**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 January 31,
                  2008
  **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.)
 
 **3201
        Cherry Ridge**
 **Building
        C, Suite 300**
 **San
        Antonio, Texas 78230**
 (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
xNo
o





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


Yes
oNo
x





The
      aggregate market value of the common equity held by non-affiliates of the issuer
      was $6,266,784 based on the closing price of $0.16 per share on March 11, 2008
      as reported on the over-the-counter bulletin board.





There
      were 39,167,403 shares of issuer’s Common Stock outstanding as of March 11,
      2008.





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














**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE QUARTER ENDED JANUARY 31, 2008**





**INDEX**




**PART
                  I. FINANCIAL INFORMATION**
              PageItem
                  1. Financial Statements (unaudited)Consolidated
                  Balance Sheets as of January 31, 2008 and July 31, 2007
              3Consolidated
                    Statements of Operations for the Three and Six Months
                  Ended
                    January 31, 2008and
                    2007
              4Consolidated
                    Statements of Comprehensive Income for the Three and Six Months
                Ended
                  January 31, 2008 and 2007
              5Consolidated
                    Statement of Changes in Stockholders’ Deficit fortheSix
                    Months
                  Ended
                    January 31, 2008
              6Consolidated
                    Statements of Cash Flows for the Six Months
                Ended
                  January 31, 2008 and 2007
              7Notes
                  to Consolidated Financial Statements
              8Item
                  2. Management’s Discussions and Analysis and Plan Of
                  Operations
              11Item
                  3. Controls and Procedures
              17**PART
                  II. OTHER INFORMATION**Item
                  1. Legal Proceedings
              17Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              18Item
                  3. Default Upon Senior Securities
              18Item
                  4. Submission of Matters to a Vote of Security Holders
              18Item
                  5. Other Information
              18Item
                  6. Exhibits
              18
  2
 **PART
          1. FINANCIAL INFORMATION**
 
 **ITEM
          1. FINANCIAL STATEMENTS**
 
 **ATSI
          COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          BALANCE SHEETS**
 (In
          thousands, except per share amounts)
 (Unaudited)
 
 January
                    31,
                
                July
                    31,2008
                
                2007ASSETSCURRENT
                    ASSETS:Cash
                    and cash equivalents
                
                $
                830
                
                $
                1,050Accounts
                    receivable, net of allowance for bad debt of $118 and $98,
                    respectively
                
                
                960
                
                
                866Note
                    receivable
                
                
                150
                
                
                50Prepaid
                    & other current assets
                
                
                119
                
                
                94Total
                    current assets
                
                
                2,059
                
                
                2,060LONG-TERM
                    ASSETS:Certificates
                    of deposit
                
                
                313
                
                
                306PROPERTY
                    AND EQUIPMENT
                
                
                502
                
                
                499Less
                    - accumulated depreciation
                
                
                (358
                )
                
                (281
                )Net
                    property and equipment
                
                
                144
                
                
                218Total
                    assets
                
                $
                2,516
                
                $
                2,584LIABILITIES
                    AND STOCKHOLDERS' DEFICITCURRENT
                    LIABILITIES:Accounts
                    payable
                
                $
                1,072
                
                $
                1,071Accrued
                    liabilities
                
                
                125
                
                
                516Current
                    portion of obligation under capital leases
                
                
                3
                
                
                3Notes
                    payable
                
                
                607
                
                
                818Convertible
                    debentures
                
                
                119
                
                
                76Total
                    current liabilities
                
                
                1,926
                
                
                2,484LONG-TERM
                    LIABILITIES:Notes
                    payable
                
                
                713
                
                
                177Convertible
                    debentures
                
                
                120
                
                
                158Obligation
                    under capital leases, less current portion
                
                
                2
                
                
                3Other
                
                
                5
                
                
                4Total
                    long-term liabilities
                
                
                840
                
                
                342Total
                    liabilities
                
                
                2,766
                
                
                2,826STOCKHOLDERS'
                    DEFICIT:Series
                    D Cumulative Preferred Stock, 3,000 shares authorized, 0 and
                    742 shares
                    issued and outstanding
                
                
                -
                
                
                1Series
                    E Cumulative Preferred Stock, 10,000 shares authorized, 0 and
                    1,170 shares
                    issued and outstanding
                
                
                -
                
                
                1Common
                    stock, $0.001 par value, 150,000,000 shares authorized, 39,167,403
                    and
                    37,620,513 sharesissued
                    and outstanding, respectively
                
                
                39
                
                
                38Additional
                    paid in capital
                
                
                72,429
                
                
                72,222Accumulated
                    deficit
                
                
                (72,719
                )
                
                (72,505
                )Other
                    comprehensive income
                
                
                1
                
                
                1Total
                    stockholders' deficit
                
                
                (250
                )
                
                (242
                )Total
                    liabilities and stockholders' deficit
                
                $
                2,516
                
                $
                2,584
 See
            accompanying summary of accounting policies and notes to financial statements.
  3


**ATSI
        COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (In
        thousands, except per share amounts)
 (Unaudited)
 
 Three
                  months ended January 31,
              
              Six
                  months ended January 31,2008
              
              2007
              
              2008
              
              2007OPERATING
                  REVENUES:Carrier
                  services
              
              $
              10,285
              
              $
              7,046
              
              $
              19,685
              
              $
              13,545Communication
                  services
              
              
              24
              
              
              27
              
              
              50
              
              
              60Total
                  operating revenues
              
              
              10,309
              
              
              7,073
              
              
              19,735
              
              
              13,605OPERATING
                  EXPENSES:Cost
                  of services (exclusive of depreciation and amortization, shown
                  below)
              
              
              9,544
              
              
              6,509
              
              
              18,328
              
              
              12,528Selling,
                  general and administrative expense (exclusive of legal and professional
                  fees)
              
              
              538
              
              
              380
              
              
              1,361
              
              
              954Legal
                  and professional fees
              
              
              65
              
              
              59
              
              
              154
              
              
              115Bad
                  debt expense
              
              
              21
              
              
              25
              
              
              21
              
              
              47Depreciation
                  and amortization expense
              
              
              38
              
              
              21
              
              
              78
              
              
              38Total
                  operating expenses
              
              
              10,206
              
              
              6,994
              
              
              19,942
              
              
              13,682OPERATING
                  INCOME (LOSS)
              
              
              103
              
              
              79
              
              
              (207
              )
              
              (77
              )OTHER
                  INCOME (EXPENSE):Debt
                  forgiveness income
              
              
              –
              
              
              –
              
              
              41
              
              
              –Interest
                  income (expense)
              
              
              (24
              )
              
              (41
              )
              
              (48
              )
              
              (69
              )Total
                  other income (expense), net
              
              
              (24
              )
              
              (41
              )
              
              (7
              )
              
              (69
              )NET
                  INCOME (LOSS)
              
              
              79
              
              
              38
              
              
              (214
              )
              
              (146
              )LESS:
                  PREFERRED DIVIDEND
              
              
              –
              
              
              (19
              )
              
              (12
              )
              
              (38
              )ADD:
                  REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
              
              
              –
              
              
              211
              
              
              340
              
              
              228NET
                  INCOME TO COMMON STOCKHOLDERS
              
              $
              79
              
              $
              230
              
              $
              114
              
              $
              44BASIC
                  INCOME PER SHARE:
              
              $
              0.00
              
              $
              0.01
              
              $
              0.00
              
              $
              0.00DILUTED
                  INCOME PER SHARE
              
              $
              0.00
              
              $
              0.01
              
              $
              0.00
              
              $
              0.00WEIGHTED
                  AVERAGE COMMON SHARES OUTSTANDING
              
              
              39,134,394
              
              
              19,962,710
              
              
              38,963,391
              
              
              18,766,060DILUTED
                  COMMON SHARES OUTSTANDING
              
              
              39,522,972
              
              
              32,420,096
              
              
              39,177,155
              
              
              31,223,446
 
 See
        accompanying summary of accounting policies and notes to financial
        statements.




4


**ATSI
        COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 (In
        thousands, except per share amounts)
 (Unaudited)
 
 Three
                  months ended January 31,
              
              Six
                  months ended January 31,2008
              
              2007
              
              2008
              
              2007Net
                  income to common stockholders
              
              $
              79
              
              $
              230
              
              $
              114
              
              $
              44Foreign
                  currency translation adjustment
              
              
              –
              
              
              –
              
              
              –
              
              
              –Comprehensive
                  income to common stockholders
              
              $
              79
              
              $
              230
              
              $
              114
              
              $
              44
 
 See
        accompanying summary of accounting policies and notes to financial statements.
 
 5




**ATSI
        COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENT OF STOCKHOLDERS DEFICIT**
 (in
        thousands, except share amounts)
 
 **Additional**
              
              
              
              **Other****Preferred
                  (D)**
              
              **Preferred
                  (E)**
              
              **Common**
              
              **Paid-in**
              
              **Retained**
              
              **Comp.****Shares**
              
              **Par**
              
              **Shares**
              
              **Par**
              
              **Shares**
              
              **Par**
              
              **Capital**
              
              **(Deficit)**
              
              **Income/Loss**
              
              **Totals****BALANCE,
                  JULY 31, 2007**
              
              
              **742**
              
              
              **1**
              
              
              **1,170**
              
              
              **1**
              
              
              **37,620,513**
              
              
              **38**
              
              **$**
              **72,222**
              
              **$**
              **(72,505**
              **)**
              **$**
              **1**
              
              **$**
              **(242**
              **)**Shares
                  issued for Services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,413,020
              
              
              1
              
              
              295
              
              
              
              
              
              
              
              
              296Common
                  shares issued for Preferred Stock Conversion
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,434
              
              
              –
              
              
              1
              
              
              
              
              
              
              
              
              1Dividends
                  declared
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12
              )
              
              
              
              
              
              
              
              (12
              )Reversal
                  of previously recorded preferred dividend
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              340
              
              
              
              
              
              
              
              
              340Stock
                  option expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              253
              
              
              
              
              
              
              
              
              253Shares
                  issued for conversion of notes payable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              130,436
              
              
              –
              
              
              30
              
              
              
              
              
              
              
              
              30Retirement
                  of preferred stock, settlement of lawsuit
              
              
              (742
              )
              
              (1
              )
              
              (1,170
              )
              
              (1
              )
              
              
              
              
              
              
              
              (700
              )
              
              
              
              
              
              
              
              (702
              )Net
                  (Loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (214
              )
              
              
              
              
              (214
              )**BALANCE,
                  JANUARY 31, 2008**
              
              
              –
              
              
              –
              
              
              –
              
              
              –
              
              
              **39,167,403**
              
              
              **39**
              
              **$**
              **72,429**
              
              **$**
              **(72,719**
              **)**
              **$**
              **1**
              
              **$**
              **(250**
              **)**
 
 See
        accompanying summary of accounting policies and notes to the consolidated
        financial statements.
 
 6


**ATSI
        COMMUNICATIONS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (In
        thousands, except per share amounts)
 (Unaudited)
 
 Six
                  months ended January 31,2008
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:NET
                  INCOME (LOSS)
              
              $
              (214
              )
              $
              (146
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Debt
                  forgiveness income
              
              
              (41
              )
              
              –Depreciation
                  and amortization
              
              
              78
              
              
              38Issuance
                  of stock grants and options, employees for services
              
              
              524
              
              
              370Issuance
                  of common stock and warrants for services
              
              
              24
              
              
              23Provisions
                  for losses on accounts receivables
              
              
              21
              
              
              47Amortization
                  of debt discount
              
              
              4
              
              
              5Settlement
                  of litigation with RoseGlen
              
              
              (175
              )
              
              –Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (114
              )
              
              (172
              )Prepaid
                  expenses and other
              
              
              (25
              )
              
              (5
              )Accounts
                  payable
              
              
              (73
              )
              
              (122
              )Accrued
                  liabilities
              
              
              (34
              )
              
              64Net
                  cash (used in) / provided by operating activities
              
              
              (25
              )
              
              102CASH
                  FLOWS FROM INVESTING ACTIVITIES:Investment
                  in certificates of deposit
              
              
              (8
              )
              
              –Note
                  receivable
              
              
              (100
              )
              
              –Purchases
                  of property & equipment
              
              
              (2
              )
              
              (13
              )Net
                  cash used in investing activities
              
              
              (110
              )
              
              (13
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Payments
                  on notes payable, related party
              
              
              –
              
              
              (90
              )Payments
                  on notes payable
              
              
              (84
              )
              
              (212
              )Proceeds
                  from advances from shareholders
              
              
              –
              
              
              663Proceeds
                  from Notes payables
              
              
              –
              
              
              250Proceeds
                  from the exercise of stock options
              
              
              –
              
              
              16Proceeds
                  from the exercise of warrants
              
              
              –
              
              
              35Principal
                  payments on capital lease obligation
              
              
              (1
              )
              
              (1
              )Net
                  cash (used in) / provided by financing activities
              
              
              (85
              )
              
              661DECREASE
                  / INCREASE IN CASH
              
              
              (220
              )
              
              750CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              1,050
              
              
              36CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              830
              
              $
              786SUPPLEMENTAL
                  DISCLOSURES:Cash
                  paid for interest
              
              $
              23
              
              $
              34Cash
                  paid for income tax
              
              
              –
              
              
              –NON-CASH
                  INVESTING AND FINANCING TRANSACTIONSIssuance
                  of common stock for conversion of debt
              
              $
              30
              
              $
              15Conversion
                  of preferred stock to common stock
              
              
              1
              
              
              381Preferred
                  stock dividends
              
              
              12
              
              
              38Reversal
                  of previously recorded preferred stock dividend
              
              
              (340
              )
              
              (228
              )
 See
          accompanying summary of accounting policies and notes to financial statements.




7




**ATSI
      COMMUNICATIONS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited interim consolidated financial statements of ATSI
      Communications, Inc. have been prepared in accordance with accounting principles
      generally accepted in the United States of America and the rules of the United
      States Securities and Exchange Commission. In the opinion of management, these
      interim financial statements contain all adjustments, consisting of normal
      recurring adjustments, necessary for a fair presentation of financial position
      and the results of operations for the interim periods presented. The results
      of
      operations for interim periods are not necessarily indicative of the results
      to
      be expected for the full year. Notes to the consolidated financial statements,
      which would substantially duplicate the disclosure contained in the audited
      financial statements for the most recent fiscal year ended July 31, 2007, as
      reported in Form 10-KSB filed on October 17, 2007, have been
      omitted.





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, ATSI incurred net losses from
      operations of $207,000 and $77,000 during the six months ended January 31,
      2008
      and 2007, respectively, and has an accumulated deficit of $72.7 million and
      working capital of $133,000 as of January 31, 2008. Although ATSI generated
      sufficient cash from operations to cover its operating expenses during the
      six
      months ended January 31, 2008, these conditions create doubt as to ATSI’s
      ability to continue as a going concern. Management plans to continue to improve
      its financial position through the profitable growth of its operations subject
      to its capital limitations. Management will also continue to pursue financings
      that may include raising additional capital through the issuance of debt. The
      financial statements do not include any adjustments that might be necessary
      if
      ATSI is unable to continue as a going concern.





**NOTE
      3 - STOCK-BASED COMPENSATION**





In
      September 2005, ATSI adopted its 2005 stock compensation plan. This plan
      authorizes the grant of up to 7.5 million warrants, stock options, restricted
      common shares, non-restricted common shares and other awards to employees,
      directors, and certain other persons. The Plan is intended to permit ATSI to
      retain and attract qualified individuals who will contribute to the overall
      success of ATSI. ATSI’s Board of Directors determines the terms of any grants
      under the Plan. Exercise prices of all warrants, stock options and other awards
      vary based on the market price of the shares of common stock as of the date
      of
      grant. The warrants, stock options, restricted common stock, non-restricted
      common stock and other awards vest based on the terms of the individual
      grant.





In
      August
      2007, ATSI’s Board of Directors approved an amendment to the Plan. Under the
      amendment, ATSI’s Board of Directors increased the maximum aggregate number of
      shares of Common Stock that may be issued under the Plan from 7.5 million shares
      to 17.5 million shares.





The
      grants under the plan during the six months ended January 31, 2008 were as
      follows:





-
      ATSI
      granted options to purchase 1,835,000 common shares to certain employees and
      Board members with an exercise price of $0.21 per share, the closing price
      of
      ATSI’s common stock on the grant date, August 15, 2007. One third of the options
      vested immediately on the grant date and the remaining two-thirds will vest
      as
      follows: one-third on the first anniversary of the grant date and one-third
      on
      the second anniversary of the grant date. All options expire if not exercised
      on
      or before the tenth anniversary of the grant date. Under the fair value option
      method, ATSI recognized $89,000 of compensation expense associated with the
      vested options on the date of grant. ATSI will recognize the remaining $177,000
      of non-cash compensation expense related to un-vested options over the relevant
      service periods.





-
      ATSI
      granted options to purchase 750,000 common shares to an employee with an
      exercise price of $0.23 per share, the closing price of ATSI’s common stock on
      the grant date, September 1, 2007. Upon successfully achieving performance
      objectives set by ATSI’s Board of Directors, the options will vest one-third on
      the first anniversary of the date of grant, one-third on the second anniversary
      of the date of grant, and one-third on the third anniversary of the date of
      grant. All options expire if not exercised on or before the tenth anniversary
      of
      the grant date. Under the fair value option method, ATSI will recognize $119,000
      of non-cash compensation expense over the relevant service period.




8




-
      ATSI
      granted options to purchase 30,000 common shares to an employee with an exercise
      price of $0.27 per share, the closing price of ATSI’s common stock on the grant
      date, November 1, 2007. The options will vest one-third on the first anniversary
      of the date of grant, one-third on the second anniversary of the date of grant,
      and one-third on the third anniversary of the date of grant. All options expire
      if not exercised on or before the tenth anniversary of the grant date. Under
      the
      fair value option method, ATSI will recognize $5,500 of non-cash compensation
      expense over the relevant service period.





-
      ATSI
      issued 1,299,398 shares of unrestricted common stock to its employees and
      directors for services rendered with a value of $272,873. (See Note 5 for
      details.)





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





Expected
                dividend yield
            0.00%Expected
                stock price volatility
            75%Risk-free
                interest rate
            4.65%Expected
                life of options
            6
                years





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




Weighted-averageWeighted-average
              
              remaining
                  contractual**2005
                  Stock Compensation Plan**
              
              Options
              
              exercise
                  price
              
              term
                  (years)Outstanding
                  at July 31, 2007
              
              
              5,598,998
              
              $
              0.17
              
              
              6Granted
              
              
              2,615,000
              
              
              0.22
              
              
              6Forfeited
              
              
              (20,000
              )
              
              0.21
              
              
              6Outstanding
                  at January 31, 2008
              
              
              8,193,998
              
              
              0.19
              
              
              6Exercisable
                  at January 31, 2008
              
              
              4,700,332
              
              $
              0.18
              
              
              6




**NOTE
      4 - DEBT**





On
      November 3, 2006, ATSI
      borrowed $250,000 from CCA Financial Services, Inc. This note initially had
      an
      interest rate of 16% per annum, provided for eleven monthly payments of
      principal and interest in the amount of $7,807 and a final payment at maturity
      of $200,000, was secured by ATSI’s equipment, deposit accounts and accounts
      receivables, and had an initial maturity date of November 3, 2007. ATSI has
      the
      option of paying off the total outstanding principal balance at any time without
      any penalties. On November 4, 2007, ATSI and CCA Financial Services, Inc. agreed
      to extend the term of the note to April 30, 2008. The new principal balance
      of
      the note is $150,000 and the interest rate is 15% per annum. All other terms
      remain the same.





On
      June
      1, 2006, ATSI restructured $275,000 in original principal amount of its 9%
      Convertible Subordinated Debentures and $141,000 in accrued interest by issuing
      new 9% Convertible Subordinated Debentures due June 1, 2011 (“New Debentures”)
      with an aggregate face value of $416,000. Each New Debenture accrues interest
      at
      9% per annum payable annually. The New Debentures and any accrued interest
      are
      subject to conversion into common stock by either ATSI or the holders of the
      New
      Debentures at the
      higher of (a) $0.27 per share or (b) the average closing price of ATSI’s common
      stock for the 10 days immediately preceding the date of conversion, subject
      to a
      maximum number of 1,540,741 common shares issuable upon conversion. The proceeds
      from the New Debentures have been discounted by $26,000 to reflect a beneficial
      conversion feature derived from the difference between the conversion price
      and
      the market price at the time of issuance. The discount will be amortized over
      the life of the New Debentures using the effective interest method. As of
      January 31, 2008, the principal balance and accrued interest on the New
      Debenture was $239,000 and $15,000, respectively.




9




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





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





On
      October 1, 2007, ATSI restructured a $500,000 note payable to Alfonso Torres.
      The new principal balance is $459,170. The new note bears interest at 6% and
      is
      payable in a single lump sum on October 1, 2009. ATSI has the option of paying
      off the total outstanding principal balance and accrued interest at any time
      without penalties. In connection with the restructuring, ATSI issued 130,435
      shares of common stock at $0.23 per share to pay off $30,000 of accrued interest
      under the original note and agreed to pay $60,000 in cash, in equal monthly
      payments starting November 2, 2007. ATSI has paid $60,000 towards the cash
      commitment. As a result of the restructuring of the note ATSI recognized $41,000
      in debt forgiveness income associated with the accrued interest forgiven by
      Alfonso Torres.




On
      December 10, 2007, ATSI and The Shaar Fund entered into a settlement agreement
      relating to certain litigation. ATSI paid $75,000 on December 12, 2007 and
      agreed to pay another $450,000 with interest at 7.5% per annum in quarterly
      payments of $16,667 on each of January 31, 2008 and April 30, 2008, and in
      quarterly payments of $26,042 commencing on July 31, 2008 and continuing until
      April 30, 2012. I f
      paid in
      full within the first 18 months, ATSI will be entitled to a discount of 22.5%
      on
      the then outstanding principal balance. The
      Shaar
      Fund agreed to surrender for cancellation 742 shares of ATSI’s 6% Series D
      Cumulative Convertible Preferred Stock and forgive approximately $340,000 in
      dividends accrued thereon as of October 24, 2007.





**NOTE
      5 - ACCOUNTS RECEIVABLE FINANCING AGREEMENT**





On
      December 12, 2007, ATSI entered into a $3,000,000 accounts receivable financing
      agreement with Wells Fargo Business Credit (“WFBC”), a division of Wells Fargo
      Bank, N.A. Under the terms of the Account Transfer Agreement between ATSI and
      WFBC, ATSI may offer to sell with recourse not less than $350,000 and no more
      than $3,000,000 of its accounts receivable to WFBC each month. WFBC pays to
      ATSI
      85% of the aggregate amount of each account transferred under the Account
      Transfer Agreement. Once the account is collected by WFBC, it retains the amount
      originally paid for the account plus a daily factoring rate of 0.0349% for
      each
      day outstanding measured from the funding date and until the account is paid
      by
      ATSI’s customer. If an account is not paid within 90 days, ATSI must repurchase
      the account for the amount that it originally received for the account and
      pay
      the factor rate that has accrued prior to repurchase. The factoring agreement
      is
      for twelve months and ATSI can terminate this agreement upon 30 days written
      notice, subject to a $15,000 early termination fee. Under the receivable
      financing agreement with WFBC, ATSI is factoring approximately $800,000 of
      its
      monthly receivables. As of the date of this filing, ATSI had approximately
      $250,000 of factored account receivables outstanding; ATSI will continue to
      factor its receivables on a monthly basis as services are rendered to its
      customers.





**NOTE
      6 - COMMON STOCK**





During
      the six months ended January 31, 2008 ATSI issued the following:





-
            113,622
                shares of common stock valued at $24,420 to its placement agent and
                consultants for their services
                rendered.




10




-
            1,299,398
                shares of common stock to its employees and directors for services
                rendered. ATSI recorded the fair value of $272,873 as the compensation
                expense in its statement of operations.





-
            3,434
                shares of common stock to a Series H Preferred Stock shareholder
                for an
                unprocessed conversion of the Series H Preferred Stock.





-
            130,436
                shares of common stock to Alfonso Torres in lieu of $30,000 in accrued
                interest associated with the Alfonso Torres note payable.





**NOTE
      7 - NOTE RECEIVABLE**





As
      of
      January 31, 2008, ATSI
      loaned $150,000 to NetSapiens Inc. The
      note
      receivable is due on June 26, 2008 with interest at 8% per year. The
      note
      is secured by NetSapiens’ proprietary Starter Platform License and SNAPsolution
      modules. ATSI can convert the outstanding interest and principal balance into
      a
      perpetual NetSapiens’ License.





**NOTE
      8 - RELATED PARTY TRANSACTIONS**





In
      January 2006, ATSI, through its wholly owned subsidiary, Telefamilia
      Communications, Inc., entered into a joint management and marketing agreement
      with Fiesta Communications, Inc. to provide accounting and administrative
      support for $2,500 per month. As of January 31, 2008, Fiesta owed ATSI $45,000
      in management fees. Additionally,
      under the joint management and marketing agreement between Telefamilia and
      Fiesta, ATSI entered into a promissory note for $15,000 with Fiesta on February
      1, 2008. The promissory note has a maturity date of April 30, 2008 and an annual
      interest rate of 8%. ATSI’s CEO and President, Arthur L.
      Smith,
      is a 20% shareholder of Fiesta.





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





**NOTE
      9 - PREFERRED STOCK SETTLEMENTS**




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





In
      December 2007, ATSI and The Shaar Fund Ltd. entered into a settlement agreement
      in which they released each other from all claims relating to the Series D
      Convertible Preferred Stock. Under the terms of the settlement agreement, The
      Shaar Fund, Ltd. agreed to surrender all outstanding shares of ATSI’s Series D
      Convertible Preferred Stock and waived all accrued and unpaid dividends thereon
      in the amount of approximately $340,000 as of October 24, 2007. ATSI paid The
      Shaar Fund, Ltd. $75,000 in cash in December 2007 and issued to The Shaar Fund
      a
      promissory note for $450,000, bearing interest at the rate of 7.5% per annum
      and
      payable in payments of $16,667 in principal and accrued interest on each of
      January 31, 2008 and April 30, 2008, and in quarterly payments of $26,042 in
      principal and accrued interest commencing on July 31, 2008 and continuing until
      April 30, 2012. ATSI
      will
      be entitled to a discount of 22.5% on the then outstanding principal
      balance i f
      ATSI
      paid the principal amount in full within the first 18 months.





**ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN 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 Exchange Act of 1934, as amended. “Forward looking
      statements” are those statements that describe management’s beliefs and
      expectations about the future. We have identified forward-looking statements
      by
      using words such as “anticipate,” “believe,” “could,” “estimate,” “may,”
“expect,” ”plan,” and “intend.” Although we believe these expectations are
      reasonable, our operations involve a number of risks and uncertainties. Some
      of
      these risks include the availability and capacity of competitive data
      transmission networks and or ability to raise sufficient capital to continue
      operations. Additional risks are included in our Annual Report on Form 10-KSB
      filed with the Securities and Exchange Commission on October 17, 2007.*




11




The
      following is a discussion of the consolidated financial condition and results
      of
      operations of ATSI for the three and six months ended January 31, 2008 and
      2007.
      As used in this section, the term “fiscal 2008” means the year ending July 31,
      2008 and “fiscal 2007” means the year ended July 31, 2007.





**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 include:





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





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





**Results
      of Operations**





The
      following table sets forth certain items included in our results of operations
      and variances between periods for the three and six months ended January 31,
      2008 and 2007. All dollar amounts are in thousands.




Three
                months ended January 31,
            
            Six
                months ended January 31,2007
            
            2006
            
            Variances
            
            %
            
            2007
            
            2006
            
            Variances
            
            %OPERATING
                REVENUES:Carrier
                services
            
            $
            10,285
            
            $
            7,046
            
            $
            3,239
            
            
            46
            %
            $
            19,685
            
            $
            13,545
            
            $
            6,140
            
            
            45
            %Communication
                services
            
            
            24
            
            
            27
            
            
            (3
            )
            
            -11
            %
            
            50
            
            
            60
            
            
            (10
            )
            
            -17
            %Total
                operating revenues
            
            
            10,309
            
            
            7,073
            
            
            3,236
            
            
            46
            %
            
            19,735
            
            
            13,605
            
            
            6,130
            
            
            45
            %Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            9,544
            
            
            6,509
            
            
            3,035
            
            
            47
            %
            
            18,328
            
            
            12,528
            
            
            5,800
            
            
            46
            %GROSS
                MARGIN
            
            
            765
            
            
            564
            
            
            201
            
            
            36
            %
            
            1,407
            
            
            1,077
            
            
            330
            
            
            31
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            538
            
            
            380
            
            
            158
            
            
            42
            %
            
            1,361
            
            
            954
            
            
            407
            
            
            43
            %Legal
                and professional fees
            
            
            65
            
            
            59
            
            
            6
            
            
            10
            %
            
            154
            
            
            115
            
            
            39
            
            
            34
            %Bad
                debt expense
            
            
            21
            
            
            25
            
            
            (4
            )
            
            -16
            %
            
            21
            
            
            47
            
            
            (26
            )
            
            -55
            %Depreciation
                and amortization expense
            
            
            38
            
            
            21
            
            
            17
            
            
            81
            %
            
            78
            
            
            38
            
            
            40
            
            
            105
            %OPERATING
                INCOME (LOSS)
            
            
            103
            
            
            79
            
            
            24
            
            
            30
            %
            
            (207
            )
            
            (77
            )
            
            (130
            )
            
            -169
            %OTHER
                INCOME (EXPENSE):Debt
                forgiveness income
            
            
            -
            
            
            -
            
            
            -
            
            
            0
            %
            
            41
            
            
            -
            
            
            41
            
            
            100
            %Interest
                income (expense)
            
            
            (24
            )
            
            (41
            )
            
            17
            
            
            41
            %
            
            (48
            )
            
            (69
            )
            
            21
            
            
            30
            %Total
                other income (expense), net
            
            
            (24
            )
            
            (41
            )
            
            17
            
            
            41
            %
            
            (7
            )
            
            (69
            )
            
            62
            
            
            90
            %NET
                INCOME (LOSS)
            
            
            79
            
            
            38
            
            
            41
            
            
            108
            %
            
            (214
            )
            
            (146
            )
            
            (68
            )
            
            -47
            %LESS:
                PREFERRED DIVIDEND
            
            
            -
            
            
            (19
            )
            
            19
            
            
            100
            %
            
            (12
            )
            
            (38
            )
            
            26
            
            
            68
            %ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            -
            
            
            211
            
            
            (211
            )
            
            -100
            %
            
            340
            
            
            228
            
            
            112
            
            
            49
            %NET
                INCOME TO COMMON STOCKHOLDERS
            
            $
            79
            
            $
            230
            
            $
            (151
            )
            
            -66
            %
            $
            114
            
            $
            44
            
            $
            70
            
            
            159
            %




12




**Three
      Months ended January 31, 2008 Compared to Three Months ended January 31,
      2007**





*Operating
      Revenues* .
      Consolidated operating revenues increased $3,236,000, or 46%, between periods
      from $7,073,000 for the quarter ended January 31, 2007 to $10,309,000 for the
      quarter ended January 31, 2008.





Carrier
      services revenue increased by $3,239,000, or 46%, from the quarter ended January
      31, 2007 to the quarter ended January 31, 2008. Our carrier traffic increased
      by
      41 % from approximately 99,343,000 minutes of voice traffic during the quarter
      ended January 31, 2006 to approximately 139,710,508 minutes
      of voice traffic in the quarter ended January 31, 2008. The increase in revenue
      and VoIP minutes is attributable primarily to the upgrade to our Nextone® Soft
      Switch, the upgrade to our Soft Switch allows us to offer high quality and
      dependable VoIP services, serve more customers and efficiently process greater
      volume of data and calls.





Communication
      services revenue decreased approximately 11%, or $3,000 from the quarter ended
      January 31, 2007 to the quarter ended January 31, 2008. The decrease in
      communication services revenue is primarily due to a decrease in retail
      customers from 123 during the quarter ended January 31, 2007 to 100 during
      the
      quarter ended January 31, 2008.





C *ost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by $3,035,000, or 47%, from the quarter
      ended January 31, 2007 to the quarter ended January 31, 2008. 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 99,343,000
      minutes in the second quarter of fiscal 2007 to approximately 139,710,508
      minutes in the quarter ended January 31, 2008, thus increasing our cost of
      services between quarters. Consolidated cost of services, as a percentage of
      revenue was comparable between quarters at 92%. Additionally, as a result of
      the
      increase in total revenue our gross profits increased from $564,000 during
      the
      quarter ended January 31, 2007 to $765,000 during the quarter ended January
      31,
      2008.





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased $158,000, or 42%, from the quarter ended January 31,
      2007  to
      the
      quarter ended January 31, 2008. The increase is primarily attributable to an
      increase in salaries of $120,000 as a result of the hiring of two new employees
      and bonuses paid to officers. Additionally, non-cash compensation expense to
      employees increased by $30,000 from the quarter ended January 31, 2007 to the
      quarter ended January 31, 2008.





*Legal
      and professional fees* .
      Legal
      and professional fees increased $6,000, or 10%, from the quarter ended January
      31, 2007  to
      the
      quarter ended January 31, 2008. The increase is attributable to $22,000 in
      legal
      fees incurred during the quarter ended January 31, 2008 in connection with
      the
      settlement between ATSI and the holders of the 6% Series D Cumulative
      Convertible Preferred Stock. We did not incur similar expenses during the
      quarter ended January 31, 2007.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $4,000, or 16%, from the quarter ended January 31, 2007
      to
      the quarter ended January 31, 2008. During the quarter ended January 31, 2007
      we
      recognized $25,000 in bad debt expense associated with uncollectible accounts.
      During the quarter ended January 31, 2008 we only recognized $21,000 in bad
      debt
      expense associated with uncollectible accounts, thus reducing our expense
      between periods.





*Depreciation
      and amortization* .
      Depreciation and amortization increased by $17,000 or 81%, from the quarter
      ended January 31, 2007 to the quarter ended January 31, 2008. The increase
      is
      attributed to the amortization during fiscal 2008 of the new computers and
      the
      upgrade to our Nextone soft-switch acquired during the fourth quarter of fiscal
      2007.





*Operating
      income (loss)* .
      The
      Company’s operating income increased by $24,000, or 30%, from the quarter ended
      January 31, 2007 to the quarter ended January 31, 2008. The increase in
      operating income is attributed to the increase between quarters in gross profit
      margin of approximately $201,000. The increase in gross profit margin was offset
      by the increase of approximately $158,000 in selling, general and administrative
      expenses due to an increase in salaries of $120,000 as a result of the hiring
      of
      two new employees and bonuses paid to officers. Additionally,
      non-cash compensation expense to employees increased by $30,000 from the quarter
      ended January 31, 2007 to the quarter ended January 31, 2008.




13




*Interest
      income (expense)* .
      Interest (expense) decreased by $17,000, or 41%, from the quarter ended January
      31, 2007 to the quarter ended January 31, 2008. The decrease can be attributed
      to the payoff of various promissory notes during fiscal 2008; and the related
      lower average balance of notes payable during the quarter ended January 31,
      2008.





*Net
      income (loss)* .
      Net
      income increased by $41,000, or 108%, from the quarter ended January 31, 2007
      to
      the quarter ended January 31, 2008. The increase in net income is attributed
      to
      the increase between quarters in gross profit margin of approximately $201,000.
      The increase in gross profit margin was offset by the increase of approximately
      $158,000 in selling, general and administrative expenses due to an increase
      in
      salaries of $120,000 as a result of the hiring of two new employees and bonuses
      paid to officers. Additionally,
      non-cash compensation expense to employees increased by $30,000 from the quarter
      ended January 31, 2007 to the quarter ended January 31, 2008.





*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $19,000, or 100%, between periods, from
      $19,000 for the quarter ended January 31, 2007 to $0 during the quarter ended
      January 31, 2008. The decrease is primarily the result of the conversion of
      all
      Redeemable Preferred Stock during the first quarter of Fiscal 2008. As a result
      we were not required to account for any preferred stock dividend during the
      quarter ended January 31, 2008.





*Reversal
      of previously recorded preferred stock dividends.* During
      the quarter ended January 31, 2007 we recognized a reversal of previously
      recorded dividend expense of $211,000, this reversal occurred as result of
      the
      conversion into common stock of 2,750 shares of Series A Convertible Preferred
      Stock and 1,905,729 shares of Series H Convertible Preferred Stock. At the
      time
      of conversion of these securities the
      market price of ATSI’s stock was higher than at the time of issuance of the
      securities. As a result, a reversal of preferred dividends was recognized during
      the period. We did not recognize any adjustments during the quarter ended
      January 31, 2008.





*Net
      income applicable to common stockholders* .
      Net
      income applicable to common stockholders decreased by $151,000, or 66%, from
      the
      quarter ended January 31, 2007 to the quarter ended January 31, 2008 even though
      we recognized an increase in gross margin between periods of $201,000 and an
      increase in operating income of $24,000. The decrease in net income applicable
      to common stockholders is attributed to the ** reversal
      of previously recorded preferred stock dividends of $211,000 recognized during
      the quarter ended January 31, 2007. We did not recognize this type of adjustment
      during the quarter ended January 31, 2008.





**Six
      Months ended January 31, 2008 Compared to Six Months ended January 31,
      2007**





*Operating
      Revenues* .
      Consolidated operating revenues increased $6,130,000, or 45%, between periods
      from $13,605,000 for the six months ended January 31, 2007 to $19,735,000 for
      the six months ended January 31, 2008.





Carrier
      services revenue increased $6,140,000, or 45%, from the six months ended January
      31, 2007 to the six months ended January 31, 2008. The
      increase in carrier services revenue is attributed to the increase in carrier
      minutes. Our carrier services minutes increased by 34% from approximately
      204,556,730 minutes of voice traffic during the six months ended January 31,
      2007 to approximately 274,710,508 minutes of voice traffic in the six months
      ended January 31, 2008. The
      increase in revenue and VoIP minutes is attributable primarily to the upgrade
      to
      our Nextone® Soft Switch, the upgrade to our Soft Switch allows us to offer high
      quality and dependable VoIP services, serve more customers and efficiently
      process greater volume of data and calls.





Communication
      services revenue decreased approximately 17%, or $10,000, from the six
      months ended January 31,
      2007
      to the six months ended January 31, 2008. The decrease in communication services
      revenue is primarily due to a decrease in the average monthly retail customers
      from 130 during the six months ended January 31, 2007 to 111 during the six
      months ended January 31, 2008.





C *ost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by $5,800,000, or 46%, from the six
      months ended January 31, 2007 to the six months ended January 31, 2008. The
      increase in cost of services is a direct result of the increase in voice
      traffic, which required an increase in service fees paid to our vendors for
      transmission services. Consolidated cost of services, as a percentage of revenue
      increased from 92% during the six months ended January 31, 2007 to 93% during
      the six months ended January 31, 2008. Despite the increase in cost of service
      (exclusive of depreciation and amortization) as a percentage of sales, gross
      profits increased from $1,077,000 during the six months ended January 31, 2007
      to $1,407,000 during the six months ended January 31, 2008 as a result of the
      increase in revenues. As previously mentioned, our carrier traffic increased
      by
      34 % from approximately 204,556,730 minutes of voice traffic during the six
      months ended January 31, 2007 to approximately 274,710,508 minutes of voice
      traffic in the six months ended January 31, 2008. The increase carrier minutes
      can mainly be attributed to increase in customers during fiscal 2008 compared
      to
      fiscal 2007.




14




*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased $407,000, or 43%, from the six months ended January 31,
      2007
      to the six months ended January 31, 2008. The increase is primarily attributable
      to an increase in salaries and wages of approximately $233,000 as a result
      of
      the hiring of two new employees and bonuses paid to officers. Furthermore,
      non-cash compensation expense to employees increased by $155,000 from the six
      months ended January 31, 2007 to the six months ended January 31, 2008. The
      increase is attributed to the recognition during the six months ended January
      31, 2008 of approximately $525,000 of non-cash compensation expense associated
      with the stock options issued to employees and directors recorded under the
      adopted of FAS-123R, Modified Stock based Compensation. We incurred
      approximately $370,000 on non-cash compensation expense during the six months
      ended January 31, 2007.




*Legal
      and Professional Fees* .
      Legal
      and professional fees increased $39,000, or 34%, from the six months ended
      January 31, 2007 to the six months ended January 31, 2008. The
      increase is attributable to $57,000 in legal fees incurred during the six months
      ended January 31, 2008 in connection with the litigation and settlement between
      ATSI and the holders of the 6% Series D Cumulative Convertible Preferred Stock.
      We did not incur similar expenses during the six months ended January 31, 2007.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $26,000, or 55%, from the six months ended January 31,
      2007
      to the six months ended January 31, 2008. During
      the six months ended January 31, 2007 we recognized $47,000 in bad debt expense
      associated with uncollectible accounts. During the six months ended January
      31,
      2008 we only recognized $21,000 in bad debt expense associated with
      uncollectible accounts.





*Depreciation
      and amortization* .
      Depreciation and amortization increased by $40,000, or 105%, from the six months
      ended January 31, 2007 to the six months ended January 31, 2008. The increase
      is
      attributed to the amortization during fiscal 2008 of the new computers and
      the
      upgrade to our Nextone soft-switch, which was acquired during the fourth quarter
      of fiscal 2007.





*Operating
      income (loss)* .
      The
      Company’s operating loss increased by $130,000, or 169%, from the six months
      ended January 31, 2007 to the six months ended January 31, 2008. The increase
      in
      operation loss is primarily attributable to an increase in salaries and wages
      of
      approximately $233,000 as a result of the hiring of two new employees and
      bonuses paid to officers. Furthermore, the increase in non-cash compensation
      expense to employees of $155,000 from the six months ended January 31, 2007
      to
      the six months ended January 31, 2008. Additionally, the increase in operating
      loss is attributed to recognition of $57,000 in legal and professional fees
      in
      connection with the litigation and settlement between ATSI and the holders
      of
      the 6% Series D Cumulative Convertible Preferred Stock. These increases in
      expenses were offset by the increase in gross margin between periods of
      approximately $330,000.





*Debt
      forgiveness income* .
      Debt
      forgiveness income increased by $41,000, or 100%, from the six months ended
      January 31, 2007 to the six months ended January 31, 2008. The increase can
      be
      attributed to the restructuring of the note payable and settlement with Alfonso
      Torres and forgiveness of $41,000 in accrued interest.




*Interest
      income (expense)* .
      Interest income (expense) decreased by $21,000, or 30%, from the six months
      ended January 31, 2007 to the six months ended January 31, 2008. The decrease
      can be attributed to the payoff of various notes during fiscal 2008; as a result
      a reduction of interest expense was recognized during the six months ended
      January 31, 2008.




*Net
      income (loss)* .
      Net
      income (loss) increased by $68,000 from the six months ended January 31, 2007
      to
      the six months ended January 31, 2008. The increase in net income (loss) is
      primarily attributable to an increase in salaries and wages of approximately
      $233,000 as a result of the hiring of two new employees and bonuses paid to
      officers. Furthermore, the increase in non-cash compensation expense to
      employees of $155,000 from the six months ended January 31, 2007 to the six
      months ended January 31, 2008. Additionally, the increase in net income (loss)
      is attributed to the increase in legal and professional fees of $57,000 in
      connection with the litigation and settlement between ATSI and the holders
      of
      the 6% Series D Cumulative Convertible Preferred Stock. These increases in
      expenses were offset by the increase in gross margin between periods of
      approximately $330,000.




15




*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $26,000, or 68%, between periods, from
      $38,000 for the six months ended January 31, 2007 to $12,000 during the six
      months ended January 31, 2008. The decrease in preferred dividends between
      periods is mainly attributed to a decrease in dividends associated with Series
      A
      Convertible Preferred Stock, Series H Convertible Preferred Stock and Series
      D
      Convertible Preferred Stock. As of January 31, 2008 all Convertible Preferred
      Stock has been converted or redeemed to common stock.





*Reversal
      of previously recorded preferred stock dividends.* During
      the six months ended January 31, 2008, we recognized a reversal of previously
      recorded dividend expense of $340,000. This reversal occurred as result of
      the
      settlement agreement reached between ATSI and The Shaar Fund. As a result of
      the
      settlement The Shaar Fund agreed to surrender 742 shares of ATSI’s 6% Series D
      Cumulative Convertible Preferred Stock and forgive accrued dividends of
      approximately $340,000 as of October 24, 2007. During the six months ended
      January 31, 2007 we recognized a reversal of previously recorded dividend
      expense of $228,000. This reversal occurred as result of the conversion into
      common stock of 2,750 shares of Series A Convertible Preferred Stock and
      2,739,121 shares of Series H Convertible Preferred Stock. At the time of
      conversion of these securities the
      market price of ATSI’s stock was higher than at the time of issuance of the
      securities, and as a result, a reversal of preferred dividends was recognized
      during the period.




*Net
      income (loss) applicable to common stockholders* .
      Net
      income applicable to common stockholders improved by $70,000, or 159%, from
      $44,000 for the six months ended January 31, 2007 to $114,000 for the six months
      ended January 31, 2008. The improvement in net income applicable to common
      stockholders is attributed to the increase between periods in gross profit
      margin of approximately $330,000. Is also attributed to the increase in the
      reversal of previously recorded preferred stock dividends of approximately
      $112,000. These increases were offset between periods by the increase in
      salaries and wages of approximately $233,000 as a result of the hiring of two
      new employees and bonuses paid to officers. Furthermore, the increase in
      non-cash compensation expense to employees of $155,000 from the six months
      ended
      January 31, 2007 to the six months ended January 31, 2008 and the increase
      in
      legal and professional fees of $57,000 in connection with the litigation and
      settlement between ATSI and the holders of the 6% Series D Cumulative
      Convertible Preferred Stock.





**Liquidity
      and Capital Resources**




*Cash
      Position:* We had a
      cash balance of $830,000 as of January 31, 2008. Net cash used by operating
      activities during the six months ended January 31, 2008 was approximately
      $25,000. Net cash used was primarily as a result of the net loss of $214,000,
      the payment of $175,000 in connection with the settlement of litigation between
      ATSI and RGC International Investors, a reduction of accounts payable by $73,000
      and a reduction in accrued liabilities of $34,000. Net cash provided by
      operating activities was provided by the non-cash charges for depreciation
      of
      $78,000, debt forgiveness income of $41,000, non-cash charges associated with
      issuance of stock grants and options to employees for services of $524,000,
      non-cash charges for issuance of common stock and warrants for services of
      $24,000 and provisions for losses on accounts receivables of $21,000.





Investing
      activities during the six
      months ended January
      31, 2008 consumed $110,000 as a result of advances to NetSapiens and investments
      in certificates of deposit.





Financing
      activities during the six months ended January 31, 2008 consumed $85,000 in
      cash. This cash was primarily consumed by debt principal payments of $84,000
      associated with various notes payables and principal payments of $1,000
      associated with our capital lease obligation. Overall, our net operating,
      investing and financing activities during the six months ended January 31,
      2008
      resulted in a decrease of $220,000 in our cash.




16




Our
      current cash expenses are expected to be approximately $120,000 per month,
      including wages, rent, utilities, litigation fees and corporate professional
      fees. We are currently generating sufficient cash from operations to cover
      all
      monthly cash expenses, but we cannot predict if, over the next twelve months,
      we
      will continue to generate sufficient cash from operations to cover all of our
      cash expenses. We intend to cover our monthly cash expenses with our cash
      produced from operations and financing activities. We expect to continue
      conserving cash resources by paying long-term executive compensation and fees
      for certain professional services with shares of our common stock. We are
      currently utilizing the factoring agreement with Wells Fargo Bank as necessary
      to provide cash for operations. Under the agreement we are able to factor up
      to
      $3,000,000 of our monthly accounts receivable. On
      an
      average, we are factoring account receivables of $800,000 per month .
      As of
      the date of this filing, we had $250,000 of outstanding receivables under the
      Wells Fargo Factoring agreement.





Furthermore,
      we will continue to pursue additional debt and equity financings to fund
      continued growth and increase our cash reserves. However, we presently do not
      have a definitive agreement in place to obtain such financing. Any additional
      debt or equity financing may not be available in sufficient amounts or on
      acceptable terms. If such financing is not available in sufficient amounts
      or on
      acceptable terms, the Company's operational results and future financial
      condition may be adversely affected.





We
      are
      not presently paying quarterly interest on our outstanding convertible
      debentures. However, we have continued to accrue interest on such debentures.
      The increase in accrued liabilities related to the interest in arrears
      contributed approximately $15,000 in cash flow savings during the six months
      ended January 31,
      2008 .





Our
      working capital was $133,000 as of January 31,
      2008 .
      This
      represents an improvement of approximately $557,000 from our working capital
      deficit at July 31, 2007. The improvement can primarily be attributed to the
      reversal of previously recorded preferred stock dividends of $340,000 as a
      result of the settlement with The Shaar Fund.




**Ongoing
      operations**





We
      generated sufficient income from operations to cover our operating expenses
      during the six months ended January 31, 2008. However, we believe that due
      to
      our limited access to capital, we may not be able to support our ongoing
      operations if we do not continue producing positive operating income in the
      future. Our ability to continue as a going concern is dependent upon generating
      sufficient income from operations to cover our operating expenses, the ongoing
      support of our stockholders and customers, and our ability to obtain capital
      resources to support expansion.





We
      will
      continue to pursue cost cutting strategies in order to conserve working capital
      that could limit the implementation of our business plan. We are dependent
      on
      our operations and the proceeds from future debt or equity investments to fully
      implement our business plan. If we are unable to continue producing positive
      cash flow from operations or raise sufficient capital, we will be required
      to
      delay or forgo some portion of our business plan, which will have an adverse
      effect on our anticipated results from operations and our financial condition.
      We intend to pursue additional debt and equity financings to fund continued
      growth and increase our cash reserves. However, we presently do not have a
      definitive agreement in place to obtain such financing. Any additional debt
      or
      equity financing may not be available in sufficient amounts or on acceptable
      terms. If such financing is not available in sufficient amounts or on acceptable
      terms, the Company's operational results and future financial condition may
      be
      adversely affected.





**ITEM
      3. CONTROLS AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





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




17




**Changes
      in Internal Control Over Financial Reporting**





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.





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




In
      June
      2007, ATSI initiated a declaratory judgment action in the United States District
      Court for the Western District of Texas against The Shaar Fund, Ltd., holder
      of
      series 6% Series D Cumulative Convertible Preferred Stock, to declare that
      any
      right to convert or redeem the shares of the Series D Preferred Stock was barred
      by the applicable statute of limitations (the “Texas Case”). On August 2, 2007,
      The Shaar Fund Ltd. filed a separate suit against ATSI in the United States
      District Court for the Southern District Court of New York seeking damages
      and
      equitable relief for alleged defaults under the Securities Purchase
      Agreement dated February 18, 2000 under which it acquired the Series D Preferred
      Stock (the “New York Case”). The claims of the parties were consolidated in the
      New York Case by agreement. In December 2007, the parties entered into a
      settlement agreement in which they released each other from all claims relating
      to the Series D Preferred Stock. Under the terms of the settlement agreement,
      The Shaar Fund, Ltd. agreed to surrender all outstanding shares of Series D
      Preferred Stock.  Additionally, The Shaar Fund waived its claims
      for alleged accrued and unpaid dividends thereon in the amount of
      approximately $340,000.  The cancellation of the preferred stock was
      effective as of October 24, 2007. ATSI agreed to pay to The Shaar Fund,
      Ltd. the sum of $75,000 in cash in December 2007 and issue to The
      Shaar Fund a promissory note in the original principal amount of $450,000,
      bearing interest at the rate of 7.5% per annum and payable in 16 quarterly
      payments over 48 months. If paid in full within the first 18 months, ATSI will
      be entitled to a discount of 22.5% on the then outstanding principal balance.




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





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





During
      the period covered by this report, the Company issued 130,438 shares of its
      common stock to Alfonso Torres in lieu of interest accrued under a promissory
      note. The transaction was privately negotiated between the Company and Mr.
      Torres, with whom the Company has substantial prior relationship. The shares
      were issued without registration pursuant to Section 4(2) of the Securities
      Act
      of 1933.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





NONE





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





NONE





**ITEM
      5. OTHER INFORMATION**





NONE




18




**ITEM
      6. EXHIBITS**





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





EXHIBIT
      INDEX





**Number**
            **Description**10.1
            Employment
                Agreement between the Registrant and Arthur L. Smith, dated as of
                January
                2, 200810.2
            Employment
                Agreement between the Registrant and Ruben Caraveo, dated as of January
                2,
                200810.3
            Employment
                Agreement between the Registrant and Antonio Estrada Jr., dated as
                of
                January 2, 200810.4
            Master
                Placement Engagement Letter between the Registrant and Tejas Securities
                Group, Inc., dated as of January 14, 2008.31.1
            Certification
                of our President and Chief Executive Officer, under Section 302 of
                the
                Sarbanes-Oxley Act of 2002.31.2
            Certification
                of our Corporate Controller and Principal Financial Officer, under
                Section
                302 of the Sarbanes-Oxley Act of 2002.32.1
            Certification
                of our President and Chief Executive Officer, under Section 906 of
                the
                Sarbanes-Oxley Act of 2002.32.2
            Certification
                of our Corporate Controller and Principal Financial Officer, under
                Section
                906 of the Sarbanes-Oxley Act of
                2002.








**SIGNATURE**





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:
                  March 13, 2008
              By:
              /s/
                  Arthur L. SmithName:
              Arthur
                  L. SmithTitle:
              President
                  and Chief Executive OfficerDate:
                  March 13, 2008
              By:
              /s/
                  Antonio EstradaName:
              Antonio
                  EstradaTitle:
              Sr.
                  VP of Finance & Corporate Controller
                (Principal
                  Accounting and Principal Financial
                  Officer)




19