS)
                          
                          
                          (53
                          )
                          
                          
                          (310
                          )
                          
                          
                          257
                          
                          
                          
                          -83
                          %OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                          
                          
                          108
                          
                          
                          
                          41
                          
                          
                          
                          67
                          
                          
                          
                          163
                          %Minority
      Interest
                          
                          
                          (14
                          )
                          
                          
                          -
                          
                          
                          
                          (14
                          )
                          
                          
                          100
                          %Interest
      income (expense)
                          
                          
                          (34
                          )
                          
                          
                          (24
                          )
                          
                          
                          (10
                          )
                          
                          
                          42
                          %Total
      other income (expense), net
                          
                          
                          60
                          
                          
                          
                          17
                          
                          
                          
                          43
                          
                          
                          
                          253
                          %NET
      INCOME (LOSS)
                          
                          
                          7
                          
                          
                          
                          (293
                          )
                          
                          
                          300
                          
                          
                          
                          -102
                          %LESS:
      PREFERRED DIVIDEND
                          
                          
                          -
                          
                          
                          
                          (12
                          )
                          
                          
                          12
                          
                          
                          
                          100
                          %ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                          
                          
                          -
                          
                          
                          
                          340
                          
                          
                          
                          (340
                          )
                          
                          
                          -100
                          %NET
      INCOME TO COMMON  STOCKHOLDERS
                          
                          $
                          7
                          
                          
                          $
                          35
                          
                          
                          $
                          (28
                          )
                          
                          
                          -80
                          %





Three
Months ended October 31, 2008 Compared to Three Months ended October 31,
2007





VoIP Service.VoIP services
revenue decreased by $2,291,000, or 24%, from the quarter ended October 31, 2007
to the quarter ended October 31, 2008.  Our VoIP traffic decreased by
14 % from approximately 134,380,145 minutes of voice traffic during the quarter
ended October 31, 2007 to approximately 115,203,750 minutes of voice traffic
during the quarter ended October 31, 2008.  Additionally, our average
revenue per minute decreased from $0.0699 during the quarter ended October 31,
2007 to $0.0619 for the quarter ended October 31, 2008, this represents a
decrease in our average revenue rate per minute of 12%.  The decrease
in revenue and VoIP minutes is attributable primarily to the overall decrease in
international VoIP traffic as a result of changes in call patterns in our
industry.





Cost of Services (Exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $2,219,000, or 25%, from the quarter ended October 31,
2007 to the quarter ended October 31, 2008.  The decrease in cost of
services is a direct result of the decrease in VoIP services
revenue.  As mentioned above, our VoIP traffic decreased from
approximately 134,380,145 minutes of voice traffic during the quarter ended
October 31, 2007 to approximately 115,203,750 minutes of voice traffic during
the quarter ended October 31, 2008, thus decreasing our cost of services between
quarters.  Cost of services, as a percentage of revenue decreased by
1.2 % between periods, from 93.2% of revenue during the quarter ended October
31, 2007 to 92% of revenue during the quarter ended October 31, 2008. The main
reason for the improvement in cost of services is as a result of our
negotiations with our vendors of extended terms and improvements in our cost per
minute, consequently, our average margin rate per minute increased by 4% between
quarters.




12




Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).SG&A expenses decreased by $290,000, or 35%, from
the quarter ended October 31, 2007to the
quarter ended October 31, 2008.  The decrease is primarily
attributable to the decrease in non-cash compensation expense to employees;
during the quarter ended October 31, 2007 we recognized $440,566 in non-cash
compensation expense to employees, in comparison, we only recognized $61,711 in
non-cash compensation expense to employees during the quarter ended October 31,
2008.





Legal and professional
fees.  Legal and professional fees decreased by $22,000, or
25%, from the quarter ended October 31, 2007 to the quarter ended October 31,
2008.  The decrease is attributable to $35,000 in legal fees incurred
during the quarter ended October 31, 2007 in connection with ongoing litigation
between ATSI and the holders of the 6% Series D Cumulative Convertible Preferred
Stock.  We did not incur similar expenses during the quarter ended
October 31, 2008.





Bad debt expense (recovery).Bad debt expense (recovery) decreased by $20,000, or 100%, from the
quarter ended October 31, 2007 to the quarter ended October 31,
2008.  During the quarter ended October 31, 2008 we recognized an
adjustment (recovery) in bad debt of $20,000 as a result of changes in the VoIP
market and historical uncollectible accounts, thus decreasing bad debt expense
between periods.





Depreciation and
amortization.  Depreciation and amortization increased by
$3,000 or 8%, from the quarter ended October 31, 2007 to the quarter ended
October 31, 2008.   The increase is attributed to the additional
amortization associated with the new computers and servers acquired during the
quarter ended October 31, 2008.





Operating income
(loss).  The Company’s operating loss decreased by $257,000, or
83%, from the quarter ended October 31, 2007 to the quarter ended October 31,
2008.  The improvement in operating loss is attributed to the decrease
in SG&A expenses, primarily a decrease between periods of $378,855 in
non-cash compensation expense to employees and a decrease in legal and
professional fees of $22,000 between periods.





Other Income
(expense).  Other income (expense) during quarter ended October
31, 2008 included a gain on early extinguishment of debt of $108,000, which was
attributed to a discount of $108,000 recognized as a result of the settlement of
the promissory note with The Shaar Fund. Additionally, during the quarter ended
October 31, 2008 we recognized $14,000 of a minority interest related to the
loss of our ownership in Fiesta Communications. Interest expense increased by
$10,000, or 42%, from $24,000 for the quarter ended October 31, 2007 to $34,000
for the quarter ended October 31, 2008. The increase is attributed to the
additional interest expense incurred as a result of the new promissory notes
with various holders for $850,000 and a promissory note with San Antonio
National Bank for $425,000.





Net income
(loss).  Net income increased by $300,000, or 102%, from the
quarter ended October 31, 2007to the
quarter ended October 31, 2008.  The improvement in net income is
attributed to the decrease between quarters in selling, general and
administrative expenses, as result of decrease of $378,855 in non-cash
compensation expense to employees. Additionally, during the quarter ended
October 31, 2008, we recognized an increase between quarters of $67,000 in gain
on early extinguishment of debt as a result of the settlement of a promissory
note.





Preferred stock
dividends.  Preferred stock dividends decreased by $12,000, or
100%, between periods, from $12,000 for the quarter ended October 31, 2007to $0 during
the quarter ended October 31, 2008. The decrease in preferred dividends between
periods is mainly attributed to a decrease in dividends associated with Series A
Convertible Preferred Stock and Series D Convertible Preferred Stock. As of
October 31, 2008 all Convertible Preferred Stock has been converted or redeemed
to common stock.





Reversal of previously recorded
preferred stock dividends.During the quarter ended October
31, 2007, we recognized a reversal of previously recorded dividend expense of
$340,000.  This reversal occurred as result of the settlement
agreement reached between ATSI and The Shaar Fund, under the settlement
agreement, The Shaar Fund agreed to surrender 742 shares of ATSI’s 6% Series D
Cumulative Convertible Preferred Stock and forgive accrued dividends of
approximately $340,000 as of October 24, 2007. We did not recognize any
reversals of previously recorded preferred stock dividends during the quarter
ended October 31, 2008.




13




Net income applicable to common
stockholders.  Net income applicable to common stockholders
decreased by $28,000, or 80%, from the quarter ended October 31, 2007 to the
quarter ended October 31, 2008. The decrease in net income applicable to common
stockholders is attributed to the decrease between quarters in the reversal of
previously recorded preferred dividend of $340,000 recognized during the quarter
ended October 31, 2008. We did not recognize this type of reversal during the
quarter ended October 31, 2008.  The decrease in the reversal of
previously recorded preferred divided was slightly offset by the decrease of
$378,855 in non-cash compensation expense to employees and the increase between
quarter of $67,000 in gain on early extinguishment of debt as a result of the
settlement of a promissory
note.





Liquidity
and Capital Resources





Cash Position:  We
had a cash balance of $1,966,000 as of October 31, 2008.  Net cash
consumed by operating activities during the quarter ended October 31, 2008 was
approximately $311,000. Net cash consumed by operating activities consisted
primarily of operating revenues of $7,136,000 after deduction of cash expenses
incurred in cost of services and selling, general and administrative
expenses.  Investing activities during the quarter ended October 31,
2008 consumed $135,000 as a result of notes receivables of $70,000 with Fiesta
Communications, a related party, investments in certificates of deposit of
$3,000 and $62,000 related to the acquisition of various computers and
servers.  Financing activities during the quarter ended October 31,
2008 provided $1,074,000 in cash. This cash was primarily provided by a
promissory note payable of $425,000 with San Antonio National Bank and a
financing from various note holders for $850,000. The cash received from the
various promissory notes were slightly offset by the cash consumed by debt
principal payments of $156,000 associated with various notes payable,
acquisition of our common stock of $44,000 and principal payments of $1,000
associated with a capital lease obligation.  Overall, our net
operating, investing and financing activities during the quarter ended October
31, 2008 resulted in an increase of $628,000 in our available cash.





We are currently utilizing the cash
received from various promissory notes payable for $1,275,000. We believe that
this financing will allow us to support our growth during the following fiscal
year. Additionally, we are utilizing the factoring agreement with Wells Fargo
Bank as necessary to provide cash for operations.  Under the agreement
we are able to factor up to $5,000,000 of our monthly accounts
receivable.  On average, we are factoring account receivables of
$200,000 per month. As of October 31, 2008 we had $41,000 of outstanding
receivables under the Wells Fargo Factoring agreement.





Our
current cash expenses are expected to be approximately $150,000 per month,
including wages, rent, utilities and corporate professional fees.  We
are currently generating sufficient cash from operations to cover all monthly
cash expenses.  We anticipate that the October 31, 2008 cash balance
of $1,966,000 combined with expected net cash flow generated from operations and
the factoring agreement with Wells Fargo Bank, will be sufficient to fund our
operations, capital asset expenditures and potential common stock repurchases
for the next twelve months.





Our
working capital was $1,040,000 as of October 31, 2008. This represents an
improvement of approximately $613,000 from our working capital at July 31, 2008.
The improvement can primarily be attributed to the net income generated during
the quarter ended October 31, 2008, including the gain on early extinguishment
of debt of $108,000 recognized during the period.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS





NONE





ITEM
4.  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures




14


We
maintain “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that
are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms, and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the “Evaluation”), under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report pursuant to Rule
13a-15 of the Exchange Act. The evaluation of our disclosure controls and
procedures included a review of the disclosure controls’ and procedures’
objectives, design, implementation and the effect of the controls and procedures
on the information generated for use in this report. In the course of our
evaluation, we sought to identify data errors, control problems or acts of fraud
and to confirm the appropriate corrective actions, if any, including process
improvements, were being undertaken. Our Chief Executive Officer and our Chief
Financial Officer concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective and were operating
at the reasonable assurance level.





Internal
Control Over Financial Reporting





We have made no changes in our internal
controls over financial reporting during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.





PART
II.  OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





NONE





ITEM
1A.  RISK FACTORS





NONE





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





During
the period covered by this report, the Company issued 637,723 common shares to
the holders of the Convertible Debentures in lieu of a principal payment of
$166,400 and $5,785 in accrued interest. The transaction was privately
negotiated between the Company and the holders of the Convertible Debentures,
with whom the Company has substantial prior relationship.  The shares
were issued without registration pursuant to Section 4(2) of the Securities Act
of 1933.


During
the period covered by this report, the Company issued warrants to purchase
425,000 common shares to the purchaser of the Company’s $850,000 10.00%
promissory note due September 10, 2010.  The warrants are exercisable
at $.19 per share of common stock at any time prior to September 10,
2013.  The holders may require the Company to repurchase the warrants
at $.39 per share at any time after September 10, 2010 and the Company may
require the holders to exercise the warrants at any time after the last sale
price for common shares exceeds $.80 per share for 10 consecutive trading
days.  The transaction was privately negotiated between the Company
and the purchasers of the Company’s promissory note without public solicitation
or advertisement.  The warrants were issued without registration
pursuant to Section 4(2) of the Securities Act of 1933.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





NONE





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





NONE




15




ITEM
5.  OTHER INFORMATION





NONE





ITEM
6.  EXHIBITS





(a)           Exhibits:  The
following documents are filed as exhibits to this report.





EXHIBIT
INDEX





Number
              
              Description10.1
              
              Promissory
      note payable to San Antonio National Bank dated October 23, 2008 in the
      principal amount of $425,000.10.2
              
              Promissory
      note receivable between ATSI Communications, Inc. and Fiesta
      Communications, Inc. dated October 31, 2008 for
$95,000.10.3
              
              Note
      Discharge Agreement dated October 30, 2008 between ATSI Communications,
      Inc. and The Shaar Fund, Inc.10.4
              
              Settlement
      Agreement dated October 20, 2008 between ATSI Communications, Inc. and the
      9% Convertible Debenture holders.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.




16




SIGNATURE





Pursuant with the requirements of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





ATSI
      COMMUNICATIONS, INC.(Registrant)Date:
      December 15, 2008
                  By:
                  /s/
      Arthur L. SmithName:
                  Arthur
      L. SmithTitle:
                  President
      and Chief Executive OfficerDate:
      December 15, 2008
                  By:
                  /s/
      Antonio EstradaName:
                  Antonio
      EstradaTitle:
                  Sr.
      VP of Finance & Corporate Controller(Principal
      Accounting and Principal Financial
Officer)




17