UNITED STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended April 30, 2009





OR





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





For the
transition period from ____________ to ___________





Commission
File Number 001-15687





ATSI
COMMUNICATIONS, INC.


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
                                      (State or Other Jurisdiction of
                                      Incorporation or Organization)
                                    
                                    74-2849995
                                      (IRS
      Employer
                                      Identification
      No.)3201 Cherry Ridge
                                      Building C, Suite 300
                                      San Antonio, Texas
                                      (Address of Principal Executive Offices)
                                    
                                    78230
                                      (Zip
      Code)(210) 614-7240
                                      (Registrant’s Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x  No
 ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).Yes x  No
 ̈





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





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





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


Yes  ̈  No
x





There
were 39,892,157 shares of the registrant’s Common Stock, $.001 par value per
share, outstanding as of June 12, 2009.





ATSI
COMMUNICATIONS, INC.


QUARTERLY
REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED APRIL 30, 2009





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements
                                2Consolidated
      Balance Sheets as of April 30, 2009 and July 31, 2008
      (unaudited)
                                2Consolidated
      Statements of Operations for the Three and Nine Months Ended April 30,
      2009and
      2008 (unaudited)
                                3Consolidated
      Statement of Changes in Stockholders’ Equity for the Nine
      MonthsEnded
      April 30, 2009 (unaudited)
                                4Consolidated
      Statements of Cash Flows for the Nine MonthsEnded
      April 30, 2009 and 2008 (unaudited)
                                5Notes
      to Consolidated Financial Statements (unaudited)
                                6Item
      2.  Management’s Discussions and Analysis and Plan of
      Operations
                                11Item
      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
                                18




- 1
-




PART
1. FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except per share amounts)





April 30,
                            
                            
                            July 31,2009
                            
                            
                            2008ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                            
                            $
                            1,048
                            
                            
                            $
                            1,338Certificates
      of deposit
                            
                            
                            110
                            
                            
                            
                            -Accounts
      receivable, net of allowance for bad debt of $10 and $60,
      respectively
                            
                            
                            513
                            
                            
                            
                            1,082Note
      receivable, related party
                            
                            
                            54
                            
                            
                            
                            25Prepaid
      & other current assets
                            
                            
                            175
                            
                            
                            
                            124Total
      current assets
                            
                            
                            1,900
                            
                            
                            
                            2,569LONG-TERM
      ASSETS:Certificates
      of deposit
                            
                            
                            215
                            
                            
                            
                            319Intangible
      Assets, net of amortization of $13 and $1, respectively
                            
                            
                            137
                            
                            
                            
                            149PROPERTY
      AND EQUIPMENT
                            
                            
                            678
                            
                            
                            
                            611Less
      - accumulated depreciation
                            
                            
                            (543
                            )
                            
                            
                            (439
                            )Net
      property and equipment
                            
                            
                            135
                            
                            
                            
                            172Total
      assets
                            
                            $
                            2,387
                            
                            
                            $
                            3,209LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                            
                            $
                            523
                            
                            
                            $
                            1,361Wells
      Fargo factoring collateral
                            
                            
                            12
                            
                            
                            
                            18Accrued
      liabilities
                            
                            
                            175
                            
                            
                            
                            116Current
      portion of obligation under capital leases
                            
                            
                            1
                            
                            
                            
                            3Notes
      payable
                            
                            
                            1,156
                            
                            
                            
                            566Convertible
      debentures, net of unamortized discount of $0 and $5,
      respectively
                            
                            
                            -
                            
                            
                            
                            78Total
      current liabilities
                            
                            
                            1,867
                            
                            
                            
                            2,142LONG-TERM
      LIABILITIES:Notes
      payable
                            
                            
                            461
                            
                            
                            
                            588Derivative
      liability
                            
                            
                            85
                            
                            
                            
                            -Convertible
      debentures, net of unamortized discount of $0 and $3,
      respectively
                            
                            
                            -
                            
                            
                            
                            81Obligation
      under capital leases, less current portion
                            
                            
                            -
                            
                            
                            
                            1Other
                            
                            
                            20
                            
                            
                            
                            3Total
      long-term liabilities
                            
                            
                            566
                            
                            
                            
                            673Total
      liabilities
                            
                            
                            2,433
                            
                            
                            
                            2,815STOCKHOLDERS'
      EQUITY:Preferred
      Stock, 16,063,000 shares authorized, 0 and 0 shares issued
      and  outstanding
                            
                            
                            -
                            
                            
                            
                            -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
                            
                            
                            73,013
                            
                            
                            
                            72,747Accumulated
      deficit
                            
                            
                            (73,100
                            )
                            
                            
                            (72,393
                            )Other
      comprehensive income
                            
                            
                            1
                            
                            
                            
                            1Total
      stockholders' equity
                            
                            
                            (46
                            )
                            
                            
                            394Total
      liabilities and stockholders' equity
                            
                            $
                            2,387
                            
                            
                            $
                            3,209







- 2
-





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share amounts)





Three months ended April 30,
                      
                      
                      Nine months ended April 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008OPERATING
      REVENUES:VoIP
      services
                      
                      $
                      3,660
                      
                      
                      $
                      11,171
                      
                      
                      $
                      16,250
                      
                      
                      $
                      30,905Total
      operating revenues
                      
                      
                      3,660
                      
                      
                      
                      11,171
                      
                      
                      
                      16,250
                      
                      
                      
                      30,905OPERATING
      EXPENSES:Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                      
                      
                      3,461
                      
                      
                      
                      10,384
                      
                      
                      
                      15,011
                      
                      
                      
                      28,713Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                      
                      
                      455
                      
                      
                      
                      555
                      
                      
                      
                      1,517
                      
                      
                      
                      1,916Legal
      and professional fees
                      
                      
                      61
                      
                      
                      
                      86
                      
                      
                      
                      230
                      
                      
                      
                      239Bad
      debt expense
                      
                      
                      -
                      
                      
                      
                      (23
                      )
                      
                      
                      2
                      
                      
                      
                      (2
                      )Depreciation
      and amortization expense
                      
                      
                      33
                      
                      
                      
                      42
                      
                      
                      
                      117
                      
                      
                      
                      120Total
      operating expenses
                      
                      
                      4,010
                      
                      
                      
                      11,044
                      
                      
                      
                      16,877
                      
                      
                      
                      30,986OPERATING
      INCOME (LOSS)
                      
                      
                      (350
                      )
                      
                      
                      127
                      
                      
                      
                      (627
                      )
                      
                      
                      (81
                      )OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      108
                      
                      
                      
                      41Investment
      loss
                      
                      
                      (15
                      )
                      
                      
                      -
                      
                      
                      
                      (42
                      )
                      
                      
                      -Interest
      income (expense)
                      
                      
                      (53
                      )
                      
                      
                      (32
                      )
                      
                      
                      (146
                      )
                      
                      
                      (79
                      )Total
      other income (expense), net
                      
                      
                      (68
                      )
                      
                      
                      (32
                      )
                      
                      
                      (80
                      )
                      
                      
                      (38
                      )NET
      INCOME (LOSS)
                      
                      
                      (418
                      )
                      
                      
                      95
                      
                      
                      
                      (707
                      )
                      
                      
                      (119
                      )LESS:
      PREFERRED DIVIDEND
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (12
                      )ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      340NET
      INCOME (LOSS) TO COMMON  STOCKHOLDERS
                      
                      $
                      (418
                      )
                      
                      $
                      95
                      
                      
                      $
                      (707
                      )
                      
                      $
                      209BASIC
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.01DILUTED
      INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
                      
                      $
                      (0.01
                      )
                      
                      $
                      0.00
                      
                      
                      $
                      (0.02
                      )
                      
                      $
                      0.01WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDING
                      
                      
                      39,892,157
                      
                      
                      
                      39,186,590
                      
                      
                      
                      39,758,501
                      
                      
                      
                      39,036,705DILUTED
      COMMON SHARES OUTSTANDING
                      
                      
                      39,892,157
                      
                      
                      
                      38,778,587
                      
                      
                      
                      39,758,501
                      
                      
                      
                      39,286,505





See
accompanying notes to unaudited financial statements


- 3
-





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
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    143
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    143Shares
      issued for conversion of notes payable
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    637,723
                                    
                                    
                                    
                                    1
                                    
                                    
                                    
                                    171
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    172Net
      loss
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    (707
                                    )
                                    
                                    
                                    
                                    
                                    
                                    
                                    (707
                                    )BALANCE,
      April 30, 2009
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    39,892,157
                                    
                                    
                                    
                                    40
                                    
                                    
                                    $
                                    73,013
                                    
                                    
                                    $
                                    (73,100
                                    )
                                    
                                    $
                                    1
                                    
                                    
                                    $
                                    (46
                                    )





See
accompanying notes to unaudited financial statements




- 4
-





ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands, except per share amounts)





Nine months ended April 30,2009
                                  
                                  
                                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:NET
      LOSS
                                  
                                  $
                                  (707
                                  )
                                  
                                  $
                                  (119
                                  )Adjustments
      to reconcile net loss to cash used in operating
activities:Investment
      loss
                                  
                                  
                                  42
                                  
                                  
                                  
                                  -Gain
      on early extinguishment of debt
                                  
                                  
                                  (108
                                  )
                                  
                                  
                                  (41
                                  )Depreciation
      and amortization
                                  
                                  
                                  117
                                  
                                  
                                  
                                  120Issuance
      of stock grants and options, employees for services
                                  
                                  
                                  143
                                  
                                  
                                  
                                  612Issuance
      of common stock and warrants for services
                                  
                                  
                                  -
                                  
                                  
                                  
                                  77Provisions
      for losses on accounts receivables
                                  
                                  
                                  2
                                  
                                  
                                  
                                  (2
                                  )Amortization
      of debt discount
                                  
                                  
                                  46
                                  
                                  
                                  
                                  6Changes
      in operating assets and liabilities:Accounts
      receivable
                                  
                                  
                                  568
                                  
                                  
                                  
                                  (253
                                  )Prepaid
      expenses and other
                                  
                                  
                                  (52
                                  )
                                  
                                  
                                  (23
                                  )Accounts
      payable
                                  
                                  
                                  (1,151
                                  )
                                  
                                  
                                  (91
                                  )Wells
      Fargo Factoring Collateral
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  -Accrued
      liabilities
                                  
                                  
                                  109
                                  
                                  
                                  
                                  (30
                                  )Net
      cash (used in) / provided by operating activities
                                  
                                  
                                  (997
                                  )
                                  
                                  
                                  256CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      in certificates of deposit
                                  
                                  
                                  (7
                                  )
                                  
                                  
                                  (10
                                  )Note
      receivable, related party
                                  
                                  
                                  (70
                                  )
                                  
                                  
                                  (15
                                  )Purchase
      of VoIP License
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (100
                                  )Purchases
      of property & equipment
                                  
                                  
                                  (67
                                  )
                                  
                                  
                                  (20
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (144
                                  )
                                  
                                  
                                  (145
                                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable
                                  
                                  
                                  (374
                                  )
                                  
                                  
                                  (178
                                  )Retirement
      of redeemable preferred stock series D&E
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (250
                                  )Acquisition
      of common stock
                                  
                                  
                                  (48
                                  )
                                  
                                  
                                  (5
                                  )Proceeds
      from Notes payables
                                  
                                  
                                  1,275
                                  
                                  
                                  
                                  -Principal
      payments on capital lease obligation
                                  
                                  
                                  (2
                                  )
                                  
                                  
                                  (2
                                  )Net
      cash provided by / (used in) financing activities
                                  
                                  
                                  851
                                  
                                  
                                  
                                  (435
                                  )DECREASE
      IN CASH
                                  
                                  
                                  (290
                                  )
                                  
                                  
                                  (324
                                  )CASH
      AND CASH EQUIVALENTS, beginning of period
                                  
                                  
                                  1,338
                                  
                                  
                                  
                                  1,050CASH
      AND CASH EQUIVALENTS, end of period
                                  
                                  $
                                  1,048
                                  
                                  
                                  $
                                  726SUPPLEMENTAL
      DISCLOSURES:Cash
      paid for interest
                                  
                                  $
                                  88
                                  
                                  
                                  $
                                  34Cash
      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
                                  )Warrants
      issued for services
                                  
                                  
                                  85
                                  
                                  
                                  
                                  -




See
accompanying notes to unaudited financial statements


- 5
-




ATSI
COMMUNICATIONS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE
1 – BASIS OF PRESENTATION





The
accompanying unaudited interim consolidated financial statements of ATSI
Communications, Inc. have been prepared in accordance with accounting principles
generally accepted in the United States of America and the rules of the United
States Securities and Exchange Commission.  In the opinion of
management, these interim financial statements contain all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented.  The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year.  Notes to the consolidated financial statements, which would
substantially duplicate the disclosure contained in the audited financial
statements for the most recent fiscal year ended July 31, 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 $42,000 of its
monthly receivables.  As of April 30, 2009, ATSI had approximately
$12,000 of factored account receivables outstanding.  ATSI will
continue to factor its receivables on a monthly basis as services are rendered
to its customers.


- 6
-





NOTE
3 – OUTSTANDING DEBT




At April 30, 2009 and July 31, 2008 outstanding debt
consisted of the following: (In thousands, except per share
amounts)


April
      30,
                                                                                    
                                                                                    
                                                                                    July
      31,2009
                                                                                    
                                                                                    
                                                                                    20089%
      Convertible Subordinated Debenture, bearing 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
      bearing 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.
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    101Note
      payable to Alfonso Torres, payable upon maturity, bearing interest of
      6.00% per annum,maturing
      October 1, 2009.
                                                                                    
                                                                                    
                                                                                    460
                                                                                    
                                                                                    
                                                                                    
                                                                                    460Note
      payable to The Shaar Fund, payable in quarterly installments bearing
      interest 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, bearing
      interest at 7.00%per
      annum, maturing April 1, 2009, collateralized by ATSI's certificates of
      deposit.
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    39Note
      payable to Wells Fargo bank payable in monthly installments, bearing
      interest at 7.25%per
      annum, maturing July 25, 2010, collateralized by ATSI's certificates of
      deposit.
                                                                                    
                                                                                    
                                                                                    89
                                                                                    
                                                                                    
                                                                                    
                                                                                    138Note
      payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions,
      payable in monthlyinstallments,
      bearing interest at 10.00% per annum, maturing September 10, 2010,
      collateralizedby
      ATSI's accounts receivables (other than accounts factored with Wells
      Fargo), $100,000certificate
      of deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally,
      weissued
      425,000 warrants to the note holders, at an exercise price per warrant of
      $0.19.The
      warrants have the following “Put” and “Call” rights: Put
      right. From and after thesecond
      anniversary of the notes payable, the holder shall have the right to
      request from ATSI,upon
      five (5) Business days prior notice, to acquire from the holders the
      warrants at a price$0.39
      per warrant. Call
      right. At any time any warrants are outstanding, if the last sale
      price of ATSI’scommon
      stock is greater than $.80 per share for ten (10) consecutive trading
      days, ATSI shallbe
      entitled to require the purchaser to exercise the warrants and pay the
      exercise price thereforeupon
      five (5) business days written notice. Net of unamortized discount of
      $47.
                                                                                    
                                                                                    
                                                                                    707
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Note
      payable to San Antonio National Bank payable in monthly installments,
      bearing interestat
      8.00% per annum, maturing October 25, 2011, collateralized by ATSI's
      assets.
                                                                                    
                                                                                    
                                                                                    361
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Total
      outstanding debt long-term debt
                                                                                    
                                                                                    
                                                                                    1,617
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,313Current
      portion of long-term debt
                                                                                    
                                                                                    
                                                                                    (1,156
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (644
                                                                                    )Long-term
      debt, net of current portion
                                                                                    
                                                                                    $
                                                                                    461
                                                                                    
                                                                                    
                                                                                    $
                                                                                    669





Payments on long-term debt of ATSI are due as
      follows:(in
      thousands)Fiscal
      2009
                  
                  $
                  1,156Fiscal
      2010
                  
                  
                  461Total
      payments
                  
                  $
                  1,617





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 and determined that liability treatment was not
applicable.


- 7
-





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 nine months ended April 30, 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 nine months ended April 30, 2009, ATSI granted:





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





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





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


- 8
-





- options
to two (2) employees to purchase an aggregate of 520,000 common shares at an
exercise price of $0.08 per share, the closing price of ATSI’s common stock on
the grant date, January 30, 2009, 250,000 vests September 1, 2009, 10,000 vests
November 1, 2009, 250,000 vests September 1, 2010 and 10,000 vests November 1,
2010.  All options expire if not exercised on or before the seventh
anniversary of the grant date.  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 Nine Months Ended April 30,2009
                    
                    
                    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 $143,000 and $612,000 in stock based compensation expense to
employees during nine months ended April 30, 2009 and 2008,
respectively.  Unamortized compensation cost totaled $35,613 and
$147,174 at April 30, 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 July 31,
2008 and the changes during the nine months ended April 30, 2009 is
presented below:


- 9
-





Weighted-averageWeighted-average
                            
                            
                            remaining
      contractual2005 Stock Compensation
Plan
                            
                            Options
                            
                            
                            exercise price
                            
                            
                            term (years)Outstanding
      at July 31, 2008
                            
                            
                            8,239,000
                            
                            
                            $
                            0.19
                            
                            
                            
                            6Granted
                            
                            
                            8,474,000
                            
                            
                            
                            0.08
                            
                            
                            
                            7Forfeited
                            
                            
                            (8,439,000
                            )
                            
                            
                            0.19
                            
                            
                            
                            4Outstanding
      at April 30, 2009
                            
                            
                            8,274,000
                            
                            
                            
                            0.08
                            
                            
                            
                            7Exercisable
      at April 30, 2009
                            
                            
                            7,619,000
                            
                            
                            $
                            0.08
                            
                            
                            
                            7





NOTE
7 – WARRANTS





During the nine months ended April 30,
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 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 warrants 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 nine months ended April 30, 2009 is
presented below:


- 10
-





Weighted-averageWeighted-average
                  
                  
                  remaining
      contractualWarrants
                  
                  
                  exercise price
                  
                  
                  term (years)Outstanding
      at July 31, 2008
                  
                  
                  375,000
                  
                  
                  $
                  0.18
                  
                  
                  
                  4Granted
                  
                  
                  425,000
                  
                  
                  
                  0.19
                  
                  
                  
                  4Exercised
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Outstanding
      at April 30, 2009
                  
                  
                  800,000
                  
                  
                  $
                  0.19
                  
                  
                  
                  4Exercisable
      at April 30, 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.





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%. Currently ATSI and Fiesta are in
negotiations to extend the maturity dates on these notes. Additionally, on
October 31, 2008, Fiesta paid in full to ATSI a promissory note with a principal
balance of $35,000 and $1,467 in accrued interest.





For the nine months ended April 30,
2009, ATSI recognized a loss of $42,000 from its investment in Fiesta under the
equity method.  Additionally, as of April 30, 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 $54,000 as of April 30, 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.


- 11
-





The
following is a discussion of the consolidated financial condition and results of
operations of ATSI for the three and nine months ended April 30, 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.




Recent
Developments
 
 During
the second and third quarters of fiscal 2009, ATSI commenced a rigorous effort
to improve call quality and the average call duration ("ACD") of calls processed
on its network. These measures included eliminating underperforming vendors and
streamlining routes offered to its customers. As of April 30, 2009, the Company
had eliminated 24 underperforming vendors from its global routing, representing
20% of its vendors. In addition, individual routes on which call statistics fell
to unacceptable levels, the Company blocked VoIP traffic. These actionsresulted in a 55%
improvement in ACD, quarter over quarter. The Company expects that the
improvement in ACD will positively influence future results of operations as
each completed call will represent a larger number of billed
minutes.
 
 Also
during the third quarter of fiscal 2009, the Company deployed a VoIP technology
platform to introduce enhanced VoIP services, including fully hosted IP/PBX
services, IP trunking, call center applications, prepaid services, and
customized VoIP solutions for specialized applications. In May, the Company
obtained its first account on the enhanced platform consisting of a VoIP network
to 154 cities for a Fortune 500 company. The network provided includes an
interactive voice response auto attendant, call recording, simultaneous calling,
voicemail to email conversion, and multiple other IP/PBX features in a hosted
environment. ATSI, as an outsourced VoIP technology enabler, is marketing these
new and synergistic services to other carriers and to enterprise customers
through established channel partners. With a current market value of over $11
billion in this sector of the industry, management believes there is a
significant market opportunity to broaden and diversify the Company's product
and service base.
 
 The
tightening of capital markets has reduced the credit worthiness of certain
existing and prospective customers. In addition to processing all eligible
accounts through its accounts receivable insurance provider, the Company has
continued enforcing its strict credit policies to minimize risk in a tough
economic climate. Even under its strict credit policy, the Company has approved
several medium and top tier carriers for credit and successfully increased its
customer base by 10% during the 3rd quarter.


Results
of Operations





The
following table sets forth certain items included in our results of operations
and variances between periods for the three and nine months ended April 30, 2009
and 2008.  All dollar amounts are in thousands.





Three
      months ended April 30,
                        
                        
                        Nine
      months ended April 30,2009
                        
                        
                        2008
                        
                        
                        Variances
                        
                        
                        %
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        Variances
                        
                        
                        %OPERATING
      REVENUES:VoIP
      services
                        
                        $
                        3,660
                        
                        
                        $
                        11,171
                        
                        
                        $
                        (7,511
                        )
                        
                        
                        -67
                        %
                        
                        $
                        16,250
                        
                        
                        $
                        30,905
                        
                        
                        $
                        (14,655
                        )
                        
                        
                        -47
                        %Total
      operating revenues
                        
                        
                        3,660
                        
                        
                        
                        11,171
                        
                        
                        
                        (7,511
                        )
                        
                        
                        -67
                        %
                        
                        
                        16,250
                        
                        
                        
                        30,905
                        
                        
                        
                        (14,655
                        )
                        
                        
                        -47
                        %Cost
      of services (exclusive of depreciation and amortization, shown
      below)
                        
                        
                        3,461
                        
                        
                        
                        10,384
                        
                        
                        
                        (6,923
                        )
                        
                        
                        -67
                        %
                        
                        
                        15,011
                        
                        
                        
                        28,713
                        
                        
                        
                        (13,702
                        )
                        
                        
                        -48
                        %GROSS
      MARGIN
                        
                        
                        199
                        
                        
                        
                        787
                        
                        
                        
                        (588
                        )
                        
                        
                        -75
                        %
                        
                        
                        1,239
                        
                        
                        
                        2,192
                        
                        
                        
                        (953
                        )
                        
                        
                        -43
                        %Selling,
      general and administrative expense (exclusive of legal and professional
      fees)
                        
                        
                        455
                        
                        
                        
                        555
                        
                        
                        
                        (100
                        )
                        
                        
                        -18
                        %
                        
                        
                        1,517
                        
                        
                        
                        1,916
                        
                        
                        
                        (399
                        )
                        
                        
                        -21
                        %Legal
      and professional fees
                        
                        
                        61
                        
                        
                        
                        86
                        
                        
                        
                        (25
                        )
                        
                        
                        -29
                        %
                        
                        
                        230
                        
                        
                        
                        239
                        
                        
                        
                        (9
                        )
                        
                        
                        -4
                        %Bad
      debt expense
                        
                        
                        -
                        
                        
                        
                        (23
                        )
                        
                        
                        23
                        
                        
                        
                        -100
                        %
                        
                        
                        2
                        
                        
                        
                        (2
                        )
                        
                        
                        4
                        
                        
                        
                        -200
                        %Depreciation
      and amortization expense
                        
                        
                        33
                        
                        
                        
                        42
                        
                        
                        
                        (9
                        )
                        
                        
                        -21
                        %
                        
                        
                        117
                        
                        
                        
                        120
                        
                        
                        
                        (3
                        )
                        
                        
                        -3
                        %OPERATING
      INCOME (LOSS)
                        
                        
                        (350
                        )
                        
                        
                        127
                        
                        
                        
                        (477
                        )
                        
                        
                        -376
                        %
                        
                        
                        (627
                        )
                        
                        
                        (81
                        )
                        
                        
                        (546
                        )
                        
                        
                        674
                        %OTHER
      INCOME (EXPENSE):Gain
      on early extinguishment of debt
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        0
                        %
                        
                        
                        108
                        
                        
                        
                        41
                        
                        
                        
                        67
                        
                        
                        
                        163
                        %Minority
      Interest
                        
                        
                        (15
                        )
                        
                        
                        -
                        
                        
                        
                        (15
                        )
                        
                        
                        100
                        %
                        
                        
                        (42
                        )
                        
                        
                        -
                        
                        
                        
                        (42
                        )
                        
                        
                        -100
                        %Interest
      income (expense)
                        
                        
                        (53
                        )
                        
                        
                        (32
                        )
                        
                        
                        (21
                        )
                        
                        
                        66
                        %
                        
                        
                        (146
                        )
                        
                        
                        (79
                        )
                        
                        
                        (67
                        )
                        
                        
                        85
                        %Total
      other income (expense), net
                        
                        
                        (68
                        )
                        
                        
                        (32
                        )
                        
                        
                        (36
                        )
                        
                        
                        113
                        %
                        
                        
                        (80
                        )
                        
                        
                        (38
                        )
                        
                        
                        (42
                        )
                        
                        
                        111
                        %NET
      INCOME (LOSS)
                        
                        
                        (418
                        )
                        
                        
                        95
                        
                        
                        
                        (513
                        )
                        
                        
                        -540
                        %
                        
                        
                        (707
                        )
                        
                        
                        (119
                        )
                        
                        
                        (588
                        )
                        
                        
                        494
                        %LESS:
      PREFERRED DIVIDEND
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        0
                        %
                        
                        
                        -
                        
                        
                        
                        (12
                        )
                        
                        
                        12
                        
                        
                        
                        -100
                        %ADD:
      REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        0
                        %
                        
                        
                        -
                        
                        
                        
                        340
                        
                        
                        
                        (340
                        )
                        
                        
                        -100
                        %NET
      INCOME (LOSS) TO COMMON  STOCKHOLDERS
                        
                        $
                        (418
                        )
                        
                        $
                        95
                        
                        
                        $
                        (513
                        )
                        
                        
                        -540
                        %
                        
                        $
                        (707
                        )
                        
                        $
                        209
                        
                        
                        $
                        (916
                        )
                        
                        
                        -438
                        %




- 12
-





Three
Months ended April 30, 2009 Compared to Three Months ended April 30,
2008





Revenues.VoIP
services revenue decreased by $7,511,000, or 67%, from the quarter ended April
30, 2008 to the quarter ended April 30, 2009.  VoIP minutes carried by
our network on which we generated revenues decreased by 49 % from approximately
145,481,136 minutes of voice traffic during the quarter ended April 30, 2008 to
approximately 74,237,464 minutes of voice traffic during the quarter ended April
30, 2009.  Additionally, our average revenue per minute (ARPM)
decreased by 36% from $0.0766 during the quarter ended April 30, 2008 to $0.0490
for the quarter ended April 30, 2009.  During the second quarter of
FY2009, we began a rigorous effort to increase traffic quality and the average
call duration (ACD) of calls processed by our network. These measures included
eliminating and streamlining many of the routes offered. This contributed to a
decrease of approximately 15% in the number of vendors connected to our network.
Despite the decline in revenue and the total number of minutes processed by our
network, our efforts to streamline the routes we offer and eliminate certain
routes resulted in an increase in average call duration (ACD) from 2.59 minutes
per call for the three months ended January 31, 2009 to 4.01 minutes for the
three months ended April 30, 2009 and partially offsetting the fewer number of
calls that were completed through our network during the three months ended
April 30, 2009. The declines in both the total minutes processed by our network
and the average revenue per minute (ARPM) are the direct result of the lower
level of international calling during the current global economic recession. We
believe that the decision made during the second quarter of Fiscal 2009 to
streamline our routes and eliminate under performing and inefficient routes will
positively influence our business in the long term, as evidenced by the
continued increase in the ACD to 4.01 minutes per call for the three months
ended April 30, 2009 from 2.59 minutes per call for the three months ended
January 31, 2009. We expect the increase in ACD to have a favorable impact on
our total revenues as the number of completed calls processed through our
networks return to normal levels since each completed call will represent a
larger number of minutes processed.





Cost of Services (exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $6,923,000, or 67%, from the quarter ended April 30, 2008
to the quarter ended April 30, 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 increased by 1.61 % between periods, from
92.95% of revenue during the quarter ended April 30, 2008 to 94.56% of revenue
during the quarter ended April 30, 2009.  The increase in cost of
services as a percentage of revenue is a result of increases received from our
vendors during the period.  Additionally, as a result of the decrease
in VoIP revenues, our gross margin declined by $588,000 or 75% to $199,000 for
the three months ended April 30, 2009 compared to $787,000 for the three months
ended April 30, 2008.





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).SG&A expenses decreased by $100,000, or 18%, from
the quarter ended April 30, 2008to the
quarter ended April 30, 2009.  The decrease is primarily attributable
to the decrease in non-cash compensation expense to employees.  During
the quarter ended April 30, 2008 we recognized $85,760 in non-cash compensation
expense to employees.  We only recognized $13,254 in non-cash
compensation expense to employees during the quarter ended April 30,
2009.





Legal and Professional
Fees.  Legal and professional fees decreased by $25,000, or
29%, from the quarter ended April 30, 2008 to the quarter ended April 30,
2009.  The primary reason for the variance between periods is
attributable to $35,000 in legal fees incurred during the quarter ended April
30, 2008 in connection with an investor relations campaign.  We did
not incur similar expenses during the quarter ended April 30, 2009.





Bad Debt Expense.Bad debt
expense decreased $23,000 between periods.  The primary reason for the
variance is attributed to a $25,000 adjustment in bad debt expense recognized
during the quarter ended April 30, 2008 as a result of changes in the VoIP
market and historical uncollectible accounts.  During the quarter
ended April 30, 2009, we did not recognize any bad debt expense.





Depreciation and
Amortization.  Depreciation and amortization decreased by
$9,000 or 21%, from the quarter ended April 30, 2008 to the quarter ended April
30, 2009.  The reduction in depreciation expense is as a result of
some of the equipment and software reaching its depreciable value.





Operating Income
(loss).  The Company reported an operating loss of $350,000 for
the three months ended April 30, 2009 compared to operating income of $127,000
for the three months ended April 30, 2008.  The net loss for the three
months ended April 30, 2009 was primarily the result of the decline in revenue
and gross margins between periods.


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Other Income
(expense).  Other expenses increased by $36,000, or 113% from
the quarter ended April 30, 2008 to the quarter ended April 30,
2009.  The primary reason for the increase in other expenses is the
recognition of $15,000 in expenses relating to our minority interest in Fiesta
Communications.  Additionally, interest expense between periods
increased by $21,000, or 66%, from $32,000 for the quarter ended April 30, 2008
to $53,000 for the quarter ended April 30, 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 $418,000 for the three months ended April 30, 2009 compared to
net income of $95,000 available to common stockholders for the three months
ended April 30, 2008.  The increase net loss for the three months
ended April 30, 2009 was primarily the result of the decline in revenue, gross
margin and operating income.





Nine
Months ended April 30, 2009 Compared to Nine Months ended April 30,
2008





Revenues.VoIP
services revenue decreased by $14,655,000, or 47%, from the nine months ended
April 30, 2008 to the nine months ended April 30, 2009.  VoIP minutes
carried on our network on which we generated revenues decreased by 33% from
approximately 419,571,789 minutes of voice traffic during the nine months ended
April 30, 2008 to approximately 282,057,374 minutes of voice traffic during the
nine months ended April 30, 2009.  Additionally, our average revenue
per minute (ARPM) decreased by 22% from $0.0735 during the nine months ended
April 30, 2008 to $0.0574 for the nine months ended April 30,
2009.  During the second quarter of FY2009, we began a rigorous effort
to increase traffic quality and the average call duration (ACD) of calls
processed by our network. These measures included eliminating and streamlining
many of the routes offered. This contributed to a decrease of approximately 15%
in the number of vendors connected to our network. Despite the decline in
revenue and the total number of minutes processed by our network, our efforts to
streamline the routes we offer and eliminate certain routes resulted in an
increase in average call duration (ACD) from 2.59 minutes per call for the three
months ended January 31, 2009 to 4.01 minutes for the three months ended April
30, 2009 and partially offsetting the fewer number of calls that were completed
through our network during the three months ended April 30, 2009. The declines
in both the total minutes processed by our network and the average revenue per
minute (ARPM) are the direct result of the lower level of international calling
during the current global economic recession. We believe that the decision made
during the second quarter of Fiscal 2009 to streamline our routes and eliminate
under performing and inefficient routes will positively influence our business
in the long term, as evidenced by the continued increase in the ACD to 4.01
minutes per call for the three months ended April 30, 2009 from 2.59 minutes per
call for the three months ended January 31, 2009. We expect the increase in ACD
to have a favorable impact on our total revenues as the number of completed
calls processed through our networks return to normal levels since each
completed call will represent a larger number of minutes processed.





Cost of Services (exclusive of
depreciation and amortization).  The consolidated cost of
services decreased by $13,702,000, or 48%, from the nine months ended April 30,
2008 to the nine months ended April 30, 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
0.53 % between periods, from 92.91% of revenue during the nine months ended
April 30, 2008 to 92.38% of revenue during the nine months ended April 30,
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 $953,000 or 43%, to $1,239,000 for the nine months
ended April 30, 2009 compared to $2,192,000 for the nine months ended April 30,
2008.





Selling, General and Administrative
(SG&A) Expenses (exclusive of legal and professional
fees).  SG&A expenses decreased by $399,000, or 21%, from
the nine months ended April 30, 2008 to the nine months ended April 30,
2009.  The decrease is primarily attributable to the decrease in
non-cash compensation expense to employees.  During the nine months
ended April 30, 2008 we recognized $612,000 in non-cash compensation expense to
employees.  In comparison, we only recognized $143,000 in non-cash
compensation expense to employees during the nine months ended April 30,
2009.


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Legal and Professional
Fees.  Legal and professional fees decreased by $9,000, or 4%,
from the nine months ended April 30, 2008 to the nine months ended April 30,
2009.  The primary reason for the variance between periods is
attributable to $35,000 in legal fees incurred during the nine months ended
April 30, 2008 in connection with an investor relations campaign.  We
did not incur similar expenses during the nine months ended April 30,
2009.





Bad Debt
Expense.  Bad debt expense increased by $4,000, from the nine
months ended April 30, 2008 to the nine months ended April 30,
2009.  During the nine months ended April 30, 2009 we only recognized
$2,000 in bad debt expense associated with uncollectible accounts.





Depreciation and
Amortization.  Depreciation and amortization decreased by
$3,000 or 3%, from the nine months ended April 30, 2008 to the nine months ended
April 30, 2009.  The reduction in depreciation expense is as a result
of some of the equipment and software reaching its depreciable value, thus the
decrease between periods.





Operating Income
(loss).  The Company’s operating loss increased by $546,000, or
674%, from the nine months ended April 30, 2008 to the nine months ended April
30, 2009.  The increase in operating loss between periods is
attributed to the decrease in gross margin, which was slightly offset by the
decrease between periods in SG&A expenses.





Other Income
(expense).  Other expense during the nine months ended April
30, 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 $67,000, or 85%, from $79,000 for the nine months ended April 30,
2008 to $146,000 for the nine months ended April 30, 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 $588,000, or 494%, from the nine
months ended April 30, 2008 to the nine months ended April 30,
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 nine months ended April 30,
2008to
$0 during the nine months ended April 30, 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 nine
months ended April 30, 2009.





Reversal of Previously Recorded
Preferred Stock Dividends.During the nine months ended April
30, 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 nine
months ended April 30, 2009.





Net Income (loss)Applicable to
Common Stockholders.  Net (loss) applicable to common
stockholders increased by $916,000, or 438%, from the nine months ended April
30, 2008 to the nine months ended April 30, 2009.  The increase in net
loss between periods is attributed to the decrease between periods of $953,000
in gross margin and the increase of $42,000 in minority interest expense.
Additionally, during the nine months ended April 30, 2008 we recognized a
reversal of previously recorded preferred dividend of $340,000.  We
did not recognize this type of reversal during the nine months ended April 30,
2009.  The decrease in the reversal of previously recorded preferred
divided was slightly offset by the decrease of $469,000 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.


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Liquidity
and Capital Resources





Cash Position:  We
had a cash balance of $1,048,000 as of April 30, 2009.  Net cash
consumed by operating activities during the nine months ended April 30,
2009 was approximately $997,000.  Investing activities during the nine
months ended April 30, 2009 consumed $144,000, consisting of an increase of
$70,000 in the note receivable from Fiesta Communications, a related party, and
investments in certificates of deposit of $7,000 and $67,000 associated with the
acquisition of various computers and servers.  Financing activities
during the nine months ended April 30, 2009 provided $851,000 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 was
slightly offset by the cash consumed by debt principal payments of $374,000
associated with various notes payable, acquisition of our common stock of
$48,000 and principal payments of $2,000 associated with a capital lease
obligation.  Overall, our net operating, investing and financing
activities during the nine months ended April 30, 2009 consumed
$290,000 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 $42,000 per month.  As of April 30,
2009 we had $12,000 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 $105,000 in cash generated from operations and approximately
$40,000 per month of our available cash to cover all monthly cash
expenses.  We anticipate that the April 30, 2009 cash balance of
$1,048,000 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 $33,000 as of April 30, 2009.  This represents a
decline of approximately $460,000 from our working capital at July 31,
2008.





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 operating at the
reasonable assurance level.


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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


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-





ITEM
6.  EXHIBITS





The
following documents are filed as exhibits to this report.





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:
      June 12, 2009
                By:
                /s/ Arthur L. SmithName:
                Arthur
      L. SmithTitle:
                President
      andChief
      Executive OfficerDate:
      June 12, 2009
                By:
                /s/ Antonio EstradaName:
                Antonio
      EstradaTitle:
                Sr.
      VP of Finance & Corporate Controller(Principal
      Accounting and Principal
                  Financial
      Officer)




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-


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.




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