UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-KSB**


(mark
      one)





x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934


For
      the
      fiscal year ended July 31, 2007




o
            TRANSITION
                REPORT UNDER 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.**


(Name
      of
      Small Business Issuer 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**


(Issuer’s
      Telephone Number)





Securities
      registered under Section 12(b) of the Exchange Act: NONE





Securities
      registered under Section 12(g) of the Exchange Act:





**Common
      Stock, Par Value $0.001 Per Share**


(Title
      of
      Class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act) o
      Yes x No





Registrant’s
      revenues for its most recent fiscal year were $31,692,150





The
      aggregate market value of the common equity held by non-affiliates of the issuer
      was $10,518,338 based on
      the closing price of
      $0.27 per
      share on October
      15, 2007 as
      reported on the over-the-counter bulletin board.





There
      were 38,956,810 shares of issuer ’s Common Stock outstanding as of October 15,
      2007.





Transitional
      Small Business Disclosure Format (check one): o Yes x
      No














**TABLE
      OF CONTENTS**




**Page****PART
                I**Item
                1. Description of Business
            
            3Overview
            
            3History
            
            4Recent
                Developments
            
            4Services
                and Products
            
            4Carrier
                Services
            
            4Network
                Services
            
            5Communication
                Services
            
            5Voice
                over Internet Protocol Network
            
            5Strategy
                and Competitive Conditions
            
            7Government
                Regulations/ Concession License
            
            9Suppliers
            
            13Employees
            
            13Risk
                Factors
            
            13Item
                2. Description of Properties
            
            15Item
                3. Legal Proceedings
            
            16Item
                4. Submission of Matters to a Vote of Security Holders
            
            16**PART
                II**Item
                5. Market for Registrant’s Common Equity and Related Stockholder
                Matters
            
            16Item
                6. Management’s Discussion and Analysis or Plan of
                Operations
            
            18Item
                7. Financial Statements and Supplementary Data
            
            26Item
                8. Changes in and Disagreements with Accountants on Accounting and
Financial
                Disclosures
            
            45Item
                8A.Controls and Procedures
            
            45**PART
                III**Item
                9. Directors, Executive Officers, Promoters and Control Persons,
                Compliance with
                Section 16(A) of the Exchange Act
            45Item
                10. Executive Compensation
            
            47Item
                11. Security Ownership of Certain Beneficial Owners and
                Management
            
            51Item
                12. Certain Relationships and Related Transactions
            
            52Item
                13. Exhibits and Reports on Form 8-K
            
            52Item
                14. Principal Accountant Fees and Services
            
            55




2




**PART
      I**





**ITEM
      I.**  **BUSINESS.**





**Overview**





We
      are an
      international telecommunications carrier that utilizes the Internet to provide
      cost-efficient and economical international communication services. Our current
      operations consist primarily of providing digital voice communications over
      the
      Internet using Voice-over-Internet-Protocol ("VoIP"). We
      provide high quality voice and enhanced communication 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. Our services include:





*Carrier
      Services:* We
      provide VoIP communication services to United States and foreign
      telecommunications companies who lack transmission facilities, require
      additional capacity or do not have the regulatory licenses to terminate traffic
      in Mexico, Asia, the Middle East and Latin America. Typically these
      telecommunications companies offer their services to the public for domestic
      and
      international long distance and VoIP services.





*Network
      Services: We* provide
      private communications links and VoIP gateway services to multi-national and
      Latin American carriers and enterprise customers who use a high volume of
      telecommunications services to communicate with their U.S. offices or businesses
      and need greater dependability than is currently available through their own
      telecommunications network. *These
      services include data, voice and fax transmission between multiple international
      offices, as well as Internet and collocation services in the United
      States.*





*Communication
      Services:* We
      provide retail local phone service and international VoIP long distance service,
      primarily to the U.S. Hispanic market throughout Texas, mainly in the Rio Grande
      Valley. Our local phone service includes access to a landline and value-added
      services such a caller ID and call waiting. These services are offered to our
      customers on both a prepaid and postpaid basis. In addition, we provide prepaid
      domestic and international long-distance services with access to our VoIP
      network platform.





We
      have
      had operating losses for almost every quarter since we began operations in
      1994.
      Our operating income from continuing operations were approximately $91,000
      and
      our operating loss $598,000, for the years ended July 31, 2007, and 2006,
      respectively. Additionally, we had a working capital deficit of approximately
      $424,000 at July 31, 2007; this represents an improvement in our working capital
      deficit of approximately of $2,376,000 from our balance at July 31, 2006.





We
      produced positive operating income during the 2 nd ,
      3 rd and
      4 th quarters
      of fiscal 2007 and expect to pay our vendors and lenders on time in the future
      if this trend continues. Additionally, we generated sufficient income from
      operations to cover our operating expenses during the fiscal year ended July
      31,
      2007. However, we believe that due to our limited access to capital, we may
      not
      be able to support our ongoing operations if we do not continue producing
      positive operating income in the future. Our ability to continue as a going
      concern is dependent upon generating sufficient income from operations to cover
      our operating expense, the ongoing support of our stockholders and customers,
      and our ability to obtain capital resources to support expansion.





During
      the twelve months ended
      July 31, 2007 ,
      we
      received $713,000
      from a private placement financing. We also received $35,000
      from the exercise of warrants and $16,000 from the exercise of stock options.
      These funds, along with funds generated from operations, allowed us to cover
      our
      operating expenses and other corporate expenses during the nine months ended
      April 30, 2007 .
      Additionally, on November 3, 2006, we entered into a factoring agreement with
      CCA Financial Services, Inc. Under the agreement, CCA Financial Services
      committed to purchase up to $1,000,000 of our monthly receivables. As our
      ongoing operations require, we will factor our receivables under this new
      agreement. As of date of this filing, we did not have any outstanding factored
      receivables under this agreement.




3





We
      will
      continue to pursue cost cutting strategies in order to conserve working capital,
      which could limit the implementation of our business plan. We are dependent
      on
      our operations and the proceeds from future debt or equity investments to fully
      implement our business plan. If we are unable to continue producing positive
      cash flow from operations or raise sufficient capital, we will be required
      to
      delay or forego some portion of our business plan, which could have an adverse
      effect on our anticipated results from operations and our financial condition. In
      addition, we are currently pursuing various financing alternatives including
      expansion of our current accounts receivable factoring arrangement and
      exchanging some portion or all of our debt for equity. However, we may not
      be
      successful in these efforts or circumstances currently unknown or unforeseen
      by
      us may arise that will result in us not being able to obtain additional funding
      for our business plan.





**History**





ATSI
      Communications, Inc., a Nevada corporation, was formed in 2004 as the successor
      to the business originally incorporated in 1994 as a Canadian holding company,
      Latcomm International, Inc., with a Texas operating subsidiary, Latin America
      Telecomm, Inc. Both corporations were renamed “American TeleSource
      International, Inc.” in 1994. In May 1998, the Canadian corporation completed a
      share exchange with a newly formed Delaware corporation, also called American
      TeleSource International, Inc., which resulted in the Canadian corporation
      becoming the wholly owned subsidiary of the Delaware corporation. Our
      stockholders voted to change our name from American TeleSource International,
      Inc. to ATSI Communications, Inc. in 2003 and to reincorporate in the State
      of
      Nevada by merger into our wholly owned subsidiary in 2004. We own 49% of ATSI
      Comunicaciones S.A de C.V. (ATSICOM), a Mexican corporation that holds a 30-year
      concession allowing for the sale of voice and data services, long distance
      transport, and the operation of a telecommunications network in
      Mexico.




**Recent
      Developments**





During
      the year ended July 31, 2007 (“fiscal 2007”):





·
            We
                expanded our NexToneIntelliconnectTM
                System by adding 1000 ports of capacity to our Multiprotocol Session
                Exchange (“MSX”) and Session Border Controller (“SBC”).This
                network expansion has allowed us to route our traffic more efficiently,
                improve our call processing, monitor quality of service and support
                our
                growth in our core business. In addition, the NexToneTM technology has
                allowed us to be more competitive and to improve margins in our
                international VoIP carrier services.




·
            We
                entered into a $1 Million accounts receivable financing agreement
                and a
                $250,000 note payable with CCA Financial Services, Inc. This financing
                arrangement provided us with access to capital to fund our growth
                initiatives and allowed us to service top tier customers that required
                extended payment terms.





**Services
      and Products**





We
      provide three types of services: Carrier Services, Network Services and
      Communication Services.




*Carrier
      Services* consists
      of VoIP
      communication services sold to United States and foreign telecommunications
      companies who lack transmission facilities, require additional capacity or
      do
      not have the regulatory licenses to terminate traffic in Mexico, Asia, the
      Middle East and Latin America. Typically
      these telecommunications companies offer their services to the public for
      domestic and international long distance and VoIP services. Revenues from this
      service accounted for approximately 99% of our total revenue during the year
      ended July 31, 2007. The percentage of our total volume of carrier services
      traffic sent by customers can fluctuate dramatically, on a quarterly, and
      sometimes, daily basis. During fiscal 2007, we entered into various reciprocal
      agreements with our customers that allow them to transport and terminate traffic
      over our network and allowed us to transmit and terminate traffic over their
      networks. These reciprocals agreements with our customers were not for a
      specific period of time or volume of minutes. Under the reciprocal agreements,
      both parties were given a set of rates for services and each party would decide
      the volume of minutes it would send to be processed. Therefore, on a
      month-to-month basis there was not a required volume commitment of minutes
      from
      each party and the parties were free to re-route their traffic away to a lower
      priced provider.


**


4




*Network
      Services* consist
      links and VoIP gateway services to multi-national and foreign carriers and
      enterprise customers who use a high volume of telecommunications services to
      communicate with their U.S. offices or businesses and need greater dependability
      than is currently available through the foreign telecommunication networks.
      These services include data, voice and fax transmission between multiple
      international offices and branches as well as Internet and collocation services
      in the United States. We
      currently provide network Services to World Data, a Mexican corporation on
      a
      month-to-month basis and generate approximately $1,500 per month in revenue.
      There is no assurance that we will continue to generate this revenue in the
      future or that we will be able to enter into a long-term contract with World
      Data or any other customer.





*Communication
      Services* consists
      of retail l ocal
      telephone service and international VoIP long distance service. We provide
      these
      services on both a post use and prepaid basis to individuals in the United
      States and Mexico, primarily to the U.S. Hispanic Market in the Rio Grande
      Valley. Our local telephone service provides access to a basic phone services
      and value-added features such as call waiting and caller ID. Domestic and
      international long distance services are provided through access to our VoIP
      platform. Revenues from Communication Services accounted for approximately
      $113,000 or 1% of our total revenues in fiscal 2007.





**Voice
      over Internet Protocol Networks**





The
      basic
      technology of traditional telecommunications systems was designed for slow
      mechanical switches. Communications over the traditional telephone network
      are
      routed through circuits that must dedicate all circuit resources to each call
      from its inception until the call ends, regardless of whether anyone is actually
      talking on the circuit. This circuit-switching technology incurs a significant
      cost per call and does not efficiently support the integration of voice with
      data services. Data networks, however, were designed for electronic switching.
      They break the data stream into small, individually addressed packages of data
      (“packets”) that are routed independently of each other from the origin to the
      destination. Therefore, they do not require a fixed amount of bandwidth to
      be
      reserved between the origin and destination of each call and they do not waste
      bandwidth when it is not being used for actual transmission of information.
      This
      allows multiple voice or voice and data calls to be pooled, resulting in these
      networks being able to carry more calls with an equal amount of bandwidth.
      Moreover, they do not require the same complex switching methods required by
      traditional voice telephone networks, instead using a multiplicity of routers
      to
      direct each packet to its destination and they automatically route packets
      around blockages, congestion or outages.





Packet
      switching can be used within a data network or across networks, including the
      public Internet. The Internet itself is not a single data network owned by
      any
      single entity, but rather a loose interconnection of networks belonging to
      many
      owners that communicate using the Internet Protocol (“IP”). By converting voice
      signals to digital data and handling the voice signals as data, it can be
      transmitted through the more efficient switching networks designed for data
      transmissions and through the Internet using the IP. The transmission of voice
      signals as digitalized data streams over the Internet is known as Voice over
      Internet Protocol or “VoIP”. A VoIP network has the following advantages over
      traditional networks:





·
            **Integration
                of Voice and Data:**VoIP networks allow for the integration and transmission of voice,
                data,
                and images using the same network equipment.





·
            **Simplification:**An
                integrated infrastructure that supports all forms of communication
                allows
                more standardization, a smaller equipment complement, and less equipment
                management.




5




·
            **Network
                Efficiency:**The integration of voice and data fills up the data communication
                channels
                efficiently, thus providing bandwidth consolidation and reduction
                of the
                costs associated with idle bandwidth. The sharing of equipment and
                operations costs across both data and voice users can also improve
                network
                efficiency since excess bandwidth on one network can be used by the
                other,
                thereby creating economies of scale for voice (especially given the
                rapid
                growth in data traffic). An integrated infrastructure that supports
                all
                forms of communication allows more standardization and reduces the
                total
                equipment complement. This combined infrastructure can support dynamic
                bandwidth optimization and a fault tolerant design. The differences
                between the traffic patterns of voice and data offer further opportunities
                for significant efficiency improvements.





·
            **Co-existence
                with traditional communication mediums:**IP
                telephony can be used in conjunction with existing PSTN switches,
                leased
                and dial-up lines, PBXs and other customer premise equipment (CPE),
                enterprise LANs, and Internet connections. IP telephony applications
                can
                be implemented through dedicated gateways, which in turn can be based
                on
                open standards platforms for reliability and scalability.





·
            **Cost
                reduction:**Under the VoIP network, the connection is directly to the Internet
                backbone and as a result the telephony access charges and settlement
                fees
                are avoided.





The
      growth of voice on the Internet was limited in the past due to poor sound
      quality caused by technical issues such as delays in packet transmission and
      by
      bandwidth limitations related to Internet network capacity and local access
      constraints. However, the continuing addition of data network infrastructure,
      recent improvements in packet switching and compression technology, and new
      software algorithms and improved hardware have substantially reduced delays
      in
      packet transmissions and resulted in better sound quality. Nevertheless, certain
      VoIP routes into countries with limited or poor Internet infrastructure continue
      to lack the consistent quality required for voice transport and termination.





A
      number
      of large long distance carriers have announced Internet telephony service
      offerings. Smaller Internet telephony service providers have also begun to
      offer
      low-cost Internet telephony services from personal computers to telephones
      and
      from telephones to telephones. Traditional carriers have substantial investments
      in traditional telephone network technology, and therefore have been slow to
      embrace Internet technology.





We
      believe that the infrastructure required for a global network is too expensive
      for most companies to deploy on their own. This mandates that the network be
      a
      combination of gateways owned by different operators. For a network to achieve
      optimal functionality and quality, however, the gateways need to be
      interoperable, or able to communicate with one another. Interoperability
      continues to be a challenge for VoIP providers and recently, technological
      solutions have emerged that support interoperability between different protocols
      and/or gateways. Cisco appears to have emerged as a dominant supplier of VoIP
      gateways and other manufacturers often seek to make their equipment
      interoperable with Cisco.





Long
      distance telephone calls transported over the Internet are less expensive than
      similar calls carried over the traditional telephone network primarily because
      the cost of using the Internet is not determined by the distance those calls
      need to travel. Also, routing calls over the Internet is more cost-effective
      than routing calls over the traditional telephone network because the technology
      that enables Internet telephony is more efficient than traditional telephone
      network technology. The greater efficiency of the Internet creates cost savings
      that can be passed on to the consumer in the form of lower long distance rates
      or retained by the carrier as higher margins.





By
      using
      the public Internet, VoIP providers like ATSI are able to avoid direct payment
      for transport of communications, instead paying for large “pipes” into the
      public Internet, billed by bandwidth rather than usage, which transmits calls
      to
      a distant gateway. The Internet, which has its origins in programs devised
      by
      the Department of Defense to provide multiple routes and therefore redundancy
      which was largely immune from the failure of a single network element, provides
      great redundancy and can be “self healing” in the event of an outage in a
      particular network element or transmission path. Moreover, adding an additional
      entry or exit point (a Point of Presence or “PoP”) does not require any
      expensive or time consuming reconfiguration or reprogramming of existing network
      elements. The new element is simply installed with a specific IP address and
      it
      can send or receive information from any other IP address on the
      Internet.




6




**Strategy
      and Competitive Conditions**





The
      long
      distance telephony market and the Internet telephony market are highly
      competitive. Our competitors include major telecommunications carriers in the
      U.S., foreign telecommunications carriers (which may be owned by foreign
      governments), and numerous small competitors, and we expect to face continuing
      competition based on price and service offerings from existing competitors
      and
      new market entrants in the future. The principal competitive factors in our
      market include price, coverage, customer service, technical response times,
      reliability, and network size/capacity. The competitive landscape is rapidly
      altering the number, identity and competitiveness of the marketplace, and we
      are
      unable to determine with certainty the impact of potential consolidation in
      our
      industry.





A
      number
      of large long distance carriers have introduced services that make Internet
      telephony or voice services over the Internet available to other carriers.
      All
      major telecommunications companies either presently do or could route traffic
      to
      destinations worldwide and compete directly with us. Smaller Internet telephony
      service providers have also begun to offer low-cost Internet telephony services
      from personal computers to telephones and from telephones to telephones. All
      major telecommunications companies either presently do or could route traffic
      to
      destinations worldwide and compete directly with us. In addition, Internet
      service providers and other companies currently in related markets have begun
      to
      provide voice over the Internet services or adapt their products to enable
      voice
      over the Internet services. These related companies may migrate into the
      Internet telephony market as direct competitors.





Many
      of
      our competitors have substantially greater financial, technical and marketing
      resources, larger customer bases, longer operating histories, greater name
      recognition and more established relationships in the industry than we have.
      As
      a result, certain of these competitors may be able to adopt more aggressive
      pricing policies that could hinder our ability to market our services. We
      believe that our key competitive advantages are our ability to deliver reliable,
      high quality voice service over the Internet in a cost-effective manner. We
      cannot provide assurances, however, that these advantages will enable us to
      succeed against comparable service offerings from our competitors. A large
      number of telecommunications companies, including AT&T, iBasis and
      Qwest currently provide wholesale voice telecommunications service which
      competes with our business. These companies have large budgets available for
      research and development, may further enhance the quality and acceptance of
      the
      transmission of voice over the Internet.





Our
      strategy is to position ourselves to take advantage of the current
      demonopolization of the Latin American telecommunications markets, as well
      as
      the increasing demand for international communications services between foreign
      markets and the United States. Historically, telecommunications services in
      Latin America have been provided by state-run companies, operating as a legal
      or *de
      facto* monopoly. Although these companies failed to satisfy the demand for services
      in
      their countries, the regulatory scheme effectively precluded competition by
      foreign carriers. Currently, there is a trend toward demonopolization of the
      telecommunications industry in Latin America, and many of these countries are
      in
      various stages of migration toward a competitive, multi-carrier market. Many
      Latin American countries produce a significant number of immigrants to the
      United States, or are becoming homes to U.S. based corporations seeking lower
      labor costs. At the same time that Latin American markets have been opening
      up,
      the demand for telecommunications services between the United States and Latin
      America (particularly Mexico) has been strengthened by:





·
            the
                rapid growth of the Latino segment of the United States population


·
            Mexico’s
                status as the top calling partner with the United States


·
            increase
                in trade and travel between Latin America and the United States






7




·
            the
                build-out of local networks and corresponding increase in the number
                of
                telephones in homes and businesses in Latin countries


·
            proliferation
                of communications devices such as faxes, mobile phones, pagers, and
                personal computers


·
            declining
                rates for services as a result of increased competition.





Carriers
      buying wholesale termination into Mexico, while cost conscious, are increasingly
      demanding high reliability and quality in service delivery. Sustainability
      and
      growth in this segment depends on specific competitive advantages like proper
      licenses, network redundancy, favorable termination agreements, or the presence
      of a business infrastructure and relationships in the specific terminating
      market. The Company competes with the dominant providers, such as Qwest, as
      well
      as other, smaller providers for international long distance services to Mexico.
      The Company believes that in contrast to the dominant providers, it has a much
      more focused and cost competitive strategy that targets select higher margin
      telecommunication niches utilizing VoIP technology. Certain carriers provide
      termination services in Mexico at lower prices, by using unlicensed IP points
      of
      presence. These carriers, however, have several disadvantages including:
      (i) generally poor quality, (ii) limited capacity, and (iii) poor
      reliability, since Mexican authorities periodically shut down their operations.
      In addition, network expansions by existing and newly licensed carriers in
      Mexico have put pressure on termination prices. The combination of
      non-conventional termination and the new settlement rates have reduced U.S
      to
      Mexico termination prices from an average price of about $0.27 per minute in
      1998 to a current rate of $0.07 per minute.





Our
      strengths include our knowledge of, and relationships within, the
      telecommunications industry in the United States and certain countries within
      Latin America, particularly Mexico. Our management and employees have in-depth
      knowledge of the Mexican culture, business environment and telecommunications
      industry. As a result, we have been able to obtain a key long distance
      concession through our 49% ownership in ATSICOM that allows us to both generate
      and carry traffic within Mexico and between Mexico and the United States.





**Government
      Regulation**





Our
      operations are subject to federal, state and foreign laws and regulations.
      There
      is significant uncertainty regarding the application of the Communications
      Act
      of 1934 and the regulations adopted by the Federal Communications Commission
      (“FCC”) to Internet telephone and there is a risk that either the FCC or
      Congress will impose common carrier restrictions and other requirements of
      traditional telecommunications providers to providers of VoIP services.





*U.S
      Federal and State Regulation of Carrier Services*





We
      believe that, under U.S. law, the Internet-related services that we provide
      constitute information services as opposed to regulated telecommunications
      services, and, as such, are not currently regulated as telecommunications common
      carriers by the Federal Communications Commission (FCC) or state agencies
      charged with regulating telecommunications carriers. Nevertheless, aspects
      of
      our operations may be subject to state or federal regulation, including
      regulations governing universal service funding, disclosure of confidential
      communications and excise tax issues. We cannot provide assurances that
      Internet-related services will not be actively regulated in the future. Several
      efforts have been made in the U.S. to enact federal legislation that would
      either regulate or exempt from regulation services provided over the Internet.
      Increased regulation of the Internet may slow its growth, particularly if other
      countries also impose regulations. Such regulation may negatively impact the
      cost of doing business over the Internet and materially adversely affect our
      business, operating results, financial condition and future
      prospects *.*





While
      the
      FCC to date has declined to classify VoIP providers as telecommunications
      carriers for regulatory purposes, various entities have challenged this premise,
      both before the FCC and at various state government agencies.  However,
      the FCC has ruled that certain traffic carried in part utilizing the Internet
      protocol format was nonetheless regulated telecommunications for which certain
      regulatory obligations applied. The
      FCC
      has considered whether to impose surcharges or other common carrier regulations
      upon certain providers of Internet telephony, primarily those which, unlike
      us,
      provide Internet telephony services directly to end users. Recently,
      the FCC ruled that interconnected VoIP service providers must make
      contributions to the Universal Service Fund. Additionally, the FCC has a pending
      proceeding to further examine the question of whether certain forms of VoIP
      services are information services or telecommunications services. The two are
      treated differently in several respects, with certain information services
      being
      regulated to a lesser degree. The FCC has noted that certain forms of
      phone-to-phone VoIP services bear many of the same characteristics as more
      traditional voice telecommunications services and lack the characteristics
      that
      would render them information services. The FCC has indicated that the
      mechanisms for contributing to the Universal Service Fund, issues as to
      applicability of access charges and other matters will be considered in that
      context. Adverse
      rulings or rulemakings could subject us to licensing requirements and additional
      fees and subsidies.





8




If
      the
      FCC were to determine that certain Internet-related services including Internet
      telephony services are subject to FCC regulations as telecommunications
      services, the FCC could subject providers of such services to traditional common
      carrier regulation, including payment of access charges to local telephone
      companies. A decision to impose such charges could also have retroactive effect.
      It is also possible that the FCC may adopt a regulatory framework other than
      traditional common carrier regulation that would apply to Internet telephony
      providers. Any such determinations could materially adversely affect our
      business, financial condition, operating results and future prospects to the
      extent that any such determinations negatively affect the cost of doing business
      over the Internet or otherwise slow the growth of the Internet.





State
      regulatory authorities may also retain jurisdiction to regulate certain aspects
      of the provision of intrastate Internet telephony services. Several state
      regulatory authorities have initiated proceedings to examine the regulation
      of
      such services. Others could initiate proceedings to do so.





*Other
      regulations affecting the Internet in the United States.*





Congress
      has recently adopted legislation that regulates certain aspects of the Internet,
      including online content, user privacy and taxation. In addition, Congress
      and
      other federal entities are considering other legislative and regulatory
      proposals that would further regulate the Internet. Congress has; for example,
      considered legislation on a wide range of issues including Internet spamming,
      database privacy, gambling, pornography and child protection, Internet fraud,
      privacy and digital signatures. Various states have adopted and are considering
      Internet-related legislation. Increased U.S. regulation of the Internet may
      slow
      its growth, particularly if other governments follow suit, which may negatively
      impact the cost of doing business over the Internet and materially adversely
      affect our business, financial condition, results of operations and future
      prospects. Legislation has also been proposed that would clarify the regulatory
      status of VoIP service. The Company has no way of knowing whether legislation
      will pass or what form it might take.





*Regulations
      pertaining to our retail operations.*





In
      the
      United States, services provided through our retail operations are subject
      to
      the provisions of the Communications Act of 1934, as amended, the FCC
      regulations, and the applicable laws and regulations of the various states
      and
      state regulatory commissions.




As
      a
      carrier offering services to the public, we must comply with the requirements
      of
      common carriage under the Communications Act of 1934, including the offering
      of
      service on a nondiscriminatory basis at just and reasonable rates, and obtaining
      FCC approval prior to any assignment of authorizations or any transfer of legal
      or actual control of the company.




We
      are
      subject to various specific common carrier telecommunications requirements
      set
      forth in the FCC’s rules, including operating, reporting and fee requirements.
      Both federal and state regulatory agencies have broad authority to impose
      monetary and other penalties on us for violations of regulatory requirements.




9




Domestic
      Service Regulation. We are considered a non-dominant domestic interstate
      carrier subject to minimal regulation by the FCC. We are not required to obtain
      FCC authority to initiate or expand our domestic interstate operations, but
      we
      are required to obtain FCC approval to transfer control or discontinue service
      and to file various reports and pay various fees and assessments. Among other
      things, interstate common carriers must offer service on a nondiscriminatory
      basis at just and reasonable rates. In addition, as a non-dominant carrier,
      we
      are subject to the FCC’s complaint jurisdiction.




All
      interstate telecommunications carriers are required to contribute to the federal
      universal service programs. The FCC currently is considering revising its
      universal service funding mechanism. We cannot predict the outcome of these
      proceedings or their potential effect on us. Although we currently do not
      provide VoIP services
      to the end users or consumers, VoIP services that we may provide in the future
      are not currently subject to direct regulation by the FCC or state regulatory
      commissions to the extent that they qualify as “enhanced” or “information”
services. The FCC defines enhanced services as services that (1) employ computer
      processing applications that act on the format, content, code, protocol or
      similar aspects of the subscriber’s transmitted information, (2) provide the
      subscriber additional, different or restructured information, or (3) involve
      subscriber interaction with stored information. In 1998, in a non-binding
      report, the FCC observed that “computer-to-computer” VoIP may be appropriately
      considered to be unregulated but that “phone-to-phone” VoIP may lack the
      characteristics that would render them unregulated “information” services. In
      February 2004, the FCC ruled that free computer-to-computer VoIP service is
      not
“telecommunications service” and that it is an interstate “information service.”
Although this order clarifies some of the relevant VoIP issues, the FCC has
      not
      yet issued a formal decision as to whether other variations of VoIP services
      should be subject to traditional common carrier telecommunications service
      regulation, such as access charge obligations. In March 2004, the FCC released
      a
      Notice of Proposed Rulemaking (“NPRM”) regarding VoIP service. The NPRM
      specifically addresses the regulatory classification and jurisdiction of VoIP;
      the application of access charges; and how to preserve key public policy
      objectives such as universal service, 911/emergency services, law enforcement
      surveillance requirements, and the needs of persons with disabilities. In
      November 2004, the FCC ruled that services provided by a particular VoIP
      provider are interstate in nature, and not subject to entry regulations of
      the
      various state Public Service Commissions. The FCC, however, declined to rule
      on
      whether the service is a regulated telecommunications service or an unregulated
      information service. In addition, in December 2004, the United States Court
      of
      Appeals for the 8 th Circuit
      ruled that such VoIP provider’s service is not subject to state regulation.
      Subsequently, in a series of orders, the FCC has decided to apply universal
      service, 911/emergency services, law enforcement surveillance requirements,
      customer privacy requirements, and requirements relating to the provision of
      services to speech and hearing-impaired persons to providers of “interconnected”
VoIP services (i.e., those that are capable of both originating calls from
      and
      terminating calls to users of the public switched telephone network), but in
      each case the FCC has explicitly declined to decide whether such services are
      “telecommunications” services subject to more comprehensive regulation. Instead,
      the FCC continues to examine the appropriate regulatory treatment of VoIP on
      a
      piecemeal basis. While initial indications from the FCC suggest that regulation
      of VoIP will be limited in nature, the future regulatory treatment of other
      variations of VoIP by the FCC and state regulatory bodies continues to be
      uncertain. Furthermore, Congressional dissatisfaction with the FCC’s treatment
      of IP telephony could result in legislation requiring the FCC to impose greater
      or lesser regulation. Changes to, and further clarifications of, the treatment
      of VoIP services could result in the imposition of burdensome regulation and
      fees on some of our services and/or increase certain of our operating costs.




State
      Regulation.  Our intrastate long distance operations are subject to
      various state laws and regulations, including, in most jurisdictions,
      certification and tariff filing requirements. Telefamilia Communications, Inc.
      (Telefamilia), a wholly owned subsidiary of ours, maintains the necessary
      certificate and tariff approvals, where approvals are necessary, to provide
      intrastate long distance service in Texas. Telefamilia also maintains the
      necessary certificate to provide local services in Texas. Texas requires prior
      approval or notification for certain stock or asset transfers or
      for
      the issuance of securities, debt or for name changes. As a certificated carrier,
      consumers may file complaints against us at the public service commissions.
      Certificates of authority can generally be conditioned, modified, canceled,
      terminated, or revoked by state regulatory authorities for failure to comply
      with state law and/or the rules, regulations and policies of the state
      regulatory authorities. Fines and other penalties also may be imposed for such
      violations. Public service commissions also regulate access charges and other
      pricing for telecommunications services within each state. The Regional Bell
      Operating Carriers and other Local Exchange Carriers have been seeking reduction
      of state regulatory requirements, including greater pricing flexibility, which,
      if granted, could subject us to increased price competition. We may also be
      required to contribute to universal service funds in Texas.




10




*International
      Regulation*





**  The
      regulatory treatment of Internet telephony outside of the U.S. varies widely
      from country to country. A number of countries that currently prohibit
      competition in the provision of voice telephony also prohibit Internet
      telephony. Other countries permit but regulate Internet telephony. Some
      countries will evaluate proposed Internet telephony service on a case-by-case
      basis and determine whether it should be regulated as a voice service or as
      another telecommunications service. In many countries, Internet telephony has
      not yet been addressed by legislation or regulation. Increased regulation of
      the
      Internet and/or Internet telephony providers or the prohibition of Internet
      telephony in one or more countries could materially adversely affect our
      business, financial condition, operating results and future prospects.





The
      International Settlements Policy governs settlements between top tier U.S.
      carriers’ and foreign carriers’ costs of terminating traffic over each other’s
      networks. The FCC recently enacted certain changes in rules designed to allow
      U.S. carriers to propose methods to pay for international call termination
      that
      deviate from traditional accounting rates and the International Settlement
      Policy. The FCC has also established lower benchmarks for the rates that U.S.
      carriers can pay foreign carriers for the termination of international services
      and these benchmarks may continue to decline. These rule changes have lowered
      the costs of our top tier competitors to terminate traffic in the United States
      and are contributing to the downward pricing pressure facing us in the carrier
      market.





*Other
      General regulations*





Congress
      has recently adopted legislation that regulates certain aspects of the Internet,
      including online content, user privacy and taxation. In addition, Congress
      and
      other federal entities are considering other legislative and regulatory
      proposals on a wide range of issues including Internet spamming, database
      privacy, gambling, pornography and child protection, Internet fraud, privacy
      and
      digital signatures. Various states have adopted and are considering
      Internet-related legislation. Increased U.S. regulation of the Internet may
      slow
      its growth, particularly if other governments follow suit, which may negatively
      impact the cost of doing business over the Internet and materially adversely
      affect our business, financial condition, results of operations and future
      prospects. The Company has no way of knowing whether legislation will pass
      or
      what form it might take.





The
      Telecommunications Act of 1996 (the “Telecom Act”), which became law in February
      1996, was designed to dismantle the monopoly system and promote competition
      in
      all aspects of telecommunications. The FCC has promulgated and continues to
      promulgate major changes to their telecommunications regulations. One aspect
      of
      the Telecom Act that is of particular importance to us is that it allows Bell
      Operating Companies or BOCs to offer in-region long distance service once they
      have taken certain steps to open their local service monopoly to competition.
      The FCC has now granted such in-region long distance authorization to BOCs
      throughout the nation. Given their extensive resources and established customer
      bases, the entry of the BOCs into the long distance market, specifically the
      international market, has created increased competition for us.





Although
      we do not know of any other specific new or proposed regulations that will
      affect our business directly, the regulatory scheme for competitive
      telecommunications market is still evolving and there could be unanticipated
      changes in the competitive environment for communications in general. For
      example, the FCC is currently considering rules that govern how Internet
      providers share telephone lines with local telephone companies and compensate
      local telephone companies. These rules could affect the role that the Internet
      ultimately plays in the telecommunications market.




11




The
      International Settlements Policy governs settlements between top tier U.S.
      carriers’ and foreign carriers’ costs of terminating traffic over each other’s
      networks. The FCC recently enacted certain changes in our rules designed to
      allow U.S. carriers to propose methods to pay for international call termination
      that deviate from traditional accounting rates and the International Settlement
      Policy. The FCC has also established lower benchmarks for the rates that U.S.
      carriers can pay foreign carriers for the termination of international services
      and these benchmarks may continue to decline. These rule changes have lowered
      the costs of our top tier competitors to terminate traffic in the United States
      and are contributing to the downward pricing pressure facing us in the carrier
      market.





**Concession
      License**





The
      Secretaría de Comunicaciones y Transportes (“SCT”) and Comisión Federal de
      Telecomunicaciones or Federal Telecommunications Comisión (“COFETEL”) issued
      ATSICOM a 30-year license in June 1998 to install and operate a public network.
      Under this license, ATSICOM is required to:




General
      requirements





·
            Maintain
                approximately $10 million in registered and subscribed capital.


·
            Install
                and operate a network in Mexico. The Mexican government must approve
                the
                operating plan before it is implemented and any future changes to
                the
                operating plan.


·
            Continuously
                develop and conduct training programs for its staff.


·
            Designate
                an individual responsible for the technical functions to operate
                the
                concession.





Concession
      services requirements





·
            Provide
                continuous and efficient services at all times to its customers.


·
            Establish
                a complaint center and correction facilities center and report to
                the
                Mexican Government on a monthly basis the complaints received and
                the
                actions taken to resolve the problems.




Tariff
      Requirements





·
            Invoice
                its customer only tariffs rates that have been approved by the Mexican
                government.




Verification
      and Information requirements




·
            Provide
                audited financial statements on a yearly basis that includes a detailed
                description of the fixed assets utilized in the network and accounting
                reporting by region and location of where the services are being
                provided.


·
            Provide
                quarterly reports and updates on the expansion of the network in
                Mexico
                and a description of the training programs and research and development
                programs.


·
            Provide
                statistic reports of traffic, switching capacity and other parameters
                in
                the network.





Guarantee
      requirements





·
            Post
                a bond/insurance policy for approximately $500,000 payable to the
                Mexican
                Federal Treasury Department in the event the concession is revoked
                for
                failure to perform any of the
                requirements.





Under
      this concession, we have the right to terminate voice and data communications
      in
      Mexico. The revocation or modification of this concession would have a material
      adverse effect on our business.





12





**Suppliers**





We
      rely
      on various suppliers to provide services in connection with our communication
      services. We depend on various Global VoIP companies to complete our voice
      over
      Internet (VoIP) traffic between US, Mexico,
      Asia, the Middle East and Latin America. We are not dependent upon any single
      supplier.





**Employees**





As
      of
      July 31, 2007, we had nine employees, all of whom performed operational,
      technical and administrative functions. We believe our future success will
      depend to a large extent on our continued ability to attract and retain highly
      skilled and qualified employees. We consider our employee relations to be good.
      None of these aforementioned employees belong to labor unions.





**Risk
      Factors**





Our
      business is subject to various operational and financial risks that could have
      an adverse effect on our financial condition or our results of operations.
      In
      addition the general economic risks associated with operation of a small company
      in a regulated industry, some of the risk factors that may apply specifically
      to
      us are set forth below.





**Our
      results of operations fluctuate from period to period.** Our
      revenue and results of operations have fluctuated and will continue to fluctuate
      from quarter to quarter in the future due to a number of factors over which
      we
      have no control, including:




·
            Many
                of our customers are not obligated to route a minimum amount of traffic
                over our system and the amount of traffic we handle may decline if
                our
                customers elect to route traffic over systems they operate or systems
                operated by other providers;


·
            increased
                competition from other telecommunication service providers or from
                service
                companies in related fields that offer telecommunication services
                may
                adversely affect the amount we can charge for traffic routed over
                our
                system;


·
            we
                may be required to reduce our charges for routing traffic to maintain
                high
                utilization of our equipment;


·
            the
                termination fees, connection fees and other charges from our
                suppliers;


·
            fraudulently
                sent or received traffic for which we are obligated to pay but which
                we
                are unable to bill to any customer;


·
            changes
                in call volume among the countries to which we complete calls;


·
            technical
                difficulties or failures of our network systems or third party delays
                in
                expansion or provisioning system components;
                and


·
            our
                ability to manage our traffic on a constant basis so that routes
                are
                profitable.




**We
      may be unable to generate sufficient volume of traffic to be profitable.** VoIP
      has
      only recently been developed and many users are only becoming aware of its
      potential If the market for VoIP telephony and new services does not develop
      as
      we expect, or develops more slowly than expected, we may be unable to maintain
      a
      high level of utilization. Some factors that may adversely affect acceptance
      of
      VoIP technology include:




·
            perceptions
                that the quality of voice transmitted over the Internet is low;


·
            perceptions
                that VoIP is unreliable;


·
            our
                inability to deliver traffic over the Internet with significant cost
                advantages;


·
            development
                by our customers of their own capacity on routes served by us; and


·
            an
                increase in termination costs of international calls.





**We
      rely on third parties to provide and maintain the networks over which we
      transmit traffic.** Our
      business model depends on the availability of the Internet and traditional
      telephone networks to transmit voice and data. Third parties own and maintain
      the equipment that translates calls from traditional voice networks to the
      Internet, and vice versa and other equipment that comprise the Internet for
      these systems fail to maintain their lines properly, fail to maintain the
      ability to terminate calls, or otherwise disrupt our ability to provide service
      to our customers, our ability to complete calls or provide other services could
      be interrupted.




13





**Our
      suppliers could increase the cost of services they provide or deny us access
      to
      systems that they operate.** We
      maintain relationships with communications service providers in many countries
      and with other carriers to carry traffic on their systems. There is no assurance
      that these services will continue to be available to us on acceptable terms,
      if
      at all. If we are unable to replace any provider that ceases to provide services
      to us on acceptable terms, or to identify and develop relationships with new
      service providers, our ability to provide services in certain countries may
      be
      adversely affected .





**We
      are subject to downward pricing pressures and a continuing need to renegotiate
      overseas rates.** As
      a
      result of numerous factors, including increased competition and global
      deregulation of telecommunications services, prices for international long
      distance calls have been decreasing. This downward trend of prices to end-users
      has caused us to lower the prices we charge communication service providers
      for
      call completion on our network. If this downward pricing pressure continues,
      we
      may not be able to offer VoIP services at costs lower than, or competitive
      with,
      the traditional voice network services with which we compete. Moreover, in
      order
      for us to lower our prices, we have to renegotiate rates with our foreign
      service providers who complete calls for us. We may not be able to renegotiate
      these terms favorably enough, or fast enough, to allow us to continue to offer
      services in a particular country on a cost-effective basis. The continued
      downward pressure on prices and our
      inability to renegotiate favorable terms in a particular country could have
      a
      material adverse effect on our ability to operate our network.





**We
      are subject to risks relating to operations in foreign countries.** Because
      we provide many of our services internationally, we are subject to additional
      risks related to providing services into foreign countries. In particular,
      in
      order to provide services in some countries, we have forged relationships with
      foreign operators. Associated risks include:




·
            unexpected
                changes in tariffs, trade barriers and regulatory requirements relating
                to
                Internet access or VoIP;


·
            economic
                weakness, including inflation, or political instability in particular
                foreign economies and markets;


·
            difficulty
                in collecting accounts receivable;


·
            tax,
                consumer protection, telecommunications, and other laws;


·
            foreign
                currency fluctuations, which could result in increased operating
                expenses
                and reduced revenues; and


·
            unreliable
                government power to protect our rights;





**International
      governmental regulation and legal uncertainties and other laws could limit
      our
      ability to provide our services, make them more expensive, or subject us to
      legal liability.** Many
      countries currently prohibit or limit competition in the provision of
      traditional voice telephony services. In some of those countries, licensed
      telephony carriers as well as government regulators and law enforcement
      authorities have questioned the legal authority of VoIP services. Our
      failure to qualify as a properly licensed service provider, or to comply with
      other foreign laws and regulations, could materially adversely affect our
      business, financial condition, and results of operations. It is also possible
      that countries may apply to our activities laws relating to services provided
      over the Internet, including laws governing:




·
            user
                privacy;


·
            pricing
                controls and termination costs;


·
            characteristics
                and quality of products and services;


·
            qualification
                to do business;


·
            consumer
                protection;


·
            cross-border
                commerce, including laws that would impose tariffs, duties and other
                import restrictions;


·
            copyright,
                trademark and patent infringement; and


·
            claims
                based on the nature and content of Internet materials, including
                defamation, negligence and the failure to meet necessary obligations.




14




If
      foreign governments or other bodies begin to impose related restrictions on
      VoIP
      or our other services or otherwise enforce other laws against us or our foreign
      suppliers, such actions could have a material adverse effect on our operations.





**If
      we are not able to keep up with rapid technological change in a cost-effective
      way, the relative quality of our services could suffer.** The
      technology upon which our services depend is changing rapidly. Significant
      technological changes could render the hardware and software that we use
      obsolete, and competitors may begin to offer new services that we are unable
      to
      offer. If we are unable to respond successfully to these developments or do
      not
      respond in a cost-effective way, we may not be able to offer competitive
      services and our business results may suffer.





**We
      may not be able to expand and upgrade our network adequately and
      cost-effectively to accommodate any future growth.** Our
      VoIP
      business requires that we handle a large number of international calls
      simultaneously. As we expand our operations, we expect to handle significantly
      more calls. If we do not expand and upgrade our hardware and software quickly
      enough, we will not have sufficient capacity to handle the increased traffic
      and
      growth in our operating performance would suffer as a result. Even with such
      expansion, we may be unable to manage new deployments or utilize them in a
      cost-effective manner. In addition to lost growth opportunities, any such
      failure could adversely affect customer confidence in our network and services.





**Single
      points of failure on our network may make our business vulnerable.** We
      operate one network control center in San Antonio, Texas. We have not yet
      designed a redundant system, provided for excess capacity, or taken other
      precautions against platform and network failures as well as facility failures
      relating to power, air conditioning, destruction, or theft. We are vulnerable
      to
      a network failure that may prohibit us from offering services.





**We
      depend on our current personnel and may have difficulty attracting and retaining
      the skilled employees we need to execute our business plan.** Our
      future success will depend, in large part, on the continued service of our
      key
      management and technical personnel. If any of these individuals or others we
      employ are unable or unwilling to continue in their present positions, our
      business, financial condition and results of operations could suffer.





**If
      the Internet infrastructure is not adequately maintained, we may be unable
      to
      maintain the quality of our services and provide them in a timely and consistent
      manner.** Our
      future success will depend upon the maintenance of the Internet infrastructure,
      including a reliable network backbone with the necessary speed, data capacity
      and security for providing reliability and timely Internet access and services.
      To the extent that the Internet continues to experience increased numbers of
      users, frequency of use or bandwidth requirements, the Internet may become
      congested and be unable to support the demands placed on it and its performance
      or reliability may decline thereby impairing our ability to complete calls
      and
      provide other services using the Internet at consistently high quality. The
      Internet has experienced a variety of outages and other delays as a result
      of
      failures of portions of its infrastructure or otherwise. Future outages or
      delays could adversely affect our ability to complete calls and provide other
      services. Moreover, critical issues concerning the commercial use of the
      Internet, including security, cost, ease of use and access, intellectual
      property ownership and other legal liability issues, remain unresolved and
      could
      materially and adversely affect both the growth of Internet usage generally
      and
      our business in particular. Finally, important opportunities to increase traffic
      on our network will not be realized if the underlying infrastructure of the
      Internet does not continue to be expanded to more locations worldwide.





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTIES.**





Our
      executive office is located at 3201 Cherry Ridge, Building C, Suite 300, San
      Antonio, Texas, consisting of 3,618 square feet. The lease for this facility
      will expire on November 15, 2011. We pay annual rent of $47,439. We believe
      that
      our leased facilities are suitable and adequate for their intended use.




15




**ITEM
      3.**  **LEGAL
      PROCEEDINGS.**




On
      October 31, 2002, ATSI filed a lawsuit in the United States District Court
      for
      the Southern District Court of New York against several individuals and
      financial institutions, including the holders of our Series D and E Redeemable
      Preferred Stock. Among other things, such claims asserted stock fraud and
      manipulation claims. On July 9, 2004, we filed a separate but related lawsuit
      in
      the same court against Sam Levinson and Uri Wolfson. In 2005, Judge Lewis A.
      Kaplan dismissed the complaints in both actions as to all defendants with
      prejudice; essentially stating the claims did not plead causes of action under
      federal law. ATSI appealed those dismissal judgments to the United States Court
      of Appeals for the Second Circuit. On July 11, 2007 the Court of Appeals
      affirmed the dismissals.





RGC
      International Investors, LDC ("RGC"), who had been a Defendant in the New York
      litigation referenced above, filed a lawsuit in the Chancery Court in Delaware
      against ATSI on March 20, 2007 asserting it still had rights of enforcement
      against ATSI to convert preferred stock to common stock or redeem such stock
      in
      connection with Certificate of Designation issued regarding such series E
      preferred stock in October of 2000. ATSI asserted, among other things, that
      RGC
      is barred from such relief based on the applicable statute of limitations.
      In
      August 2007 the parties reached a confidential settlement agreement. Under
      the
      confidential settlement agreement the 1,170 shares of Series E Preferred Stock
      have been cancelled.





In
      June
      2007, ATSI initiated a declaratory judgment action in the United States District
      Court for the Western District of Texas against Shaar Fund, Ltd., holder of
      series D preferred stock who still asserted it had rights under instruments
      that
      issued incident to such stock. ATSI asserted that alleged rights asserted by
      the
      Shaar Fund Ltd are barred by applicable statute of limitations. On August 2,
      2007, Shaar Fund Ltd. filed a separate suit against ATSI in the United States
      District Court for the Southern District Court of New York asserting it
      continued to own rights under the instruments relating to the series D preferred
      stock. By September, 2007, the parties reached an agreement as to the competing
      suits which led to ATSI dismissing the Texas suit in favor of litigating all
      remaining issues between it and Shaar Fund Ltd. as to such matters in United
      States District Court for the Southern District Court of New York. Pleading
      deadlines have been extended in the New York action as the parties are currently
      explore a mutual resolution.





In
      December 2006, ATSI filed suit in Bexar County District Court to recover
      approximately $63,000 (plus attorney’s fees, legal interest, and court costs)
      against a company that called itself Lightspeed Telecom, Inc. and its principals
      or alter egos. The suit is for unpaid telecommunications services provided
      at
      the instance of Defendants. ATSI asserts such services were obtained by or
      at
      the direction of Defendants without intent to pay, which the individual
      Defendants deny. Lightspeed admits liability but the two individual Defendants
      deny liability. This case is currently in the process of being set for trial
      in
      2008.





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





NONE


**PART
      II.**





**ITEM5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES.**





**Market
      for Common Equity**




Our
      common stock is quoted on the OTC Bulletin Board under the symbol “ATSX”. The
      following table sets forth the high and low bid prices for our common stock
      from
      August 1, 2005 through July 31, 2007, as reported by Bloomberg, LP. Price
      quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail
      mark-up, markdown or commission, and may not necessarily represent actual
      transactions.




16




**Fiscal
                  2006**
              
              **High**
              
              **Low****First****Quarter**
              
              $
              0.44
              
              $
              0.14**Second
                  Quarter**
              
              $
              0.43
              
              $
              0.21**Third
                  Quarter**
              
              $
              0.51
              
              $
              0.25**Fourth
                  Quarter**
              
              $
              0.39
              
              $
              0.19**Fiscal
                  2007**
              
              
              **High**
              
              
              **Low****First****Quarter**
              
              $
              0.19
              
              $
              0.34**Second
                  Quarter**
              
              $
              0.22
              
              $
              0.36**Third
                  Quarter**
              
              $
              0.19
              
              $
              0.34**Fourth
                  Quarter**
              
              $
              0.23
              
              $
              0.24





**Holders**





As
      of
      July 31, 2007, we had approximately 6,706 common shareholders of record.





**Dividends**





We
      have
      not paid cash dividends on our common stock and we do not anticipate paying
      a
      dividend in the future.





**Equity
      Compensation Plans**





The
      following table provides information regarding securities that have been or
      are
      authorized to be issued under our equity compensation plans as of July 31,
      2007:





**Number
                of Securities to be Issued Upon Exercise of Outstanding Options,
                Warrants
                and Rights**
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and
                Rights**
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans****Equity
                Compensation plans approved by security holders**
            -0-
            N/A
            -0-**Equity
                Compensation Plans not approved by security
                holders**
            5,699,000
            $.17
            821,000**Total**
            5,699,000
            $.17
            821,000





The
      material features of each equity compensation plan are described in Note 9
      of
      the Notes to the Financial Statements.





**Sales
      of Unregistered Securities**





On
      September 18, 2006, the Company issued 66,226 shares of its common stock to
      Mr.
      Richard Benkendorf, a former director, under a settlement agreement. The shares
      were exempt from registration under Section 4(2) of the Securities Act of 1933,
      as amended, and were restricted from further transfer without
      registration.





On
      October 2, 2007, the Company issued 150,000 shares of its common stock for
      $34,500 to NetComm Services Corp. upon exercise of warrants. The shares were
      exempt from registration under Section 4(2) of the Securities Act of 1933,
      as
      amended, and were restricted from further transfer without
      registration.





On
      January 22, 2007, the Company issued 111,909 shares of its common stock in
      exchange for 2,750 shares of Series A Convertible Preferred Stock and all
      accrued dividends thereon. The shares were exempt from registration under
      Section 3(a)(9) of the Securities Act of 1933, as amended.




17




On
      February 7, 2007, the Company issued 137,412 shares of its common stock to
      Mr.
      John Fleming, a director, under a settlement agreement. The shares were exempt
      from registration under Section 4(2) of the Securities Act of 1933, as amended,
      and were restricted from further transfer without registration.




On
      June
      1, 2007, the Company issued 419,081 shares of its common stock to the holders
      of
      its debentures dated June 1, 2006. The shares were exempt from registration
      under Section 4(2) of the Securities Act of 1933, as amended, and were
      restricted from further transfer without registration.





During
      the twelve months ended July 31, 2007, the Company issued a total of 495,062
      to
      various professionals in lieu of fees. These shares were exempt from
      registration under Section 4(2) of the Securities Act of 1933, as amended,
      and
      were restricted from further transfer without registration.





During
      the twelve months ended July 31, 2007, the Company issued a total of 16,149,938
      shares of common stock in connection with the conversion and redemption of
      all
      outstanding shares of its Series H Convertible Preferred Stock. No compensation
      was paid to any person in connection with the exchange and the exchange was
      exempt from registration pursuant to Section 3(a)(9) of the Securities Act
      of
      1033.




During
      the twelve months ended July 31, 2007, the Company issued 137,412 shares of
      its
      common stock to Mr. John Fleming, a director, pursuant to a settlement
      agreement. The transaction was privately negotiated between the Company and
      Mr.
      Fleming, 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 twelve months ended July 31, 2007, the Company issued an aggregate of
      2,566,482 shares of its common stock in exchange and conversion of outstanding
      promissory notes in the original principal amount of $564,600 and accrued
      interest of $10,292. The promissory notes were originally sold in a private
      placement that did not involve a public solicitation and all of the note holders
      certified to the Company that they are accredited investors. In addition, the
      Company issued 297,270 shares of common stock to the placement agent in
      connection with the original private placement of the promissory notes. The
      shares were exempt from registration under Section 4(2) of the Securities Act
      of
      1933 as a private placement.





**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.**





*SPECIAL
      NOTE: This Annual Report on Form 10-KSB contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended
      and
      Section 21E of the Securities and 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,” and “intend.” Although we believe these expectations are reasonable,
      our operations involve a number of risks and uncertainties, including our
      ability to continue as a going concern.*





The
      following is a discussion of the consolidated financial condition and results
      of
      operations of ATSI Communications, Inc., for the fiscal years ended July 31,
      2007 and 2006. It should be read in conjunction with our Consolidated Financial
      Statements, the Notes thereto, and the other financial information included
      elsewhere in this annual report on Form 10-KSB. For purposes of the following
      discussion, fiscal 2007 or 2007 refers to the year ended July 31, 2007 and
      fiscal 2006 or 2006 refers to the year ended July 31, 2006.




18


**Sources
      of revenue and direct cost** ****





*Sources
      of revenue:*





Carrier
      Services: **  We
      currently provide VoIP communication services to U.S. and foreign
      telecommunications companies that lack transmission facilities, require
      additional capacity or do not have the regulatory licenses to terminate traffic
      in Mexico, Asia, the Middle East and Latin America. Typically,
      these telecommunications companies offer their services to the public for
      domestic and international long distance services. In addition, we provide
      private communications links and VoIP gateway services.





Communication
      Services :
      We
      provide retail local phone service and international VoIP long distance service
      primarily to the U.S. Hispanic market throughout Texas, mainly in the Rio Grande
      Valley. Our local phone service includes access to a landline and value-added
      services such a caller ID and call waiting. These services are offered to our
      customers on both a prepaid and postpaid basis. We also provide prepaid domestic
      and long-distance services through our prepaid VoIP network platform. Customers
      access this platform and complete the call by using their local phone number
      as
      a “PIN” or personal identification number.





Network
      Services : We
      provide private communication links and VoIP gateway services to multi-national
      and foreign carriers and enterprise customers who require a high volume of
      telecommunications services to communicate with their U.S. offices or businesses
      and need greater dependability than is currently available through the foreign
      telecommunication networks. These services include data, voice and fax
      transmission between multiple international offices and branches as well as
      Internet and co-location services in the United States. **





*Direct
      Costs:*





Carrier
      Services: ** We
      incur
      transmission and termination charges from our suppliers and the providers of
      the
      infrastructure and network. The cost is based on a per minute rate and volume
      of
      minutes transported and terminated through the network. Additionally, we incur
      fixed Internet bandwidth charges and per minute billing charges. In some cases
      we incur installation charges from certain carriers. These installation costs
      are passed on to our customers for the connection to our VoIP network.





Communication
      Services: We incur
      charges for local telephone service and related features from the local exchange
      carrier. Additionally, we incur a cost per minute and platform fees from our
      suppliers for long distance services and platform access based on the number
      of
      accounts and calls accessed by our customers.





Network
      Services: Under
      the network services, we incur bandwidth and co-location charges. The bandwidth
      charges are incurred as part of the connection links between the customer’s
      different remote locations and sites to transmit data, voice and Internet
      services. We also incur co-location charges that are passed through to our
      customers.




**Results
      of Operations**





The
      following table sets forth certain items included in our results of operations
      in thousands of dollars amounts and variances between periods for the years
      ended July 31, 2007 and 2006.


Years
                ended July 31,2007
            
            2006
            
            Variances
            
            %OPERATING
                REVENUES:Carrier
                services
            
            $
            31,562
            
            $
            14,549
            
            $
            17,013
            
            
            117
            %Communication
                services
            
            
            113
            
            
            125
            
            
            (12
            )
            
            -10
            %Network
                services
            
            
            17
            
            
            22
            
            
            (5
            )
            
            -23
            %Total
                operating revenues
            
            
            31,692
            
            
            14,696
            
            
            16,996
            
            
            116
            %Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            29,521
            
            
            13,869
            
            
            15,652
            
            
            113
            %GROSS
                MARGIN
            
            
            2,171
            
            
            827
            
            
            1,344
            
            
            163
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            1,625
            
            
            1,138
            
            
            487
            
            
            43
            %Legal
                and professional fees
            
            
            258
            
            
            195
            
            
            63
            
            
            32
            %Bad
                debt expense
            
            
            98
            
            
            -
            
            
            98
            
            
            -100
            %Depreciation
                and amortization expense
            
            
            99
            
            
            92
            
            
            7
            
            
            8
            %OPERATING
                INCOME (LOSS)
            
            
            91
            
            
            (598
            )
            
            689
            
            
            115
            %OTHER
                INCOME (EXPENSE):Loss
                on derivative instrument liabilities
            
            
            -
            
            
            (6
            )
            
            6
            
            
            100
            %Debt
                forgiveness income
            
            
            -
            
            
            50
            
            
            (50
            )
            
            -100
            %Interest
                expense
            
            
            (348
            )
            
            (151
            )
            
            (197
            )
            
            -130
            %Total
                other income (expense), net
            
            
            (348
            )
            
            (107
            )
            
            (241
            )
            
            -225
            %NET
                (LOSS) FROM CONTINUING OPERATIONS
            
            
            (257
            )
            
            (705
            )
            
            448
            
            
            64
            %DISCONTINUED
                OPERATIONSGain
                on disposal of discontinued operations
            
            
            -
            
            
            1,652
            
            
            (1,652
            )
            
            -100
            %NET
                INCOME FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            1,652
            
            
            (1,652
            )
            
            -100
            %NET
                INCOME (LOSS)
            
            $
            (257
            )
            $
            947
            
            $
            (1,204
            )
            
            -127
            %LESS:
                PREFERRED DIVIDEND
            
            
            (56
            )
            
            (959
            )
            
            903
            
            
            94
            %ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            828
            
            
            -
            
            
            828
            
            
            100
            %NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            $
            515
            
            $
            (12
            )
            $
            527
            
            
            4392
            %


19


**Year
      Ended July 31, 2007 Compared to Year ended July 31, 2006**





*Operating
      revenues.* Consolidated operating revenues increased by 116% between periods from $14.7
      million for the year ended July 31, 2006 to $31.7 million for the year ended
      July 31, 2007.




Carrier
      Services revenues increased by approximately $17 million, or 117% from the
      year
      ended July 31, 2006 to the year ended July 31, 2007. Our VoIP carrier traffic
      increased from approximately 283 million
      minutes during the year ended July 31, 2006 to
      approximately 451 million minutes during the year ended July 31, 2007. The
      increase in revenue and carrier traffic can mainly be attributed to an increase
      in customers over the last twelve months. The increase in total customers is
      as
      a result of the Company’s ability to offer high quality and dependable VoIP
      services to multiple countries in the world and greater capacity due to our
      increase in port capacity in our Nextone Soft Switch.





Communication
      services revenue decreased approximately 10% or $12,000 from the year ended
      July
      31, 2006 to the year ended July 31, 2007. The decrease in communication services
      revenue is primarily due to a decrease in retail customers from 159 during
      the
      year ended July 31, 2006 to 117 during the year ended July 31,
      2007.





Network
      Services revenues decreased by approximately 23% or $5,000 from the year ended
      July 31, 2006 to the year ended July 31, 2007. The decrease in network services
      revenue is primarily due to the decrease in network services customers.




Cost
      of
      Services (Exclusive of depreciation and amortization). The consolidated cost
      of
      services increased by approximately $15.7 million, or 113% from the year ended
      July 31, 2006 to the year ended July 31, 2007. The increase in cost of services
      is a direct result of the increase in carrier services revenue. As mentioned
      above, our carrier traffic increased from approximately 283 million minutes
      during the year ended July 31, 2006 to approximately 451 million minutes in
      the
      year ended July 31, 2007. Cost of services, as a percentage of revenue decreased
      from 94% during the year ended July 31, 2006 to 93% during the year ended July
      31, 2007. Additionally, as a result of the increase in total revenue our gross
      profits increased from $827,000 during the year ended July 31, 2006 to
      $2,171,000 during the year ended July 31, 2007.




20




*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased $487,000, or 43% from the year ended July 31, 2006 to the
      year ended July 31, 2007. The increase is primarily attributable to an increase
      in salaries and wages of approximately $257,000 as a result of the hiring of
      two
      new employees, bonuses paid to officers, and accounts receivable-factoring
      fees
      of approximately $43,000 during the year ended July 31, 2007. Furthermore,
      non-cash issuance of common stock and warrants for services increased by
      $157,000 from the year ended July 31, 2006 to the year ended July 31, 2007.
      The
      increase is attributed to the recognition during the year ended July 31, 2007
      of
      approximately $473,000 of non-cash compensation expense associated with stock
      options issued to employees and directors compared $267,000 in fiscal 2006.





*Legal
      and professional fees* .
      Legal
      and professional fees increased by $63,000, or 32% from the year ended July
      31,
      2006 to the year ended July 31, 2007. The increase is attributable to the
      recognition of approximately $7,500 associated with the preparation of the
      closing documents for the new accounts receivable factoring agreement. Also,
      during the year ended July 31, 2007 we recognized approximately $31,000 in
      professional fees associated with the evaluation of derivative instruments
      and
      restructuring of debt and we recognized approximately $45,000 in legal fees
      associated with a lawsuit filed by the Company for stock fraud and manipulation
      by various institutions.




*Bad
      debt expense.* During
      the year ended July 31, 2007 we recognized $98,000 in bad debt expense for
      certain accounts receivable we deemed we were unlikely to collect. We did not
      recognize any bad debt expense during the year ended July 31, 2006.





*Depreciation
      and amortization* .
      Depreciation and amortization increased by $7,000 or 8% year ended July 31,
      2006
      to the year ended July 31, 2007. The increase is attributed to the amortization
      during the fiscal 2007 of new computers and equipment acquired during fiscal
      2007.





*Operating
      income (loss)* .
      The
      Company’s operating income (loss) improved by $689,000 or 115% from the year
      ended July 31, 2006 to the year ended July 31, 2007. The improvement in
      operating income (loss) between periods is attributed to the increase in gross
      profit of $1,344,000. The increase in gross profit margin was partially offset
      by the increase in selling, general and administrative expenses, legal and
      professional fees, and bad debt expense.





*Loss
      on derivative instruments liabilities, net.* The
      Company recognized a loss on derivative instruments of $6,000 during the year
      ended July 31, 2006. No gain or loss was recognized during the year ended July
      31, 2007, as we had no derivative liabilities during 2007.





*Debt
      forgiveness income.* Debt
      forgiveness income decreased by $50,000 from the year
      ended July 31, 2006 to the year ended July 31, 2007 . The
      decrease is primarily due to the recognition during the year ended July 31,
      2006
      of $50,000 in debt forgiveness income associated with the settlement of debt
      for
      the issuance of common stock. This
      transaction was related to the settlement of $50,000 in debt with a consultant.
      This debt was incurred during fiscal 2000 and associated with the commissions
      incurred as part of the acquisition of the concession license in Mexico. The
      debt
      forgiveness income was based on the difference between the market price of
      ATSI’s equity at the time of issuance and the market price calculated at the
      time of the settlement of the debt. We did not have any debt forgiveness income
      in 2007.




*Interest
      expense* .
      Interest expense increased by $197,000 from the year ended July 31, 2006 to
      the
      year ended July 31, 2007. The increase can be attributed to the beneficial
      conversion feature of $143,723 recognized with conversion of the $564,600 in
      notes payable plus accrued interest of $10,292 and to
      the
      amortization of approximately $94,000 of deferred financing fees as
      part
      of the private placement financing.




21




*Net
      loss from continuing operations* .
      Net
      loss from continuing operations improved by $448,000 from the year ended July
      31, 2006 to the year ended July 31, 2007. The improvement in net loss between
      periods is attributed to the increase in operating income, which as partially
      offset by the increase in interest expense.





*Net
      income from discontinued operations.* During
      the year ended July 31, 2006 we recognized a gain on disposal of discontinued
      operations of $1,652,000. The gain on disposal of discontinued operations arose
      from the sale of ATSI’s ownership in ATSIMex Personal S.A de C.V. Under the
      share purchase agreement the buyer acquired the total ownership and assumed
      all
      related liabilities on this entity of $1,652,000 and as a result we recognized
      a
      gain of $1,652,000. No gain on disposal of discontinued operation was recognized
      during the year ended July 31, 2007.





*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $903,000 or 94% between periods, from
      $959,000 for the year ended July 31, 2006 to $56,000 during the year ended
      July
      31, 2007. The decrease in preferred dividends between periods is mainly
      attributed to the conversion of Series A Convertible Preferred Stock and Series
      H Convertible Preferred Stock during 2007.





*Reversal
      of previously recorded preferred stock dividends.* During
      the year ended July 31, 2007, we recognized a reversal of previously recorded
      dividend expense of $828,000. This reversal occurred as result of the conversion
      into common stock of 2,750 shares of Series A Convertible Preferred Stock and
      11,802,420 shares of Series H Convertible Preferred Stock. At the time of
      conversion of these securities the
      market price of ATSI’s stock was higher than at the time of issuance of the
      securities. As a result, a reversal of preferred dividends was recognized during
      the period.





*Net
      income (loss) to common stockholders* .
      Net
      income (loss) to common stockholders improved by $527,000. The improvement
      in
      net income applicable to common stockholders is attributed to the cumulative
      effect of the increase in operating income and the reversal of previously
      recorded preferred dividend of approximately $828,000.





**Liquidity
      and Capital Resources**




*Cash
      Position:* We had a
      cash balance of $1,050,000 as of July 31, 2007. Net cash provided by operating
      activities during the year ended July 31, 2007, was approximately $562,000,
      attributable to improved operating results from an increase in gross margins
      offset by working capital changes.





Investing
      activities during the year
      ended July 31, 2007 ,
      consumed $501,000. We used $306,000 to acquire two certificates of deposit
      necessary to secure certain obligations of the Company. We used $50,000 on
      a
      note receivable issued to a NetSapiens. The note receivable is secured by
      NetSapiens’ proprietary Starter Platform License. Additionally, we used $145,000
      to upgrade our Nextone Soft-switch and other equipment necessary to handle
      the
      increase in minutes of voice traffic transported in our network and sustain
      higher revenues.





Financing
      activities during the year ended July 31, 2007, generated $953,000 in cash.
      This
      cash was primarily generated from proceeds of our private placement of $713,000,
      proceeds from a notes payable of $550,000, cash proceeds of $35,000 from the
      exercise of 150,000 warrants and cash proceeds of $16,000 from the exercise
      of
      100,000 stock options. These cash proceeds were offset by debt principal
      payments of $106,000 associated with two related party notes payable, the
      principal payments of $104,000 associated with various notes payable, the
      principal payments of $148,000 associated with advances from shareholders and
      principal payments of $3,000 associated with our capital leases. Overall, our
      net operating, investing and financing activities during the year ended July
      31,
      2007 provided an increase of $1,014,000 in cash.




22




Our
      current cash expenses are expected to be approximately $90,000 per month,
      including wages, rent, utilities, litigation fees and corporate professional
      fees. We are currently generating sufficient cash from operations to cover
      all
      monthly cash expenses, but we cannot predict if, over the next twelve months,
      we
      will continue to generate sufficient cash from operations to cover all of our
      cash expenses. We intend to cover our monthly cash expenses with our cash
      produced from operations and financing activities. We expect to continue
      conserving cash resources by paying long-term executive compensation and fees
      for certain professional services with shares of our common stock. Additionally,
      on November 3, 2006, we entered into a factoring agreement with CCA Financial
      Services, Inc. Under the agreement, CCA Financial Services committed to purchase
      up to $1,000,000 of ATSI’s monthly receivables. As
      our
      ongoing operations require, we will continue factoring our receivables under
      this agreement, which on average has been $850,000 of our monthly
      receivables .
      As of
      the date of this filing, we paid all factor receivables to our factoring agent;
      we will continue to factor our receivables on a monthly basis as services are
      rendered to our customers. Furthermore, we will continue to pursue additional
      debt and equity financings to fund continued growth and increase our cash
      reserves. However, we presently do not have a definitive agreement in place
      to
      obtain such financing. Any additional debt or equity financing may not be
      available in sufficient amounts or on acceptable terms. If such financing is
      not
      available in sufficient amounts or on acceptable terms, the Company's
      operational results and future financial condition may be adversely affected.





We
      are
      not presently paying quarterly interest or dividends on our outstanding
      convertible debentures and preferred stock. However, we have continued to accrue
      dividends and interest on such debentures. The increase in accrued liabilities
      related to the dividends and interest in arrears contributed approximately
      $76,000 in cash flow savings during the year ended July 31,
      2007 .




Our
      working capital deficit was $424,000 as of J uly
      31,
      2007 .
      This
      represents an improvement of approximately $2,376,000 from our working capital
      deficit at July 31, 2006. The improvement can primarily be attributed to the
      elimination of $1,773,680 of accrued dividends due to the conversion into common
      stock of 11,802,420 shares of Series H Convertible Preferred Stock and accrued
      dividends. Additionally, during the year ended July 31, 2007, we reclassified
      a
      note payable of $500,000 from long-term liabilities to current liabilities.
      This
      note is due in October 2007.





**Ongoing
      operations**





We
      generated sufficient income from operations to cover our operating expenses
      during the fiscal year ended July 31, 2007. However, we believe that due to
      our
      limited access to capital, we may not be able to support our ongoing operations
      if we do not continue producing positive operating income in the future. Our
      ability to continue as a going concern is dependent upon generating sufficient
      income from operations to cover our operating expense, the ongoing support
      of
      our stockholders and customers, and our ability to obtain capital resources
      to
      support expansion.





During
      the year ended
      July 31, 2007 ,
      we
      received $713,000
      from the private placement financing, $35,000
      from the exercise of warrants and $16,000 from the exercise of stock options.
      These funds, along with funds generated from operations, allowed us to cover
      our
      operating expenses and other corporate expenses during the year ended
      July 31, 2007 .
      Additionally, on November 3, 2006, we entered into a factoring agreement with
      CCA Financial Services, Inc. Under the agreement, CCA Financial Services
      committed to purchase up to $1,000,000 of our monthly receivables. As our
      ongoing operations require, we will factor our receivables under this agreement.
      As of date of this filing, we did not have any outstanding factored receivables
      under this agreement.





We
      will
      continue to pursue cost cutting strategies in order to conserve working capital
      that could limit the implementation of our business plan. We are dependent
      on
      our operations and the proceeds from future debt or equity investments to fully
      implement our business plan. If we are unable to continue producing positive
      cash flow from operations or raise sufficient capital, we will be required
      to
      delay or forego some portion of our business plan, which will have an adverse
      effect on our anticipated results from operations and our financial condition.
      Alternatively, we may seek interim financing in the form of private placement
      of
      debt or equity securities. Such interim financing may not be available in the
      amounts or at the time when it is required.




23




**Critical
      Accounting Policies**





***Revenue
      Recognition.*** ATSI
      derives revenue from Carrier Services, Network Services, and Communication
      Services. ATSI records and reports its revenue on the gross amount billed to
      its
      customers in accordance with EITF 99-19. Revenue
      is recognized when persuasive evidence of an arrangement exists, service or
      network capacity has been provided, the price is fixed or determinable,
      collectibility is reasonably assured and there are no significant obligations
      remaining.





*Carrier
      Service* :
      ATSI
      provides VoIP communication services to U.S. and foreign telecommunications
      companies, who lack transmission facilities, require additional capacity or
      do
      not have the regulatory licenses to terminate traffic in Mexico, Asia, the
      Middle East and Latin America. Typically
      these telecommunications companies offer their services to the public for
      domestic and international long distance services. Carrier
      service revenue is derived through transporting and terminating minutes of
      telecommunications traffic over ATSI’s owned or leased VoIP network (Voice over
      Internet Protocol). ATSI recognizes revenue in the period the service is
      provided, net of revenue reserves for potential billing credits. Such disputes
      can result from disagreements with customers regarding the duration, destination
      or rates charged for each call.





*Communication
      Services:* ATSI
      provides retail local phone service and international VoIP long distance service
      to the U.S. Hispanic market throughout Texas, mainly in the Rio Grande Valley.
      Our local phone service includes access to a landline and value-added services
      such a caller ID and call waiting. These services are offered to our customers
      in both prepaid and postpaid basis. Additionally, ATSI provides prepaid domestic
      and long-distance services; under these services ATSI allows our customers
      to
      access our prepaid VoIP network platform. The customer will access this platform
      and be able to complete the call by using their local phone number as their
      “PIN” or personal identification number. The revenues derived from prepaid local
      telephone and long-distance are billed monthly in advance and are recognized
      the
      following month when services are provided. Additionally, revenues derived
      from
      postpaid local telephone and long-distance services are recognized monthly
      as
      services are provided.





*Network
      Services:* ATSI provides
      private communication links and VoIP gateway services to multi-national and
      foreign carriers and enterprise customers who use a high volume of
      telecommunications services to communicate with their U.S. offices or businesses
      and need greater dependability than is currently available through the foreign
      telecommunication networks. These services include data, voice and fax
      transmission between multiple international offices and branches as well as
      Internet and collocation services in the United States. ATSI
      recognizes network services revenue during the period the service is
      provided.





***Direct
      Cost of Revenue:***





*Carrier
      Services:* Under
      carrier services, ATSI incurs termination charges. These charges are related
      to
      the fees that ATSI is charged by carriers/vendors for the termination of phone
      calls into their infrastructure and network to
      terminate traffic in Mexico, Asia, the Middle East and Latin America. The
      cost
      is based on a per minute rate and volume. ATSI also incurs installation charges
      from various carriers; this cost is passed on to customers for the connection
      to
      the VoIP network from ATSI’s carriers.





*Network
      Services* :
      Under
      network services, ATSI incurs Internet, co-location, and fiber optic charges.
      The Internet and fiber optic charges are incurred as part of the connection
      links between the customer’s different remote locations and sites to transmit
      data, voice and Internet services. Co-location charges are incurred for space
      utilized to install gateways, servers, and other communications equipment.





*Communication
      Services* :
      ATSI
      incurs charges for local telephone service and related features from the
      dominant local exchange carrier. Additionally, ATSI incurs a cost per minute
      and
      platform fees from two suppliers for long distance services and platform
      access.





***Stock-based
      compensation.***  Effective
      February 1, 2006, ATSI began recording compensation expense associated with
      stock options and other forms of equity compensation in accordance with
      Statement of Financial Accounting Standards No. 123R, Share-Based Payment, as
      interpreted by SEC Staff Accounting Bulletin No. 107. Prior to February 1,
      2006, ATSI had accounted for stock options according to the provisions of
      Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees”, and
      related interpretations, and therefore no related compensation expense was
      recorded for awards granted with no intrinsic value. ATSI adopted the modified
      prospective transition method as permitted under SFAS No. 123R, and,
      consequently, has not retroactively adjusted results from prior periods. Under
      this modified prospective transition method, compensation cost associated with
      stock options recognized during fiscal 2006 includes the amortization related
      to
      the remaining service period of all stock option awards granted prior to
      February 1, 2006, based on the grant date fair value estimated in accordance
      with the original provisions of SFAS No. 123.




24




***Derivative
      financial instruments*** .
      ATSI
      does not use derivative instruments to hedge exposures to cash flow, market,
      or
      foreign currency risks.





Derivative
      financial instruments are initially measured at their fair value. For derivative
      financial instruments that are accounted for as liabilities, the derivative
      instrument is initially recorded at its fair value and is then re-valued at
      each
      reporting date, with changes in the fair value reported as charges or credits
      to
      income. For option-based derivative financial instruments, ATSI uses the
      Black-Scholes option-pricing model to value the derivative
      instruments.





The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the
      balance sheet as current or non-current based on whether or not net-cash
      settlement of the derivative instrument could be required within 12 months
      of
      the balance sheet date.





ATSI
      evaluates the application of SFAS 133 and EITF 00-19 for all of its financial
      instruments.





25




**ITEM
      7.**  **FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Consolidated
      Financial Statements of ATSI Communications, Inc. and
      Subsidiaries**




PageReport
                  of Independent Registered Public Accounting Firm
              27Consolidated
                  Balance Sheets for the Years Ended July 31, 2007 and 2006
              28Consolidated
                  Statements of Operations for the Years Ended July 31, 2007 and
                  2006
              29Consolidated
                  Statements of Comprehensive Income (loss) for the Years Ended July
                  31,
                  2007 and 2006
              30Consolidated
                  Statement of Changes in Stockholders’ Deficit for the Years Ended July 31,
                  2007 and 2006
              31Consolidated
                  Statements of Cash Flows for the Years Ended July 31, 2007 and
                  2006
              32Notes
                  to Consolidated Financial Statements
              33




26


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders


ATSI
      Communications, Inc.


San
      Antonio, Texas





We
      have
      audited the accompanying consolidated balance sheets of **** ATSI
      Communications, Inc. and subsidiaries as of July 31, 2007 and 2006, and the
      related consolidated statements of operations, comprehensive income (loss),
      stockholders’ deficit and cash flows for each of the two years then ended. These
      consolidated financial statements are the responsibility of ATSI’s management.
      Our responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of
      ATSI **** as
      of
      July 31, 2007 and 2006 and the consolidated results of their operations and
      its
      cash flows for each of the two years then ended in conformity with accounting
      principles generally accepted in the United States of America.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      ATSI will continue as a going concern. As discussed in Note 2 to the
      consolidated financial statements, ATSI has a working capital deficit, has
      suffered recurring losses from operations and has a stockholders’ deficit. These
      conditions raise substantial doubt about ATSI’s ability to continue as a going
      concern. Management's plans in regard to these matters are also described in
      Note 2. The consolidated financial statements do not include any adjustments
      that might result from the outcome of this uncertainty.





MALONE
      & BAILEY, PC


www.malone-bailey.com


Houston,
      Texas





October
      15, 2007





27




**PART
                    1. FINANCIAL INFORMATION****ITEM
                    1. FINANCIAL STATEMENTS**ATSI
                    COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                    BALANCE SHEETS(In
                    thousands, except per share amounts)July
                    31,
                
                July
                    31,2007
                
                2006ASSETSCURRENT
                    ASSETS:Cash
                    and cash equivalents
                
                $
                1,050
                
                $
                36Accounts
                    receivable, net of allowance for bad debt of $98 and $0,
                    respectively
                
                
                866
                
                
                621Note
                    receivable
                
                
                50
                
                
                -Prepaid
                    & other current assets
                
                
                94
                
                
                33Total
                    current assets
                
                
                2,060
                
                
                690LONG-TERM
                    ASSETS:Certificates
                    of deposit
                
                
                306
                
                
                -PROPERTY
                    AND EQUIPMENT
                
                
                499
                
                
                284Less
                    - accumulated depreciation
                
                
                (281
                )
                
                (182
                )Net
                    property and equipment
                
                
                218
                
                
                102Total
                    assets
                
                $
                2,584
                
                $
                792LIABILITIES
                    AND STOCKHOLDERS' DEFICITCURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                1,071
                
                $
                676Accounts
                    payable, related parties
                
                
                -
                
                
                42Line
                    of credit, CSI Business Finance
                
                
                -
                
                
                150Accrued
                    liabilities
                
                
                516
                
                
                2,389Current
                    portion of obligation under capital leases
                
                
                3
                
                
                3Notes
                    payable
                
                
                818
                
                
                50Notes
                    payable, related party
                
                
                -
                
                
                106Convertible
                    debentures
                
                
                76
                
                
                74Total
                    current liabilities
                
                
                2,484
                
                
                3,490LONG-TERM
                    LIABILITIES:Notes
                    payable
                
                
                177
                
                
                500Convertible
                    debentures
                
                
                158
                
                
                234Obligation
                    under capital leases, less current portion
                
                
                3
                
                
                6Other
                
                
                4
                
                
                4Total
                    long-term liabilities
                
                
                342
                
                
                744Total
                    liabilities
                
                
                2,826
                
                
                4,234STOCKHOLDERS'
                    DEFICIT:Series
                    A Cumulative Convertible Preferred Stock, $0.001, 50,000 shares
                    authorized, 0 and 2,750 shares issued
                    and outstanding
                
                
                -
                
                
                -Series
                    D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
                    issued
                    and outstanding
                
                
                1
                
                
                1Series
                    E Cumulative Preferred Stock, 10,000 shares authorized, 1,170
                    shares
                    issued and outstanding
                
                
                1
                
                
                1Series
                    H Convertible Preferred Stock, $0.001, 16,000,000 shares authorized,
                    0 and
                    11,802,353 shares issued
                    and outstanding, respectively
                
                
                -
                
                
                12Common
                    stock, $0.001 par value, 150,000,000 shares authorized, 37,620,513
                    and
                    16,44,768 sharesissued
                    and outstanding, respectively
                
                
                38
                
                
                16Additional
                    paid in capital
                
                
                72,222
                
                
                68,775Accumulated
                    deficit
                
                
                (72,505
                )
                
                (72,248
                )Other
                    comprehensive income
                
                
                1
                
                
                1Total
                    stockholders' deficit
                
                
                (242
                )
                
                (3,442
                )Total
                    liabilities and stockholders' deficit
                
                $
                2,584
                
                $
                792See
                    accompanying summary of accounting policies and notes to financial
                    statements.




28




ATSI
                COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF OPERATIONS(In
                thousands, except per share amounts)Years
                ended July 31,2007
            
            2006OPERATING
                REVENUES:Carrier
                services
            
            $
            31,562
            
            $
            14,549Communication
                services
            
            
            113
            
            
            125Network
                services
            
            
            17
            
            
            22Total
                operating revenues
            
            
            31,692
            
            
            14,696OPERATING
                EXPENSES:Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            29,521
            
            
            13,869Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            1,625
            
            
            1,138Legal
                and professional fees
            
            
            258
            
            
            195Bad
                debt expense
            
            
            98
            
            
            -Depreciation
                and amortization expense
            
            
            99
            
            
            92Total
                operating expenses
            
            
            31,601
            
            
            15,294OPERATING
                INCOME (LOSS)
            
            
            91
            
            
            (598
            )OTHER
                INCOME (EXPENSE):Loss
                on derivative instrument liabilities
            
            
            -
            
            
            (6
            )Debt
                forgiveness income
            
            
            -
            
            
            50Interest
                expense
            
            
            (348
            )
            
            (151
            )Total
                other income (expense), net
            
            
            (348
            )
            
            (107
            )NET
                (LOSS) FROM CONTINUING OPERATIONS
            
            
            (257
            )
            
            (705
            )DISCONTINUED
                OPERATIONSGain
                on disposal of discontinued operations
            
            
            -
            
            
            1,652NET
                INCOME FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            1,652NET
                INCOME (LOSS)
            
            $
            (257
            )
            $
            947LESS:
                PREFERRED DIVIDEND
            
            
            (56
            )
            
            (959
            )ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            828
            
            
            -NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            $
            515
            
            $
            (12
            )BASIC
                INCOME (LOSS) PER SHARE:From
                continuing operations
            
            $
            0.02
            
            $
            (0.12
            )From
                discontinued operations
            
            $
            -
            
            $
            0.12Total
            
            $
            0.02
            
            $
            0.00DILUTED
                INCOME (LOSS) PER SHAREFrom
                continuing operations
            
            $
            (0.01
            )
            $
            (0.02
            )From
                discontinued operations
            
            $
            -
            
            $
            0.05Total
            
            $
            (0.01
            )
            $
            0.03WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            27,908,044
            
            
            13,516,342DILUTED
                COMMON SHARES OUTSTANDING
            
            
            28,049,739
            
            
            31,287,366




See
                accompanying summary of accounting policies and notes to financial
                statements.




29




ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In
                  thousands, except per share amounts)Years
                  ended July 31,2007
              
              2006(Restated)Net
                  income (loss) to common stockholders
              
              $
              515
              
              $
              (12
              )Foreign
                  currency translation adjustment
              
              
              -
              
              
              (501
              )Comprehensive
                  income (loss) to common stockholders
              
              $
              515
              
              $
              (513
              )
  See
                  accompanying summary of accounting policies and notes to financial
                  statements.




30




**ATSI
          COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENT OF STOCKHOLDERS DEFICIT**
 **(in
            thousands, except share amounts)**
  ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        ****
                        **Additional**
                        ****
                        ****
                        ****
                        **Other**
                        ****
                        ****
                        ********
                        **Preferred
                            (A)**
                        ****
                        **Preferred
                            (D)**
                        ****
                        **Preferred
                            (E)**
                        ****
                        **Preferred
                            (H)**
                        ****
                        **Common**
                        ****
                        **Paid-in**
                        ****
                        **Retained**
                        ****
                        **Comp.**
                        ****
                        ****
                        ********
                        **Shares**
                        ****
                        **Par**
                        ****
                        **Shares**
                        ****
                        **Par**
                        ****
                        **Shares**
                        ****
                        **Par**
                        ****
                        **Shares**
                        ****
                        **Par**
                        ****
                        **Shares**
                        ****
                        **Par**
                        ****
                        **Capital**
                        ****
                        **(Deficit)**
                        ****
                        **Income/Loss**
                        ****
                        **Totals****BALANCE,
                            JULY 31, 2005**
                        
                        
                        **3,750**
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        —
                        
                        
                        **13,912,300**
                        
                        
                        14
                        
                        
                        **10,396,892**
                        
                        
                        **10**
                        
                        $
                        **66,741**
                        
                        $
                        **(73,195**
                        **)**
                        $
                        **502**
                        
                        $
                        **(5,928**
                        **)**Shares
                            issued for services
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        549,456
                        
                        
                        1
                        
                        
                        127
                        
                        
                        
                        
                        
                        
                        
                        
                        128Shares
                            issued to purchase assets
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        180,272
                        
                        
                        -
                        
                        
                        58
                        
                        
                        
                        
                        
                        
                        
                        
                        58Shares
                            issued for P/S conversion
                        
                        
                        (1,000
                        )
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (2,309,880
                        )
                        
                        (2
                        )
                        
                        2,959,731
                        
                        
                        3
                        
                        
                        167
                        
                        
                        
                        
                        
                        
                        
                        
                        168Shares
                            issued for debt conversion
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        200,000
                        
                        
                        -
                        
                        
                        866,386
                        
                        
                        1
                        
                        
                        255
                        
                        
                        
                        
                        
                        
                        
                        
                        256Reclass
                            of Series D from debt
                        
                        
                        
                        
                        
                        
                        
                        
                        742
                        
                        
                        1
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        740
                        
                        
                        
                        
                        
                        
                        
                        
                        740Reclass
                            of Series E from debt
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,170
                        
                        
                        1
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,169
                        
                        
                        
                        
                        
                        
                        
                        
                        1,170Exercise
                            of warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        366,666
                        
                        
                        -
                        
                        
                        54
                        
                        
                        
                        
                        
                        
                        
                        
                        54Warrant
                            expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        49
                        
                        
                        
                        
                        
                        
                        
                        
                        49Preferred
                            stock dividend
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (959
                        )
                        
                        
                        
                        
                        
                        
                        
                        (959
                        )Shares
                            issued for services, employees
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,125,000
                        
                        
                        1
                        
                        
                        179
                        
                        
                        
                        
                        
                        
                        
                        
                        180Derivative
                            instruments (income) expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        82
                        
                        
                        
                        
                        
                        
                        
                        
                        82Beneficial
                            conversion feature
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        26
                        
                        
                        
                        
                        
                        
                        
                        
                        26Stock
                            option expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        87
                        
                        
                        
                        
                        
                        
                        
                        
                        87Other
                            comp. income/loss
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (501
                        )
                        
                        (501
                        )Net
                            income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        947
                        
                        
                        
                        
                        
                        947**BALANCE,
                            JULY 31, 2006**
                        
                        
                        **2,750**
                        
                        
                        —
                        
                        
                        **742**
                        
                        
                        1
                        
                        
                        **1,170**
                        
                        
                        1
                        
                        
                        **11,802,420**
                        
                        
                        **12**
                        
                        
                        **16,444,403**
                        
                        
                        **16**
                        
                        $
                        **68,775**
                        
                        $
                        **(72,248**
                        **)**
                        $
                        **1**
                        
                        $
                        **(3,442**
                        **)**Shares
                            issued for Services
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        1,475,062
                        
                        
                        1
                        
                        
                        333
                        
                        
                        
                        
                        
                        
                        
                        
                        334Common
                            shares issued for Preferred Stock Conversion
                        
                        
                        (2,750
                        )
                        
                        —
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (11,802,420
                        )
                        
                        (12
                        )
                        
                        16,261,847
                        
                        
                        16
                        
                        
                        1,137
                        
                        
                        
                        
                        
                        
                        
                        
                        1,141Exercise
                            of warrants
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        150,000
                        
                        
                        2
                        
                        
                        35
                        
                        
                        
                        
                        
                        
                        
                        
                        37Dividends
                            declared
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (56
                        )
                        
                        
                        
                        
                        
                        
                        
                        (56
                        )Reversal
                            of previously recorded preferred dividend
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        828
                        
                        
                        
                        
                        
                        
                        
                        
                        828Stock
                            option expense
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        267
                        
                        
                        
                        
                        
                        
                        
                        
                        267Proceeds
                            from exercise of options
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        100,000
                        
                        
                        1
                        
                        
                        16
                        
                        
                        
                        
                        
                        
                        
                        
                        17Beneficial
                            Conversion Feature, private placement
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        144
                        
                        
                        
                        
                        
                        
                        
                        
                        144Shares
                            issued for conversion of notes payable
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,189,201
                        
                        
                        2
                        
                        
                        743
                        
                        
                        
                        
                        
                        
                        
                        
                        745Net
                            (Loss)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (257
                        )
                        
                        
                        
                        
                        (257
                        )**BALANCE,
                            JULY 31, 2007**
                        
                        
                        **—**
                        
                        
                        —
                        
                        
                        **742**
                        
                        
                        1
                        
                        
                        **1,170**
                        
                        
                        1
                        
                        
                        **—**
                        
                        
                        **—**
                        
                        
                        **37,620,513**
                        
                        
                        **38**
                        
                        $
                        **72,222**
                        
                        $
                        **(72,505**
                        **)**
                        $
                        **1**
                        
                        $
                        **(242**
                        **)**
 See
        accompanying summary of accounting policies and notes to the consolidated
        financial statements .


31




ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWS(In
                  thousands, except per share amounts)Years
                  ended July 31,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:NET
                  INCOME (LOSS)
              
              $
              (257
              )
              $
              947Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Gain
                  in disposal of investment
              
              
              -
              
              
              (1,652
              )Debt
                  forgiveness income
              
              
              -
              
              
              -Depreciation
                  and amortization
              
              
              99
              
              
              92Issuance
                  of stock grants and options, employees for services
              
              
              473
              
              
              267Issuance
                  of common stock and warrants for services
              
              
              129
              
              
              176Provisions
                  for losses on accounts receivables
              
              
              98
              
              
              -Loss
                  on derivative instrument liabilities
              
              
              -
              
              
              6Amortization
                  of debt discount
              
              
              152
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (343
              )
              
              (451
              )Prepaid
                  expenses and other
              
              
              (61
              )
              
              10Accounts
                  payable
              
              
              174
              
              
              101Accounts
                  payable - related parties
              
              
              15
              
              
              43Accrued
                  liabilities
              
              
              83
              
              
              157Net
                  cash provided by / used in operating activities
              
              
              562
              
              
              (304
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Investment
                  in certificates of deposit
              
              
              (306
              )
              
              (4
              )Note
                  receivable
              
              
              (50
              )
              
              -Purchases
                  of property & equipment
              
              
              (145
              )
              
              -Net
                  cash used in investing activities
              
              
              (501
              )
              
              (4
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from notes payable, related party
              
              
              -
              
              
              120Payments
                  on notes payable, related party
              
              
              (106
              )
              
              (30
              )Proceeds
                  from notes payable
              
              
              550
              
              
              50Payments
                  on notes payable
              
              
              (104
              )
              
              -Payments
                  on advances from shareholders
              
              
              (148
              )
              
              -Proceeds
                  from advances from shareholders
              
              
              713
              
              
              -Proceeds
                  from line of credit, net
              
              
              -
              
              
              124Proceeds
                  from the exercise of stock options
              
              
              16Proceeds
                  from the exercise of warrants
              
              
              35
              
              
              54Principal
                  payments on capital lease obligation
              
              
              (3
              )
              
              (3
              )Net
                  cash provided by financing activities
              
              
              953
              
              
              315INCREASE
                  IN CASH
              
              
              1,014
              
              
              7CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              36
              
              
              29CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              1,050
              
              $
              36SUPPLEMENTAL
                  DISCLOSURES:Cash
                  paid for interest
              
              $
              77
              
              $
              24Cash
                  paid for income tax
              
              
              -
              
              
              -NON-CASH
                  INVESTING AND FINANCING TRANSACTIONSIssuance
                  of common stock for conversion of debt
              
              $
              688
              
              $
              256Issuance
                  of common stock for accounts payable
              
              
              58
              
              
              -Issuance
                  of common stock for purchase of fixed & intangible
                  assets
              
              
              -
              
              
              58Conversion
                  of preferred stock to common stock
              
              
              1,141
              
              
              167Discount
                  for beneficial conversion feature on convertible debt
              
              
              144
              
              
              26Fair
                  value of derivatives transferred to equity
              
              
              -
              
              
              82Reclass
                  preferred stock from debt to equity
              
              
              -
              
              
              1,912Preferred
                  stock dividends
              
              
              56
              
              
              959Reversal
                  of previously recorded preferred stock dividend
              
              
              (828
              )
              
              -
  See
                  accompanying summary of accounting policies and notes to financial
                  statements.


32





**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Description
      of Business.*** ATSI
      Communications, Inc. was incorporated in Nevada on May 24, 2004. ATSI is an
      international telecommunications carrier that utilizes the Internet to provide
      economical international communication services to carriers and telephony
      resellers around the world. ATSI’s continuing operations consist of VoIP carrier
      services, network services, and retail communication services. ATSI’s primary
      business consists of providing VoIP communication services to U.S. and foreign
      telecommunications companies that lack transmission facilities and require
      additional capacity or do not have the regulatory licenses to terminate traffic
      in Mexico, Asia, the Middle East and Latin America.





***Principles
      of Consolidation.*** The
      consolidated financial statements have been prepared on the accrual basis of
      accounting under accounting principles generally accepted in the United States.
      All significant inter-company balances and transactions have been eliminated
      in
      consolidation.





***Reclassifications.*** Certain
      amounts in the consolidated financial statements of the prior year have been
      reclassified to conform to the presentation of the current year for comparative
      purposes.





***Use
      of Estimates.*** In
      preparing financial statements, management makes estimates and assumptions
      that
      affect the reported amounts of assets and liabilities in the balance sheet
      and
      revenue and expenses in the statement of expenses. Actual results could differ
      from those estimates.





***Concentration
      of Credit Risk.*** Financial
      instruments that potentially subject ATSI to concentration of credit risk
      consist primarily of trade receivables. In the normal course of business, ATSI
      provides credit terms to its customers. Accordingly, ATSI performs ongoing
      credit evaluations of its customers and maintains allowances for possible
      losses, which, when realized, have been within the range of management’s
      expectations. ATSI maintains cash in bank deposits accounts, which, at times,
      may exceed federally insured limits. ATSI has not experienced any losses in
      such
      accounts and ATSI does not believe ATSI is exposed to any significant credit
      risk on cash and cash equivalents.





***Revenue
      Recognition.*** ATSI
      derives revenue from Carrier Services, Network Services, and Communication
      Services. ATSI records and reports its revenue on the gross amount billed to
      its
      customers in accordance with EITF 99-19. Revenue
      is recognized when persuasive evidence of an arrangement exists, service or
      network capacity has been provided, the price is fixed or determinable,
      collectibility is reasonably assured and there are no significant obligations
      remaining.





*Carrier
      Service* :
      ATSI
      provides VoIP communication services to U.S. and foreign telecommunications
      companies, who lack transmission facilities, require additional capacity or
      do
      not have the regulatory licenses to terminate traffic in Mexico, Asia, the
      Middle East and Latin America. Typically
      these telecommunications companies offer their services to the public for
      domestic and international long distance services. Carrier
      service revenue is derived through transporting and terminating minutes of
      telecommunications traffic over ATSI’s owned or leased VoIP network (Voice over
      Internet Protocol). ATSI recognizes revenue in the period the service is
      provided, net of revenue reserves for potential billing credits. Such disputes
      can result from disagreements with customers regarding the duration, destination
      or rates charged for each call.





*Communication
      Services:* ATSI
      provides retail local phone service and international VoIP long distance service
      to the U.S. Hispanic market throughout Texas, mainly in the Rio Grande Valley.
      Our local phone service includes access to a landline and value-added services
      such a caller ID and call waiting. These services are offered to our customers
      in both prepaid and postpaid basis. Additionally, ATSI provides prepaid domestic
      and long-distance services; under these services ATSI allows our customers
      to
      access our prepaid VoIP network platform. The customer will access this platform
      and be able to complete the call by using their local phone number as their
      “PIN” or personal identification number. The revenues derived from prepaid local
      telephone and long-distance are billed monthly in advance and are recognized
      the
      following month when services are provided. Additionally, revenues derived
      from
      postpaid local telephone and long-distance services are recognized monthly
      as
      services are provided.




33




*Network
      Services:* ATSI provides
      private communication links and VoIP gateway services to multi-national and
      foreign carriers and enterprise customers who use a high volume of
      telecommunications services to communicate with their U.S. offices or businesses
      and need greater dependability than is currently available through the foreign
      telecommunication networks. These services include data, voice and fax
      transmission between multiple international offices and branches as well as
      Internet and collocation services in the United States. ATSI
      recognizes network services revenue during the period the service is
      provided.





***Direct
      Cost of Revenue:***





*Carrier
      Services:* Under
      carrier services, ATSI incurs termination charges. These charges are related
      to
      the fees that ATSI is charged by carriers/vendors for the termination of phone
      calls into their infrastructure and network to
      terminate traffic in Mexico, Asia, the Middle East and Latin America. The
      cost
      is based on a per minute rate and volume. ATSI also incurs installation charges
      from various carriers; this cost is passed on to customers for the connection
      to
      the VoIP network from ATSI’s carriers.





*Network
      Services* :
      Under
      network services, ATSI incurs Internet, co-location, and fiber optic charges.
      The Internet and fiber optic charges are incurred as part of the connection
      links between the customer’s different remote locations and sites to transmit
      data, voice and Internet services. Co-location charges are incurred for space
      utilized to install gateways, servers, and other communications equipment.





*Communication
      Services* :
      ATSI
      incurs charges for local telephone service and related features from the
      dominant local exchange carrier. Additionally, ATSI incurs a cost per minute
      and
      platform fees from two suppliers for long distance services and platform
      access.





***Cash
      and Cash Equivalents.*** For
      purposes of the statement of cash flows, ATSI considers all highly liquid
      investments purchased with an original maturity of three months or less to
      be
      cash equivalents.





***Allowance
      for Doubtful Accounts.*** Bad debt
      expense is recognized based on management’s estimate of likely losses each year
      based on past experience and an estimate of current year uncollectible amounts.
      As of July 31, 2007, ATSI’s allowance for doubtful accounts balance was
      approximately $98,000. There was no allowance for doubtful accounts as of July
      31, 2006.





***Investment
      in unconsolidated subsidiary.*** **** On
      May
      22, 2003 ATSI sold 51% of its interest in ATSI Comunicaciones S.A de C.V.,
      (ATSICOM) As of July 31, 2007, ATSI has a 49% interest in the profits and equity
      of ATSICOM, a Mexican corporation engaged in providing telecommunications
      services. During fiscal 2003, ATSI recorded the investment in the unconsolidated
      subsidiary in conformity with the equity method of accounting. During the year
      ended July 31, 2004, ATSI determined that the estimated future cash flows
      expected from the concession license were less than its carrying value. As
      a
      result ATSI recorded an impairment loss of approximately $702,000 to reduce
      the
      recorded value of the concession license to zero. A lthough
      there is no assurance of future value appreciation, from time to time ATSI
      will
      conduct a valuation of its investment in the concession license and record
      the
      determined value, if any, in its financial statements. As of July 31, 2007,
      nothing has come to management’s attention that would require ATSI to make any
      adjustment to its financial statement.





***Property
      and equipment.*** Property
      and equipment is recorded at cost. Additions are capitalized and maintenance
      and
      repairs are charged to expense as incurred. Gains and losses on dispositions
      of
      equipment are reflected in operations. Depreciation is provided using the
      straight-line method over the estimated useful lives of the assets, which are
      one to five years.





***Impairment
      of Long-Lived Assets.*** ATSI
      reviews the carrying value of its long-lived assets annually or whenever events
      or changes in circumstances indicate that the value of an asset may no longer
      be
      appropriate. ATSI assesses recoverability of the carrying value of the asset
      by
      estimating the future net cash flows expected to result from the asset,
      including eventual disposition. If the future net cash flows are less than
      the
      carrying value of the asset, an impairment loss is recorded equal to the
      difference between the asset’s carrying value and fair value.




34




***Derivative
      financial instruments*** .
      ATSI
      does not use derivative instruments to hedge exposures to cash flow, market,
      or
      foreign currency risks.





Derivative
      financial instruments are initially measured at their fair value. For derivative
      financial instruments that are accounted for as liabilities, the derivative
      instrument is initially recorded at its fair value and is then re-valued at
      each
      reporting date, with changes in the fair value reported as charges or credits
      to
      income. For option-based derivative financial instruments, ATSI uses the
      Black-Scholes option-pricing model to value the derivative
      instruments.





The
      classification of derivative instruments, including whether such instruments
      should be recorded as liabilities or as equity, is re-assessed at the end of
      each reporting period. Derivative instrument liabilities are classified in
      the
      balance sheet as current or non-current based on whether or not net-cash
      settlement of the derivative instrument could be required within 12 months
      of
      the balance sheet date. There are no derivative instrument liabilities as of
      July 31, 2007.





***Income
      taxes.*** ATSI
      recognizes deferred tax assets and liabilities based on differences between
      the
      financial reporting and tax bases of assets and liabilities using the enacted
      tax rates and laws that are expected to be in effect when the differences are
      expected to be recovered. ATSI provides a valuation allowance for deferred
      tax
      assets for which it does not consider realization of such assets to be more
      likely than not.





***Stock-based
      compensation.***  Effective
      February 1, 2006, ATSI began recording compensation expense associated with
      stock options and other forms of equity compensation in accordance with
      Statement of Financial Accounting Standards No. 123R, Share-Based Payment, as
      interpreted by SEC Staff Accounting Bulletin No. 107. Prior to February 1,
      2006, ATSI had accounted for stock options according to the provisions of
      Accounting Principles Board Opinion No. 25, “Accounting
      for Stock Issued to Employees”, and
      related interpretations, and therefore no related compensation expense was
      recorded for awards granted with no intrinsic value. ATSI adopted the modified
      prospective transition method as permitted under SFAS No. 123R, and,
      consequently, has not retroactively adjusted results from prior periods. Under
      this modified prospective transition method, compensation cost associated with
      stock options recognized during fiscal 2006 includes the amortization related
      to
      the remaining service period of all stock option awards granted prior to
      February 1, 2006, based on the grant date fair value estimated in accordance
      with the original provisions of SFAS No. 123.





The
      following table illustrates the effect on net income loss and net loss per
      share
      for the twelve months ended July 31, 2007 if ATSI had applied the fair value
      provisions of FASB Statement No. 123R, to stock-based employee compensation:





Twelve
                months ended July 31,2007
            
            2006Net
                income (loss) to commonshareholders,
                as reported
            $
            515,000
            
            $
            (12,000
            )Add:
            stock based
              compensation determinedunder
              intrinsic value based method
            
            -
            
            
            -Less:
            stock based
              compensation determinedunder
              fair
              value based method
            
            -
            
            
            (281,499
            )Pro
              forma net income (loss) to common stockholders
            $
            515,000
            
            $
            (293,499
            )Basic
                net income (loss) per common share:As
              reported
            $
            0.02
            
            $
            0.00Pro
              forma
            $
            0.02
            
            $
            (0.02
            )Diluted
                net income (loss) per common share:As
              reported
            $
            (0.01
            )
            $
            0.03Pro
              forma
            $
            (0.01
            )
            $
            (0.01
            )




35




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




For
                  the Years Ended July 31,2007
              
              2006Expected
                  dividends yield
              
              
              0.00
              %
              
              0.00
              %Expected
                  stock price volatility
              
              
              80
              %
              
              50
              %Risk-free
                  interest rate
              
              
              4.51
              %
              
              4.39
              %Expected
                  life of options
              
              
              7
                  years
              
              
              10
                  years


***Basic
      and diluted net loss per share.*** The
      basic net loss per common share is computed by dividing the net loss by the
      weighted average number of common shares outstanding. Diluted net loss per
      common share is computed by dividing the net loss adjusted on an "as if
      converted" basis, by the weighted average number of common shares outstanding
      plus potential dilutive securities.





***Recently
      issued accounting pronouncements.*** ATSI
      does not expect the adoption of any other recently issued accounting
      pronouncements to have a significant impact on ATSI’s results of operations,
      financial position or cash flows.





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, ATSI incurred net losses from
      operations of $257,000 and $705,000 in fiscal 2007 and 2006, respectively,
      has
      an accumulated deficit of $72.5 million and a working capital deficit of
      $424,000 as of July 31, 2007. Although we generated sufficient income from
      operations to cover our operating expenses during the fiscal year ended July
      31,
      2007, these conditions create doubt as to ATSI’s ability to continue as a going
      concern. Management plans to continue to improve its financial position through
      the profitable growth of its operations subject to its capital limitations.
      Management will also continue to pursue financings that may include raising
      additional capital through the issuance of debt and sales of common stock,
      preferred stock. The financial statements do not include any adjustments that
      might be necessary if ATSI is unable to continue as a going
      concern.





**NOTE
      3 - PROPERTY AND EQUIPMENT**





Following
      is a summary of ATSI’s property and equipment at July 31, 2007 and 2006 (in
      thousands):





Useful
                lives
            
            2007
            
            2006Telecom
                equipment & software
            
            
            1-5
                years
            
            $
            499
            
            $
            284Less:
                accumulated depreciation
            
            
            
            
            
            (281
            )
            
            (182
            )Net-property
                and equipment
            
            
            
            
            $
            218
            
            $
            102





For
      the
      years ended July 31, 2007 and 2006, depreciation and amortization totaled
      approximately $99,000 and $92,000, respectively.




36




**NOTE
      4 -NOTE RECEIVABLE**





On
      July
      13 ,
      2007,
      ATSI agreed to loan $150,000 to NetSapiens Inc. The
      promissory note receivable has a maturity date of June 26, 2008 and an annual
      interest rate of 8%. The note will be funded by ATSI in five installments as
      follows:





1)
            $50,000
                on July 13, 2007;2)
            $25,000
                on August 13, 2007;3)
            $25,000
                on September 13, 2007;4)
            $25,000
                on October 13, 2007; and5)
            $25,000
                on November 13, 2007.





The
      note
      is secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
      modules and provides for accrual of interest each month with the principal
      balance due at maturity. Additionally, ATSI can convert at any time the
      outstanding interest and principal balance into a perpetual NetSapiens’ License.
      As of July 31, 2007, the principal balance outstanding on the note was $50,000
      and ATSI has funded the remaining $100,000 as of October 12, 2007.





**NOTE
      5 - NOTES PAYABLE**





On
      November 3, 2006, ATSI
      borrowed $250,000 from CCA Financial Services, Inc. This note bears an interest
      at the rate of 16%, provides for eleven monthly principal and interest payments
      of $7,807 and a final payment at maturity of $200,000, is secured by ATSI’s
      equipment, deposit accounts and accounts receivables and matures on November
      3,
      2007. ATSI has the option of paying off the total outstanding principal balance
      at any time without any penalties. In
      connection with the transaction ATSI paid application, legal and documentation
      fees of $7,500.





On
      November 3, 2006, ATSI entered into an accounts receivable factoring agreement
      with CCA Financial Services, Inc. Under the agreement, CCA
      Financial Services committed to purchase up to $1,000,000 of ATSI’s accounts receivables. The
      factoring agreement is for twelve months and ATSI can terminate this agreement
      at its sole discretion at any time, subject to a $10,000 early termination
      fee.
      The factoring rate ranges from 1.00%-1.25% based on the factored amount and
      number of days outstanding. As our ongoing operations require, we will continue
      factoring our receivables under this agreement, which on average has been
      $850,000 of our monthly receivables. As of the date of this filing, we did
      not
      have any factored receivables outstanding; we will continue to factor our
      receivables on a monthly basis as services are rendered to our
      customers.





During
      the nine months ended April 30, 2007, ATSI borrowed $564,000 under several
      notes
      payable. Which matured on May 28, 2007 and bear an annual interest rate of
      12%. On
      February 1, 2007, ATSI notified the holders of the notes of its intent to
      convert the outstanding principal and interest into common stock. The conversion
      price was set by ATSI at $0.22 per share, which was approximately 80% of the
      market price at February 1, 2007. A beneficial conversion feature for the difference between the closing price
      and
      the conversion price was recognized in accordance with EITF 98-5 and EITF 00-27.
      The beneficial conversion feature is presented as a discount to the related
      debt
      or a dividend to the related equity, with an offsetting amount increasing
      additional paid-in capital. As a
      result, ATSI recognized $143,723 in discount from the beneficial conversion
      feature at the time of the issuance and issued 2,566,482 common
      shares to the note holders. In addition, ATSI issued 238,636 shares of common
      stock with a fair value of $66,818 and made cash payment of $26,960 for services
      provided by the placement agents in connection with the placement of the notes.
      As of July 31, 2007, the entire discount has been expensed by ATSI as the result
      of the conversion of all notes to common shares.





On
      February 7, 2007, ATSI paid off its $16,000 note payable with Mr. John Fleming,
      a director of ATSI.





On
      March
      28, 2007, ATSI borrowed $100,000 from Wells Fargo Bank. This
      note
      bears an annual interest rate of 7%, provides for twelve monthly principal
      and
      interest payments of $4,481, and is secured by ATSI’s certificate of deposit for
      $100,000. ATSI has the option of paying off the total outstanding principal
      balance at any time without any penalties.




37




On
      July
      25, 2007, ATSI borrowed $200,000 from Wells Fargo Bank. This
      note
      bears an annual interest rate of 7.25%, provides for thirty-six monthly
      principal and interest payments of $6,208 and is secured by ATSI’s certificate
      of deposit for $200,000. ATSI has the option of paying off the total outstanding
      principal balance at any time without any penalties.





On
      June
      1, 2006, ATSI restructured it’s 9% Convertible Subordinated Debentures
      (“Original 9% debentures”) by issuing 416 9% Convertible Subordinated Debentures
      (“New Debentures”) with a face value of $1,000 each, due June 2011. The New
      Debentures were issued in exchange for all of the Original 9% Debentures in
      the
      aggregate principal amount of $275,000 and $141,000 of accrued interest through
      June 2006. Each New Debenture accrues interest at the rate of 9% per annum
      payable annually. The debentures and any accrued interest are subject to an
      election to convert into common stock by either ATSI or the holders 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. The maximum
      common shares that can be issued upon conversion of the debentures are 1,540,741
      common shares. Additionally, the proceeds from the debentures have been
      discounted by $26,000 to reflect a beneficial conversion feature derived from
      the difference between the conversion price and the market price at the time
      of
      issuance. The discount will be amortized over the life of the debentures using
      the effective interest method. On June 1, 2007, ATSI issued 419,081 restricted
      common shares as the 2nd principal payment and accrued interest on
      the debentures of $83,200 and $29,952, respectively. Additionally, as of July
      31, 2007, ATSI had approximately $85,000 in accrued interest associated with
      these debentures.





ATSI
      analyzed these instruments for derivative accounting consideration under SFAS
      133 and EITF 00-19, and determined that derivative accounting is not
      applicable.





**NOTE
      6 - COMMITMENTS AND CONTINGENCIES**





Leases:





ATSI
      leases its office space with monthly payments of $4,085; the lease expires
      in
      November 2011. The annual rent expense under the operating lease was $43,486
      and
      $45,442 for 2006 and 2007, respectively. The future minimum lease payments
      under
      the operating lease are as follows:





FY2008
            
            $
            47,439FY2009
            
            
            48,199FY2010
            
            
            49,100FY2011
            
            
            49,250


Litigation:





On
      October 31, 2002, ATSI filed a lawsuit in the United States District Court
      for
      the Southern District Court of New York against several individuals and
      financial institutions, including the holders of our Series D and E Redeemable
      Preferred Stock. On July 11, 2007, the lawsuit was dismissed by the Court
      of Appeals.





One
      of
      the defendants, RGC International Investors, LDC, filed a lawsuit in the
      Chancery Court in Delaware against ATSI on March 20, 2007 asserting it still
      had
      rights of enforcement against ATSI to convert preferred stock to common stock
      or
      redeem such stock in connection with Certificate of Designation issued regarding
      such series E preferred stock in October of 2000. In August 2007 the parties
      reached a confidential settlement agreement under which the 1,170
      shares of Series E Preferred Stock have been cancelled.





Currently
      ATSI is still in litigation with Shaar Fund, Ltd., the holders of the series
      D
      preferred stock and is involved in settlement negotiations.




38


**NOTE
      7 - EQUITY**





***Common
      Stock***





During
      the year ended July 31, 2007 ATSI issued:





-
            495,062
                shares of common stock valued at $128,920 for its placement agent
                fees and
                legal and consulting services rendered by various
                individuals.





-
            980,000
                shares of common stock to its employees and directors for services
                rendered. ATSI recorded compensation expense of $205,800 in its statement
                of operations for the aggregate market value of the stock at the
                date of
                issuance.





-
            16,149,938
                shares of common stock in connection with the conversion and redemption
                of
                11,802,420 shares of Series H Preferred Stock and accrued premium
                common
                shares.





-
            111,909
                shares of common stock in connection with the conversion of 2,750
                shares
                of Series A Preferred Stock and accrued dividend.





-
            150,000
                shares of common stock upon exercise of outstanding warrants for
                aggregate
                proceeds of $34,500.





-
            100,000
                shares of common stock upon exercise of outstanding stock options
                by an
                employee for $16,000.





-
            66,226
                shares of common stock to Richard Benkendorf as a payment of $15,226
                under
                a settlement agreement.





-
            137,412
                shares of common stock to John Fleming as a payment of $42,600 under
                a
                settlement agreement.





-
            2,566,482
                shares of common stock in connection with the conversion of various
                notes
                payable in the principal amount of $564,600 and accrued interest
                of
                $10,292.





-
            419,081
                shares of common stock valued at $113,152 in connection with the
                annual
                payment on the “New Debentures” dated June 1, 2006.





No
      dividends were declared on ATSI’s common stock during fiscal 2007 and
      2006.





***Preferred
      Stock***





The
      terms
      of ATSI’s preferred stock restrict ATSI from declaring and paying dividends on
      ATSI’s common stock until such time as all outstanding dividends have been
      fulfilled related to the preferred stock. The outstanding preferred stock have
      liquidation preference prior to common stock and ratably with each other. No
      dividends were declared on ATSI’s preferred stock during fiscal 2007 and 2006.





**Series
      A Preferred Stock**





Series
      A
      Preferred Stocks were issued in March 1999. The
      Series A Preferred Stock and any accumulated, unpaid dividends may be converted
      into Common Stock for up to one year at the average closing price of the Common
      Stock for twenty (20) trading days preceding the Date of Closing (the “Initial
      Conversion Price”). On each Anniversary Date up to and including the fifth
      Anniversary Date, the Conversion price on any unconverted Preferred Stock,
      will
      be reset to be equal to 75% of the average closing price of the stock for the
      then twenty (20) preceding days provided that the Conversion price can not
      be
      reset any lower than 75% of the Initial Conversion Price. As these conversion
      features were considered a “beneficial conversion feature” to the holder, ATSI
      allocated approximately $3.6 million of the approximately $5.0 million in
      proceeds to additional paid-in capital as a discount that has been fully
      amortized in prior periods. The Series A Preferred Stock is callable and
      redeemable by ATSI at 100% of its face value, plus any accumulated, unpaid
      dividends at ATSI’s option any time after the Common Stock of ATSI has traded at
      200% or more of the conversion price in effect for at least twenty (20)
      consecutive trading days. The Series A Preferred Stock holders are entitled
      to
      vote, based on number of common stock into which the preferred stock could
      be
      converted. Dividends are payable on June 1, September 1, December 1 and March
      1.




39




During
      fiscal 2007, ATSI issued 111,909 common shares in conversion of 2,750 shares
      of
      Series A Preferred Stock. As of July 31, 2007, all
      Series A
      Preferred Stock have been converted into common stock.





**Series
      D Preferred Stock**





Series
      D
      Preferred Stock was issued in February 2000. The Series D Preferred Stock
      accrues cumulative dividends at the rate of 6% per annum payable quarterly.
      The
      Series D Preferred Stock and any accumulated, unpaid dividends may be converted
      into Common Stock for up to two years at the lesser of a) the market price
      on
      the day prior to closing or b) 83% of the five lowest closing bid prices on
      the
      ten days preceding conversion. The terms of ATSI’s Series D Preferred Stock
      allow for mandatory redemption by the holder upon certain conditions. The Series
      D Preferred Stock allows the holder to elect redemption upon the change of
      control of ATSI at 120% of the sum of $1,300 per share and accrued and unpaid
      dividends. Additionally, the holder may elect redemption at $1,270 per share
      plus accrued and unpaid dividends if ATSI refuses to honor conversion notice
      or
      if a third party challenges conversion. The Series D Preferred Stock holders
      are
      not entitled to vote.





On
      January 24, 2003 ATSI received a demand redemption letter from the Series D
      Preferred holders. ATSI has not issued these shares; it is the position of
      ATSI
      that the investor’s shares are not owed. Further ATSI has filed a lawsuit
      against one or more parties to whom the investors share are allegedly
      owed.





In
      June
      2007, ATSI initiated a declaratory judgment action in the United States District
      Court for the Western District of Texas against Shaar Fund, Ltd., holder of
      series D preferred stock who still asserted it had rights under instruments
      that
      issued incident to such stock. ATSI asserted that alleged rights asserted by
      the
      Shaar Fund Ltd are barred by applicable statute of limitations.





On
      August
      2, 2007, Shaar Fund Ltd. filed a separate suit against ATSI in the United States
      District Court for the Southern District Court of New York asserting it
      continued to own rights under the instruments relating to the series D preferred
      stock.





By
      September, 2007, the parties reached an agreement as to the competing suits
      which led to ATSI dismissing the Texas suit in favor of litigating all remaining
      issues between it and Shaar Fund Ltd. as to such matters in United States
      District Court for the Southern District Court of New York. Pleading deadlines
      have been extended and the parties are currently exploring a mutual
      resolution.




As
      of
      July 31, 2007, 742 shares of Series D Preferred Stock remain outstanding, for
      which ATSI has accrued approximately $285,000 for dividends.





**Series
      E Preferred Stock**





Series
      E
      Preferred Stocks were issued in October 2000 with a stated value of $1,000
      per
      share.. The Series E Preferred Stock contain certain conversion and redemption
      features which provide that (1) they may be converted into Common Stock for
      up
      to three years at the lesser of a) the market price - defined as the average
      of
      the closing bid price for the five lowest of the ten trading days prior to
      conversion or b) the fixed conversion price - defined as 120% of the lesser
      of
      the average closing bid price for the ten days prior to closing or the October
      12, 2000 closing bid price and (2) allow for mandatory redemption by the holder
      upon certain conditions.





The
      Series E Preferred Stock allows the holder to elect redemption at $1,250 per
      share plus 6% per annum if: 1) ATSI refuses conversion notice, 2) an effective
      registration statement was not obtained by prior to March 11, 2001, 3)
      bankruptcy proceedings are initiated against ATSI, 4) The Secretaría de
      Comunicaciones y Transportes of the SCT limits or terminates the scope of the
      concession or, 5) if ATSI fails to maintain a listing on NASDAQ, NYSE or AMEX.
      ATSI believes that the holders of the Series E Preferred Stock can no longer
      enforce the conversion or redemption features of the Preferred Stock instruments
      due to, among other things, the expiration of the applicable statute of
      limitations. Subsequent to July 31, 2007 the parties reached a confidential
      settlement agreement. Under the confidential settlement agreement the 1,170
      shares of Series E Preferred Stock have been cancelled. The
      Series E Convertible Preferred Stock holders are not entitled to
      vote.




40




As
      of
      July 31, 2007, 1,170 shares of Series E Preferred Stock remained outstanding
      and
      in August 2007, ATSI reached a confidential settlement agreement with the
      holders of the 1,170 shares of Series E Preferred Stock. Under the confidential
      settlement agreement ATSI paid $175,000 to the Series E Preferred Stock
      shareholders and the 1,170
      shares of Series E Preferred Stock h ave
      been
      cancelled.





**Series
      H Preferred Stock**





On
      May 6,
      2004, ATSI’s stockholders approved the reincorporation of ATSI into a wholly
      owned subsidiary, ATSI Merger Corporation in Nevada. As a result of the merger,
      ATSI’s Stockholders of record as of May 24, 2004 received one (1) share of New
      ATSI Common Stock and ten (10) shares of New ATSI Series H Convertible Preferred
      Stock for each 100 shares of Old ATSI Common Stock surrendered. During fiscal
      2004, 14,385,000 shares of the New ATSI Series H Convertible Preferred Stock
      were issued.





Pursuant
      to ATSI’s Certificate of Incorporation, ATSI’s board of directors may issue, in
      series, 16,000,000 of the New ATSI Series H Convertible Preferred shares, with
      a
      par value of $0.001. The Series H Convertible Preferred Stock holders are not
      entitled to vote but they are entitled to receive dividends on common stock.
      Per
      the certificate of designation, ATSI can redeem the Series H Preferred Stock
      for
      common stock at any time.





During
      fiscal 2007, 11,802,420 shares
      of
      Series H Preferred Stock were converted to 16,149,938 shares
      of
      common stock. As of July 31, 2007, all shares of Series H Preferred Stock have
      been converted into common stock.





**NOTE
      8 - STOCK-BASED COMPENSATION AND WARRANTS**





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. The terms of any grants under the Plan are determined by the
      Board of Directors of ATSI. Exercise prices of all of the warrants and stock
      options and other awards will 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.





Issuances
      under the “2005 Stock Compensation Plan” during fiscal 2007 are:





-
      1,345,000 options to purchase common stock to its employees and members of
      the
      Board of Directors with an exercise price of $0.21 per share, the closing price
      of ATSI’s common stock on the grant date, September 25, 2006. One third of the
      options vested immediately at the issuance date and the remaining two-thirds
      will vest equally over a period of two years. Under the fair value option
      method, ATSI recognized $71,000 of compensation expense associated with the
      vested options at the date of grant. ATSI will recognize the remaining $142,000
      of non-cash compensation expense related to un-vested options over the service
      period.





-
      980,000
      shares of unrestricted common stock to its employees and directors for services
      rendered. See Note 7 for details.





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





Expected
                dividend yield
            
            
            0.00
            %Expected
                stock price volatility
            
            
            80
            %Risk-free
                interest rate
            
            
            4.51
            %Expected
                life of options
            
            
            7
                years




41




A
      summary
      of the options as of July 31,
      2006
      and 2007 and
      the
      changes during the year ended July 31,
      2006
      and 2007 is
      presented below:





Weighted-
              averageWeighted-
              average
            
            remaining
              contractual**2005
                Stock Compensation Plan**
            
            Options
            
            exercise
                price
            
            term
                (years)Outstanding
                at July 31, 2005
            
            
            -
            
            $
            -
            
            
            -Granted
            
            
            4,354,000
            
            
            0.16
            
            
            9Exercised
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Outstanding
                at July 31, 2006
            
            
            4,354,000
            
            $
            0.16
            
            
            9Granted
            
            
            1,345,000
            
            
            0.21
            
            
            9Exercised
            
            
            (100,000
            )
            
            0.16
            
            
            9Forfeited
            
            
            -
            
            
            -
            
            
            -Outstanding
                at July 31, 2007
            
            
            5,599,000
            
            $
            0.17
            
            
            9Exercisable
                at July 31, 2007
            
            
            2,837,000
            
            $
            0.17
            
            
            9





In
      June
      2004, ATSI adopted the 2004 stock compensation plan. This plan authorizes the
      grant of up to 7.5 million of warrants, stock options, restricted common stock,
      non-restricted common stock and other awards, or a combination, to employees,
      directors, consultants and certain other persons. The plan is intended to permit
      ATSI to retain and attract qualified individuals who will contribute to ATSI’s
      overall success of ATSI. The exercise price of all of the warrants, stock
      options, restricted common stock, non-restricted common stock and other awards
      will 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 pursuant based in the individual security
      granted.





The
      issuances under this plan during fiscal 2006 and 2007 are:





-
            On
                January 1, 2006, ATSI entered into consulting agreements for 90 days
                with
                NetComm Services Corp. The consulting agreement automatically renews
                every
                90 days unless either party notifies the other of the intent to cancel
                within 15 days prior to the renewal period. As of July 31, 2007,
                the
                consulting agreement has automatically renewed and is still effective.
                The
                consulting agreement with NetComm Services Corp. provided for the
                issuance
                of compensation warrants to purchase a total of 150,000 shares of
                ATSI’s
                common stock at price of $0.23 per share. These warrants expire on
                January
                1, 2009. At issuance, ATSI recognized $29,477 of non-cash compensation
                expense associated with the issuance of these warrants.During fiscal 2007 150,000 warrants were exercised at a price of
                $0.23 per
                share.




42




A
      summary
      of the warrants as of July 31,
      2006
      and 2007 and
      the
      changes during the year ended July 31,
      2006
      and 2007 is
      presented below:





Weighted-averageWeighted-average
            
            remaining
                contractual**2004
                Stock Compensation Plan (Warrants)**
            
            Warrants
            
            exercise
                price
            
            term
                (years)Outstanding
                at July 31, 2005
            
            
            303,140
            
            $
            0.25
            
            
            3Granted
            
            
            350,000
            
            
            0.23
            
            
            3Exercised
            
            
            (366,666
            )
            
            0.24
            
            
            3Forfeited
            
            
            (136,474
            )
            
            0.25
            
            
            3Outstanding
                at July 31, 2006
            
            
            150,000
            
            $
            0.23
            
            
            3Granted
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (150,000
            )
            
            0.23
            
            
            3Forfeited
            
            
            -
            
            
            -
            
            
            -Outstanding
                at July 31, 2007
            
            
            -
            
            $
            -
            
            
            -Exercisable
                at July 31, 2007
            
            
            -
            
            
            -
            
            
            -





**NOTE
      9 - PREFERRED STOCK DIVIDEND**





During
      fiscal 2007, ATSI reversed previously recorded accrued dividends payable on
      outstanding shares of Series A Convertible Preferred Stock and Series H
      Convertible Preferred Stock of $828,000. The
      adjustment to the accrued dividends occurred as a result of the conversion
      of
      2,750 shares of Series A Convertible Preferred Stock and 11,802,420 shares
      of
      Series H Convertible Preferred Stock into 16,261,847 shares of ATSI's common
      stock. Upon
      conversion of these preferred shares, ATSI reversed the balance previously
      accrued for dividends with a corresponding amount recorded to common stock
      at
      par value and additional paid in capital.  The reversal is reflected as a
      reconciling item on the statements of operations to derive net income to common
      stockholders.





**NOTE
      10 - INCOME TAXES**





At
      July
      31, 2007, ATSI had a consolidated net operating loss carry-forward (“NOL”) of
      approximately $8,416,000 expiring ranging from 2009 through 2026. ATSI had
      no
      deferred tax asset resulting from its NOL. The loss carry forwards are subject
      to certain limitations under the Internal Revenue Code including Section 382
      of
      the Tax Reform Act of 1986.





ATSI
      conducts a periodic examination of its valuation allowance. Factors considered
      in the evaluation include recent and expected future earnings and ATSI’s
      liquidity and equity positions. As of July 31, 2007, ATSI has determined that
      a
      valuation allowance is necessary for the entire amount of deferred tax
      assets.





Deferred
      tax assets are comprised of the following as of July 31, 2007 and
      2006:





2007
            
            2006Net
                operating loss carry-forward
            
            $
            2,861,000
            
            $
            3,964,000Valuation
                allowance
            
            
            (2,861,000
            )
            
            (3,964,000
            )Total
                deferred tax asset
            
            $
            -
            
            $
            -


In
        June
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB
        Statement No. 109” (FIN 48). This Interpretation provides guidance on
        recognition, classification and disclosure concerning uncertain tax liabilities.
        The evaluation of a tax position requires recognition of a tax benefit if
        it is
        more likely than not it will be sustained upon examination. We adopted this
        Interpretation effective January 1, 2007. The adoption did not have a material
        impact on our consolidated financial statements.




43


**NOTE
      11 - EARNINGS (LOSS) PER SHARE**





In
      accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share
      have been computed based upon the weighted average common shares outstanding.
      Diluted earnings per share gives effect to outstanding convertible preferred
      shares, warrants and stock options, unless their effect is anti-dilutive.
      Earnings (loss) per common share has been computed as follows:




Year
                ended July 31,2007
            
            2006(In
                thousands, except share information)Net
                income (loss) to be used to compute income(loss)
                per share:Net
                income (loss)
            
            $
            (257
            )
            $
            947Less
                preferred dividends
            
            
            772
            
            
            (959
            )Net
                income (loss) attributable to commonShareholders
                - Basic
            
            
            515
            
            
            (12
            )Add
                back preferred dividends
            
            
            (772
            )
            
            959Net
                income (loss) attributable to commonshareholders
                -Diluted
            
            $
            (257
            )
            $
            947Weighted
                average number of shares:Weighted
                average common shares outstanding
            
            
            27,908,044
            
            
            13,516,342Effect
                of conversion of preferred shares
            
            
            -
            
            
            15,591,698Effect
                of warrants and options
            
            
            141,695
            
            
            2,179,326Weighted
                average common shares outstandingassuming
                dilution
            
            
            28,049,739
            
            
            31,287,366Basic
                income (loss) per common share
            
            $
            0.02
            
            $
            (0.00
            )Diluted
                income (loss) per common share
            
            $
            (0.01
            )
            $
            0.03





**NOTE
      12 - RELATED PARTY TRANSACTIONS**





In
      January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
      Communications, Inc., entered into a joint management and marketing agreement
      with Fiesta Communications, Inc. Under the joint management and marketing
      agreement ATSI provides accounting and administrative support for a monthly
      fee
      of $2,500. As of July 31, 2007, Fiesta owed ATSI $30,000 in management fees.
      ATSI’s CEO and President, Arthur L Smith, is a 20% shareholder of Fiesta.





ATSI
      has
      evaluated its relationship with Fiesta and determined that Fiesta is not a
      variable interest entity under FIN 46(R) and also concluded that it is not
      the
      primary beneficiary as defined by FIN 46(R) and, as a result, ATSI is not
      required to consolidate Fiesta at its formation.





**NOTE
      13 - SUBSEQUENT EVENTS**





On
      August
      15, 2007 ATSI granted 1,835,000 options to purchase common stock to its
      employees and members of the Board of Directors with an exercise price of $0.21
      per share, the closing price of ATSI’s common stock on the grant date. One third
      of the options vested immediately at the issuance date and the remaining
      two-thirds will vest equally over a period of two years. Under the fair value
      option method, ATSI recognized $89,000 of compensation expense associated with
      the vested options at the date of grant. ATSI will recognize the remaining
      $177,000 of non-cash compensation expense related to un-vested options over
      the
      service period. Additionally, on August 15, 2007 ATSI
      issued 1,299,398 shares of unrestricted common stock to its employees and
      directors for services rendered with a market value of $272,874.





In
      August
      2007, ATSI reached a confidential settlement agreement with the holders of
      the
      1,170 shares of Series E Preferred Stock. Under the confidential settlement
      agreement ATSI paid $175,000 to the Series E Preferred Stock shareholders and
      the 1,170
      shares of Series E Preferred Stock h ave
      been
      cancelled.




44




**ITEM
        8**. **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE.**





NONE.





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES.**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company has adopted and implemented disclosure controls and procedures designed
      to provide reasonable assurance that all reportable information will be
      recorded, processed, summarized and reported within the time period specified
      in
      the SEC’s rules and forms. Under the supervision and with the participation of
      the Company’s management, including the Company’s President and Chief Executive
      Officer and the Company’s Controller and Principal Financial Officer, the
      Company has evaluated the effectiveness of the design and operation of its
      disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b)
      as of
      the end of the fiscal quarter covered by this report. Based on that evaluation,
      the President and Chief Executive Officer and the Controller and Principal
      Financial Officer have concluded that these disclosure controls and procedures
      are effective as of the end of the fiscal year covered by this report.





**Changes
      in Internal Control Over Financial Reporting**





There
      were no changes in the Company's internal control over financial reporting
      during the fourth fiscal quarter covered by this report that have had a material
      affect or are reasonably likely to have a material affect on internal control
      over financial reporting.





**PART
      III**





**ITEM
                    9.**
                  **DIRECTORS,
                      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
                      WITH SECTION
                      16(A) OF THE EXCHANGE
                      ACT.**





**Business
      Experience**





The
      following table contains the name, age of our directors and executive
      officers.





**Name**
            **Age**
            **Position
                Held**Arthur
                L. Smith
            42
            President,
                Chief Executive Officer and DirectorRuben
                Caraveo
            39
            Sr.
                Vice President, Operations and TechnologyAntonio
                Estrada
            33
            Corporate
                ControllerJohn
                R. Fleming
            53
            Director,
                Interim Executive Chairman of the BoardMurray
                R. Nye
            53
            Director





*Arthur
      L. Smith* has
      served as our Chief Executive Officer and Director since May 2003. Mr. Smith
      also served as the President of ATSI de Mexico S.A de C.V. from August 2002
      to
      April 2003, as our Chief Executive Officer and a Director from June 1996 to
      July
      2002 and as our President since our formation in June 1996 to July 1998. Mr.
      Smith also served as President, Chief Operating Officer and a director of
      ATSI-Canada since its formation in May 1994. From December 1993 until May 1994,
      Mr. Smith served in the same positions with Latcomm International Inc., which
      amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May 1994.
      From
      June 1989 to December 1993, Mr. Smith was employed as director of international
      sales by GeoComm Partners, a satellite-based telecommunications company located
      in San Antonio, providing telecommunications services to Latin America. Mr.
      Smith has over 18 years’ experience in the telecommunications industry.




45




*Ruben
      R. Caraveo* has
      served as our Sr. Vice President of Operations and Technology since August
      2006,
      and is also the Chief Operations Officer for our wholly-owned subsidiary
      Digerati Networks, Inc. Mr. Caraveo also served as Vice President of Sales
      and
      Operations from May 2003 to July 2006. Mr. Caraveo is responsible
      for the daily operations of Digerati Networks, Inc., Network
      Engineering, MIS, and the delivery of VoIP Carrier Services. Prior to joining
      ATSI, Mr. Caraveo served as Vice President of Operations and Engineering at
      Vycera Communications where he was responsible for overseeing all daily
      operations, including Network Operations, Engineering, Marketing, and the
      Network Trouble Reporting and Resolution departments. His prior experience
      also
      includes positions with Worldtel Interactive, Frontier, and WorldCom. Mr.
      Caraveo has more than 18 years' telecommunications industry experience,
      specializing in the areas of Carrier Sales, Network Operations, Engineering,
      Data and Systems Analysis, Product Marketing, and Systems Development. Mr.
      Caraveo attended California State University, Northridge, School of
      Engineering.




*Antonio
      Estrada* has ** served
      as
      our Corporate Controller since May 2003. From January 2002 through January
      2003,
      Mr. Estrada served as our Director of International Accounting and Treasurer.
      From January 2001 to January 2002, Mr. Estrada served in various roles within
      ATSI, including International Accounting Manager and general Accountant. Prior
      to joining ATSI in 1999 he served as a Senior Accountant for the Epilepsy
      Association of San Antonio and South Texas. Mr. Estrada has more than 10 years’
experience in the telecommunications industry, financial reporting, treasury
      management, internal audit and accounting. Mr. Estrada graduated from the
      University of Texas at San Antonio, with a Bachelors of Business Administration,
      with a concentration in Accounting.





*John
      R. Fleming* has
      served as our Non-executive Chairman of the Board since August 2002 and as
      one of our Directors since January 2001. Mr. Fleming is the principal and
      founder of Vision Corporation, an early-stage investment company that focuses
      on
      communications technologies, service and hardware.  Mr. Fleming also
      owns Secure Media Solutions, Inc. , which specializes
      in digital medium transfer technologies for both the film and
      television industries.  Prior to forming Vision Corporation, Mr.
      Fleming served as President, International of IXC Communications, Inc. from
      April 1998 to December 1999. Immediately prior to that he served as IXC’s
      President of Emerging Markets from December 1997, as Executive Vice President
      of
      IXC from March 1996 through November 1997 and as Senior Vice President of IXC
      from October 1994 through March 1996. He served as Vice President of Sales
      and
      Marketing of IXC from its formation in July 1992 until October 1994. Prior
      to
      that, Mr. Fleming served as Director of Business Development and Director of
      Carrier Sales of CTI from 1986 to March 1990 and as Vice President of Marketing
      and Sales of CTI from March 1990 to July 1992. Mr. Fleming was a Branch Manager
      for Satellite Business Systems from 1983 to 1986.




*Murray
      R. Nye* has
      served as one of our Directors since its formation in June 1996. Mr. Nye also
      served as of the Chief Executive Officer and a director of ATSI-Canada from
      its
      formation in May 1994. From December 1993 until May 1994, Mr. Nye served in
      the
      same positions with Latcomm International Inc., which company amalgamated with
      Willingdon Resources Ltd. to form ATSI-Canada in May 1994. From 1992 to 1995,
      Mr. Nye served as President of Kirriemuir Oil & Gas Ltd. From 1989 until
      1992, Mr. Nye was self-employed as a consultant and Mr. Nye is again currently
      self-employed as a consultant. Mr. Nye serves as a director of D.M.I.
      Technologies, Inc., an Alberta Stock Exchange-traded company.





**Audit
      Committee and Audit Committee Financial Expert**





The
      Company does not presently have an audit or compensation committee or other
      board committee performing equivalent functions. The Company’s Board of
      Directors performs all functions of the audit committee and compensation
      committee. The Company does not have an audit committee financial expert because
      none of its current directors have the necessary training or experience to
      qualify as a financial expert.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
      directors and executive officers and persons who own more than 10% of a
      registered class of the Company’s equity securities to file various reports with
      the Securities and Exchange Commission concerning their holdings of, and
      transactions in, securities of the Company. Copies of these filings must be
      furnished to the Company. Based on a review of the copies of such forms
      furnished to the Company and other information, the Company believes that,
      during the fiscal year ended July 31, 2007, the following individuals failed
      to
      report transactions in the Company’s equity securities or reported transactions
      late:




46




**Name
                and Position**
            
            **Number
                of Transactions Not Reported**
            
            **Number
                of Reports Filed Late**
            
            **Number
                of Transactions Reported Late**Arthur
                L. Smith, President and Director
            
            
            0
            
            
            0
            
            
            0Ruben
                R. Caraveo, Sr. Vice President
            
            
            15
            
            
            15
            
            
            15Antonio
                Estrada, Controller
            
            
            0
            
            
            0
            
            
            0John
                R. Fleming
            
            
            5
            
            
            0
            
            
            0Murray
                R. Nye
            
            
            5
            
            
            0
            
            
            0





**Code
      of Ethics**





ATSI
      Communications, Inc. adopted an
      Executive Code of Ethics that applies to the Chief Executive Officer, Chief
      Financial Officer, Controller and other members of our management team. The
      Executive Code of Ethics may be viewed on our Website, www.atsi.net .
      Upon
      request, a copy of the Executive Code of Ethics will be provided without charge
      upon written request to ATSI Communications, Inc., 3201 Cherry Ridge, Building
      C, Suite 300, San Antonio, Texas 78230.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION.**





**COMPENSATION
      DISCUSSION AND ANALYSIS**





*Compensation
      Objectives*





Our
      compensation programs are designed to meet the following objectives:





-
            Offer
                compensation opportunities that attract highly qualified executives,
                reward outstanding initiative and achievement, and retain the leadership
                and skills necessary to build long-term shareholder value;





-
            Emphasize
                pay-for-performance by maintaining a portion of executives’ total
                compensation at risk, tied to both our annual and long-term financial
                performance and the creation of shareholder value; and





-
            Further
                our short and long-term strategic goals and values by aligning executive
                officer compensation with business objectives and individual performance.





Our
      Board
      of Directors believes that an executive’s compensation should be tied not just
      to how the individual executive performs, but also to how well our management
      team performs against both financial and non-financial goals.





*Compensation
      Elements*





Our
      executive compensation program is intended to be simple and clear, and consists
      of the following elements (depending on individual performance):





-
            Base
                salary;


-
            Annual
                performance-based cash bonus;


-
            Long-term
                incentives in the form of stock options;
                and


-
            Benefits
                that are offered to executives on the same basis as our non-executive
                employees





**Role
      of Management in Determining Compensation Decisions**





At
      the
      request of our Board of Directors, our management makes recommendations to
      our
      Board of Directors relating to executive compensation program design, specific
      compensation amounts, bonus targets, incentive plan structure and other
      executive compensation related matters, including with respect to such matters
      pertaining to our Chief Executive Officer. Our Board of Directors maintains
      decision-making authority with respect to these executive compensation matters.




47




Our
      Board
      of Directors reviews the recommendations of our management with respect to
      total
      executive compensation and each element of compensation when making pay
      decisions. In allocating compensation among compensation elements, we emphasize
      incentive, not fixed compensation to ensure that executives only receive
      superior pay for superior results. We equally value short- and long-term
      compensation because both short- and long-term results are critical to our
      success.





*Compensation
      Elements*




Our
      executive compensation program has three primary integrated components: base
      salary, annual incentive awards, and long term-incentive awards in the form
      of
      stock options. In addition, our compensation program is comprised of various
      benefits provided to all employees, including life insurance, health insurance
      and other customary benefits. The objectives and details of why each element
      of
      compensation is paid are described below.





*Base
      Salary*





Our
      objective for paying base salaries to executives is to reward them for
      performing the core responsibilities of their positions and to provide a level
      of security with respect to a portion of their compensation. Our Compensation
      Committee considers a number of factors when setting base salaries for
      executives, including the following:





-
            Existing
                salary levels;


-
            Competitive
                pay practices;


-
            Individual
                and corporate performance; and


-
            Internal
                equity among our executives, taking into consideration their relative
                contributions to our success.





*Annual
      Incentive Awards*





Our
      objective for offering annual cash bonus awards to our named executive officers
      is to motivate them to achieve our financial goals, while taking into account
      their individual goals and responsibilities. Our Board of Directors implemented
      our 2007 executive officer bonus plan, effective as of the first quarter of
      fiscal 2007 pursuant to which our named executive officers became eligible
      to
      receive cash bonus awards calculated and paid on a quarterly basis. The amounts
      payable under our 2007 executive officer bonus plan were to be calculated based
      on our revenue, margin, cash balance and net income for 2007 against the 2007
      financial plan approved by our Board of Directors.





Under
      our
      2007 executive officer bonus plan, we assigned a specific bonus target to each
      executive for performance in 2007. Our Board of Directors designed these bonus
      targets were designed to allow for additional compensation in the event we
      meet
      our targets set fort under the financial plan approved by our Board of
      Directors. Cash bonus targets were determined based on individual responsibility
      levels and performance expectations and would be payable in a proportionate
      amount representing the percentage of our targeted corporate net income goal
      pursuant to our 2007 financial plan. After discussion and deliberation, our
      Board of Directors ultimately approved
      our management’s recommendations as detailed below:




**2007 Target****Name**
              
              **Title**
              
              **Bonus**Arthur
                  L. Smith
              
              
              President,
                  Chief Executive Officer and Director
              
              $
              75,000.00Ruben
                  Caraveo
              
              
              Sr.
                  Vice President, Operations and Technology
              
              $
              71,500.00Antonio
                  Estrada
              
              
              Corporate
                  Controller
              
              $
              45,000.00




48




On
      June
      19, 2006, our Board of Directors approved the 2007 annual bonus payouts and
      2007
      base salaries and bonus targets.





Payouts
      under our 2007 executive officer bonus plan are dependent on our achievement
      towards our revenue; margin, cash balance and net income goal such that 100%
      of
      the bonus target amounts would be paid upon achievement of 100% of the net
      income goal. Above and below target performance methodologies were also
      established.





We
      consider the specific net income goals in our 2007 financial plan to be our
      confidential information, the disclosure of which would cause us to experience
      financial harm. We believe that tying annual bonus payments for each of our
      named executive officers to the achievement of challenging revenue, margin,
      cash
      balance and net income goals best aligns the interest of our executives with
      the
      interests of our shareholders and promotes a unity of purpose among our key
      business leaders. Regardless of our actual financial performance under our
      2007
      financial plan, our Board of Directors retained the discretion to adjust bonuses
      payable under our 2007 executive officer bonus plan up or down as it deemed
      appropriate.





The
      following table sets forth the compensation paid to the Chief Executive Officer
      and all of the other Named Executive Officers as of July 31, 2007.





**SUMMARY
      COMPENSATION TABLE**





**Name
                    and Principal Position**
                **Year**
                **Salary**
                  **($)**
                **Bonus**
                  **($)**
                **Stock
                    Awards**
                  **($)**
                **Option
                    Awards**
                  **($)**
                **All
                    Other Compensation**
                  **($)**
                **Total**
                  **($)**Arthur
                    L. Smith
                  CEO
                    & President
                2007
                $150,000
                $42,187(3)
                $47,250(1)
                $63,000(1)
                $22,154(2)
                $324,591Ruben
                    Caraveo
                  Senior
                    Vice President
                2007
                $130,000
                $48,750(3)
                $36,750(1)
                $52,500(1)
                $19,904(2)
                $287,904Antonio
                    Estrada
                  Corporate
                    Controller
                2007
                $90,000
                $28,686(3)
                $36,750(1)
                $52,500(1)
                $15,216(2)
                $223,152





(1)
            A
                description of the assumptions made in valuation of options granted
                can be
                found in Note 9 to the Financial Statements, which is deemed to be
                a part
                of this Item.





(2)
            All
                other compensation consists of contributions by the Company into
                the
                Non-Standardized Profit Sharing
                Plan.





(3)
            This
                represents bonus paid for the first three quarters of fiscal 2007,
                the
                2007 4thquarter bonuses will be paid during the 1stquarter of fiscal 2008.





The
      following table sets forth information relating to unexercised options held
      by,
      and unvested stock awards to, each of the Named Executive Officers as of July
      31, 2007.




49




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**


**Option
                  Awards**
              **Stock
                  Awards****Number
                  of Securities Underlying Unexercised Options**
              **Number
                  of Securities Underlying Unexercised Options**
              
              **Equity
                  Incentive Plan Awards:**
              **Option
                  Exercise Price**
              
              **Number
                  of Shares or Units of Stock That Have Not Vested**
              **Market
                  Value of Shares or Units of Stock That Have Not
                  Vested****Name**
              **(#)**Exercisable
              **(#)**Unexercisable
              
              **Number
                    of Securities Underlying Unexercised Unearned Options**(#)
              **($)**
              **Option
                    Expiration Date**
              **(#)**
              **($)**Arthur
                  L. Smith
              175,000
              350,000
              (1)
              -
              $
                  0.16
              9/29/2015
              -
              -370,666
              49,334
              (2)
              -
              $
                  0.16
              10/3/20015
              -
              -100,000
              200,000
              (3)
              -
              $
                  0.21
              9/25/2016
              -
              -Ruben
                  Caraveo
              158,333
              316,667
              (1)
              -
              $
                  0.16
              9/29/2015
              -
              -330,332
              44,668
              (2)
              -
              $
                  0.16
              10/3/20015
              -
              -83,333
              166,667
              (3)
              -
              $
                  0.21
              9/25/2016
              -
              -Antonio
                  Estrada
              158,333
              316,667
              (1)
              -
              $
                  0.16
              9/29/2015
              -
              -302,332
              44,668
              (2)
              -
              $
                  0.16
              10/3/20015
              -
              -83,333
              166,667
              (3)
              -
              $
                  0.21
              9/25/2016
              -
              -





(1)
            50%
                of the options vest on September 29, 2007 and 50% on September 29,
                2008


(2)
            Options
                vest on October 3, 2007


(3)
            50%
                of the options vest on September 25, 2007 and 50% on September 25,
                2008





**Option
      Exercises**





No
      options to purchase our common stock were exercised by our executive officers
      named in the Summary Compensation Table above during the fiscal year ended
      July
      31, 2007





**Non-Standardized
      Profit Sharing Plan**





We
      currently provide a Non-Standardized Profit Sharing Plan; the Board of Directors
      approved the plan on September 15, 2006. Under the plan our employees qualified
      to participate in the plan after one year of employment. Contribution under
      the
      plan by the Company is based on 25% of the annual base salary of each eligible
      employee. Contributions under the plan are fully vested upon funding.





**Nonqualified
      Deferred Compensation**





We
      do not
      have any non-qualified defined contribution plans or other deferred compensation
      plans.




50


**Compensation
      of Directors**





The
      following table sets forth information relating to compensation of directors
      who
      are not also executive officers during the year ended July 31,
      2007.





**Name**
            **Fees
                Earned or Paid in Cash**
              **($)**
            **Stock
                Awards**
              **($)**
            **Option
                Awards**
              **($)**
            **Nonqualified
                Deferred Compensation Earnings**
              **($)**
            **All
                Other Compensation**
              **($)**
            **Total**
              **($)**John
                Fleming
            
            $31,500(1)
            $42,000(1)
            
            
            $73,500Murray
                Nye
            
            $31,500(2)
            $42,000(2)
            
            
            $73,500





(1)
            As
                of July 31, 2007, Mr. Fleming had options to purchase an aggregate
                of
                825,000 shares of common stock and 150,000 shares of common stock
                issued
                pursuant to Stock awards. A description of the assumptions made in
                valuation of options granted can be found in Note 9 to the Financial
                Statements, which is deemed to be a part of this
                Item.


(2)
            As
                of July 31, 2007, Mr. Nye had options to purchase an aggregate of
                825,000
                shares of common stock and 150,000 shares of common stock issued
                pursuant
                to Stock awards. A description of the assumptions made in valuation
                of
                options granted can be found in Note 9 to the Financial Statements,
                which
                is deemed to be a part of this
                Item.




Each
      Director that is not an officer of the Company receives $2,000 for each meeting
      of the Board attended in person and $500 for each meeting attended by telephone.
      In addition to the foregoing, each Director is reimbursed the reasonable
      out-of-pocket expenses in connection with their travel to an attendance at
      meetings of the Board of Directors.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT** **





Information
      regarding securities authorized to be issued under equity compensation plans
      is
      set forth under Item 4 of this Annual Report on Form 10-KSB.





The
      following table lists the beneficial ownership of shares of our Common Stock
      (i)
      each person know to the Company to own more than 5% of the outstanding voting
      securities issued by the Company, (ii) each director and nominee, (iii) the
      Named Executive Officers, and (iv) all directors and officers as a group.
      Information with respect to officers, directors and their families as of July
      31, 2007 and is based on the books and records of the Company and information
      obtained from each individual. Information with respect to other stockholders
      is
      based upon the Schedule 13D or Schedule 13G filed by such stockholders with
      the
      Securities and Exchange Commission. Unless otherwise stated, the business
      address of each individual or group is the same as the address of the Company's
      principal executive office and all securities are beneficially owned solely
      by
      the person indicated *.*




**%
                  OF**
              **TOTAL
                  VOTING****NAME
                  OF INDIVIDUAL OR GROUP**
              **COMMON
                  STOCK**
              **CLASS
                  (1)**
              **INTEREST**Arthur
                  L. Smith
              1,790,819
                  (2)
              4.3%
              1,790,819
                  (2)President,
                  Chief Executive OfficerDirectorRuben
                  R. Caraveo
              1,118,446
                  (3)
              2.7%
              1,118,446
                  (3)Vice
                  President, Sales and OperationsAntonio
                  Estrada
              1,133,125
                  (4)
              2.7%
              1,133,125
                  (4)Corporate
                  ControllerJohn
                  R. Fleming
              1,083,424
                  (5)
              2.6%
              1,083,424
                  (5)DirectorMurray
                  R. Nye
              1,083,424
                  (6)
              2.6%
              1,083,424
                  (6)Director**ALL
                  OFFICERS AND****DIRECTORS
                  AS A GROUP**
              6,209,238
                  (7)
              15.0%
              6,209,238
                  (7)


(1)
              Based
                  upon 41,357,180 shares of common stock outstanding as of July 31,
                  2007.
                  Any shares represented by options exercisable within 60 days after
                  July
                  31, 2007 are treated as being outstanding for the purpose of computing
                  the
                  percentage of the class for such person but not
                  otherwise.


(2)
            Includes
                645,667 shares subject to options exercisable at July 31,
                2007.


(3)
            Includes
                572,000 shares subject to options exercisable at July 31,
                2007.


(4)
            Includes
                572,000 shares subject to options exercisable at July 31,
                2007.


(5)
            Includes
                425,000 shares subject to options exercisable at July 31,
                2007.


(6)
            Includes
                425,000 shares subject to options exercisable at July 31,
                2007.


(7)
            Includes
                2,611,667 shares subject to options exercisable at July 31,
                2007.




51


**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE.**





In
      January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
      Communications, Inc., entered into a joint management and marketing agreement
      with Fiesta Communications, Inc. Under the joint management and marketing
      agreement ATSI provides accounting and administrative support for a monthly
      fee
      of $2,500. As of July 31, 2007, Fiesta owed ATSI $30,000 in management fees.
      ATSI’s CEO and President, Arthur L Smith, is a 20% shareholder of Fiesta.





ATSI
      has
      evaluated its relationship with Fiesta and determined that Fiesta is not a
      variable interest entity under FIN 46(R) and also concluded that it is not
      the
      primary beneficiary as defined by FIN 46(R) and, as a result, ATSI is not
      required to consolidate Fiesta at its formation.





**ITEM
      13.**  **EXHIBITS
      AND REPORTS ON FORM 8-K**





The
      following documents are exhibits to this report.





2.1
            Plan
                and Agreement of Merger of ATSI Communications, Inc. with and into
                ATSI
                Merger Corporation, dated as of March 24, 2004.*(Exhibit
                2.1 to Form 8-K of ATSI filed on May 24,
                2004)*




3.1
            Articles
                of Incorporation of ATSI Merger Corporation.*(Exhibit
                3.1 to Form 8-K of ATSI filed on May 24,
                2004)*





3.2
            Bylaws
                of ATSI Merger Corporation.*(Exhibit
                3.2 to Form 8-K of ATSI filed on May 24,
                2004)*





3.3
            Articles
                of Merger of ATSI Communications, Inc. with and into ATSI Merger
                Corporation.*(Exhibit
                3.3 to Form 8-K of ATSI filed on May 24,
                2004)*





4.1
            Securities
                Purchase Agreement between The Shaar Fund Ltd. and ATSI dated July
                2, 1999*(Exhibit
                10.33 to Registration statement on Form S-3 (No. 333-84115) filed
                August
                18, 1999)*





4.2
            Common
                Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
                July 2,
                1999*(Exhibit
                10.35 to Registration statement on Form S-3 (No. 333-84115) filed
                August
                18, 1999)*




52




4.3
            Registration
                Rights Agreement between The Shaar Fund Ltd. and ATSI dated July
                2, 1999*(Exhibit
                10.36 to Registration statement on Form S-3 (No. 333-84115) filed
                August
                18, 1999)*





4.4
            Securities
                Purchase Agreement between The Shaar Fund Ltd. and ATSI dated September
                24, 1999*(Exhibit
                10.39 to Registration statement on Form S-3 (No. 333-84115) filed
                October
                26, 1999)*





4.5
            Common
                Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
                September 24, 1999*(Exhibit
                10.41 to Registration statement on Form S-3 (No. 333-84115) filed
                October
                26, 1999)*





4.6
            Registration
                Rights Agreement between The Shaar Fund Ltd. and ATSI dated September
                24,
                1999*(Exhibit
                10.42 to Registration statement on Form S-3 (No. 333-84115) filed
                October
                26, 1999)*





4.7
                  Formof
                      Modification of Convertible Note*(Exhibit
                      4.6 to Registration statement on Form S-3 (No. 333-35846) filed
                      April 28,
                      2000)*





4.8
            Securities
                Purchase Agreement between The Shaar Fund Ltd. and ATSI dated February
                22,
                2000*(Exhibit
                4.5 to Registration statement on Form S-3 (No. 333-89683) filed April
                13,
                2000)*





4.9
            Common
                Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
                February 22, 2000*(Exhibit
                4.7 to Registration statement on Form S-3 (No. 333-89683) filed April
                13,
                2000)*





4.10
            Registration
                Rights Agreement between The Shaar Fund Ltd. and ATSI dated February
                22,
                2000*(Exhibit 4.9 to Registration statement on Form S-3 (No. 333-89683)
                filed
                April 13, 2000)*





4.11
            Convertible
                Debenture Agreement*(Exhibit
                4.37 to Annual Report on Form 10-K for the year ended July 31, 2003
                filed
                November 12, 2003)*





4.12
            Secured
                Promissory Note and Security Agreement dated November 4, 2005 between
                ATSI
                Communications, Inc. and CSI Business Finance, Inc.*(Exhibit
                4.2 to form 10-QSB for the period Ended October 31, 2005 filed December
                15, 2005)*





4.18
            Convertible
                Debenture Agreement*(Exhibit
                4.18 to Annual Report on Form 10-KSB for the year ended July 31,
                2006
                filed October 30, 2006)**





4.19
            Promissory
                Note dated May 5, 2006 between Telefamilia Communications, Inc. and
                Fiesta
                Communications, Inc.*(Exhibit
                4.19 to Annual Report on Form 10-KSB for the year ended July 31,
                2006
                filed October 30, 2006)**




4.20
            Note
                Receivable dated July 13, 2007 between ATSI Communications, Inc.
                andNetSapiens,
                Inc.***





10.1
            Stock
                Purchase Agreement with Telemarketing (Sale of ATSICOM)*(Exhibit
                10.1 to Form 8-K filed June 16, 2003)***





10.2
            Interconnection
                Agreement TELMEX and ATSICOM (English summary) (*Exhibit
                10.26 to Annual Report on Form 10-K for year ended July 31, 2003
                filed
                November 12, 2003)*





10.3
            Interconnection
                Agreement TELMEX and ATSICOM (English Translation)*(Exhibit
                10.27 to Amended Annual Report on Form 10-K/A for the year ended
                July 31,
                2003 filed March 2, 2004)*





10.4
            Stock
                Purchase Agreement dated October 15, 2005 between ATSI Communications,
                Inc. and Alejandro Sanchez Guzman (Sale of ATSIMex Personal S.A de
                C.V.)*(Exhibit 10.2 to quarterly report Form 10QSB for the quarter ended
                October
                31, 2005 filed December 15,
                2005)*





10.5
            Factoring
                Agreement dated February 20, 2006 between ATSI Communications, Inc.
                and
                CSI Business Finance, Inc.*(Exhibit
                10.2 to quarterly report Form 10QSB for the quarter ended January
                31, 2006
                filed March 23, 2006)*




53




10.6
            Agreement
                of Compromise, Settlement and Release dated May 27, 2006 between
                ATSI
                Communications, Inc. and Richard C. Benkendorf.*(Exhibit
                10.2 to quarterly report Form 10QSB for the quarter ended April 30,
                2006
                filed June 13, 2006)*





10.7
            Confidential
                Settlement Agreement dated August 27, 2007 between ATSI Communications,
                Inc. and RGC International Investors,
                LDC.*





21
            Subsidiaries
                of ATSI (*Exhibit
                21 to Annual Report on Form 10-K for year ended July 31, 2004 filed
                November 9, 2004)*





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.***





99.1
            FCC
                Radio Station Authorization - C Band*(Exhibit
                10.10 to Registration statement on Form S-4 (No. 333-05557) filed
                June 7,
                1996)*





99.2
            FCC
                Radio Station Authorization - Ku Band*(Exhibit
                10.11 to Registration statement on Form 10 (No. 333-05557) filed
                June 7,
                1996)*





99.3
            Section
                214 Certification from FCC (*Exhibit
                10.12 to Registration statement on Form 10 (No. 333-05557) filed
                June 7,
                1996)*





99.4
            Comercializadora
                License (Payphone License) issued to ATSI-Mexico*(Exhibit
                10.24 to Registration statement on Form 10 (No. 000-23007) filed
                August
                22, 1997)*





99.5
            Network
                Resale License issued to ATSI-Mexico*(Exhibit
                10.25 to Registration statement on Form 10 (No. 000-23007) filed
                August
                22, 1997)*





99.6
            Shared
                Teleport License issued to Sinfra (*Exhibit
                99.7 to Amended Annual Report on Form 10-K for year ended July 31,
                1999
                filed April 14, 2000)*





99.7
            Packet
                Switching Network License issued to SINFRA*(Exhibit
                10.26 to Registration statement on Form 10 (No. 000-23007) filed
                August
                22, 1997)*





99.8
            Value-Added
                Service License issued to SINFRA*(Exhibit 99.9 to Amended Annual Report on Form 10-K for year ended
                July
                31, 1999 filed April 13, 2000)*





99.9
            Public
                Utility Commission of Texas ("PUC") approval of transfer of the Service
                Provider Certificate of Authority ("SPCOA") from Hinotel, Inc. to
                ATSI's
                subsidiary, Telefamilia Communications, Inc. Dated October 25,
                2004.*(Exhibit 99.1 on Form 10-QSB for the quarter ended October 31, 2004
                filed
                December 15, 2004)*




54


**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.**





The
      Company paid the following fees to its principal independent accountants for
      services during the fiscal years ended July 31, 2007 and July 31,
      2006.





Year
                Ended July 31,Description
                of Fees
            
            2007
            
            2006Audit
                Fees
            
            $
            31,500
            
            $
            32,000Other
                Fees
            
            
            26,140
            
            
            24,500Tax
                Fees
            
            
            -0-
            
            
            -0-





The
      Audit
      Committee has instructed Malone and Bailey, PC that any fees for non-audit
      services must be approved before being incurred.





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**ATSI
                COMMUNICATIONS, INC.**Date:****October
                17, 2007
            By:
            /s/
                Arthur L. SmithArthur
              L. Smith
              President
                  and
                  Chief
                    Executive Officer





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





**Signature**
            **Title**
            **Date**/s/
                Arthur L. Smith
            Principal
                Executive Officer and Director
            October
                17, 2007Arthur
                L. Smith/s/
                Antonio Estrada
            Principal
                Accounting Officer
            October
                17, 2007Antonio
                Estrada
            Principal
                Finance Officer/s/
                John R. Fleming
            Director
            October
                17, 2007John
                R. Fleming/s/
                Murray R. Nye
            Director
            October
                17, 2007Murray
                R. Nye





55