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 January 31,
2009





 ̈
            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 Registrant as Specified in Its Charter)





Nevada
              
              74-2849995(State
      or Other Jurisdiction of Incorporation
              
              (IRS
      Employeror
      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. YesxNo ̈





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 filer ̈
              
              Accelerated filer ̈Non-accelerated filer ̈
              
              Smaller reporting Companyx





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


Yes ̈Nox





There
were 39,892,157 shares of the registrant’s Common Stock, $.001 par value per
share, outstanding as of March 13, 2009.








ATSI
COMMUNICATIONS, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED JANUARY 31, 2009





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial StatementsConsolidated
      Balance Sheets as of January 31, 2009 and July 31, 2008
      (unaudited)
                                                    3Consolidated
      Statements of Operations for the Three and Six Months Ended January 31,
      2009 and 2008 (unaudited)
                                                    4Consolidated
      Statement of Changes in Stockholders’ Equity for the Six
      Months  Ended January 31, 2009 (unaudited)
                                                    5Consolidated
      Statements of Cash Flows for the Six Months  Ended January 31,
      2009 and 2008 (unaudited)
                                                    6Notes
      to Consolidated Financial Statements (unaudited)
                                                    7Item
      2. Management’s Discussions and Analysis and Plan of
      Operations
                                                    12Item
      3. Quantitative and qualitative disclosures about market
    risk
                                                    16Item
      4. Controls and Procedures
                                                    16PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                                                    17Item
      1A. Risk Factors
                                                    17Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                                                    17Item
      3. Default Upon Senior Securities
                                                    17Item
      4. Submission of Matters to a Vote of Security Holders
                                                    17Item
      5. Other Information
                                                    17Item
      6. Exhibits
                                                    17


2


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
      31,2009
                                                                          
                                                                          
                                                                          2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                                                          
                                                                          $
                                                                          1,258
                                                                          
                                                                          
                                                                          $
                                                                          1,338Accounts
      receivable, net of allowance for bad debt of $40 and $60,
      respectively
                                                                          
                                                                          
                                                                          644
                                                                          
                                                                          
                                                                          
                                                                          1,082Note
      receivable, related party
                                                                          
                                                                          
                                                                          70
                                                                          
                                                                          
                                                                          
                                                                          25Prepaid
      & other current assets
                                                                          
                                                                          
                                                                          183
                                                                          
                                                                          
                                                                          
                                                                          124Total
      current assets
                                                                          
                                                                          
                                                                          2,155
                                                                          
                                                                          
                                                                          
                                                                          2,569LONG-TERM
      ASSETS:Certificates
      of deposit
                                                                          
                                                                          
                                                                          324
                                                                          
                                                                          
                                                                          
                                                                          319Intangible
      Assets, net of amortization
                                                                          
                                                                          
                                                                          141
                                                                          
                                                                          
                                                                          
                                                                          149PROPERTY
      AND EQUIPMENT
                                                                          
                                                                          
                                                                          674
                                                                          
                                                                          
                                                                          
                                                                          611Less
      - accumulated depreciation
                                                                          
                                                                          
                                                                          (515
                                                                          )
                                                                          
                                                                          
                                                                          (439
                                                                          )Net
      property and equipment
                                                                          
                                                                          
                                                                          159
                                                                          
                                                                          
                                                                          
                                                                          172Total
      assets
                                                                          
                                                                          $
                                                                          2,779
                                                                          
                                                                          
                                                                          $
                                                                          3,209LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                                          
                                                                          $
                                                                          442
                                                                          
                                                                          
                                                                          $
                                                                          1,361Wells
      Fargo factoring collateral
                                                                          
                                                                          
                                                                          13
                                                                          
                                                                          
                                                                          
                                                                          18Accrued
      liabilities
                                                                          
                                                                          
                                                                          144
                                                                          
                                                                          
                                                                          
                                                                          116Current
      portion of obligation under capital leases
                                                                          
                                                                          
                                                                          2
                                                                          
                                                                          
                                                                          
                                                                          3Notes
      payable
                                                                          
                                                                          
                                                                          1,086
                                                                          
                                                                          
                                                                          
                                                                          566Convertible
      debentures, net of unamortized discount of $0 and $5,
      respectively
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          78Total
      current liabilities
                                                                          
                                                                          
                                                                          1,687
                                                                          
                                                                          
                                                                          
                                                                          2,142LONG-TERM
      LIABILITIES:Notes
      payable
                                                                          
                                                                          
                                                                          626
                                                                          
                                                                          
                                                                          
                                                                          588Derivative
      liability
                                                                          
                                                                          
                                                                          85
                                                                          
                                                                          
                                                                          
                                                                          -Convertible
      debentures, net of unamortized discount of $0 and $3,
      respectively
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          81Obligation
      under capital leases, less current portion
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          1Other
                                                                          
                                                                          
                                                                          21
                                                                          
                                                                          
                                                                          
                                                                          3Total
      long-term liabilities
                                                                          
                                                                          
                                                                          732
                                                                          
                                                                          
                                                                          
                                                                          673Total
      liabilities
                                                                          
                                                                          
                                                                          2,419
                                                                          
                                                                          
                                                                          
                                                                          2,815STOCKHOLDERS'
      EQUITY:Preferred
      Stock, 16,063,000 shares authorized, 0 and 0 shares issued
      and  outstanding, respectively
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          -Common
      stock, $0.001 par value, 150,000,000 shares authorized, 39,892,157 and
      39,550,415 sharesissued
      and outstanding, respectively
                                                                          
                                                                          
                                                                          40
                                                                          
                                                                          
                                                                          
                                                                          39Additional
      paid in capital
                                                                          
                                                                          
                                                                          73,000
                                                                          
                                                                          
                                                                          
                                                                          72,747Accumulated
      deficit
                                                                          
                                                                          
                                                                          (72,681
                                                                          )
                                                                          
                                                                          
                                                                          (72,393
                                                                          )Other
      comprehensive income
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          1Total
      stockholders' equity
                                                                          
                                                                          
                                                                          360
                                                                          
                                                                          
                                                                          
                                                                          394Total
      liabilities and stockholders' equity
                                                                          
                                                                          $
                                                                          2,779
                                                                          
                                                                          
                                                                          $
                                                                          3,209




See
accompanying notes to unaudited financial statements


3





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





Three
      months ended January 31,
                
                
                Six
      months ended January 31,2009
                
                
                2008
                
                
                2009
                
                
                2008OPERATING
      REVENUES:VoIP
      services
                
                $
                5,454
                
                
                $
                10,309
                
                
                $
                12,590
                
                
                $
                19,735Total
      operating revenues
                
                
                5,454
                
                
                
                10,309
                
                
                
                12,590
                
                
                
                19,735OPERATING
      EXPENSES:Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                
                
                4,984
                
                
                
                9,544
                
                
                
                11,550
                
                
                
                18,328Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                
                
                529
                
                
                
                538
                
                
                
                1,062
                
                
                
                1,361Legal
      and professional fees
                
                
                102
                
                
                
                65
                
                
                
                169
                
                
                
                154Bad
      debt expense
                
                
                21
                
                
                
                21
                
                
                
                2
                
                
                
                21Depreciation
      and amortization expense
                
                
                42
                
                
                
                38
                
                
                
                84
                
                
                
                78Total
      operating expenses
                
                
                5,678
                
                
                
                10,206
                
                
                
                12,867
                
                
                
                19,942OPERATING
      INCOME (LOSS)
                
                
                (224
                )
                
                
                103
                
                
                
                (277
                )
                
                
                (207
                )OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                
                
                -
                
                
                
                -
                
                
                
                108
                
                
                
                41Investment
      loss
                
                
                (12
                )
                
                
                -
                
                
                
                (26
                )
                
                
                -Interest
      income (expense)
                
                
                (59
                )
                
                
                (24
                )
                
                
                (93
                )
                
                
                (48
                )Total
      other income (expense), net
                
                
                (71
                )
                
                
                (24
                )
                
                
                (11
                )
                
                
                (7
                )NET
      INCOME (LOSS)
                
                
                (295
                )
                
                
                79
                
                
                
                (288
                )
                
                
                (214
                )LESS:
      PREFERRED DIVIDEND
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12
                )ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                340NET
      INCOME (LOSS) TO COMMON  STOCKHOLDERS
                
                $
                (295
                )
                
                $
                79
                
                
                $
                (288
                )
                
                $
                114BASIC
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                
                $
                (0.01
                )
                
                $
                0.00
                
                
                $
                (0.01
                )
                
                $
                0.00DILUTED
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                
                $
                (0.01
                )
                
                $
                0.00
                
                
                $
                (0.01
                )
                
                $
                0.00WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
                
                
                40,232,194
                
                
                
                39,134,394
                
                
                
                39,954,869
                
                
                
                38,963,391DILUTED
      COMMON SHARES OUTSTANDING
                
                
                40,232,194
                
                
                
                39,522,972
                
                
                
                40,423,212
                
                
                
                39,177,155





See
accompanying notes to unaudited financial statements


4





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


(in
thousands, except share amounts)





AdditionalPreferred
      Stock
                              
                              
                              Common
                              
                              
                              Paid-in
                              
                              
                              Accumulated
                              
                              
                              Other
      Comp.Shares
                              
                              
                              Par
                              
                              
                              Shares
                              
                              
                              Par
                              
                              
                              Capital
                              
                              
                              Deficit
                              
                              
                              Income/Loss
                              
                              
                              TotalsBALANCE,
      July 31, 2008
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              39,550,415
                              
                              
                              
                              39
                              
                              
                              $
                              72,747
                              
                              
                              $
                              (72,393
                              )
                              
                              $
                              1
                              
                              
                              $
                              394Repurchase
      of common shares
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (295,981
                              )
                              
                              
                              (0
                              )
                              
                              $
                              (48
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (48
                              )Stock
      option expense
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              130
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              130Shares
      issued for conversion of notes payable
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              637,723
                              
                              
                              
                              1
                              
                              
                              
                              171
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              172Net
      loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (288
                              )
                              
                              
                              
                              
                              
                              
                              (288
                              )BALANCE,
      January 31, 2009
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              39,892,157
                              
                              
                              
                              40
                              
                              
                              $
                              73,000
                              
                              
                              $
                              (72,681
                              )
                              
                              $
                              1
                              
                              
                              $
                              360





See
accompanying notes to unaudited financial statements


5





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands, except per share amounts)





SIx
      months ended January 31,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      LOSS
                  
                  $
                  (288
                  )
                  
                  $
                  (214
                  )Adjustments
      to reconcile net loss to cash used in operating
activities:Investment
      loss
                  
                  
                  26
                  
                  
                  
                  -Gain
      on early extinguishment of debt
                  
                  
                  (108
                  )
                  
                  
                  (41
                  )Depreciation
      and amortization
                  
                  
                  84
                  
                  
                  
                  78Issuance
      of stock grants and options, employees for services
                  
                  
                  130
                  
                  
                  
                  524Issuance
      of common stock and warrants for services
                  
                  
                  -
                  
                  
                  
                  24Provisions
      for losses on accounts receivables
                  
                  
                  2
                  
                  
                  
                  21Amortization
      of debt discount
                  
                  
                  30
                  
                  
                  
                  4Settlement
      litigation with RoseGlen
                  
                  
                  -
                  
                  
                  
                  (175
                  )Changes
      in operating assets and liabilities:Accounts
      receivable
                  
                  
                  435
                  
                  
                  
                  (114
                  )Prepaid
      expenses and other
                  
                  
                  (59
                  )
                  
                  
                  (25
                  )Accounts
      payable
                  
                  
                  (1,231
                  )
                  
                  
                  (73
                  )Wells
      Fargo Factoring Collateral
                  
                  
                  (5
                  )
                  
                  
                  -Accrued
      liabilities
                  
                  
                  79
                  
                  
                  
                  (34
                  )Net
      cash used by operating activities
                  
                  
                  (905
                  )
                  
                  
                  (25
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in certificates of deposit
                  
                  
                  (5
                  )
                  
                  
                  (8
                  )Note
      receivable, related party
                  
                  
                  (70
                  )
                  
                  
                  -Purchase
      of VoIP License
                  
                  
                  -
                  
                  
                  
                  (100
                  )Purchases
      of property & equipment
                  
                  
                  (62
                  )
                  
                  
                  (2
                  )Net
      cash used in investing activities
                  
                  
                  (137
                  )
                  
                  
                  (110
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                  
                  
                  (264
                  )
                  
                  
                  (84
                  )Acquisition
      of common stock
                  
                  
                  (48
                  )
                  
                  
                  -Proceeds
      from Notes payables
                  
                  
                  1,275
                  
                  
                  
                  -Principal
      payments on capital lease obligation
                  
                  
                  (1
                  )
                  
                  
                  (1
                  )Net
      cash provided / (used in) financing activities
                  
                  
                  962
                  
                  
                  
                  (85
                  )DECREASE
      IN CASH
                  
                  
                  (80
                  )
                  
                  
                  (220
                  )CASH
      AND CASH EQUIVALENTS, beginning of period
                  
                  
                  1,338
                  
                  
                  
                  1,050CASH
      AND CASH EQUIVALENTS, end of period
                  
                  $
                  1,258
                  
                  
                  $
                  830SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for interest
                  
                  $
                  56
                  
                  
                  $
                  23Cash
      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
                  )





See
accompanying notes to unaudited 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 $60,000 of its
monthly receivables.  As of January 31, 2009, ATSI had approximately
$13,000 of factored account receivables outstanding.  ATSI will
continue to factor its receivables on a monthly basis as services are rendered
to its customers.


NOTE
3 – OUTSTANDING DEBT





At January 31, 2009 and July
31, 2008 outstanding debt consisted of the following: (In thousands, except per
share amounts)


January
      31,
                                                                                    
                                                                                    
                                                                                    July
      31,2009
                                                                                    
                                                                                    
                                                                                    20089%
      Convertible Subordinated Debenture, bering interest at 9.00% per annum
      maturingJune
      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 daysimmediately
      preceding the date of conversion, subject to a maximum number of
      1,540,741common
      shares issuable upon conversion, outstanding balance, net of unamortized
      discountof
      $0 and $5, respectively. On October 20, 2008  we reached a
      settlement agreement withthe
      Debenture holders, as result we converted the outstanding principal
      balance and accruedinterest
      of $166 and $6, respectively, into 637,723 shares of common
      stock.
                                                                                    
                                                                                    $
                                                                                    -
                                                                                    
                                                                                    
                                                                                    $
                                                                                    159Note
      payable to CCA Financial Services payable in monthlyinstallments
      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 accruedinterest
      of $54 and $1, respectively.
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    101
  7
 At January 31, 2009 and July
31, 2008 outstanding debt consisted of the following: (In thousands, except per
share amounts)
 January
      31,
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            July
      31,2009
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            2008Note
      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 of7.50%
      per annum, maturing April 12, 2012.  On October 30, 2008, we
      reached a settlementagreement,
      in which we agreed to pay $290 to fully satisfy the note. Additionally,
      thenote
      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.
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            13
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            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.
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            105
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            138Note
      payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
      payable in monthlyinstallments,
      bering interest at 10.00% per annum, maturing September 10, 2010,
      collateralizedBy
      ATSI's accounts receivables (other than accounts factored with Wells
      Fargo), $100,000certificate
      of deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally,
      weissued
      425,000 warrants to the note holders, at an exercise price per warrant of
      $0.19.The
      warrants have the following “Put” and “Call” rights: Put right. From and
      after thesecond
      anniversary of the notes payable, the holder shall have the right to
      request from ATSI,upon
      five (5) Business days prior notice, to acquire from the holders the
      warrants at a price$0.39
      per warrant. Call right.  At any time any warrants are
      outstanding, if the last sale price of ATSI’scommon
      stock is greater than $.80 per share for ten (10) consecutive trading
      days, ATSI shallbe
      entitled to require the purchaser to exercise the warrants and pay the
      exercise price thereforeupon
      five (5) business days written notice. Net of unamortized discount of
      $63.
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            741
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Note
      payable to San Antonio National Bank payable in monthly installments,
      bering interestat
      8.00% per annum, maturing October 25, 2011, collateralized by ATSI's
      assets.
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            393
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            -Total
      outstanding debt long-term debt
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,712
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            1,313Current
      portion of long-term debt
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (1,086
                                                                                                                                                            )
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            (644
                                                                                                                                                            )Long-term
      debt, net of current portion
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            626
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            669Payments
      on long-term debt of ATSI are due as
      follows:(in
      thousands)Fiscal
      2009
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,086Fiscal
      2010
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            626Total
      payments
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            
                                                                                                                                                            $
                                                                                                                                                            1,712





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 was not applicable.


8


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 discharge agreement ATSI recognized
a gain on early extinguishment of debt $108,160.





NOTE
5 – EQUITY





Common
Stock





During
the six months ended January 31, 2009 ATSI issued:





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





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 six months ended January 31, 2009, 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.





- ATSI
granted options to purchase 60,000 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, November 4, 2008.  The options vest equally at each anniversary
of the grant date over a three year period.  All options expire if not
exercised on or before the seventh anniversary of the grant date.  Under
the fair value option method, ATSI will recognize over the relevant service
periods $6,681 of non-cash compensation expense related to un-vested
options.


9


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





- On January 30, 2009, ATSI’s Board of
Directors approved the amendment of previously awarded stock options and as a
result ATSI reissued 7,619,000 stock options to various employees. The new
exercise price of these options is set at $0.08 per share, the closing price as
of the date of the amendment of the terms. The options vested upon issuance and
will expire if not exercised on or before the seventh anniversary of the grant
date. Under SFAS No.123R, a modification of the terms of an award that makes it
more valuable shall be treated as an exchange of the original award for a new
award. In substance, the entity repurchases the original instrument by issuing a
new instrument of greater value, incurring additional compensation cost for that
incremental value. The incremental value shall be measured by the difference
between (a) the fair value of the modified option determined in accordance with
the provisions of this section and (b) the value of the old option immediately
before its terms are modified, determined based on the shorter of (1) its
remaining expected life or (2) the expected life of the modified option. Upon
issuance, ATSI recognized $46,038 of non-cash incremental compensation
expense.





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




For the Six Months Ended January
      31,2009
                    
                    
                    2008Expected
      dividends yield
                    
                    
                    0.00
                    %
                    
                    
                    0.00
                    %Expected
      stock price volatility
                    
                    
                    128%-296
                    %
                    
                    
                    75
                    %Risk-free
      interest rate
                    
                    
                    2.28%-3.48
                    %
                    
                    
                    4.65
                    %Expected
      life of options
                    
                    4.5
      years
                    
                    
                    6
      years





ATSI
recognized $130,000 and $524,000 in stock based compensation expense to
employees during six months ended January 31, 2009 and 2008,
respectively.  Unamortized compensation cost totaled $64,255 and
$147,174 at January 31, 2009 and July 31, 2008, respectively.





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





A summary of the options as of January
31, 2009 and the changes during the six months ended January 31, 2009 is
presented below:




2005 Stock Compensation
Plan
                                      
                                      Options
                                      
                                      
                                      Weighted-average
                                        exercise price
                                      
                                      
                                      Weighted-average
                                        remaining contractual
                                        term (years)Outstanding
      at July 31, 2008
                                      
                                      
                                      8,239,000
                                      
                                      
                                      $
                                      0.19
                                      
                                      
                                      
                                      6Granted
                                      
                                      
                                      8,474,000
                                      
                                      
                                      
                                      0.08
                                      
                                      
                                      
                                      7Forfeited
                                      
                                      
                                      (8,239,000
                                      )
                                      
                                      
                                      0.19
                                      
                                      
                                      
                                      4Outstanding
      at January 31, 2009
                                      
                                      
                                      8,474,000
                                      
                                      
                                      
                                      0.08
                                      
                                      
                                      
                                      7Exercisable
      at January 31, 2009
                                      
                                      
                                      7,619,000
                                      
                                      
                                      $
                                      0.08
                                      
                                      
                                      
                                      7


10


NOTE
7 – WARRANTS





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





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





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





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





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





Expected
      dividend yield
                  
                  
                  0.00
                  %Expected
      stock price volatility
                  
                  
                  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.





A summary of the warrants as of July
31, 2008 and the changes during the six months ended January 31, 2009 is
presented below:


Weighted-averageWeighted-average
                            
                            
                            remainingcontractualWarrants
                            
                            
                            exercise price
                            
                            
                            term (years)Outstanding
      at July 31, 2008
                            
                            
                            375,000
                            
                            
                            $
                            0.18
                            
                            
                            
                            4Granted
                            
                            
                            425,000
                            
                            
                            
                            0.19
                            
                            
                            
                            4Exercised
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Forfeited
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Outstanding
      at January 31, 2009
                            
                            
                            800,000
                            
                            
                            $
                            0.19
                            
                            
                            
                            4Exercisable
      at January 31, 2009
                            
                            
                            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 were purchased through the
open market through December 31, 2008 based on price and market
conditions.  Through December 31, 2008, ATSI repurchased 295,981 of
its common stock at an average purchase price of $0.16.


11


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.  Additionally, on May 1, 2008, Fiesta entered into convertible
promissory note with ATSI for $52,984, with a maturity date of May 1, 2011 and
an interest rate of 9%.  Under the convertible promissory note, Fiesta
agreed to pay twelve (12) equal quarterly payments of $5,088 starting on August
1, 2008 and continuing each quarterly period thereafter until all accrued and
unpaid interest has been paid.





On October 31, 2008, ATSI and Fiesta
agreed to extend the maturity date on the $30,000 promissory note to April 30,
2009 and all other terms remained the same.  On October 31, 2008,
Fiesta entered into a note payable with ATSI for $95,000, with a maturity date
of April 30, 2009 and an interest rate of 10%.  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 six months ended January 31,
2009, ATSI recognized $26,000 loss from its investment in Fiesta under the
equity method.  Additionally, as of January 31, 2009, the balance of
the investment in Fiesta in the amount of $108,000 was netted against the
various notes receivable due from Fiesta, as a result the net investment value /
related party note receivable is $70,000 as of January 31, 2009.





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 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 29,
2008.





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, 2009 and
2008.  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.





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.


12


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,
2009 and 2008.  All dollar amounts are in thousands.





Three months ended January 31,
                  
                  
                  Six months ended January 31,2009
                  
                  
                  2008
                  
                  
                  Variances
                  
                  
                  %
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  Variances
                  
                  
                  %OPERATING
      REVENUES:VoIP
      services
                  
                  $
                  5,454
                  
                  
                  $
                  10,309
                  
                  
                  $
                  (4,855
                  )
                  
                  
                  -47
                  %
                  
                  $
                  12,590
                  
                  
                  $
                  19,735
                  
                  
                  $
                  (7,145
                  )
                  
                  
                  -36
                  %Total
      operating revenues
                  
                  
                  5,454
                  
                  
                  
                  10,309
                  
                  
                  
                  (4,855
                  )
                  
                  
                  -47
                  %
                  
                  
                  12,590
                  
                  
                  
                  19,735
                  
                  
                  
                  (7,145
                  )
                  
                  
                  -36
                  %Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                  
                  
                  4,984
                  
                  
                  
                  9,544
                  
                  
                  
                  (4,560
                  )
                  
                  
                  -48
                  %
                  
                  
                  11,550
                  
                  
                  
                  18,328
                  
                  
                  
                  (6,778
                  )
                  
                  
                  -37
                  %GROSS
      MARGIN
                  
                  
                  470
                  
                  
                  
                  765
                  
                  
                  
                  (295
                  )
                  
                  
                  -39
                  %
                  
                  
                  1,040
                  
                  
                  
                  1,407
                  
                  
                  
                  (367
                  )
                  
                  
                  -26
                  %Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                  
                  
                  529
                  
                  
                  
                  538
                  
                  
                  
                  (9
                  )
                  
                  
                  -2
                  %
                  
                  
                  1,062
                  
                  
                  
                  1,361
                  
                  
                  
                  (299
                  )
                  
                  
                  -22
                  %Legal
      and professional fees
                  
                  
                  102
                  
                  
                  
                  65
                  
                  
                  
                  37
                  
                  
                  
                  57
                  %
                  
                  
                  169
                  
                  
                  
                  154
                  
                  
                  
                  15
                  
                  
                  
                  10
                  %Bad
      debt expense
                  
                  
                  21
                  
                  
                  
                  21
                  
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  2
                  
                  
                  
                  21
                  
                  
                  
                  (19
                  )
                  
                  
                  -90
                  %Depreciation
      and amortization expense
                  
                  
                  42
                  
                  
                  
                  38
                  
                  
                  
                  4
                  
                  
                  
                  11
                  %
                  
                  
                  84
                  
                  
                  
                  78
                  
                  
                  
                  6
                  
                  
                  
                  8
                  %OPERATING
      INCOME (LOSS)
                  
                  
                  (224
                  )
                  
                  
                  103
                  
                  
                  
                  (327
                  )
                  
                  
                  -317
                  %
                  
                  
                  (277
                  )
                  
                  
                  (207
                  )
                  
                  
                  (70
                  )
                  
                  
                  34
                  %OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  108
                  
                  
                  
                  41
                  
                  
                  
                  67
                  
                  
                  
                  163
                  %Minority
      Interest
                  
                  
                  (12
                  )
                  
                  
                  -
                  
                  
                  
                  (12
                  )
                  
                  
                  100
                  %
                  
                  
                  (26
                  )
                  
                  
                  -
                  
                  
                  
                  (26
                  )
                  
                  
                  -100
                  %Interest
      income (expense)
                  
                  
                  (59
                  )
                  
                  
                  (24
                  )
                  
                  
                  (35
                  )
                  
                  
                  146
                  %
                  
                  
                  (93
                  )
                  
                  
                  (48
                  )
                  
                  
                  (45
                  )
                  
                  
                  94
                  %Total
      other income (expense), net
                  
                  
                  (71
                  )
                  
                  
                  (24
                  )
                  
                  
                  (47
                  )
                  
                  
                  196
                  %
                  
                  
                  (11
                  )
                  
                  
                  (7
                  )
                  
                  
                  (4
                  )
                  
                  
                  57
                  %NET
      INCOME (LOSS)
                  
                  
                  (295
                  )
                  
                  
                  79
                  
                  
                  
                  (374
                  )
                  
                  
                  -473
                  %
                  
                  
                  (288
                  )
                  
                  
                  (214
                  )
                  
                  
                  (74
                  )
                  
                  
                  35
                  %LESS:
      PREFERRED DIVIDEND
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  -
                  
                  
                  
                  (12
                  )
                  
                  
                  12
                  
                  
                  
                  -100
                  %ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  0
                  %
                  
                  
                  -
                  
                  
                  
                  340
                  
                  
                  
                  (340
                  )
                  
                  
                  -100
                  %NET
      INCOME (LOSS) TO COMMON  STOCKHOLDERS
                  
                  $
                  (295
                  )
                  
                  $
                  79
                  
                  
                  $
                  (374
                  )
                  
                  
                  -473
                  %
                  
                  $
                  (288
                  )
                  
                  $
                  114
                  
                  
                  $
                  (402
                  )
                  
                  
                  -353
                  %





Three
Months ended January 31, 2009 Compared to Three Months ended January 31,
2008





VoIP Service.VoIP services
revenue decreased by $4,855,000, or 47%, from the quarter ended January 31, 2008
to the quarter ended January 31, 2009.  VoIP minutes carried by our
network on which we generated revenues decreased by 34 % from approximately
139,710,508 minutes of voice traffic during the quarter ended January 31, 2008
to approximately 93,182,514 minutes of voice traffic during the quarter ended
January 31, 2009.  Additionally, our average revenue per minute
decreased from $0.0736 during the quarter ended January 31, 2008 to $0.0585 for
the quarter ended January 31, 2009.  This represents a decrease in our
average revenue rate per minute of 21%.  The decrease in revenue and
VoIP minutes is attributable primarily to the overall decrease in international
VoIP calling.





Cost of Services (Exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $4,560,000, or 48%, from the quarter ended January 31,
2008 to the quarter ended January 31, 2009.  The decrease in cost of
services is a direct result of the decrease in VoIP services
revenue.  Cost of services, as a percentage of revenue decreased by
1.22 % between periods, from 92.60% of revenue during the quarter ended January
31, 2008 to 91.38% of revenue during the quarter ended January 31,
2009.  The decline in cost of services as a percentage of revenue is a
result of negotiation of extended terms and lower rates with our
vendors.  As a result of the decrease in VoIP revenues, our gross
margin declined by $295,000 or 39% to $470,000 for the three months ended
January 31, 2009 compared to $765,000 for the three months ended January 31,
2008.  The percentage decline in gross margin was less than the
percentage decline in revenues because of the improvement in cost of services as
a percentage of revenue.





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).SG&A expenses decreased by $9,000, or 2%, from the
quarter ended January 31, 2008to the
quarter ended January 31, 2009.  The decrease is primarily
attributable to the decrease in non-cash compensation expense to
employees.  During the quarter ended January 31, 2008 we recognized
$85,257 in non-cash compensation expense to employees.  We only
recognized $68,105 in non-cash compensation expense to employees during the
quarter ended January 31, 2009.


13


Legal and professional
fees.  Legal and professional fees increased by $37,000, or
57%, from the quarter ended January 31, 2008 to the quarter ended January 31,
2009.  The increase 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, 2008.





Bad debt expense.Bad debt
expense is comparable between periods at $21,000.  During the quarter
ended January 31, 2009 we recognized approximately $21,000 in bad debt
associated with the write-off of troubled accounts as a result of the
deteriorating global financial markets.





Depreciation and
amortization.  Depreciation and amortization increased by
$4,000 or 11%, from the quarter ended January 31, 2008 to the quarter ended
January 31, 2009.  The increase is attributed to the additional
amortization associated with the new computers and servers acquired since
January 31, 2008.





Operating income
(loss).  The Company reported an operating loss of $224,000 for
the three months ended January 31, 2009 compared to operating income of $103,000
for the three months ended January 31, 2008.  The net loss for the
three months ended January 31, 2009 was primarily the result of the decline in
gross margins and the increase in legal and professional expenses.





Other Income
(expense).  Other expenses increased by $47,000, or 196% from
the quarter ended January 31, 2008 to the quarter ended January 31,
2009.  The primary reason for the increase in other expenses is the
recognition of $12,000 in expenses relating to our minority interest in Fiesta
Communications.  Additionally, interest expense between periods
increased by $35,000, or 146%, from $24,000 for the quarter ended January 31,
2008 to $59,000 for the quarter ended January 31, 2009.  The increase
is attributed to increases in the amount outstanding under promissory notes and
increases in the interest rates paid by the Company.





Net income (loss) applicable to
common stockholders.  The Company reported a net loss to common
stockholders of $295,000 for the three months ended January 31, 2009 compared to
net income of $79,000 available to common stockholders for the three months
ended January 31, 2008.  The increase net loss for the three months
ended January 31, 2009 was primarily the result of the decline in operating
income and increases in other expenses between periods.





Six
Months ended January 31, 2009 Compared to Six Months ended January 31,
2008





VoIP Service.VoIP services
revenue decreased by $7,145,000, or 36%, from the six months ended January 31,
2008 to the six months ended January 31, 2009.  VoIP minutes carried
on our network on which we generated revenues decreased by 24 % from
approximately 274,090,653 minutes of voice traffic during the six months ended
January 31, 2008 to approximately 208,386,264 minutes of voice traffic during
the six months ended January 31, 2009.  Additionally, our average
revenue per minute decreased from $0.0718 during the six months ended January
31, 2008 to $0.0604 for the six months ended January 31, 2009.  This
represents a decrease in our average revenue rate per minute of
16%.  The decrease in revenue and VoIP minutes is attributable
primarily to the overall decrease in international VoIP calling.





Cost of Services (Exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $6,778,000, or 37%, from the six months ended January 31,
2008 to the six months ended January 31, 2009.  The decrease in cost
of services is a direct result of the decrease in VoIP services
revenue.  Cost of services, as a percentage of revenue decreased by
1.13 % between periods, from 92.87% of revenue during the six months ended
January 31, 2008 to 91.74% of revenue during the six months ended January 31,
2009.  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.  As a result of the decrease in VoIP revenues,
our gross margin declined by $367,000 or 26% to $1,040,000 for the three months
ended January 31, 2009 compared to $1,407,000 for the three months ended January
31, 2008.  The percentage decline in gross margin was less than the
percentage decline in revenues because of the improvement in cost of services as
a percentage of revenue.





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).  SG&A expenses decreased by $299,000, or 22%, from
the six months ended January 31, 2008 to the six months ended January 31,
2009.  The decrease is primarily attributable to the decrease in
non-cash compensation expense to employees.  During the six months
ended January 31, 2008 we recognized $524,000 in non-cash compensation expense
to employees.  In comparison, we only recognized $130,000 in non-cash
compensation expense to employees during the six months ended January 31,
2009.


14


Legal and professional
fees.  Legal and professional fees increased by $15,000, or
10%, from the six months ended January 31, 2008 to the six months ended January
31, 2009.  The increase is attributable to $30,000 in Board of
Directors fees incurred during the six months ended January 31,
2008.  We did not incur similar expenses during the six months ended
January 31, 2008.





Bad debt
expense.  Bad debt expense decreased by $19,000, or 90%, from
the six months ended January 31, 2008 to the six months ended January 31,
2009.  During the six months ended January 31, 2008 we recognized
$21,000 in bad debt expense associated with uncollectible
accounts.  During the six months ended January 31, 2009 we only
recognized $2,000 in bad debt expense associated with uncollectible
accounts.





Depreciation and
amortization.  Depreciation and amortization increased by
$6,000 or 8%, from the six months ended January 31, 2008 to the six months ended
January 31, 2009.  The increase is attributed to the additional
amortization associated with the new computers and servers acquired since
January 31, 2008.





Operating income
(loss).  The Company’s operating loss increased by $70,000, or
34%, from the six months ended January 31, 2008 to the six months ended January
31, 2009.  The increase in operating loss between periods is
attributed to the decrease in gross margin; the decrease in gross margin and was
slightly offset by the decrease between periods in SG&A
expenses.





Other Income
(expense).  Other expense during six months ended January 31,
2009 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.  However, the gain was offset
by our equity interest in Fiesta Communications and an increase in interest
expense of $45,000, or 94%, from $48,000 for the six months ended January 31,
2008 to $93,000 for the six months ended January 31, 2009.  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 loss increased by $74,000, or 35%, from the six
months ended January 31, 2008to the six
months ended January 31, 2009.  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.





Preferred stock
dividends.  Preferred stock dividends decreased by $12,000, or
100%, between periods, from $12,000 for the six months ended January 31,
2008to
$0 during the six months ended January 31, 2009.  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, none of which were outstanding during the six
months ended January 31, 2009.





Reversal of previously recorded
preferred stock dividends.During the six months ended January
31, 2008, 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 six
months ended January 31, 2009.





Net income (loss) applicable to
common stockholders.  Net (loss) applicable to common
stockholders increased by $402,000, or 353%, from the six months ended January
31, 2008 to the six months ended January 31, 2009.  The increase in
net (loss) between periods is attributed to the decrease between periods of
$367,000 in gross margin, increase of $15,000 in legal and professional fees,
increase of $45, 000 in interest expense and the increase of $26,000 in minority
interest expense. Additionally, during the six months ended January 31, 2008 we
recognized a reversal of previously recorded preferred dividend of
$340,000.  We did not recognize this type of reversal during the six
months ended January 31, 2009.  The decrease in the reversal of
previously recorded preferred divided was slightly offset by the decrease of
$394,000 in non-cash compensation expense to employees and a decrease between
periods of $67,000 in gain on early extinguishment of debt as a result of the
settlement of a promissory note.


15


Liquidity
and Capital Resources





Cash Position:  We
had a cash balance of $1,258,000 as of January 31, 2009.  Net cash
consumed by operating activities during the six months ended January 31,
2009 was approximately $904,000.  Investing activities during the
six months ended January 31, 2009 consumed $138,000, consisting of an increase
of $70,000 in the note receivable from Fiesta Communications, a related party,
and investments in certificates of deposit of $5,000 and $62,000 guarantying the
acquisition of various computers and servers.  Financing activities
during the six months ended January 31, 2009 provided $962,000 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 $264,000
associated with various notes payable, acquisition of our common stock of
$48,000 and principal payments of $1,000 associated with a capital lease
obligation.  Overall, our net operating, investing and financing
activities during the six months ended January 31, 2009 consumed
$80,000 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
$60,000 per month.  As of January 31, 2009 we had $13,000 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 using approximately $13,000 per month of our available cash to
cover all monthly cash expenses.  We anticipate that the January 31,
2009 cash balance of $1,258,000 combined with expected net cash flow
generated from future 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 $468,000 as of January 31, 2009.  This represents
an improvement of approximately $41,000 from our working capital at July 31,
2008.  The improvement can primarily be attributed to the reduction of
$414,000 in current liabilities as a result of the settlement of a promissory
note with The Shaar Fund and payments to our vendors.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS





N/A





ITEM
4.  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





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 Principal Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.  We conducted an evaluation, under the supervision and
with the participation of our Chief Executive Officer and Chief Principal
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 Principal 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.


16


Changes
in 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





ITEM
5.  OTHER INFORMATION





NONE





ITEM
6.  EXHIBITS





The
following documents are filed as exhibits to this report.


17





Number
                      
                      Description31.1
                      
                      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.





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 16, 2009
              By:
              /s/ Arthur L. SmithName:
              Arthur
      L. SmithTitle:
              President
      andChief
      Executive OfficerDate:
      March 16, 2009
              By:
              /s/ Antonio EstradaName:
              Antonio
      EstradaTitle:
              Sr.
      VP of Finance & Corporate Controller(Principal
      Accounting and Principal
                Financial
      Officer)


18


EXHIBIT
INDEX





Number
                      
                      Description31.1
                      
                      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.


19