**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-QSB**





**(Mark
      One** )


**x**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the quarterly period ended April 30, 2006  **o**
            **TRANSITION REPORT PURSUANT TO SECTION 13
              OR 15(d)
              OF THE SECURITIES EXCHANGE ACT OF 1934**For
              the transition period from _____________ to
              _________________







Commission
      File Number 001-15687





**ATSI
      COMMUNICATIONS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)





**Nevada**
              (State
                or Other Jurisdiction of Incorporation or Organization)
            
            **74-2849995**
              (IRS
                Employer
              Identification
                No.)**8600
                Wurzbach, Suite 700W**
              **San
                Antonio, Texas 78240**
              (Address
                of Principal Executive Offices)**(210)
                614-7240**
              (Issuer’s
                Telephone Number, Including Area
                Code)





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. Yes x No o





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





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:





**Class**
            **Outstanding
                As Of June 12, 2006**Common
                Stock, $.001 par
            15,258,331





Transitional
      Small Business Disclosure Format: Yes o No x











**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE QUARTER ENDED APRIL 30, 2006**





**INDEX**








**PART
                  I. FINANCIAL INFORMATION**
              PageItem
                  1. Financial StatementsConsolidated
                  Balance Sheets as of April 30, 2006 and July 31, 2005
              1Consolidated
                  Statements of Operations for the Three and Nine MonthsEnded
                  April 30, 2006 and 2005
              2Consolidated
                  Statements of Comprehensive Loss for the Three and Nine MonthsEnded
                  April 30, 2006 and 2005
              3Consolidated
                  Statements of Cash Flows for the Nine Months Ended April 30, 2006
                  and 2005
              4Notes
                  to Consolidated Financial Statements
              5Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              9Item
                  3. Controls and Procedures
              18**PART
                  II. OTHER INFORMATION**Item
                  1. Legal Proceedings
              18Item
                  2. Unregistered Sales of Equity Securities and use of
                  proceeds
              19Item
                  3. Default upon senior securities
              19Item
                  6. Exhibits
              19








**PART
                  1. FINANCIAL INFORMATION****ITEM
                  1. FINANCIAL STATEMENTS**ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETS(in
                  thousands, except share information)April
                  30,
              
              July
                  31,2006
              
              2005(unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              105
              
              $
              29Accounts
                  receivable
              
              
              404
              
              
              170Prepaid
                  & other current assets
              
              
              21
              
              
              44Total
                  current assets
              
              
              530
              
              
              243Property
                  and Equipment
              
              
              284
              
              
              228Less
                  - accumulated depreciation of $161,171 and $89,566,
                  respectively
              
              
              (161
              )
              
              (90
              )Net
                  property and equipment
              
              
              123
              
              
              138Total
                  assets
              
              $
              653
              
              $
              381LIABILITIES
                  AND STOCKHOLDERS' DEFICITCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              803
              
              $
              606Accounts
                  payable, CSI Business Finance
              
              
              150
              
              
              -Accrued
                  liabilities
              
              
              915
              
              
              1,033Current
                  portion of obligation under capital leases
              
              
              3
              
              
              3Notes
                  payable
              
              
              50
              
              
              -Notes
                  payable, related party
              
              
              16
              
              
              16Notes
                  payable, Franklin, Cardwell & Jones (see note 4)
              
              
              -
              
              
              77Convertible
                  debentures
              
              
              234
              
              
              234Series
                  D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
                  issued
                  and outstanding
              
              
              1,215
              
              
              1,182Series
                  E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
                  issued and outstanding
              
              
              1,802
              
              
              1,749Derivative
                  financial instrument liabilities (see note 7)
              
              
              2
              
              
              24Liabilities
                  from discontinued operations, net of assets
              
              
              -
              
              
              1,152Total
                  current liabilities
              
              
              5,190
              
              
              6,076LONG-TERM
                  LIABILITIES:Notes
                  payable
              
              
              500
              
              
              500Obligation
                  under capital leases, less current portion
              
              
              7
              
              
              9Other
              
              
              5
              
              
              8Total
                  long-term liabilities
              
              
              512
              
              
              517Total
                  liabilities
              
              
              5,702
              
              
              6,593STOCKHOLDERS'
                  DEFICIT:Series
                  A Cumulative Convertible Preferred Stock, $0.001, 50,000 shares
                  authorized, 2,750 sharesissued
                  and outstanding
              
              
              -
              
              
              -Series
                  H Convertible Preferred Stock, $0.001, 16,000,000 shares authorized,
                  12,346,489 and 13,912,372 sharesissued
                  and outstanding, respectively
              
              
              12
              
              
              14Common
                  stock, $0.001, 150,000,000 shares authorized, 15,206,653 and 10,397,222
                  sharesissued
                  and outstanding, respectively
              
              
              15
              
              
              10Additional
                  paid in capital
              
              
              67,106
              
              
              66,458Accumulated
                  deficit
              
              
              (72,183
              )
              
              (73,196
              )Other
                  comprehensive income
              
              
              1
              
              
              502Total
                  stockholders' deficit
              
              
              (5,049
              )
              
              (6,212
              )Total
                  liabilities and stockholders' deficit
              
              $
              653
              
              $
              381See
                  accompanying summary of accounting policies and notes to financial
                  statements.
 
 1
  ATSI
                  COMMUNICATIONS, INC.AND
                  SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF OPERATIONS(In
                  thousands, except per share amounts)(unaudited)
  Three
                  months ended April 30,
              
              
              Nine
                  months ended April 30,2006
              
              
              2005
              
              
              2006
              
              
              2005OPERATING
                  REVENUES:Carrier
                  services
              
              $
              4,086
              
              $
              1,727
              
              $
              9,344
              
              $
              3,943Network
                  services
              
              
              5
              
              
              70
              
              
              17
              
              
              217Total
                  operating revenues
              
              
              4,091
              
              
              1,797
              
              
              9,361
              
              
              4,160OPERATING
                  EXPENSES:Cost
                  of services (exclusive of depreciationand
                  amortization, shown below)
              
              
              3,899
              
              
              1,660
              
              
              8,908
              
              
              3,854Selling,
                  general and administrative expense (exclusive of legal and professional
                  fees,non
                  cash stock compensation to employees and warrants for services,
                  shown
                  below)
              
              
              184
              
              
              139
              
              
              497
              
              
              314Legal
                  and professional fees
              
              
              72
              
              
              41
              
              
              153
              
              
              365Non-cash
                  issuance of common stock and warrants for services
              
              
              25
              
              
              19
              
              
              151
              
              
              533Non-cash
                  stock-based compensation, employees
              
              
              -
              
              
              -
              
              
              180
              
              
              474Bad
                  debt
              
              
              -
              
              
              -
              
              
              -
              
              
              4Depreciation
                  and amortization
              
              
              23
              
              
              32
              
              
              72
              
              
              79Total
                  operating expenses
              
              
              4,203
              
              
              1,891
              
              
              9,961
              
              
              5,623OPERATING
                  (LOSS)
              
              
              (112
              )
              
              (94
              )
              
              (600
              )
              
              (1,463
              )OTHER
                  INCOME (EXPENSE):Other
                  income (expense)
              
              
              -
              
              
              9
              
              
              -
              
              
              13Gain
                  on disposal of investment
              
              
              -
              
              
              12,104
              
              
              -
              
              
              12,104Gain
                  (loss) on derivative instrument liabilities
              
              
              88
              
              
              135
              
              
              (8
              )
              
              (317
              )Debt
                  forgiveness income
              
              
              11
              
              
              -
              
              
              50
              
              
              460Interest
                  expense
              
              
              (26
              )
              
              11
              
              
              (81
              )
              
              (68
              )Total
                  other income (expense), net
              
              
              73
              
              
              12,259
              
              
              (39
              )
              
              12,192NET
                  (INCOME) LOSS FROM CONTINUING OPERATIONS
              
              
              (39
              )
              
              12,165
              
              
              (639
              )
              
              10,729DISCONTINUED
                  OPERATIONS (see note 6)Gain
                  on disposal of discontinued operations
              
              
              -
              
              
              -
              
              
              1,652
              
              
              -NET
                  INCOME FROM DISCONTINUED OPERATIONS
              
              
              -
              
              
              -
              
              
              1,652
              
              
              -NET
                  INCOME (LOSS):
              
              
              ($39
              )
              $
              12,165
              
              $
              1,013
              
              $
              10,729LESS:
                  PREFERRED DIVIDENDS
              
              
              (41
              )
              
              (38
              )
              
              (136
              )
              
              (114
              )NET
                  INCOME (LOSS) TO COMMON STOCKHOLDERS
              
              
              ($80
              )
              $
              12,127
              
              $
              877
              
              $
              10,615BASIC
                  INCOME (LOSS) PER SHARE
              
              
              ($0.01
              )
              $
              1.39
              
              $
              0.07
              
              $
              1.69From
                  continuing operations
              
              
              ($0.01
              )
              $
              1.39
              
              
              ($0.06
              )
              $
              1.69From
                  discontinued operations
              
              $
              0.00
              
              $
              0.00
              
              $
              0.13
              
              $
              0.00DILUTED
                  INCOME (LOSS) PER SHARE
              
              
              ($0.01
              )
              $
              0.44
              
              $
              0.04
              
              $
              0.43From
                  continuing operations
              
              
              ($0.01
              )
              $
              0.44
              
              
              ($0.02
              )
              $
              0.43From
                  discontinued operations
              
              $
              0.00
              
              $
              0.00
              
              $
              0.06
              
              $
              0.00WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING
              
              
              14,819,277
              
              
              8,719,307
              
              
              12,876,351
              
              
              6,272,332
  See
                  accompanying summary of accounting policies and notes to financial
                  statements.
 
 2
  ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In
                  thousands)(unaudited)Three
                  months ended April 30,
              
              Nine
                  months ended April 30,2006
              
              
              2005
              
              
              2006
              
              
              2005Net
                  income (loss) to common stockholders
              
              
              ($80
              )
              $
              12,127
              
              $
              877
              
              $
              10,615Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              (501
              )
              
              -Comprehensive
                  income (loss) to common stockholders
              
              
              ($80
              )
              $
              12,127
              
              $
              376
              
              $
              10,615
 
 See
        accompanying summary of accounting policies and notes to financial
        statements.
 
 3
  ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWS(In
                  thousands)(unaudited)Nine
                  months ended April 30,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:NET
                  INCOME
              
              $
              1,013
              
              $
              10,729Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Gain
                  in disposal of discontinued operations
              
              
              (1,652
              )
              
              (12,104
              )Debt
                  forgiveness income
              
              
              (50
              )
              
              (460
              )Depreciation
                  and amortization
              
              
              72
              
              
              79Non-cash
                  issuance of stock grants and options, employees
              
              
              180
              
              
              474Non-cash
                  issuance of common stock and warrants for services
              
              
              151
              
              
              533Provisions
                  for losses on accounts receivables
              
              
              -
              
              
              4Loss
                  on derivative instrument liabilities
              
              
              8
              
              
              317Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (234
              )
              
              (120
              )Prepaid
                  expenses and other
              
              
              22
              
              
              (18
              )Accounts
                  payable
              
              
              296
              
              
              62Accrued
                  liabilities
              
              
              48
              
              
              77Net
                  cash used in operating activities
              
              
              (146
              )
              
              (427
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property & equipment
              
              
              (4
              )
              
              (8
              )Acquisition
                  of business
              
              
              -
              
              
              (8
              )Net
                  cash used in investing activities
              
              
              (4
              )
              
              (16
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from notes payable
              
              
              50
              
              
              810Payments
                  on notes payable
              
              
              -
              
              
              (810
              )Proceeds
                  from line of credit, net
              
              
              124
              
              
              -Proceeds
                  from the exercise of warrants
              
              
              54
              
              
              414Principal
                  payments on capital lease obligation
              
              
              (2
              )
              
              (2
              )Net
                  cash provided by financing activities
              
              
              226
              
              
              412INCREASE
                  (DECREASE) IN CASH
              
              
              76
              
              
              (31
              )CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              29
              
              
              94CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              105
              
              $
              63SUPPLEMENTAL
                  DISCLOSURES:Cash
                  paid for interest
              
              $
              9
              
              
              -Cash
                  paid for income taxes
              
              
              -
              
              
              -NON-CASH
                  INVESTING AND FINANCING TRANSACTIONSIssuance
                  of common stock for conversion of debt
              
              $
              149
              
              $
              829Issuance
                  of common stock for purchase of fixed & intangible
                  assets
              
              
              58
              
              
              24Fair
                  value of the derivative instrument
              
              
              -
              
              
              26Conversion
                  of preferred stock to common stock
              
              
              102
              
              
              206Change
                  in derivative liabilities on warrants exercised
              
              
              22
              
              
              1,668See
                  accompanying summary of accounting policies and notes to financial
                  statements.
 
 4


**ATSI
      COMMUNICATIONS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited interim financial statements of ATSI Communications,
      Inc.
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America and the rules of the United States Securities
      and Exchange Commission (“SEC”). In the opinion of management, these interim
      financial statements contain all adjustments, consisting of normal recurring
      adjustments, necessary for a fair presentation of financial position and the
      results of operations for the interim periods presented. The results of
      operations for interim periods are not necessarily indicative of the results
      to
      be expected for the full year. Notes to the financial statements, which would
      substantially duplicate the disclosure contained in the audited financial
      statements for the most recent fiscal year ended July 31, 2005, as reported
      in
      the amended Form 10-KSB/A filed April 14, 2006, have been omitted.




Derivative
      financial instruments






ATSI
      does
      not use derivative instruments to hedge exposures to cash flow, market, or
      foreign currency risks. ATSI evaluates all of it financial instruments to
      determine if such instruments are derivatives or contain features that qualify
      as embedded derivatives. 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 using the Black-Scholes
      pricing model, with changes in the fair value reported as charges or credits
      to
      income. 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.




Recently
      Issued Accounting Standards





In
      December 2004, the FASB issued Statement No. 123(R) (“FAS 123(R)”). In addition,
      in March 2005 the Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin Topic 14, “Share-Based Payment” (SAB 107) which provides
      interpretations regarding the interaction between FAS 123(R) and certain SEC
      rules and regulations and provided the staff’s views regarding the valuation of
      share-based payment arrangements for public companies. FAS 123(R) focuses
      primarily on accounting for transactions in which an entity obtains employee
      services in share-based payment transactions, including stock option awards.
      FAS
      123(R) revised FASB Statement No. 123, “Accounting for Stock-Based
      Compensation”, (“FAS 123”) and supersedes APB Opinion No. 25. FAS 123(R) will
      require us to measure the cost of employee services received in exchange for
      stock option awards based on the grant-date fair value of such awards. That
      cost
      will be recognized over the period during which an employee is required to
      provide service in exchange for the award, which is usually the vesting period.
      We will report such compensation costs as part of our general and administrative
      expenses.





**NOTE
      2 - 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 (“SFAS”) 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 (“APB”) 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 provided for under SFAS No. 123R, and,
      consequently, has not retroactively adjusted results from prior
      periods.





ATSI
      adopted the disclosure requirements of FAS 123, Accounting for Stock-Based
      Compensation (FAS No. 123) and FAS No. 148 with respect to pro forma disclosure
      of compensation expense for options issued. For purposes of the pro forma
      disclosures, the fair value of each option grant is estimated on the grant
      date
      using the Black-Scholes option-pricing model.





5


The
      following table illustrates the effect on net loss and net loss per share if
      ATSI had applied the fair value provisions of FAS 123, to stock-based employee
      compensation.





Three
                months ended April 30,
            
            Nine
                months ended April 30,2006
            
            2005
            
            2006
            
            2005Net
                income (loss) to commonshareholders,
                as reported
            
            
            ($80,000
            )
            $
            12,127,000
            
            $
            877,000
            
            $
            10,615,000Add: 
                stock
                based compensation determinedunder
                intrinsic value based method
            
            
            -
            
            
            -
            
            
            -
            
            
            -Less:
                stock based compensation determinedunder
                fair value based method
            
            
            -
            
            
            -
            
            
            (281,499
            )
            
            -Pro
                forma net income (loss)
            
            
            ($80,000
            )
            $
            12,127,000
            
            $
            595,501
            
            $
            10,615,000Basic
                net income (loss) per common share:As
                reported
            
            
            ($0.01
            )
            $
            1.39
            
            $
            0.06
            
            $
            1.69Pro
                forma
            
            
            ($0.01
            )
            $
            1.39
            
            $
            0.05
            
            $
            1.69Diluted
                net income (loss) per common share:As
                reported
            
            
            ($0.01
            )
            $
            0.44
            
            $
            0.04
            
            $
            0.43Pro
                forma
            
            
            ($0.01
            )
            $
            0.44
            
            $
            0.03
            
            $
            0.43





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:




Nine
                Months Ended April 30,2006
            
            2005Expected
                dividends yield
            
            
            0.00
            %
            
            N/AExpected
                stock price volatility
            
            
            139
            %
            
            N/ARisk-free
                interest rate
            
            
            4.42
            %
            
            N/AExpected
                life of options
            
            
            10
                years
            
            
            N/A







During
      the nine months ended April 30, 2006, ATSI granted 2,450,000 options to purchase
      common stock to employees and members of the Board of Directors with an exercise
      price of $0.16, the closing price of ATSI’s stock on the grant date, September
      29, 2005. These options will vest over a period of three years. ATSI did not
      recognize any expense at the time these options were granted since the exercise
      price on the options was equal to the average market price at the grant date.
      Under the fair value option method, compensation expense would have been
      $257,275 and would have been amortized over the service period.




Additionally,
      during the nine months ended April 30, 2006 ATSI granted 1,904,000 options
      to
      purchase common stock to employees and members of the Board of Directors with
      an
      exercise price of $0.16, the closing price of ATSI’s stock on the grant date,
      September 29, 2005. Seventy three percent
      of these options vested immediately and the remaining balances vest over three
      years. ATSI
      did
      not recognize any expense at the time these options were granted since the
      exercise price on the options was equal to the average market price at the
      grant
      date. Under the fair value option method, compensation expense would have been
      $24,224 and would have been amortized over the service period.




During
      the nine months ended April 30, 2006, ATSI’s Board of Directors approved the
      issuance of 1,125,000 shares of common stock to its employees and directors
      and
      468,871 shares of common stock to consultants for services with a market value
      of $180,000 and $107,163, respectively. We recorded compensation expense in
      our
      statement of operations for the aggregate market value of the stock at the
      date
      of issuance.





6


**NOTE
      3 - SETTLEMENT OF NOTE RECEIVABLE**





On October
      31, 2005, ATSI Communications, Inc. and Telemarketing de Mexico S.A de C.V.
      reached a “Confidential Settlement Agreement and Mutual Release”. Under the
      settlement agreement the parties agreed to release all claims and liabilities
      between the parties. ATSI agreed to release Telemarketing de Mexico S.A de
      C.V.
      of a note receivable with a balance $598,000. ATSI
      previously recognized an allowance for this receivable and the balance reflected
      in our balance sheet was zero. No additional gain or loss was recognized upon
      settlement. Additionally,
      as part of the settlement ATSI agreed to release 10% of ATSI
      Communicaciones S.A de C.V. total outstanding common stock, that was held as
      collateral on the note receivable.





**NOTE
      4 - NOTES PAYABLE**





On
      November 1, 2004, ATSI entered into a promissory note payable with Franklin,
      Cardwell & Jones, PC, for $103,454 associated with legal and professional
      services previously rendered. The note payable had a maturity date of December
      1, 2005 and has an annual interest rate of 6%. On December 1, 2005 Franklin,
      Cardwell & Jones agreed to extend the maturity date on this note until
      December 1, 2006.





Under
      the
      terms in the note the holder, at any time after November 1, 2005, can convert
      all or any part of the outstanding balance and accrued and unpaid interest
      to
      shares of ATSI’s common stock equal to the amount converted divided by the
      product of (a) 0.90 times (b) the five-day average of the last sales of the
      common stock prior to the conversion day. This conversion feature was determined
      to be an embedded derivative and, accordingly, the embedded derivative portion
      of the value of the note is attributable to the conversion feature.





On
      November 1, 2005, the holder of the note elected to convert $13,454 of the
      principal balance and $6,207 of the accrued interest into 66,603 common shares
      of ATSI. Furthermore,
      on January 6, 2006, the holder elected to convert $20,000 of the principal
      balance and $1,632 of accrued interest into 98,328 common shares of ATSI stock.
      On April 1, 2006, the holder elected to convert the remaining principal balance
      of $70,000 and $1,950 of accrued interest into 278,444 shares of ATSI stock. As
      of
      April 30, 2006 the principal and accrued interest of the Franklin, Cardwell
      & Jones note payable had been fully converted into ATSI stock. Accordingly,
      the embedded derivative liability at April 30, 2006, is zero. A corresponding
      gain on derivative instrument liabilities of $10,219 is reflected in the
      statement of operations for the nine months ended April 30, 2006.




On
      November 4, 2005, ATSI entered into a note payable with CSI Business Finance,
      Inc. for $50,000. The promissory note payable has a maturity date of November
      6,
      2006 and an annual interest rate of 18%. The note provides for interest payments
      of $750 each month with the principal balance due at maturity. The
      note
      is secured by ATSI’s equipment, deposit accounts and accounts receivables. ATSI
      has
      the option of paying off the total outstanding principal balance at any time,
      subject to a $10,000 early termination fee.





**NOTE
      5 - ACCOUNTS RECEIVABLE CREDIT FACILITY**





On
      November 4, 2005 ATSI entered into a credit facility agreement with CSI Business
      Finance, Inc. Under the agreement, CSI Business Finance, Inc. committed to
      loan
      up to $150,000 bearing interest at 18% per annum and maturing November 4, 2006.
      The credit facility is secured by ATSI’s accounts receivables. In connection
      with the transaction ATSI paid an application, legal and documentation fee
      of
      $6,000 and a brokerage fee of $20,000 to Corporate Strategies, Inc. As of April
      30, 2006, ATSI has fully drawn the available credit facility of $150,000.





**NOTE
      6 - GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS**





During
      the nine months ended April 30, 2006, ATSI recognized a gain on disposal of
      discontinued operations of $1,652,000. The gain on disposal of discontinued
      operations was associated with the sale in October 2005 of ATSI’s Mexican
      subsidiary, ATSIMex Personal S.A de C.V. This entity discontinued all operations
      in May 2003. The total liabilities of this entity, net of assets, were
      approximately $1,652,000 and were assumed by the purchaser.





7


**NOTE
      7 - DERIVATIVES**




ATSI
      evaluates the application of SFAS 133 and EITF 00-19 for all of its
      financial instruments and identified the following financial instruments as
      derivatives:





1)
            Note
                Payable, Franklin, Cardwell and Jones2)
            9%
                Convertible Debenture;Warrants
                to purchase common stock associated with the 2003 Debentures the
                ("2003
                Debenture Warrants");3)
            Warrants
                to purchase common stock in connection with consulting agreements
                with two
                individuals (“Consulting Warrants”)




Based
      on
      the guidance in SFAS 133 and EITF 00-19, we concluded that all of these
      instruments were required to be accounted for as derivatives. SFAS 133 and
      EITF
      00-19 require ATSI to bifurcate and separately account for the conversion
      features of the Note Payable to Franklin, Cardwell & Jones, the 9%
      Convertible Debentures and warrants issued to consultants as embedded
      derivatives.





Pursuant
      to SFAS 133, ATSI bifurcated the conversion feature from the Note Payable to
      Franklin, Cardwell & Jones, because the conversion price is not fixed and
      it’s not convertible into a fixed number of shares. Accordingly, the embedded
      derivative must be bifurcated and accounted for separately.





In
      addition, ATSI bifurcated the conversion feature from the 9% Convertible
      Debenture and the associated warrants, since the conversion price is not fixed
      and it is not convertible into a fixed number of shares.





Furthermore,
      ATSI concluded that the exercise price and the number of shares to be issued
      under the “Consulting Warrants” to two individuals are fixed. However, since the
      9% Convertible Debenture was issued prior to these warrants and these debentures
      might result in issuing an indeterminate number of shares, it cannot be
      concluded that the Company has a sufficient number of authorized shares to
      settle these warrants. As such, the warrants were accounted for as derivative
      instrument liabilities. ATSI is required to record the fair value of the
      conversion features and the warrants on its balance sheet at fair value with
      changes in the values of these derivatives reflected in the consolidated
      statement of operations as “Gain (loss) on embedded derivative liability.”




The
      impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
      as of
      April 30, 2006 and July 31, 2005 is as follows:





Embedded
                derivative liability balance
            
            Net
                change4/30/2006
            
            7/31/2005
            
            in
                valueNote
                Payable, Franklin, Cardwell & Jones
            
            $
            -
            
            $
            18,851
            
            
            ($18,851
            )9%
                Convertible Debenture & Warrants
            
            
            -
            
            
            -
            
            
            -Consulting
                Warrants
            
            
            2,236
            
            
            5,353
            
            
            (3,117
            )Total:
            
            $
            2,236
            
            $
            24,204
            
            
            ($21,968
            )





8


And
      the
      impact on statements of operations as of the three and nine months ended April
      30, 2006 and 2005 is as follows:




**Gain
                (loss) on embedded derivative liabilities:**
            
            Three
                months ended April 30,
            
            Nine
                months ended April 30,2006
            
            2005
            
            2006
            
            2005Note
                Payable, Franklin, Cardwell and Jones
            
            $
            43,476
            
            $
            24,138
            
            $
            10,219
            
            $
            10,5409%
                Convertible Debenture & Warrants
            
            
            -
            
            
            4,280
            
            
            -
            
            
            10,535Consulting
                Warrants
            
            
            44,058
            
            
            106,404
            
            
            (18,422
            )
            
            (337,552
            )**Total
                gain (loss) on embedded derivative liabilities:**
            
            $
            87,534
            
            $
            134,822
            
            
            ($8,203
            )
            
            ($316,477
            )





Since
      the
      conversion option for the Series D Preferred Stock is contingent, as a result
      of
      the ongoing litigation with the holders of these securities, the Series D
      Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If the
      contingency and lawsuit is resolved in the future and the holder becomes
      able to convert, ATSI will assess whether the conversion option meets the
      definition of a derivative under SFAS 133. However, as of July 31, 2003, the
      Series D Preferred Stock, which is carried as a current liability, is recorded
      at its stated redemption amount of $1,270 per share or approximately $942,000.
      ATSI continues to accrue dividends on the Series D Preferred Stock, pending
      resolution of the Company’s lawsuit. At April 30, 2006, the carrying amount of
      the Series D Preferred Stock was $1,215,000, including accrued dividends of
      $273,000.





Because
      the conversion option for the Series E Preferred Stock is contingent, as a
      result of the ongoing litigation with the holders of these securities, the
      Series E Preferred Stock is not within the scope of SFAS 133 and EITF 00-19.
      If
      the contingency and lawsuit is resolved in the future and the holder
      becomes able to convert, ATSI will assess whether the conversion option meets
      the definition of a derivative under SFAS 133. However, as of July 31, 2003,
      the
      Series E Preferred Stock, which is carried as a current liability, is recorded
      at its stated redemption amount of $1,250 per share or approximately $1,463,000.
      ATSI continues to accrue an amount equivalent to dividends of 6% per annum
      on
      the Series E Preferred Stock, pending resolution of the Company’s lawsuit. At
      April 30, 2006, the carrying amount of the Series E Preferred Stock was
      $1,802,000, including accrued dividends of $339,000.





**NOTE
      8- FACTORING OF ACCOUNTS RECEIVABLE** ****





On
      February 20, 2006 ATSI entered into a factoring agreement with CSI Business
      Finance, Inc. Under the agreement CSI Business committed to purchase up to
      $400,000 of ATSI’s accounts receivables. The factoring agreement is for an
      indefinite period of time, the factor or the Company can terminate this
      agreement at its sole discretion at any time without
      cause .
      The
      factoring rate ranges from 1.25%-2.25% per factored amount. The
      accounts receivable factoring agreement is secured by ATSI’s accounts
      receivables. As of
      the date of this filing the Company did not have any outstanding factored
      receivables under this agreement.





**NOTE
      9- SUBSEQUENT EVENTS**




On
      June
      16, 2005, ATSI Communications, Inc. filed an arbitration claim against
      Ntera Holdings, Inc. involving a dispute in the range of $100,000 and
      attorney's fees. The claim was associated with a dispute over alleged debt
      of
      ATSI incurred under a Reciprocal Network Carrier Service Agreement between
      the
      parties. On May 31, 2006, ATSI Communications, Inc. and Ntera Holdings,
      Inc. consummated an agreement of compromise, settlement and release
      under which ATSI paid $5,000 in cash and may provide Ntera up to $78,000 in VoIP termination services over
      a 90-day period from June 10, 2006 through September 10, 2006 to fully
      discharge the alleged indebtedness.





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





*SPECIAL
      NOTE: This Quarterly Report on Form 10-QSB 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. Therefore, these
      types of statements may prove to be incorrect.*





9


The
      following is a discussion of the consolidated financial condition and results
      of
      operations of ATSI for the three and nine months ended April 30, 2006 and 2005.
      As used in this section, the term “fiscal 2006” means the year ending July 31,
      2006 and “fiscal 2005” means the year ended July 31, 2005.





**General**





We
      are an
      international telecommunications carrier that utilizes the Internet to provide
      cost-efficient and economical international telecommunications 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 telecommunication services to carriers,
      telephony resellers and other VoIP carriers through various agreements with
      service providers in the United States, Mexico, Asia, the Middle East and Latin
      America utilizing VoIP technology. Our services are as follows:





*Carrier
      Services:* We
      provide VoIP termination 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 services.




*Network
      Services:* We
      provide private communication 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
      telecommunication 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
      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. Additionally, we provide prepaid domestic
      and long-distance services; under these services we allow our customers to
      access our prepaid VoIP network platform.





Our
      Retail business was launched during the first quarter of Fiscal 2005 through
      the
      acquisition of a Competitive
      Local Exchange Carrier (“CLEC”) based in South Texas. This acquisition has
      served as a gateway to reach out to the Hispanic communities residing along
      the
      US and Mexico border. Our strategy is to provide reliable and affordable local
      and long distance services to the underserved Hispanic community through Texas.
      Our entry to the retail services under our TeleFamilia brand and subsidiary
      will
      allow us to leverage our existing international VoIP network with additional
      services that have the potential to deliver higher margins than our wholesale
      international VoIP services. We have deployed various postpaid and prepaid
      retail services and generated approximately $91,000 in retail services revenue
      during the nine months ended April 30, 2006.





Additionally,
      during the second quarter of Fiscal 2006, we expanded our NexTone ’ Communications Session Controller (soft-switch) by 65% to enhance our VoIP
      network. This network expansion has allowed us to route our traffic more
      efficiently, improve our call processing, monitor quality of service and enable
      us to share port resources with our customers. The NexTone technology has
      allowed us to be more competitive and to improve our margins in our wholesale
      international telecommunication services. As a result of these enhancements
      to
      our VoIP Network our customer base has grown to approximately 72 customers
      and
      our revenue increased from $3,943,000 during the nine months ended April 30,
      2005 to $9,344,000 for the nine months ended April 30, 2006.




10


We
      have
      had operating losses for almost every quarter since we began operations in
      1994. Our
      operating losses from continuing operations were approximately $600,000 and
      $1,463,000, for the nine months ended April 30, 2006 and 2005, respectively.
      Additionally, we had a working capital deficit of approximately $4,660,000
      at
      April 30, 2006. We
      have
      experienced difficulty in paying our vendors and lenders on time in the past,
      and we expect this trend to continue over the next 12 months as we continue
      to
      build our customer base and increase our operations. Moreover, we are currently
      pursuing various alternatives including equity offerings, accounts receivable
      factoring, exchanging some portion or all of our debt for equity, and
      restructuring our debt to extend the maturity. However, in the event we fail
      to
      execute on our current plan or that circumstances currently unknown or
      unforeseen by us arise, we may not succeed in re-capitalizing the Company or
      be
      able to obtain additional funding to allow us to meet our
      obligations.





Due
      to
      the recurring losses, negative cash flows generated from our operations and
      our
      substantial working capital deficit, our auditor’s opinion on our financial
      statements as of July 31, 2005 calls attention to substantial doubts about
      our
      ability to continue as a going concern. This means that there is substantial
      doubt that we will be able to continue in business through the end of our next
      fiscal year, July 31, 2006. In order to remain a going concern, we intend to
      attract new customers to generate additional revenues and/or generate cash
      from
      debt or equity offerings. There is no assurance that we will be able to obtain
      sufficient additional customers or funding to continue as a going concern.





As
      a
      result of the recurring losses, negative cash flows from operations and our
      substantial working capital deficit, during the nine months ended April 30,
      2006, management continued to pursue different avenues for funding. During
      the
      nine months ended April 30, 2006 we received $54,000 from the exercise of 366,666 warrants. Additionally, o n
      November 4, 2005, we entered into a note payable with CSI Business Finance,
      Inc.
      for $50,000 and also signed an accounts receivable credit facility with CSI
      Business Finance, Inc. and as of the end of the second quarter we had drawn
      $150,000 of this facility. The
      proceeds from the exercise of warrants, note payable and accounts
      receivable credit facility have
      allowed the Company to pay those operating and corporate expenses that were
      not
      covered by our current cash inflows from operations. We will continue to require
      additional funding until the cash inflows from operations are sufficient to
      cover the monthly operating expenses. There is no assurance that we will be
      successful in securing additional funding over the next twelve months.





**Results
      of Operations**





The
      following table sets forth certain items included in the Company’s results of
      operations in dollar mounts and as a percentage of total revenues for the three
      month and nine month periods ended April 30, 2006 and 2005.





Three
                Months Ended April 30,
            
            Nine
                Months Ended April 30,2006
            
            2005
            
            2006
            
            2005$
            
            %
            
            $
            
            %
            
            $
            
            %
            
            $
            
            %Operating
                revenuesCarrier
                services
            
            $
            4,086
            
            
            100
            %
            $
            1,727
            
            
            96
            %
            $
            9,344
            
            
            100
            %
            $
            3,943
            
            
            95
            %Network
                services
            
            
            5
            
            
            0
            %
            
            70
            
            
            4
            %
            
            17
            
            
            0
            %
            
            217
            
            
            5
            %Total
                operating revenues
            
            
            4,091
            
            
            100
            %
            
            1,797
            
            
            100
            %
            
            9,361
            
            
            100
            %
            
            4,160
            
            
            100
            %Cost
                of services (Exclusive of depreciationand
                amortization, shown below)
            
            
            3,899
            
            
            95
            %
            
            1,660
            
            
            92
            %
            
            8,908
            
            
            95
            %
            
            3,854
            
            
            93
            %Gross
                Margin
            
            
            192
            
            
            5
            %
            
            137
            
            
            8
            %
            
            453
            
            
            5
            %
            
            306
            
            
            7
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees,non
                cash stock compensation to employees and warrants for services, shown
                below)
            
            
            184
            
            
            4
            %
            
            139
            
            
            8
            %
            
            497
            
            
            5
            %
            
            314
            
            
            8
            %Legal
                and professional fees
            
            
            72
            
            
            2
            %
            
            41
            
            
            2
            %
            
            153
            
            
            2
            %
            
            365
            
            
            9
            %Non-cash
                issuance of common stock and warrants for services
            
            
            25
            
            
            1
            %
            
            19
            
            
            1
            %
            
            151
            
            
            2
            %
            
            533
            
            
            13
            %Non-cash
                stock-based compensation, employees
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            180
            
            
            2
            %
            
            474
            
            
            11
            %Bad
                debt
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %Depreciation
                and amortization
            
            
            23
            
            
            1
            %
            
            32
            
            
            2
            %
            
            72
            
            
            1
            %
            
            79
            
            
            2
            %Operating
                loss
            
            
            (112
            )
            
            -3
            %
            
            (94
            )
            
            -5
            %
            
            (600
            )
            
            -6
            %
            
            (1,463
            )
            
            -35
            %Other
                Expense
            
            
            -
            
            
            0
            %
            
            9
            
            
            1
            %
            
            -
            
            
            0
            %
            
            13
            
            
            0
            %Gain
                on disposal of investment
            
            
            -
            
            
            0
            %
            
            12,104
            
            
            674
            %
            
            -
            
            
            0
            %
            
            12,104
            
            
            291
            %Gain
                (loss) on derivative instrument liabilities
            
            
            88
            
            
            2
            %
            
            135
            
            
            8
            %
            
            (8
            )
            
            0
            %
            
            (317
            )
            
            -8
            %Debt
                forgiveness income
            
            
            11
            
            
            0
            %
            
            -
            
            
            0
            %
            
            50
            
            
            1
            %
            
            460
            
            
            11
            %Interest
                expense
            
            
            (26
            )
            
            -1
            %
            
            11
            
            
            1
            %
            
            (81
            )
            
            -1
            %
            
            (68
            )
            
            -2
            %Net
                loss from continuing operations
            
            
            ($39
            )
            
            -1
            %
            $
            12,165
            
            
            677
            %
            
            ($639
            )
            
            -7
            %
            $
            10,729
            
            
            258
            %Discontinued
                operations(see
                note 6)Gain
                on disposal of discontinued operations
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            1,652
            
            
            18
            %
            
            -
            
            
            0
            %Net
                income from discontinued operations
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            1,652
            
            
            18
            %
            
            -
            
            
            0Less:
                preferred stock dividends
            
            
            (41
            )
            
            -1
            %
            
            (38
            )
            
            -2
            %
            
            (136
            )
            
            -1
            %
            
            (114
            )
            
            -3
            %Net
                income (loss) applicable to common stockholders
            
            
            ($80
            )
            
            -2
            %
            $
            12,127
            
            
            675
            %
            $
            877
            
            
            9
            %
            $
            10,615
            
            
            255
            %





11


**Three
      Months ended April 30, 2006 Compared to Three Months ended April 30,
      2005**





*Operating
      Revenues* .
      Consolidated operating revenues increased 128% between periods from $1,797,000
      for the quarter ended April 30, 2005 to $4,091,000 for the quarter ended April
      30, 2006.




Carrier
      services revenues increased $2,359,000, or 137% from the quarter ended April
      30,
      2005 to the quarter ended April 30, 2006. Our carrier traffic increased from
      approximately 39,105,786 minutes in the second quarter of fiscal 2005 to
      approximately 65,875,150 minutes in the quarter ended April 30, 2006. The
      increase in revenue and carrier traffic can mainly be attributed to an increase
      in customers during the third quarter of fiscal 2006 compared to the third
      quarter of fiscal 2005. Network services revenues decreased approximately 93%
      or
      $65,000 from the quarter ended April 30, 2005 to the quarter ended April 30,
      2006. The decrease in network services revenue is primarily due to the decrease
      in network services customers. Currently we provide network services to only
      one
      customer.




C *ost
      of Services. (Exclusive of depreciation and amortization)* The
      consolidated cost of services increased by $2,239,000 or 135% from the quarter
      ended April 30, 2005 to the quarter ended April 30, 2006. 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 39,105,786
      minutes in the third quarter of fiscal 2005 to approximately 65,875,150 minutes
      in the quarter ended April 30, 2006, thus increasing our cost of services
      between quarters. Consolidated cost of services, as a percentage of revenue
      increased from 92% during the third quarter of fiscal 2005 to 95% during the
      quarter ended April 30, 2006. However, as a result of the increase in total
      revenue our gross profits increased from $137,000 during the quarter ended
      April
      30, 2005 to $192,000 during the quarter ended April 30, 2006.





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees, non-cash stock compensation to employees and common stock
      and
      warrants for services).* SG&A
      expenses increased $45,000, or 32% from the quarter ended April 30, 2005 to
      the
      quarter ended April 30, 2006. The increase is primarily attributable to
      an increase
      in salaries and wages and consulting fees of approximately $35,000 as a result
      of the hiring of two new employees and the increase in bank fees of
      approximately $7,000 during the quarter ended April 30, 2006.





*Legal
      and professional fees* .
      Legal
      and professional fees increased $31,000, or 76% from the quarter ended April
      30,
      2005 to the quarter ended April 30, 2006. The increase is attributable to the
      recognition of approximately $44,000 in professional fees associated with the
      evaluation of derivative instruments during the quarter. We did not incur these
      types of expenses during the quarter ended April 30, 2005.




*Non-cash
      issuance of common stock and warrants for services* .
      Non-cash issuance of common stock and warrants for services increased by $6,000
      from the quarter ended April 30, 2005 to the quarter ended April 30, 2006.
      The
      increase is primarily due to recognition during the quarter ended April 30,
      2006
      of approximately $25,000 in non-cash compensation expense associated with
      consulting agreements entered into with certain individual and legal services
      paid in common stock during the quarter.





12


*Depreciation
      and Amortization* .
      Depreciation and amortization decreased by $9,000 or 28% from the quarter ended
      April 30, 2005 to the quarter ended April 30, 2006. The decrease in is
      attributed to the full amortization during the fiscal 2005 of the installation
      and maintenance associated with the initial acquisition of the Nextone
      Soft-switch.





*Operating
      Loss* .
      The
      Company’s operating loss increased by $18,000 or 19% from the quarter ended
      April 30, 2005 to the quarter ended April 30, 2006. The increase in operating
      loss is attributed to the increase of approximately $25,000 in non-cash
      compensation expense, increase of approximately $12,000 in legal and
      professional fees and an increase of approximately $45,000 in selling, general
      and administrative expenses during the quarter ended April 30, 2006. Theses
      increases were substantially offset between quarters by the increase in gross
      profit margin of approximately $55,000.





*Gain
      on disposal of investment.* Gain
      on
      disposal of investment decreased to zero during the quarter ended April 30,
      2006. During the quarter ending April 30, 2005 ATSI recognized a gain on
      disposal of investment of approximately $12,104,000. The gain on disposal of
      investment was associated with the disposal of ATSI’s subsidiaries, American
      TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan).
      These
      entities filed for protection under Chapter 11 of the U.S. Bankruptcy Code
      on
      February 4, 2003 and February 18, 2003 respectively. The court ordered joint
      administration of both cases on April 9, 2003 and on May 14, 2003 the court
      converted the cases to Chapter 7. The two bankrupt subsidiaries have ceased
      operations.





*Gain
      (loss) on derivative instruments liabilities, net.* The
      Company recognized a gain on derivative instruments of $88,000 during the
      quarter ended April 30, 2006 compared to a gain of $135,000 during the quarter
      ended April 30, 2005, a decrease of $47,000 between periods. The decrease is
      as
      a result of the net unrealized (non-cash) change in the fair value of our
      derivative instrument liabilities related to certain, warrants, and embedded
      derivatives in our debt instruments that have been bifurcated and accounted
      for
      separately.





*Debt
      forgiveness income.* Debt
      forgiveness income increased by $11,000 from the quarter ended April 30, 2005
      to
      the quarter ended April 30, 2006. The
      increase is primarily due to the recognition during the quarter ended April
      30,
      2006 of $26,000 in debt forgiveness income associated with the settlement of
      debt for the issuance of common stock. This
      transaction was related to the settlement of $32,000 of accrued interest
      associated with the conversion of 500 Redeemable Preferred Series A shares
      into
      common stock. The debt forgiveness income was slightly offset by the expense
      incurred of approximately $15,000 associated with the conversion of the Note
      payable and accrued interest associated with the Franklin Cardwell & Jones
      note. The debt
      forgiveness expense was recognized based on the difference between the accrued
      interest and principal balance on the Note
      Payable and the market
      price of ATSI stock issued as part of the conversion.




*Interest
      expense* .
      Interest expense increased by $37,000 from the quarter ended April 30, 2005
      to
      the quarter ended April 30, 2006. The increase can be attributed to the increase
      in interest expense of approximately $9,000 associated with the note payable
      and
      the accounts receivable credit facility with CSI Business Finance, Inc.
      Additionally, during the quarter ended April 30, 2006 we recognized $7,500
      of
      interest expense associated with the long term Note Payable and we also
      recognized approximately $6,000 of interest expense associated with the
      Convertible Debentures.





*Net
      loss from continuing operations* .
      Net
      loss from continuing operations increased by $12,204,000. The increase in net
      loss from continuing operations is attributed to the decrease in gain on
      disposal of investment of approximately $12,104,000 and the increase of $25,000
      in non-cash compensation expense, increase of approximately $12,000 in legal
      and
      professional fees and an increase of approximately $45,000 in selling, general
      and administrative expenses during the quarter ended April 30, 2006.
      Additionally, the increase in net loss from continuing operations is attributed
      to the decrease in the gain on derivative instrument liabilities of
      approximately $47,000 and an increase in interest expense of approximately
      $37,000 between quarters. These increases were slightly offset between quarters
      by the increase in gross profit margin of approximately $55,000.





13


*Preferred
      Stock Dividends* .
      Preferred Stock Dividends expense increased by $3,000 or 8% between periods,
      from $38,000 for the quarter ended April 30, 2005 to $41,000 during the quarter
      ended April 30, 2006. The increase in preferred dividend expense during the
      quarter ended April 30, 2006 is mainly attributed to the recognition of
      preferred dividend expense associated with the conversion of 131,359 shares
      of
      Redeemable Preferred Series H into 157,635 shares of common stock.





*Net
      income (loss) applicable to common stockholders* .
      Net
      loss applicable to common stockholders increased by $12,207,000. The increase
      in
      net loss applicable to common stockholders is attributed to the decrease in
      gain
      on disposal of investment of approximately $12,104,000 and the increase of
      approximately $25,000 in non-cash compensation expense, increase of
      approximately $12,000 in legal and professional fees and an increase of
      approximately $45,000 in selling, general and administrative expenses during
      the
      quarter ended April 30, 2006. Additionally, the increase in net loss applicable
      to common stockholders is attributed to the decrease in the gain on derivative
      instrument liabilities of approximately $47,000 and an increase in interest
      expense of approximately $37,000 between quarters. These increases were slightly
      offset between quarters by the increase in gross profit margin of approximately
      $55,000.





**Nine
      Months ended April 30, 2006 Compared to Nine Months ended April 30,
      2005**





*Operating
      Revenues* .
      Consolidated operating revenues increased 125% between periods from $4,160,000
      for the nine months ended April 30, 2005 to $9,361,000 for the nine months
      ended
      April 30, 2006.




Carrier
      services revenues increased $5,401,000, or 137% from the nine months ended
      April
      30, 2005 to the nine months ended April 30, 2006. Our carrier traffic increased
      from approximately 107,235,144 minutes in the nine months ended April 30, 2005
      to approximately 180,704,747 minutes in the nine months ended April 30, 2006.
      The increase in revenue and carrier traffic can mainly be attributed to an
      increase in customers during fiscal 2006 compared to fiscal 2005. Network
      services revenues decreased approximately 92% or $200,000 from the nine months
      ended April 30, 2005 to the nine months ended April 30, 2006. The decrease
      in
      network services revenue is primarily due to the decrease in network services
      customers.




C *ost
      of Services. (Exclusive of depreciation and amortization)* The
      consolidated cost of services increased by $5,054,000 or 131% from the nine
      months ended April 30, 2005 to the nine months ended April 30, 2006. 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 107,235,144 minutes in the nine months ended April 30, 2005 to
      approximately 180,704,747 minutes in the nine months ended April 30, 2006,
      thus
      increasing our cost of services between quarters. Consolidated cost of services
      as a percentage of sales increased from 93% in the nine months of fiscal 2005
      to
      95% in the nine months of fiscal 2006. As a result, gross margins declined
      from
      7% of revenue in the nine months of fiscal 2005 to 5% of revenue in the nine
      months of fiscal 2006. However, as a result of the increase in total revenue
      our
      gross profits increased from $306,000 during the period ended April 30, 2005
      to
      $453,000 during the nine months ended April 30, 2006.





*Selling,
      General and Administrative (SG&A) Expenses*  *(exclusive
      of legal and professional fees, non-cash stock compensation to employees and
      common stock and warrants for services).* SG&A
      expenses increased $183,000, or 58% from the nine months ended April 30, 2005
      to
      the nine months ended April 30, 2006.  The
      increase is primarily attributable to an adjustment of $92,000 in salaries and wages and a reversal of an over-accrual
      for services recognized during the second quarter of Fiscal 2005. Additionally,
      during the third quarter of fiscal 2006 we recognized an increase in salaries
      and wages and consulting fees of approximately $35,000 as a result of the hiring
      of two new employees and the increase in bank fees of approximately $17,000
      during the nine months ended April 30, 2006.




*Legal
      and professional fees* .
      Legal
      and professional fees decreased $212,000, or 58% from the nine months ended
      April 30, 2005 to the nine months ended April 30, 2006.  The
      decrease is attributable to the recognition of approximately $150,000 in
      professional fees associated with a marketing campaign that commenced during
      the
      nine months ended April 30, 2005. Additionally, during the nine months ended
      April 30, 2005 we recognized approximately $90,000 in legal fees associated
      with
      a lawsuit filed by the Company for stock fraud and manipulation by various
      institutions, as described in the legal proceeding section of this report.
      We
      did not incur these types of expenses during the nine months ended April 30,
      2006.




14


*Non-cash
      issuance of common stock and warrants for services* .
      Non-cash issuance of common stock and warrants for services decreased by
      $382,000 from the nine months ended April 30, 2005 to the nine months ended
      April 30, 2006. The decrease is primarily due to recognition during the quarter
      ended January 31, 2005 of approximately $400,000 in non-cash compensation
      expense associated with the consulting agreements entered into with certain
      individual affiliates of Recap Marketing & Consulting, LLP. We did not incur
      these types of expenses during the nine months ended April 30, 2006.




*Non-cash
      stock-based compensation, employees* .
      Non-cash compensation expense to employees decreased by $294,000 from the nine
      months ended April 30, 2005 to the nine months ended April 30, 2006. The
      decrease is attributed to the recognition during the nine months ended April
      30,
      2005 of approximately $474,000 of non-cash compensation expense associated
      with
      the stock grants to our employees and board of directors. We incurred $180,000
      of non-cash compensation expense associated with the stock grants to our
      employees and board of directors issued during the nine months ended April
      30,
      2006.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $4,000 from the nine months ended April 30, 2005 to the
      nine months ended April 30, 2006. During the nine months ended April 30, 2005
      we
      recognized $4,000 in bad debt expense associated with the write-off of a
      receivable from carrier services customer that ceased operations.





*Depreciation
      and Amortization* .
      Depreciation and amortization decreased by $7,000 or 9% from the nine months
      ended April 30, 2005 to the nine months ended April 30, 2006. The decrease
      in is
      attributed to the full amortization during the fiscal 2005 of the installation
      and maintenance associated with the initial acquisition of the Nextone
      Soft-switch. As result, during fiscal 2006 we did not incur this type of
      expense.





*Operating
      Loss* .
      The
      Company’s operating loss decreased by $863,000 or 59% from the nine months ended
      April 30, 2005 to the nine months ended April 30, 2006. The reduction in
      operating loss between periods is attributed to the increase in gross profit
      margin of $147,000; the decrease between periods in non-cash issuance of common
      stock and warrants expense for services of $382,000 and the decrease in non-cash
      stock based compensation expense to employees of $294,000 and the decrease
      in
      legal and professional fees of $212,000.





*Gain
      on disposal of investment.* Gain
      on
      disposal of investment decreased to zero during the nine months ended April
      30,
      2006. During the nine months ending April 30, 2005 ATSI recognized a gain on
      disposal of investment of approximately $12,104,000. The gain on disposal of
      investment was associated with the disposal of ATSI’s subsidiaries, American
      TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan).
      These
      entities filed for protection under Chapter 11 of the U.S. Bankruptcy Code
      on
      February 4, 2003 and February 18, 2003 respectively. The court ordered joint
      administration of both cases on April 9, 2003 and on May 14, 2003 the court
      converted the cases to Chapter 7. The two bankrupt subsidiaries have ceased
      operations.





*Gain
      (loss) on derivative instruments liabilities, net.* The
      Company recognized a loss on derivative instruments of $8,000 during the nine
      months ended April 30, 2006 compared to a loss of $317,000 during the nine
      months ended April 30, 2005, a decrease of $309,000. The decrease is as a result
      of the net unrealized (non-cash) change in the fair value of our derivative
      instrument liabilities related to certain, warrants, and embedded derivatives
      in
      our debt instruments that have been bifurcated and accounted for
      separately.





*Debt
      forgiveness income.* Debt
      forgiveness income decreased by 89% from $460,000 during the nine months ended
      April 30, 2005 to $50,000 during the nine months ended April 30, 2006. The
      decrease is primarily due to the recognition during the nine months ended April
      30, 2005 of $460,000 in debt forgiveness income associated with the settlement
      of various liabilities for the issuance of common stock. These transactions
      were
      related to the settlement of $859,500 liability with Alfonso Torres Roqueni,
      the
      former owner of the concession license that we acquired in July 2000, and the
      settlement of a $250,000 note payable with Infraestructura Espacial, S.A de
      C.V.
      and Tomas Revesz, a former ATSI director. The debt forgiveness income was based
      on the difference between the market price of ATSI equity at the time of
      issuance and the market price calculated at the time of the settlement of the
      debt.





15


*Interest
      expense* .
      Interest expense increased by $13,000 or 19% from the nine months ended April
      30, 2005 to the nine months ended April 30, 2006. The increase can be attributed
      to the increase in interest expense of approximately $9,000 associated with
      the
      note payable and the accounts receivable credit facility with CSI Business
      Finance, Inc. During the nine months ended April 30, 2005 we did not incur
      any
      interest expense associated with the Note payable and the accounts receivable
      credit facility with CSI Business Finance, Inc.





*Net
      loss from continuing operations* .
      Net
      loss from continuing operations decreased by $11,368,000. The decrease in
      operating loss between periods is attributed decrease in gain on disposal of
      investment of approximately $12,104,000 and a decrease between periods of
      $382,000 in non-cash issuance of common stock and warrants expense for services
      and the decrease of $294,000 in non-cash stock based compensation expense to
      employees and the decrease between periods of $212,000 in legal and professional
      fees. The decrease in operating loss from continuing operations was slightly
      offset by the increase in gross profit margin of $147,000.




*Net
      income from discontinued operations.* During
      the nine months ended April 30, 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 .




*Preferred
      Stock Dividends* .
      Preferred Stock Dividends expense increased by $22,000 or 19% between periods,
      from $114,000 for the nine months ended April 30, 2005 to $136,000 during the
      nine months ended April 30, 2006. The increase in preferred dividend expense
      during the nine months ended April 30, 2006 is attributed to the recognition
      of
      preferred dividend expense associated with the conversion of 1,765,864 shares
      of
      Redeemable Preferred Series H to 2,134,193 shares of common stock.





*Net
      income (loss) to Common Stockholders* .
      During
      the nine months ended April 30, 2006 we recognized $877,000 in net income to
      common stockholders, this represented a decreased of $9,738,000 from the nine
      months ended April 30, 2005. The decrease in net income to common stockholders
      is primarily due to the decrease in gain on disposal of investment of
      approximately $12,104,000. The decrease in gain on disposal of investment was
      slightly offset by the recognition of $1,652,000 from the gain on disposal
      of
      discontinued operations associated with to the sale of ATSIMex Personal S.A
      de
      C.V. Additionally, the improvement in net income to common stockholders between
      periods is attributed to the increase in gross profit margin of $147,000.
      Further, the improvement in net loss from continuing operations is attributed
      to
      the decrease between periods of $382,000 in non-cash issuance of common stock
      and warrants expense for services, the decrease of $294,000 in non-cash stock
      based compensation expense to employees and the decrease between periods of
      $212,000 in legal and professional fees. The decrease in these expenses was
      slightly offset by the decrease during the same period in debt forgiveness
      income of $410,000.





**Liquidity
      and Capital Resources**





*Cash
      Position:* During
      the nine months ended April 30, 2006, operations consumed approximately $146,000
      in cash, primarily due to the operating loss offset by non-cash expenses
      compared to the prior period. Investing activities during the nine months of
      fiscal 2006 consumed an additional $4,000 relating to the acquisition of various
      computers and routers. Financing activities during the nine months of fiscal
      2006 generated $226,000 in cash. This cash was primarily generated from proceeds
      of an accounts receivable credit facility of $150,000 and cash proceeds from
      a
      note payable of $50,000 from CSI Business Finance, Inc. as previously described
      in the footnotes to the financial statements. Additionally, we received $54,000
      from the exercise of 366,666 warrants. These cash proceeds were offset by the
      $26,000 paid to Corporate Strategies, Inc. for the factoring and processing
      fees
      and the $2,000 associated with the principal payments under the lease of certain
      equipment. Overall, our net operating, investing and financing activities during
      the nine months ended April 30, 2006 provided an increase of $76,000 in cash.
      We
      had a cash balance of $105,000 as of April 30, 2006.





16


Our
      current operating expenses are expected to be approximately $70,000 per month,
      including wages, rent, utilities, litigation fees and corporate professional
      fees. We will require approximately $30,000 per month to cover the deficiencies
      in cash from operations during Fiscal 2006. We intend to cover our initial
      monthly operating expenses with our available cash from operations and the
      factoring of our receivables. We expect to continue conserving cash resources
      by
      paying executive compensation, fees for certain consultants and professional
      services with shares of our common stock. Furthermore, we will continue to
      pursue additional debt and equity financings to cover our deficiencies in 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 results
      of
      operations and financial condition may be adversely affected.





We
      are
      not presently paying quarterly interest and dividends on our outstanding
      convertible debentures and Redeemable Preferred stock. However, we have
      continued to accrue dividends and interest on such debentures and Redeemable
      Preferred stock. The increase in accrued liabilities related to the dividends
      and interest in arrears contributed approximately $154,000 in cash flow savings
      during the nine months ended April 30, 2006.





Our
      working capital deficit was $4,660,000 as of April 30, 2006. This represents
      a
      decrease of approximately $1,173,000 from our working capital deficit at July
      31, 2005. The decrease can primarily be attributed to the recognition of a
      gain
      from discontinued operations associated with the disposal of investment of
      $1,652,000. The gain on disposal of investment is associated with the sale
      of
      ATSI’s ownership in ATSIMex Personal S.A de C.V.





Our
      current liabilities include:





·
            $200,000
                owed to CSI Business Finance, Inc. for a line of credit and a current
                note
                payable.





·
            $1,215,000
                associated with the Series D Cumulative preferred stock. Of this
                balance,
                $942,000 is associated with the full redemption of this security
                and
                $273,000 is related to the accrued dividends as of April 30,
                2006.





·
            $1,802,000
                associated with the Series E Cumulative preferred stock. Of this
                balance,
                $1,463,000 is associated with the full redemption of this security
                and
                $339,000 is related to the accrued dividends as of April 30, 2006.
                During
                the fiscal year ended July 31, 2003, the Company was de-listed from
                AMEX
                and according to the terms of the Series E Cumulative preferred stock
                Certificate of Designation, if the Company fails to maintain a listing
                on
                NASDAQ, NYSE or AMEX the Series E preferred stockholder could request
                a
                mandatory redemption of the total outstanding preferred stock. As
                of the
                date of this filing we have not received such redemption notice.
                On
                October 31, 2002, we 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, for, among other things, stock fraud
                and
                manipulation. On July 9, 2004, we filed a separate but related lawsuit
                in
                the same court against Sam Levinson and Uri Wolfson. On February
                25, 2005,
                Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
                the
                complaint in the first action as to all defendants with prejudice.
                A
                judgment was entered in that action on September 8, 2005. We appealed
                that
                judgment on September 20, 2005 to the United States Court of Appeals
                for
                the Second Circuit. On April 27, 2005, the court entered a final
                judgment
                dismissing the second action with prejudice based on the February
                25, 2005
                decision in the first action. On May 25, 2005, we appealed the dismissal
                of the second action to the United States Court of Appeals for the
                Second
                Circuit. The defendants' briefs were filed in both appeals on March
                29,
                2006, and our reply briefs were filed on May 12, 2006. Oral arguments
                have
                not yet been scheduled. Currently we cannot predict the outcome of
                this
                litigation or the financial impact on our ongoing
                operations.





17


**Ongoing
      operations**





We
      believe that, based on our limited access to capital resources and our current
      cash balances, financial resources may not be available to support our ongoing
      operations for the next twelve months or until we are able to generate income
      from operations in excess of operating expenses. These matters raise substantial
      doubt about our ability to continue as a going concern. Our ability to continue,
      as a going concern is dependent upon the ongoing support of our stockholders
      and
      customers, our ability to obtain capital resources to support operations, and
      our ability to successfully market our services.





During
      the nine months ended April 30, 2006, we received $150,000
      from an accounts receivable credit facility, $50,000 from a Note Payable with
      CSI Business Finance, Inc. and $54,000
      from the exercise of warrants. These funds allowed us to cover our operating
      expenses and other corporate expenses during the period ended April 30, 2006.
      Additionally, on February 20, 2006 we entered into a factoring agreement with
      CSI Business Finance, Inc. Under the agreement, CSI Business committed to
      purchase up to $400,000 of ATSI’s monthly receivables. As our ongoing operations
      require, we will factor our receivables under this new agreement. As of date
      of
      this filing the Company did not have any outstanding factored receivables under
      this agreement.





We
      will
      continue to pursue cost cutting or expense deferral strategies in order to
      conserve working capital. These strategies will limit the implementation of
      our
      business plan and increase our future liabilities. We are dependent on our
      operations and the proceeds from future debt or equity investments to fund
      our
      operations and fully implement our business plan. If we are unable to raise
      sufficient capital, we will be required to delay or forego some portion of
      our
      business plan, which will have a material 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, and will likely not be on terms favorable to the
      Company.





**ITEM
      3. 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(e)
      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 quarter covered by
      this
      report. There were no changes in the Company’s internal control over financial
      reporting during the 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





In
      the
      previous quarter, we identified deficiencies in our internal controls and
      disclosure controls related to the accounting for convertible debt with
      conversion features contingent upon future prices of our stock and convertible
      debt with detachable warrants, primarily with respect to accounting for
      derivative liabilities in accordance with EITF 00-19 and SFAS 133. Since January
      2006, we have undertaken improvements to our internal controls in an effort
      to
      remediate these deficiencies through the following efforts: 1) implementing
      a
      review of all convertible securities to identify any securities that are not
      conventional convertible securities and 2) improving supervision and training
      of
      our accounting staff to understand and implement the requirements of EITF 00-19
      and SFAS 133.





18


**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**





On
      October 31, 2002, we 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, for, among other things, stock fraud and manipulation. On July 9, 2004,
      we filed a separate but related lawsuit in the same court against Sam Levinson
      and Uri Wolfson. On February 25, 2005, Judge Lewis A. Kaplan issued a memorandum
      opinion and order dismissing the complaint in the first action as to all
      defendants with prejudice. A judgment was entered in that action on September
      8,
      2005. We appealed that judgment on September 20, 2005 to the United States
      Court
      of Appeals for the Second Circuit. On April 27, 2005, the court entered a final
      judgment dismissing the second action with prejudice based on the February
      25,
      2005 decision in the first action. On May 25, 2005, we appealed the dismissal
      of
      the second action to the United States Court of Appeals for the Second Circuit.
      The defendants' briefs were filed in both appeals on March 29, 2006, and our
      reply briefs were filed on May 12, 2006. Oral arguments have not yet been
      scheduled. Currently we cannot predict the outcome of this litigation or the
      financial impact on our ongoing operations.





On
      June
      16, 2005, ATSI Communications, Inc. filed an arbitration claim against
      Ntera Holdings, Inc. involving a dispute in the range of $100,000 and
      attorney's fees. The claim is associated with a dispute over alleged debt of
      ATSI incurred under a Reciprocal Network Carrier Service Agreement between
      the
      parties. ATSI disputed a portion of the amount of indebtedness
      asserted against ATSI by Ntera and, as to the undisputed amount, ATSI
      asserted Ntera had agreed to allow payment of same by providing
      services to Ntera as ATSI had previously agreed to allow Ntera to pay ATSI
      debt
      in past.  On July 7, 2005 Ntera Holdings, Inc. filed a
      counterclaim **** asserting
      full indebtedness and denying
      any reciprocal services exchange agreement.  On May 31,
      2006, ATSI Communications, Inc. and Ntera Holdings,
      Inc. consummated an agreement of compromise, settlement and release
      under which ATSI paid $5,000 in cash and may provide Ntera up to $78,000 in VoIP termination services over
      a 90-day period from June 10, 2006 through September 10, 2006 to fully
      discharge the alleged indebtedness.





On
      October 24, 2005, Richard Beckenforf filed a lawsuit in Travis County, Texas
      against ATSI asserting indebtedness allegedly owed to him, principally
      for unpaid fees and un-reimbursed expenses during such time he was a
      director of ATSI.  Such claims were for approximately $96,000 and
      exceeded $100,000 with attorney’s fees. This claim was settled on March 21,
      2006 for $1,500 and issuance of ATSI stock valued at approximately
      $46,000 over the course of up to 6 months.   The Travis County suit
      has been dismissed with appropriate releases and the agreement is in its
      2nd month of compliance toward performance of such
      agreement.




On
      April
      13, 2006 ATSI filed suit in Bexar County, Texas and obtained injunctive relief
      against former ATSI consultant Diane Huth and John Highland associated to a
      dispute relating to who has prior claim and rightful ownership of the trade
      name
      "Telefamilia," which Defendants have undertaken to trademark for their own
      purposes.  Defendants have filed an answer denying any
      liability.   Temporary Injunctive relief was granted preserving ATSI's
      claims to such trade name.  Currently, the suit is pending and no
      trial date has been set.





As
      reported in the Quarterly report on Form 10-QSB/A for the quarter ended January
      31, 2006, we settled the suit by Vianet Communications, Inc. on August 10,
      2005
      and the suit by Helen B. Swartz, Trustee, was dismissed on August 29, 2005.
      We
      may become a party to future claims and legal proceedings arising in the
      ordinary course of business. Due to the inherent uncertainty of litigation,
      the
      range of possible loss, if any, cannot be estimated with a reasonable degree
      of
      precision and there can be no assurance that the resolution of any particular
      claim or proceeding would not have an adverse effect on our results of
      operations in the period in which it occurred.





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**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





On
      April
      14, 2006, we issued 25,380 shares of our common stock to Richard Benkendorf
      as a
      payment of $7,614 associated with the settlement agreement between ATSI and
      Mr.
      Benkendorf. The shares issued to Mr. Benkendorf were issued pursuant to an
      exemption from registration under Section 4(2) of the Securities Act because
      of
      the limited size of the group, the absence of public solicitation or
      advertising, and restrictions on resale of the shares.





On
      April
      20, 2006, we issued 278,444 shares of our common stock to Franklin, Cardwell
      and
      Jones as a payment of $1,950 of accrued interest and principal payment of
      $70,000 on the current note payable. The shares issued to Franklin, Cardwell
      and
      Jones were issued pursuant to an exemption from registration under Section
      4(2)
      of the Securities Act because of the limited size of the group, the absence
      of
      public solicitation or advertising, and restrictions on resale of the
      shares.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





As
      of
      April 30, 2006, the Company was in arrears with respect to the declaration
      of
      the following dividends payable on outstanding shares of its Preferred
      Stock:


Series
                  A Cumulative Preferred Stock
              
              $
              208,000Series
                  D Cumulative Preferred Stock
              
              
              273,000Series
                  E Cumulative Preferred Stock
              
              
              339,000TOTAL
              
              $
              820,000


**ITEM
      6. EXHIBITS**





(a)  Exhibits:
      The following documents are filed as exhibits to this report.





**Exhibit****Number**
            **Description**10.1
            Agreement
                of Compromise, Settlement and Release dated May 31, 2006 between
                ATSI
                Communications, Inc. and Ntera Holdings, Inc.10.2
            Agreement
                of Compromise, Settlement and Release dated May 27, 2006 between
                ATSI
                Communications, Inc. and Richard C. Benkendorf31.1
            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.








20


**SIGNATURE**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**ATSI
              COMMUNICATIONS, INC**.(Registrant)Date: June
              13, 2006
            By:
            /s/ Arthur
              L.
              SmithName:Arthur
              L. SmithTitle:
              President and Chief Executive Officer


Date: June
              13, 2006
            By:
            /s/ Antonio
              EstradaName:Antonio
              EstradaTitle:
              Corporate Controller(Principal
                Accounting and Principal Financial Officer)




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