Unassociated Document
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

 
 
Page
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements
2
   
Consolidated Balance Sheets as of April 30, 2009 and July 31, 2008 (unaudited)
2
Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2009
  
and 2008 (unaudited)
3
Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months
  
Ended April 30, 2009 (unaudited)
4
Consolidated Statements of Cash Flows for the Nine Months
  
Ended April 30, 2009 and 2008 (unaudited)
5
Notes to Consolidated Financial Statements (unaudited)
6
   
Item 2.  Management’s Discussions and Analysis and Plan of Operations
11
   
Item 3. Quantitative and qualitative disclosures about market risk
16
   
Item 4. Controls and Procedures
16
   
PART II. OTHER INFORMATION
  
   
Item 1. Legal Proceedings
17
   
Item 1A. Risk Factors
17
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
17
   
Item 3. Default Upon Senior Securities
17
   
Item 4. Submission of Matters to a Vote of Security Holders
17
   
Item 5. Other Information
17
   
Item 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
    
2008
  
             
ASSETS
            
CURRENT ASSETS:
            
Cash and cash equivalents
   $ 1,048     $ 1,338  
Certificates of deposit
     110       -  
Accounts receivable, net of allowance for bad debt of $10 and $60, respectively
     513       1,082  
Note receivable, related party
     54       25  
Prepaid & other current assets
     175       124  
Total current assets
     1,900       2,569  
                 
LONG-TERM ASSETS:
                
Certificates of deposit
     215       319  
Intangible Assets, net of amortization of $13 and $1, respectively
     137       149  
                 
PROPERTY AND EQUIPMENT
     678       611  
Less - accumulated depreciation
     (543 )     (439 )
Net property and equipment
     135       172  
                 
Total assets
   $ 2,387     $ 3,209  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
CURRENT LIABILITIES:
                
Accounts payable
   $ 523     $ 1,361  
Wells Fargo factoring collateral
     12       18  
Accrued liabilities
     175       116  
Current portion of obligation under capital leases
     1       3  
Notes payable
     1,156       566  
Convertible debentures, net of unamortized discount of $0 and $5, respectively
     -       78  
Total current liabilities
     1,867       2,142  
                 
LONG-TERM LIABILITIES:
                
Notes payable
     461       588  
Derivative liability
     85       -  
Convertible debentures, net of unamortized discount of $0 and $3, respectively
     -       81  
Obligation under capital leases, less current portion
     -       1  
Other
     20       3  
Total long-term liabilities
     566       673  
                 
Total liabilities
     2,433       2,815  
                 
STOCKHOLDERS' 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 shares issued and outstanding, respectively
     40       39  
Additional paid in capital
     73,013       72,747  
Accumulated deficit
     (73,100 )     (72,393 )
Other comprehensive income
     1       1  
Total stockholders' equity
     (46 )     394  
Total liabilities and stockholders' equity
   $ 2,387     $ 3,209  

See accompanying notes to unaudited financial statements

 
- 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
    
2008
  
OPERATING REVENUES:
                        
VoIP services
   $ 3,660     $ 11,171     $ 16,250     $ 30,905  
                                 
Total operating revenues
     3,660       11,171       16,250       30,905  
                                 
OPERATING EXPENSES:
                                
Cost of services (exclusive of depreciation and amortization, shown below)
     3,461       10,384       15,011       28,713  
Selling, general and administrative expense (exclusive of legal and professional fees)
     455       555       1,517       1,916  
Legal and professional fees
     61       86       230       239  
Bad debt expense
     -       (23 )     2       (2 )
Depreciation and amortization expense
     33       42       117       120  
Total operating expenses
     4,010       11,044       16,877       30,986  
                                 
OPERATING INCOME (LOSS)
     (350 )     127       (627 )     (81 )
                                 
OTHER INCOME (EXPENSE):
                                
Gain on early extinguishment of debt
     -       -       108       41  
Investment 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
     -       -       -       340  
 
                               
NET INCOME (LOSS) TO COMMON  STOCKHOLDERS
   $ (418 )   $ 95     $ (707 )   $ 209  
                                 
BASIC INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
   $ (0.01 )   $ 0.00     $ (0.02 )   $ 0.01  
DILUTED INCOME (LOSS) PER SHARE TO COMMON STOCKHOLDERS
   $ (0.01 )   $ 0.00     $ (0.02 )   $ 0.01  
                                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
     39,892,157       39,186,590       39,758,501       39,036,705  
DILUTED 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)

                           
Additional
                    
   
Preferred Stock
    
Common
    
Paid-in
    
Accumulated
    
Other Comp.
        
   
Shares
    
Par
    
Shares
    
Par
    
Capital
    
Deficit
    
Income/Loss
    
Totals
  
BALANCE, July 31, 2008
     -       -       39,550,415       39     $ 72,747     $ (72,393 )   $ 1     $ 394  
Repurchase of common shares
                     (295,981 )     (0 )   $ (48 )                     (48 )
Stock option expense
                                     143                       143  
Shares issued for conversion of notes payable
                     637,723       1       171                       172  
Net 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
    
2008
  
             
CASH 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       120  
Issuance of stock grants and options, employees for services
     143       612  
Issuance of common stock and warrants for services
     -       77  
Provisions for losses on accounts receivables
     2       (2 )
Amortization of debt discount
     46       6  
Changes 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 )     256  
                 
CASH 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       1,050  
                 
CASH AND CASH EQUIVALENTS, end of period
   $ 1,048     $ 726  
                 
SUPPLEMENTAL DISCLOSURES:
                
Cash paid for interest
   $ 88     $ 34  
Cash paid for income tax
     -       -  
                 
NON-CASH  INVESTING AND FINANCING TRANSACTIONS
                
Issuance of common stock for conversion of debt
   $ 172     $ 30  
Conversion of preferred stock to common stock
     -       1  
Preferred stock dividends
     -       12  
Reversal 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
    
2008
  
             
9% Convertible Subordinated Debenture, bearing interest at 9.00% per annum maturing
            
June 1, 2010, convertible into common stock annually at the higher of:
            
A) $0.27 per share or B) the average closing price of ATSI common stock for the 10 days
            
immediately preceding the date of conversion, subject to a maximum number of 1,540,741
            
common shares issuable upon conversion, outstanding balance, net of unamortized discount
            
of $0 and $5, respectively. On October 20, 2008 we reached a settlement agreement with
            
the Debenture holders, as result we converted the outstanding principal balance and accrued
            
interest of $166 and $6, respectively, into 637,723 shares of common stock.
   $ -     $
159
  
                 
Note payable to CCA Financial Services payable in monthly
                
installments 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 accrued
                
interest of $54 and $1, respectively.
     -      
101
  
                 
Note payable to Alfonso Torres, payable upon maturity, bearing interest of 6.00% per annum,
                
maturing October 1, 2009.
     460      
460
  
                 
Note payable to The Shaar Fund, payable in quarterly installments bearing interest of
                
7.50% per annum, maturing April 12, 2012. On October 30, 2008, we reached a settlement
                
agreement, in which we agreed to pay $290 to fully satisfy the note. Additionally, the
                
note holder agreed to provide us with a discount of $108.
     -      
416
  
                 
Note 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.
     -      
39
  
                 
Note 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      
138
  
                 
Note payable to ATVF, Scott Crist, Roderick Ciaccio & Vencore Solutions, payable in monthly
                
installments, bearing interest at 10.00% per annum, maturing September 10, 2010, collateralized
                
by ATSI's accounts receivables (other than accounts factored with Wells Fargo), $100,000
                
certificate of deposit with Wells Fargo and ATSI's ownership in ATSICOM. Additionally, we
                
issued 425,000 warrants to the note holders, at an exercise price per warrant of $0.19.
                
The warrants have the following “Put” and “Call” rights: Put right. From and after the
                
second anniversary of the notes payable, the holder shall have the right to request from ATSI,
                
upon five (5) Business days prior notice, to acquire from the holders the warrants at a price
                
$0.39 per warrant. Call right. At any time any warrants are outstanding, if the last sale price of ATSI’s
                
common stock is greater than $.80 per share for ten (10) consecutive trading days, ATSI shall
                
be entitled to require the purchaser to exercise the warrants and pay the exercise price therefore
                
upon five (5) business days written notice. Net of unamortized discount of $47.
     707      
-
  
                 
Note payable to San Antonio National Bank payable in monthly installments, bearing interest
                
at 8.00% per annum, maturing October 25, 2011, collateralized by ATSI's assets.
     361      
-
  
                 
Total outstanding debt long-term debt
     1,617      
1,313
  
Current 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
   $ 1,156  
Fiscal 2010
     461  
Total 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
    
2008
  
Expected 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-average
  
         
Weighted-average
    
remaining contractual
  
2005 Stock Compensation Plan
  
Options
    
exercise price
    
term (years)
  
                   
Outstanding at July 31, 2008
     8,239,000     $ 0.19       6  
                         
Granted
     8,474,000       0.08       7  
Forfeited
     (8,439,000 )     0.19       4  
Outstanding at April 30, 2009
     8,274,000       0.08       7  
                         
Exercisable 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-average
  
         
Weighted-average
    
remaining contractual
  
   
Warrants
    
exercise price
    
term (years)
  
                   
Outstanding at July 31, 2008
     375,000     $ 0.18       4  
Granted
     425,000       0.19       4  
Exercised
     -       -       -  
Forfeited
     -       -       -  
Outstanding at April 30, 2009
     800,000     $ 0.19       4  
                         
Exercisable 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.

 
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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 actions resulted 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 %
 
 
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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, 2008 to 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.

 
- 13 -
 

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.

 
- 14 -
 

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, 2008 to $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.

 
- 15 -
 

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

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. Smith
 
Name:
Arthur L. Smith
 
Title:
President and
   
Chief Executive Officer
     
Date: June 12, 2009
By:
/s/ Antonio Estrada
 
Name:
Antonio Estrada
 
Title:
Sr. VP of Finance & Corporate Controller
   
(Principal Accounting and Principal
Financial Officer)
 
 
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EXHIBIT INDEX

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