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 1934





For the
quarterly period ended January 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
                74-2849995(State
      or Other Jurisdiction of
                (I.R.S.
      EmployerIncorporation
      or Organization)
                Identification
      No.)3201
      Cherry RidgeBuilding
      C, Suite 300San
      Antonio, Texas
                78230(Address
      of Principal Executive Offices)
                (Zip
      Code)





(210)
614-7240


(Registrant’s
Telephone Number, Including Area Code)





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.   Yes x  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).         Yes
 ̈  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 the definition of “large accelerated filler,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):





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  ̈  No
x





There
were 45,504,120 shares of the registrant’s Common Stock, $.001 par value per
share, outstanding as of March 12, 2010.





ATSI
COMMUNICATIONS, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED JANNUARY 31, 2010





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
                  2Consolidated
      Balance Sheets as of January 31, 2010 and July 31, 2009
      (unaudited)
                  2Consolidated
      Statements of Operations for the Three and Six Months Ended January 31,
      2010 and 2009 (unaudited)
                  3Consolidated
      Statement of Changes in Stockholders’ Deficit for the Six Months Ended
      January 31, 2010 (unaudited)
                  4Consolidated
      Statements of Cash Flows for the Six Months Ended January 31, 2010 and
      2009 (unaudited)
                  5Notes
      to Consolidated Financial Statements (unaudited)
                  6Item
      2. Management’s Discussions and Analysis of Financial Condition and
      Results of Operations
                  8Item
      3. Quantitative and Qualitative Disclosures about Market
    Risk
                  12Item
      4. Controls and Procedures
                  13PART
      II. OTHER INFORMATIONItem
      6. Exhibits
                  13







PART
1. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share amounts)





January
      31,
                    
                    
                    July
      31,2010
                    
                    
                    2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                    
                    $
                    78
                    
                    
                    $
                    637Certificates
      of deposit
                    
                    
                    61
                    
                    
                    
                    325Accounts
      receivable, net of allowance for bad debt of $10 and $10,
      respectively
                    
                    
                    750
                    
                    
                    
                    337Prepaid
      & other current assets
                    
                    
                    66
                    
                    
                    
                    77Total
      current assets
                    
                    
                    955
                    
                    
                    
                    1,376LONG-TERM
      ASSETS:Intangible
      Assets, net of amortization of $24 and $16, respectively
                    
                    
                    126
                    
                    
                    
                    134PROPERTY
      AND EQUIPMENT
                    
                    
                    825
                    
                    
                    
                    794Less
      - accumulated depreciation
                    
                    
                    (656
                    )
                    
                    
                    (576
                    )Net
      property and equipment
                    
                    
                    169
                    
                    
                    
                    218Total
      assets
                    
                    $
                    1,250
                    
                    
                    $
                    1,728LIABILITIES AND STOCKHOLDERS'
      DEFICITCURRENT
      LIABILITIES:Accounts
      payable
                    
                    $
                    605
                    
                    
                    $
                    585Accrued
      liabilities
                    
                    
                    114
                    
                    
                    
                    192Notes
      payable, net of unamortized discount of $12 and $33,
      respectively
                    
                    
                    668
                    
                    
                    
                    1,173Derivative
      liability
                    
                    
                    85
                    
                    
                    
                    -Total
      current liabilities
                    
                    
                    1,472
                    
                    
                    
                    1,950LONG-TERM
      LIABILITIES:Notes
      payable
                    
                    
                    726
                    
                    
                    
                    291Derivative
      liability
                    
                    
                    -
                    
                    
                    
                    85Other
                    
                    
                    8
                    
                    
                    
                    3Total
      long-term liabilities
                    
                    
                    734
                    
                    
                    
                    379Total
      liabilities
                    
                    
                    2,206
                    
                    
                    
                    2,329STOCKHOLDERS'
      EQUITY 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
                    
                    
                    73,270
                    
                    
                    
                    73,253Noncontrolling
      interest
                    
                    
                    (138
                    )
                    
                    
                    (114
                    )Accumulated
      deficit
                    
                    
                    (74,135
                    )
                    
                    
                    (73,787
                    )Other
      comprehensive income
                    
                    
                    1
                    
                    
                    
                    1Total
      stockholders' deficit
                    
                    
                    (956
                    )
                    
                    
                    (601
                    )Total
      liabilities and stockholders' deficit
                    
                    $
                    1,250
                    
                    
                    $
                    1,728




Unaudited,
see accompanying notes to financial statements




2


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





Three
      months ended January 31,
                      
                      
                      Six
      months ended January 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009OPERATING
      REVENUES:VoIP
      services
                      
                      $
                      4,897
                      
                      
                      $
                      5,454
                      
                      
                      $
                      9,882
                      
                      
                      $
                      12,590Total
      operating revenues
                      
                      
                      4,897
                      
                      
                      
                      5,454
                      
                      
                      
                      9,882
                      
                      
                      
                      12,590OPERATING
      EXPENSES:Cost
      of services (exclusive of depreciation and amortization)
                      
                      
                      4,515
                      
                      
                      
                      4,984
                      
                      
                      
                      9,220
                      
                      
                      
                      11,550Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                      
                      
                      357
                      
                      
                      
                      529
                      
                      
                      
                      726
                      
                      
                      
                      1,062Legal
      and professional fees
                      
                      
                      41
                      
                      
                      
                      102
                      
                      
                      
                      139
                      
                      
                      
                      169Bad
      debt expense
                      
                      
                      -
                      
                      
                      
                      21
                      
                      
                      
                      -
                      
                      
                      
                      2Depreciation
      and amortization expense
                      
                      
                      44
                      
                      
                      
                      42
                      
                      
                      
                      87
                      
                      
                      
                      84Total
      operating expenses
                      
                      
                      4,957
                      
                      
                      
                      5,678
                      
                      
                      
                      10,172
                      
                      
                      
                      12,867OPERATING
      LOSS
                      
                      
                      (60
                      )
                      
                      
                      (224
                      )
                      
                      
                      (290
                      )
                      
                      
                      (277
                      )OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      108Investment
      loss
                      
                      
                      -
                      
                      
                      
                      (12
                      )
                      
                      
                      -
                      
                      
                      
                      (26
                      )Interest
      expense
                      
                      
                      (38
                      )
                      
                      
                      (59
                      )
                      
                      
                      (82
                      )
                      
                      
                      (93
                      )Total
      other expense
                      
                      
                      (38
                      )
                      
                      
                      (71
                      )
                      
                      
                      (82
                      )
                      
                      
                      (11
                      )NET
      INCOME (LOSS)
                      
                      
                      (98
                      )
                      
                      
                      (295
                      )
                      
                      
                      (372
                      )
                      
                      
                      (288
                      )Net
      loss applicable to noncontrolling interest
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      24
                      
                      
                      
                      -NET
      INCOME (LOSS) TO COMMON  STOCKHOLDERS
                      
                      $
                      (98
                      )
                      
                      $
                      (295
                      )
                      
                      $
                      (348
                      )
                      
                      $
                      (288
                      )BASIC
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )DILUTED
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                      
                      $
                      (0.00
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )
                      
                      $
                      (0.01
                      )WEIGHTED
      AVERAGE BASIC COMMON SHARES OUTSTANDING
                      
                      
                      45,504,120
                      
                      
                      
                      40,232,194
                      
                      
                      
                      45,504,120
                      
                      
                      
                      39,954,869WEIGHTED
      AVERAGE DILUTED COMMON SHARES OUTSTANDING
                      
                      
                      45,504,120
                      
                      
                      
                      40,232,194
                      
                      
                      
                      45,504,120
                      
                      
                      
                      40,423,212





Unaudited,
see accompanying notes to financial statements


3


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' DEFICIT


FOR
THE SIX MONTHS ENDED JANUARY 31, 2010


(in
thousands, except share amounts)





AdditionalCommon
                          
                          
                          Paid-in
                          
                          
                          Noncontrolling
                          
                          
                          Accumulated
                          
                          
                          Other Comp.Shares
                          
                          
                          Par
                          
                          
                          Capital
                          
                          
                          interest
                          
                          
                          Deficit
                          
                          
                          Income/Loss
                          
                          
                          TotalsBALANCE,
      July 31, 2009
                          
                          
                          45,504,120
                          
                          
                          
                          46
                          
                          
                          $
                          73,253
                          
                          
                          $
                          (114
                          )
                          
                          $
                          (73,787
                          )
                          
                          $
                          1
                          
                          
                          $
                          (601
                          )Stock
      option expense
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          17
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          17Net
      loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (24
                          )
                          
                          
                          (348
                          )
                          
                          
                          
                          
                          
                          
                          (372
                          )BALANCE,
      January 31, 2010
                          
                          
                          45,504,120
                          
                          
                          
                          46
                          
                          
                          $
                          73,270
                          
                          
                          $
                          (138
                          )
                          
                          $
                          (74,135
                          )
                          
                          
                          1
                          
                          
                          $
                          (956
                          )





Unaudited,
see accompanying notes to financial statements


4


ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands, except per share amounts)





Six
      months ended January 31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      INCOME (LOSS)
                
                $
                (372
                )
                
                $
                (288
                )Adjustments
      to reconcile net loss to cash used in operating
activities:Investment
      loss
                
                
                -
                
                
                
                26Gain
      on early extinguishment of debt
                
                
                -
                
                
                
                (108
                )Depreciation
      and amortization
                
                
                87
                
                
                
                84Issuance
      of stock grants and options, employees for services
                
                
                17
                
                
                
                130Provisions
      (recovery) for losses on accounts receivables
                
                
                -
                
                
                
                -Amortization
      of debt discount
                
                
                21
                
                
                
                2Settlemnt
      litigation with RoseGlen
                
                
                
                
                
                
                30Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (413
                )
                
                
                435Prepaid
      expenses and other
                
                
                11
                
                
                
                (59
                )Accounts
      payable
                
                
                22
                
                
                
                (1,231
                )Wells
      Fargo Factoring Collateral
                
                
                -
                
                
                
                (5
                )Accrued
      liabilities
                
                
                (8
                )
                
                
                79Net
      cash used in operating activities
                
                
                (635
                )
                
                
                (905
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in certificates of deposit
                
                
                264
                
                
                
                (5
                )Note
      receivable, related party
                
                
                -
                
                
                
                (70
                )Purchases
      of property & equipment
                
                
                (31
                )
                
                
                (62
                )Net
      cash provided by / ( used in) investing activities
                
                
                233
                
                
                
                (137
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                
                
                (356
                )
                
                
                (264
                )Acquisition
      of common stock
                
                
                -
                
                
                
                (48
                )Proceeds
      from Notes payables
                
                
                200
                
                
                
                1,275Principal
      payments on capital lease obligation
                
                
                (1
                )
                
                
                (1
                )Net
      cash (used in) / provided by financing activities
                
                
                (157
                )
                
                
                962DECREASE
      IN CASH
                
                
                (559
                )
                
                
                (80
                )CASH
      AND CASH EQUIVALENTS, beginning of period
                
                
                637
                
                
                
                1,338CASH
      AND CASH EQUIVALENTS, end of period
                
                $
                78
                
                
                $
                1,258SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for interest
                
                $
                47
                
                
                $
                56Cash
      paid for income tax
                
                
                -
                
                
                
                -NON-CASH  INVESTING
      AND FINANCING TRANSACTIONSIssuance
      of common stock for conversion of debt
                
                $
                -
                
                
                $
                172




Unaudited,
see accompanying notes to financial statements




5


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, 2009, as reported in
Form 10-K filed on October 15, 2009, have been omitted.





NOTE
2 – ACCOUNTS RECEIVABLE FINANCING





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
automatically renews for an additional twelve months.  ATSI can
terminate this agreement upon 30 days’ written notice, subject to a $15,000
early termination fee.  As of January 31, 2010, all receivables
sold to WFBC had been collected and the entire $5,000,000 facility was
available.  ATSI will continue to factor its receivables on a monthly
basis as necessary to provide funds for operations.





NOTE
3 – OUTSTANDING DEBT





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


January
      31,
                                            
                                            
                                            July
      31,2010
                                            
                                            
                                            2009Note
      payable to Alfonso Torres, payable upon maturity, bearing interest of
      6.00% per annum, maturing October 31, 2011, unsecured.
                                            
                                            
                                            524
                                            
                                            
                                            
                                            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.
                                            
                                            
                                            37
                                            
                                            
                                            
                                            72Note
      payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
      payable in monthly installments, bearing 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 $0.80 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
      $12 and $33, respectively
                                            
                                            
                                            380
                                            
                                            
                                            
                                            604Note
      payable to San Antonio National Bank payable in monthly installments,
      bearing interest at 8.00% per annum, maturing October 25, 2011,
      collateralized by ATSI's assets.
                                            
                                            
                                            259
                                            
                                            
                                            
                                            328Note
      payable to ATV  Texas Ventures payable in monthly installments,
      bearing interest at 12.00% per annum, maturing November 10, 2011,
      collateralized by ATSI's assets.
                                            
                                            
                                            93
                                            
                                            
                                            
                                            -Note
      payable to ATV Texas Ventures payable in monthly installments, bearing
      interest at 12.00% per annum, maturing January 10, 2012, collateralized by
      ATSI's assets.
                                            
                                            
                                            100
                                            
                                            
                                            
                                            -Total
      outstanding debt long-term debt
                                            
                                            
                                            1,393
                                            
                                            
                                            
                                            1,464Current
      portion of long-term debt
                                            
                                            
                                            (668
                                            )
                                            
                                            
                                            (1,173
                                            )Long-term
      debt, net of current portion
                                            
                                            $
                                            725
                                            
                                            
                                            $
                                            291Payments on long-term debt of ATSI are due as
      follows:(in
      thousands)Fiscal
      2010
                                            
                                            
                                            
                                            
                                            
                                            $
                                            668Fiscal
      2011
                                            
                                            
                                            
                                            
                                            
                                            
                                            725Total
      payments
                                            
                                            
                                            
                                            
                                            
                                            $
                                            1,393




6





ATSI
analyzed these instruments for derivative accounting consideration under ASC
815-15 and ASC 815-40, and determined that the warrants issued to ATVF, Scott
Crist, Roderick Ciaccioa & Vencore Solutions did not meet the definition of
equity under ASC 815-15 and ASC 815-40, 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. As of January 31, 2010, ATSI was not in compliance of its
loan covenants for all outstanding promissory notes with ATVF, ATV Texas
Ventures and San Antonio National Bank.





NOTE
4 – STOCK-BASED COMPENSATION TO EMPLOYEES





In
September 2005, ATSI adopted its 2005 stock compensation plan.  This
plan 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.





ATSI did not grant any employee stock
options during the six months ended January 31, 2010.




7







ATSI
recognized $17,265 and $130,000 in stock based compensation expense to employees
during six months ended January 31, 2010 and 2009,
respectively.  Unamortized compensation cost totaled $10,694 and
$64,255 at January 31, 2010 and January 31, 2009, respectively.





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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 our 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 15,
2009.





The
following is a discussion of the consolidated financial condition and results of
operations of ATSI for the three and six months ended January 31, 2010 and
2009.  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,
2009.  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.





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.





We also provide enhanced hosted VoIP
Services, which include fully hosted IP/PBX services, IP trunking, call center
applications, prepaid services, and customized VoIP solutions for specialized
applications.  Under our current network, we provide interactive voice
response auto attendant, call recording, simultaneous calling, voicemail to
email conversion, and multiple other IP/PBX features in a hosted
environment.  As an outsourced VoIP technology enabler, we are
marketing new and synergistic services to other carriers and to enterprise
customers through established channel partners.





Results
of Operations





The
following table sets forth certain items included in our results of operations
and variances between periods for the three and six months ended January 31,
2010 and 2009.  All dollar amounts are in thousands.


8




Three
      months ended January 31,
                                                
                                                
                                                Six
      months ended January 31,2010
                                                
                                                
                                                2009
                                                
                                                
                                                Variances
                                                
                                                
                                                %
                                                
                                                
                                                2010
                                                
                                                
                                                2009
                                                
                                                
                                                Variances
                                                
                                                
                                                %OPERATING
      REVENUES:VoIP
      services
                                                
                                                $
                                                4,897
                                                
                                                
                                                $
                                                5,454
                                                
                                                
                                                $
                                                (557
                                                )
                                                
                                                
                                                -10
                                                %
                                                
                                                $
                                                9,882
                                                
                                                
                                                $
                                                12,590
                                                
                                                
                                                $
                                                (2,708
                                                )
                                                
                                                
                                                -22
                                                %Total
      operating revenues
                                                
                                                
                                                4,897
                                                
                                                
                                                
                                                5,454
                                                
                                                
                                                
                                                (557
                                                )
                                                
                                                
                                                -10
                                                %
                                                
                                                
                                                9,882
                                                
                                                
                                                
                                                12,590
                                                
                                                
                                                
                                                (2,708
                                                )
                                                
                                                
                                                -22
                                                %Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                                                
                                                
                                                4,515
                                                
                                                
                                                
                                                4,984
                                                
                                                
                                                
                                                (469
                                                )
                                                
                                                
                                                -9
                                                %
                                                
                                                
                                                9,220
                                                
                                                
                                                
                                                11,550
                                                
                                                
                                                
                                                (2,330
                                                )
                                                
                                                
                                                -20
                                                %GROSS
      MARGIN
                                                
                                                
                                                382
                                                
                                                
                                                
                                                470
                                                
                                                
                                                
                                                (88
                                                )
                                                
                                                
                                                -19
                                                %
                                                
                                                
                                                662
                                                
                                                
                                                
                                                1,040
                                                
                                                
                                                
                                                (378
                                                )
                                                
                                                
                                                -36
                                                %Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                                                
                                                
                                                357
                                                
                                                
                                                
                                                529
                                                
                                                
                                                
                                                (172
                                                )
                                                
                                                
                                                -33
                                                %
                                                
                                                
                                                726
                                                
                                                
                                                
                                                1,062
                                                
                                                
                                                
                                                (336
                                                )
                                                
                                                
                                                -32
                                                %Legal
      and professional fees
                                                
                                                
                                                41
                                                
                                                
                                                
                                                102
                                                
                                                
                                                
                                                (61
                                                )
                                                
                                                
                                                -60
                                                %
                                                
                                                
                                                139
                                                
                                                
                                                
                                                169
                                                
                                                
                                                
                                                (30
                                                )
                                                
                                                
                                                -18
                                                %Bad
      debt expense
                                                
                                                
                                                -
                                                
                                                
                                                
                                                21
                                                
                                                
                                                
                                                (21
                                                )
                                                
                                                
                                                -100
                                                %
                                                
                                                
                                                -
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                (2
                                                )
                                                
                                                
                                                -100
                                                %Depreciation
      and amortization expense
                                                
                                                
                                                44
                                                
                                                
                                                
                                                42
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                5
                                                %
                                                
                                                
                                                87
                                                
                                                
                                                
                                                84
                                                
                                                
                                                
                                                3
                                                
                                                
                                                
                                                4
                                                %OPERATING
      LOSS
                                                
                                                
                                                (60
                                                )
                                                
                                                
                                                (224
                                                )
                                                
                                                
                                                164
                                                
                                                
                                                
                                                -73
                                                %
                                                
                                                
                                                (290
                                                )
                                                
                                                
                                                (277
                                                )
                                                
                                                
                                                (13
                                                )
                                                
                                                
                                                5
                                                %OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                0
                                                %
                                                
                                                
                                                -
                                                
                                                
                                                
                                                108
                                                
                                                
                                                
                                                (108
                                                )
                                                
                                                
                                                -100
                                                %Minority
      Interest
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (12
                                                )
                                                
                                                
                                                12
                                                
                                                
                                                
                                                -100
                                                %
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (26
                                                )
                                                
                                                
                                                26
                                                
                                                
                                                
                                                -100
                                                %Interest
      income (expense)
                                                
                                                
                                                (38
                                                )
                                                
                                                
                                                (59
                                                )
                                                
                                                
                                                21
                                                
                                                
                                                
                                                -36
                                                %
                                                
                                                
                                                (82
                                                )
                                                
                                                
                                                (93
                                                )
                                                
                                                
                                                11
                                                
                                                
                                                
                                                -12
                                                %Total
      other income (expense), net
                                                
                                                
                                                (38
                                                )
                                                
                                                
                                                (71
                                                )
                                                
                                                
                                                33
                                                
                                                
                                                
                                                -46
                                                %
                                                
                                                
                                                (82
                                                )
                                                
                                                
                                                (11
                                                )
                                                
                                                
                                                (71
                                                )
                                                
                                                
                                                645
                                                %NET
      INCOME (LOSS)
                                                
                                                
                                                (98
                                                )
                                                
                                                
                                                (295
                                                )
                                                
                                                
                                                197
                                                
                                                
                                                
                                                -67
                                                %
                                                
                                                
                                                (372
                                                )
                                                
                                                
                                                (288
                                                )
                                                
                                                
                                                (84
                                                )
                                                
                                                
                                                29
                                                %Net
      loss applicable to noncontrolling interest
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                0
                                                %
                                                
                                                
                                                24
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                24
                                                
                                                
                                                
                                                100
                                                %NET
      INCOME (LOSS) TO COMMON STOCKHOLDERS
                                                
                                                
                                                (98
                                                )
                                                
                                                
                                                (295
                                                )
                                                
                                                
                                                197
                                                
                                                
                                                
                                                -67
                                                %
                                                
                                                
                                                (348
                                                )
                                                
                                                
                                                (288
                                                )
                                                
                                                
                                                (60
                                                )
                                                
                                                
                                                21
                                                %





Three
Months ended January 31, 2010 Compared to Three Months ended January 31,
2009





VoIP Service. VoIP services revenue
decreased by $557,000, or 10%, from the quarter ended January 31, 2009 to the
quarter ended January 31, 2010.  VoIP minutes carried by our network
on which we generated revenues increased by 63% from approximately 93,102,888
minutes of voice traffic during the quarter ended January 31, 2009 to
approximately 151,627,627 minutes of voice traffic during the quarter ended
January 31, 2010.  Despite the increase in VoIP minutes, our average
revenue per minute decreased from $0.0584 during the quarter ended January 31,
2009 to $0.0322 for the quarter ended January 31, 2010.  This
represents a decrease in our average revenue rate per minute of
45%.  The decrease in revenue and the average revenue per minute is
attributable primarily to our customers constantly seeking low cost service
providers to terminate their VoIP services as a result of the overall price
pressure in the international VoIP market due to the global economic
recession.





Cost of Services (exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $469,000, or 9%, from the quarter ended January 31, 2009
to the quarter ended January 31, 2010.  The decrease in cost of
services is a direct correlation to the decrease in VoIP services
revenue.  Cost of services, as a percentage of revenue increased by
0.82 % between periods, from 91.38% of revenue during the quarter ended January
31, 2009 to 92.20% of revenue during the quarter ended January 31,
2010.  The increase in cost of services as a percentage of revenue was
due to the increase in costs from our vendors and the fixed costs required to
operate our network.  Also, as a result of the decrease in VoIP
revenues and increase in costs of service as a percent of sales, our gross
margin declined by $88,000, or 19%, from $470,000 for the three months ended
January 31, 2009 compared to $382,000 for the three months ended
January 31, 2010.


9





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).SG&A expenses decreased by $172,000, or 33%, from
the quarter ended January 31, 2009 to the quarter ended January 31,
2010.  The decrease is primarily attributable to the decrease in
non-cash compensation expense to employees.  During the quarter ended
January 31, 2009, we recognized $68,105 in non-cash compensation expense to
employees, but during the quarter ended January 31, 2010 we only recognized
$3,333 in non-cash compensation expense to employees





Legal and professional
fees.  Legal and professional fees decreased by $61,000, or
60%, from the quarter ended January 31, 2009 to the quarter ended January 31,
2010.  The decrease is attributable to $30,000 in Board of Director
fees incurred during the quarter ended January 31, 2009.  We did not
incur similar expenses during the quarter ended January 31, 2010.





Bad debt
expense.  Bad debt expense decreased by $21,000.  The
decrease is attributable to $21,000 in bad debt expense recognized during the
three months ended January 31, 2009 associated with the write-off of
uncollectible accounts.  We did not incur similar expenses during the
quarter ended January 31, 2010.





Depreciation and
amortization.  Depreciation and amortization increased by
$2,000 or 5%, from the quarter ended January 31, 2009 to the quarter ended
January 31, 2010.  The increase is attributed to the additional
amortization associated with the new computers and servers acquired during the
three months ended January 31, 2010.





Operating income
(loss).  The Company reported an operating loss of $60,000 for
the three months ended January 31, 2010 compared to an operating loss of
$224,000 for the three months ended January 31, 2009.  The improvement
in net loss between periods was primarily attributed to the decline in selling
and general administrative expenses, professional fees and bad
debt.





Other income
(expense).  Other expenses decreased by $33,000, or 46% from
the quarter ended January 31, 2009 to the quarter ended January 31,
2010.  The primary reason for the decrease in other expenses is
related to the decrease of $12,000 in expenses associated to our minority
interest in Fiesta Communications recognized during the quarter ended January
31, 2009.  Additionally, interest expense between periods decreased by
$21,000, or 36%, from $59,000 for the quarter ended January 31, 2009 to $38,000
for the quarter ended January 31, 2010.  The decrease in interest
expense is attributed to the decrease in outstanding principal balances under
various promissory notes.  As a result, our interest expense decreased
between periods.





Net income (loss) to common
stockholders.  The Company reported a net loss to common
stockholders of $98,000 for the three months ended January 31, 2010 compared to
a net loss of $295,000 to common stockholders for the three months ended January
31, 2009.  The decrease in net loss between periods was primarily the
result of the reduction in selling, general and administrative expenses, legal
fees and professional fess and bad debt.





Six
Months ended January 31, 2010 Compared to Six Months ended January 31,
2009





VoIP Service.VoIP services
revenue decreased by $2,708,000, or 22%, from the six months ended
January 31, 2009 to the six months ended January 31, 2010.  VoIP
minutes carried on our network on which we generated revenues, increased by 38%
from approximately 206,479,684 minutes of voice traffic during the six months
ended January 31, 2009 to approximately 285,166,132 minutes of voice
traffic during the six months ended January 31, 2010.  Despite the
increase in VoIP minutes, our average revenue per minute decreased from $0.0608
during the six months ended January 31, 2009 to $0.03455 for the six months
ended January 31, 2010.  This represents a decrease in our average
revenue rate per minute of 43%.  The decrease in revenue and the
average revenue per minute is attributable primarily to our customers constantly
seeking low cost service providers to terminate their VoIP services as a result
of the overall price pressure in the international VoIP market due to the global
economic recession.


10





Cost of Services (exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $2,330,000, or 20%, from the six months ended January 31,
2009 to the six months ended January 31, 2010.  The decrease in cost
of services is a direct correlation of the decrease in VoIP services
revenue.  Cost of services, as a percentage of revenue increased by
1.56 % between periods, from 91.74% of revenue during the six months ended
January 31, 2009 to 93.30% of revenue during the six months ended January 31,
2010.  The increase in cost of services as a percentage of revenue is
due to the increase in costs from our vendors as a result of the quality
requirements and fixed costs required to operate our network. Also, as a result
of the decrease in VoIP revenues, our gross margin declined by $378,000 or 36%
from $1,040,000 for the six months ended January 31, 2009 compared to $662,000
for the six months ended January 31, 2010





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).  SG&A expenses decreased by $336,000, or 32%, from
the six months ended January 31, 2009 to the six months ended January 31,
2010.  The decrease is primarily attributable to the decrease in
non-cash compensation expense to employees.  During the six months
ended January 31, 2009 we recognized $130,000 in non-cash compensation expense
to employees.  In comparison, we only recognized $17,000 in non-cash
compensation expense to employees during the six months ended January 31, 2009.
Additionally, our salaries and wages decreased between periods by $213,000 as a
result of the termination of various employees during fiscal 2009.





Legal and Professional
Fees.  Legal and professional fees decreased by $30,000, or
18%, from the six months ended January 31, 2009 to the six months ended January
31, 2010.  The decrease is attributable to $30,000 in Board of
Directors fees incurred during the six months ended January 31,
2009.  We did not incur similar expenses during the six months ended
January 31, 2010.





Bad Debt
Expense.  Bad debt expense improved by $2,000, or 100%, from
the six months ended January 31, 2009 to the six months ended January 31,
2010.  During the six months ended January 31, 2009, we recognized
$2,000 in bad debt expense associated with uncollectible accounts.  We
did not incur similar expenses during the six months ended January 31,
2010.





Depreciation and
Amortization.  Depreciation and amortization increased by
$3,000 or 4%, from the six months ended January 31, 2009 to the six months ended
January 31, 2010.  The increase is attributed to additional
amortization expense associated with the new computers acquired during the
period ending January 31, 2010.





Operating Income
(loss).  The Company’s operating loss increased by $13,000, or
5%, from the six months ended January 31, 2009 to the six months ended January
31, 2010.  The increase in operating loss between periods is
attributed to the decrease in gross margin, which was slightly offset by the
decrease between periods in SG&A expenses and the decrease in legal and
professional fees.





Other Income
(expense).  Other expense increased by $71,000 from the six
months ended January 31, 2009 to the six months ended January 31,
2010.  Other expense during the six months ended January 31, 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 our equity interest in
Fiesta Communications of $26,000 and interest expense of $93,000.  We
did not recognize a gain on early extinguishment of debt during the six months
ended January 31, 2010, thus the increase in other expense between
periods.


11


Net Income
(loss).  Net loss increased by $84,000, or 29%, from the six
months ended January 31, 2009 to the six months ended January 31,
2010.  The increase in net loss between periods is attributed to the
decrease between periods in operating income and the increase between periods in
other expenses.





Net Loss Applicable to
Noncontrolling Interest.  Loss attributed to noncontrolling
interest increased by $24,000, or 100%, from the six months ended January 31,
2009 to the six months ended January 31, 2010.  During the six months
ended January 31, 2010, we recognized $24,000 associated to the losses incurred
in Fiesta and Telefamilia.  We did not recognize any noncontrolling
interest expenses during the six months ended January 31, 2009.





Net Income (loss) to Common
Stockholders.  The Company reported a net loss to common
stockholders of $348,000 for the six months ended January 31, 2010 compared to a
net loss to common stockholders of $288,000 for the six months ended January 31,
2010.  The increase in net loss for the six months ended January 31,
2010 was primarily the result of the decline in revenue, gross margin and the
increase in operating losses.





Liquidity
and Capital Resources





Cash Position:  We
had a cash balance of $78,000 as of January 31, 2010.  Net cash
consumed by operating activities during the six months ended January 31, 2010
was approximately $635,000.  Investing activities during the six
months ended January 31, 2010 generated $233,000, consisting of $264,000 from
the sale of certificates of deposit.  This was slightly offset by
$31,000 associated with the acquisition of various servers and
computers.  Financing activities during the six months ended January
31, 2010 consumed $157,000 in cash.  The cash consumed during the
period is associated with the debt principal payments of $356,000 related to
various notes payable and principal payments of $1,000 associated with a capital
lease obligation.  Additionally, we received proceeds of $200,000 from
various promissory notes during the six months ended January 31,
2010.  Overall, our net operating, investing and financing activities
during the six months ended January 31, 2010 consumed $559,000 of our available
cash.





We are currently utilizing our
available cash to fund any deficiencies in our cash flows from
operations.  During the six months ended January 31, 2010, we received
$200,000 from Texas Ventures under two 24 month promissory notes.  As
of January 31, 2010, there was a total of $5,000,000 available under our account
receivable factoring line with WFBC.





Our
current cash expenses are expected to be approximately $135,000 per month,
including wages, rent, utilities and corporate professional fees.  We
are currently using $128,000 in cash generated from operations and approximately
$45,000 per month of our available cash to cover all monthly cash
expenses.  We anticipate that the January 31, 2010 cash balance
of $78,000, certificate of deposit of $61,000, combined with our ability to
raise additional cash from our funding source, expected net cash flow generated
from future operations and the factoring agreement with WFBC, will be sufficient
to fund our operations and capital asset expenditures for the next twelve
months.





Our
working capital (deficit) was $517,000 as of January 31, 2010.  This
represents an improvement of approximately $57,000 from our working capital
(deficit) at July 31, 2009.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS





NONE


12




ITEM 4.  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 January 31, 2010.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting during the six
months ended January 31, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





PART
II.  OTHER INFORMATION





ITEM
6.  EXHIBITS





The following documents are filed as
exhibits to this report.





Number
            
            Description10.1
            
            Promissory
      note payable and security agreement with ATV Texas Ventures III, LP. dated
      January 10, 2010 in the principal amount of $100,000.31.1
            
            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.




13




SIGNATURE





Pursuant with the requirements 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.(Registrant)Date:
      March 12, 2010
                By:
                /s/ Arthur L. SmithName:
                Arthur
      L. SmithTitle:
                President
      andChief
      Executive OfficerDate:
      March 12, 2010
                By:
                /s/ Antonio Estrada Jr.Name:
                Antonio
      Estrada Jr.Title:
                Sr.
      VP of Finance & Corporate
                  Controller(Principal
      Accounting and Principal
                  Financial
      Officer)


14


EXHIBIT
INDEX





Number
            
            Description10.1
            
            Promissory
      note payable and security agreement with ATV Texas Ventures III, LP. dated
      January 10, 2010 in the principal amount of $100,000.31.1
            
            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.