**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,
                2007  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
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 March 15, 2007**Common
                Stock, $.001 par
            23,585,757




Transitional Small Business
              Disclosure Format:
            Yes
o
                No x





**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE QUARTER ENDED JANUARY 31, 2007**





**INDEX**





**PART
                  I. FINANCIAL INFORMATION**
              PageItem
              1
              .
              Financial
                  Statements (unaudited)Consolidated
                  Balance Sheets as of January 31, 2007 and July 31, 2006
              3Consolidated
                  Statements of Operations for the Three and Six MonthsEnded
                  January 31, 2007 and 2006
              4Consolidated
                  Statements of Comprehensive Income (Loss) for the Three and Six
                  MonthsEnded
                  January 31, 2007 and 2006
              5Consolidated
                  Statements of Cash Flows for the Six Months Ended January 31, 2007
                  and
                  2006
              6Notes
                  to Consolidated Financial Statements
              7Item
              2
              .
              Management’s
                  Discussion and Analysis Of Financial Condition and Results of
                  Operations
              10Item
              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




i


**PART
                  1. FINANCIAL INFORMATION****ITEM
                  1. FINANCIAL STATEMENTS**ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  BALANCE SHEETS(In
                  thousands, except share and per share amounts)January
                  31,
              
              July
                  31,2007
              
              2006(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              786
              
              $
              36Accounts
                  receivable, net of allowance for bad debt of $47 and $0,
                  respectively
              
              
              746
              
              
              621Prepaid
                  & other current assets
              
              
              38
              
              
              33Total
                  current assets
              
              
              1,570
              
              
              690PROPERTY
                  AND EQUIPMENT
              
              
              297
              
              
              284Less
                  - accumulated depreciation
              
              
              (220
              )
              
              (182
              )Net
                  property and equipment
              
              
              77
              
              
              102Total
                  assets
              
              $
              1,647
              
              $
              792LIABILITIES
                  AND STOCKHOLDERS' DEFICITCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              705
              
              $
              676Accounts
                  payable, related parties
              
              
              42
              
              
              42Line
                  of credit, CSI Business Finance
              
              
              -
              
              
              150Accrued
                  liabilities
              
              
              1,868
              
              
              2,389Current
                  portion of obligation under capital leases
              
              
              3
              
              
              3Notes
                  payable
              
              
              1,251
              
              
              50Notes
                  payable, related party
              
              
              16
              
              
              106Convertible
                  debentures
              
              
              116
              
              
              74Total
                  current liabilities
              
              
              4,001
              
              
              3,490LONG-TERM
                  LIABILITIES:Notes
                  payable
              
              
              -
              
              
              500Convertible
                  debentures
              
              
              196
              
              
              234Obligation
                  under capital leases, less current portion
              
              
              5
              
              
              6Other
              
              
              4
              
              
              4Total
                  long-term liabilities
              
              
              205
              
              
              744Total
                  liabilities
              
              
              4,206
              
              
              4,234STOCKHOLDERS'
                  DEFICIT:Series
                  A Cumulative Convertible Preferred Stock, $0.001, 50,000 shares
                  authorized, 0 and 2,750 sharesissued
                  and outstanding, respectively
              
              
              -
              
              
              -Series
                  D Cumulative Preferred Stock, $0.001, 3,000 shares authorized,
                  742 shares
                  issued and outstanding
              
              
              1
              
              
              1Series
                  E Cumulative Preferred Stock, $0.001, 10,000 shares authorized,
                  1,170
                  shares issued and outstanding
              
              
              1
              
              
              1Series
                  H Convertible Preferred Stock, $0.001, 16,000,000 shares authorized,9,060,521and 11,802,353 sharesissued
                  and outstanding, respectively
              
              
              9
              
              
              12Common
                  stock, $0.001 par value, 150,000,000 shares authorized,22,042,169and
                  16,444,768 sharesissued
                  and outstanding, respectively
              
              
              22
              
              
              16Additional
                  paid in capital
              
              
              69,801
              
              
              68,775Accumulated
                  deficit
              
              
              (72,394
              )
              
              (72,248
              )Other
                  comprehensive income
              
              
              1
              
              
              1Total
                  stockholders' deficit
              
              
              (2,559
              )
              
              (3,442
              )Total
                  liabilities and stockholders' deficit
              
              $
              1,647
              
              $
              792See
                  accompanying summary of accounting policies and notes to financial
                  statements.






3





ATSI
                COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF OPERATIONS(In
                thousands, except share and per share amounts)(Unaudited)Three
                months ended January 31,
            
            Six
                months ended January 31,2007
            
            2006
            
            2007
            
            2006OPERATING
                REVENUES:Carrier
                services
            
            $
            7,041
            
            $
            2,913
            
            $
            13,536
            
            $
            5,205Communication
                services
            
            
            27
            
            
            29
            
            
            60
            
            
            52Network
                services
            
            
            5
            
            
            5
            
            
            9
            
            
            13Total
                operating revenues
            
            
            7,073
            
            
            2,947
            
            
            13,605
            
            
            5,270OPERATING
                EXPENSES:Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            6,509
            
            
            2,769
            
            
            12,528
            
            
            5,009Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            380
            
            
            224
            
            
            954
            
            
            625Legal
                and professional fees
            
            
            59
            
            
            55
            
            
            115
            
            
            75Bad
                debt expense
            
            
            25
            
            
            -
            
            
            47
            
            
            -Depreciation
                and amortization expense
            
            
            21
            
            
            26
            
            
            38
            
            
            48Total
                operating expenses
            
            
            6,994
            
            
            3,074
            
            
            13,682
            
            
            5,757OPERATING
                INCOME (LOSS)
            
            
            79
            
            
            (127
            )
            
            (77
            )
            
            (487
            )OTHER
                INCOME (EXPENSE):Loss
                on derivative instrument liabilities
            
            
            -
            
            
            (69
            )
            
            -
            
            
            (95
            )Debt
                forgiveness income
            
            
            -
            
            
            38
            
            
            -
            
            
            38Interest
                expense
            
            
            (41
            )
            
            (28
            )
            
            (69
            )
            
            (54
            )Total
                other income (expense), net
            
            
            (41
            )
            
            (59
            )
            
            (69
            )
            
            (111
            )INCOME
                (LOSS) FROM CONTINUING OPERATIONS
            
            
            38
            
            
            (186
            )
            
            (146
            )
            
            (598
            )DISCONTINUED
                OPERATIONSGain
                on disposal of discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            1,652INCOME
                FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            -
            
            
            -
            
            
            1,652NET
                INCOME (LOSS)
            
            $
            38
            
            $
            (186
            )
            $
            (146
            )
            $
            1,054LESS:
                PREFERRED DIVIDEND
            
            
            (19
            )
            
            (36
            )
            
            (38
            )
            
            (59
            )ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            211
            
            
            -
            
            
            228
            
            
            -NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            $
            230
            
            $
            (222
            )
            $
            44
            
            $
            995BASIC
                INCOME (LOSS) PER SHARE:From
                continuing operations
            
            $
            0.01
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.06
            )From
                discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            0.14Total
            
            $
            0.01
            
            $
            (0.02
            )
            $
            0.00
            
            $
            0.08DILUTED
                INCOME (LOSS) PER SHAREFrom
                continuing operations
            
            $
            0.01
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.06
            )From
                discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            0.14Total
            
            $
            0.01
            
            $
            (0.02
            )
            $
            0.00
            
            $
            0.08WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDINGBASIC
            
            
            19,962,710
            
            
            12,927,793
            
            
            18,766,060
            
            
            11,936,566DILUTED
            
            
            32,420,096
            
            
            12,927,793
            
            
            31,223,446
            
            
            11,936,566See
                accompanying summary of accounting policies and notes to financial
                statements.




4







ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In
                  thousands)(Unaudited)Three
                  months ended January 31,
              
              Six
                  months ended January 31,2007
              
              2006
              
              2007
              
              2006Net
                  income (loss) to common stockholders
              
              $
              230
              
              $
              (222
              )
              $
              44
              
              $
              995Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -Comprehensive
                  income (loss) to common stockholders
              
              $
              230
              
              $
              (222
              )
              $
              44
              
              $
              995See
                  accompanying summary of accounting policies and notes to financial
                  statements.




5


ATSI
                  COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                  STATEMENTS OF CASH FLOWS(In
                  thousands)(Unaudited)Six
                  months ended January 31,2007
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:NET
                  INCOME (LOSS)
              
              $
              (146
              )
              $
              1,054Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Gain
                  in disposal of investment
              
              
              -
              
              
              (1,652
              )Depreciation
                  and amortization
              
              
              38
              
              
              48Issuance
                  of stock grants and options, employees for services
              
              
              370
              
              
              180Issuance
                  of common stock and warrants for services
              
              
              23
              
              
              126Provisions
                  for losses on accounts receivables
              
              
              47
              
              
              -Loss
                  on derivative instrument liabilities
              
              
              -
              
              
              95Amortization
                  of discount on debt
              
              
              5
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (172
              )
              
              (108
              )Prepaid
                  expenses and other
              
              
              (5
              )
              
              24Accounts
                  payable
              
              
              (122
              )
              
              146Accrued
                  liabilities
              
              
              64
              
              
              33Net
                  cash provided / (used) in operating activities
              
              
              102
              
              
              (54
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property & equipment
              
              
              (13
              )
              
              (4
              )Net
                  cash used in investing activities
              
              
              (13
              )
              
              (4
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from notes payable
              
              
              250
              
              
              50Payments
                  on notes payable, related party
              
              
              (90
              )
              
              -Payments
                  on notes payable
              
              
              (212
              )
              
              -Advances
                  from shareholders
              
              
              663
              
              
              -Proceeds
                  from factoring line of credit
              
              
              -
              
              
              150Processing
                  fees, factoring line of credit
              
              
              -
              
              
              (26
              )Proceeds
                  from the exercise of stock options
              
              
              16
              
              
              -Proceeds
                  from the exercise of warrants
              
              
              35
              
              
              46Principal
                  payments on capital lease obligation
              
              
              (1
              )
              
              (1
              )Net
                  cash provided by financing activities
              
              
              661
              
              
              219INCREASE
                  IN CASH
              
              
              750
              
              
              161CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              36
              
              
              29CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              786
              
              $
              190SUPPLEMENTAL
                  DISCLOSURES:Cash
                  paid for interest
              
              $
              34
              
              $
              7NON-CASH
                  INVESTING AND FINANCING TRANSACTIONSIssuance
                  of common stock for conversion of debt
              
              $
              15
              
              $
              115Conversion
                  of preferred stock to common stock
              
              
              381
              
              
              92Fair
                  value of derivatives transferred to equity
              
              
              -
              
              
              22Preferred
                  stock dividends
              
              
              38
              
              
              59Reversal
                  of previously recorded preferred stock dividend
              
              
              (228
              )
              
              -See
                  accompanying summary of accounting policies and notes to financial
                  statements.





6


**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. 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, 2006, as reported
      in
      Form 10-KSB filed on November 1, 2006, have been omitted.





**NOTE
      2 - GOING CONCERN**





As
      shown
      in the accompanying financial statements, ATSI incurred net loss from operations
      of $146,000 and net loss from operation of $598,000 during the six months ended
      January 31, 2007 and 2006, respectively, has an accumulated deficit of $72
      million and a working capital deficit of $2,545,000 (including $1,367,000 of
      accrued liabilities for common shares issuable in connection with Series H
      Convertible Preferred Stock) as of January 31, 2007. These conditions create
      doubt as to ATSI’s ability to continue as a going concern. In order to remain a
      going concern, ATSI anticipates it will generate positive cash flows from its
      operations and/or generate cash from debt or equity offerings. There is no
      assurance that ATSI will be able to continue generating positive cash flows
      from
      its operations or obtain funding to remain as a going concern. Management plans
      to continue to improve its financial position through the growth of its
      operations subject to its capital limitations. The Company’s ability to continue
      as a going concern is dependent upon the ongoing support of its stockholders
      and
      customers. The Company’s ability to continue generating sufficient income from
      operations to cover its operating expense and its ability to obtain capital
      resources to support expansion. The financial statements do not include any
      adjustments that might be necessary if ATSI is unable to continue as a going
      concern.





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





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 as permitted under SFAS No. 123R, and,
      consequently, has not retroactively adjusted results from prior periods. Under
      this modified prospective transition method, compensation cost associated with
      stock options recognized during fiscal 2006 includes the amortization related
      to
      the remaining service period of all stock option awards granted prior to
      February 1, 2006, based on the grant date fair value estimated in accordance
      with the original provisions of SFAS No. 123.





7


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





Three
                months ended January 31,
            
            Six
                months ended January 31,2007
            
            2006
            
            2007
            
            2006Net
                income (loss) to commonshareholders,
                as reported
            
            $
            230,000
            
            
            ($222,000
            )
            $
            44,000
            
            $
            995,000Add:stock
                based compensation determinedunder
                intrinsic value based method
            
            
            -
            
            
            -
            
            
            -
            
            
            -Less:
                stock based compensation determinedunder
                fair value based method
            
            
            -
            
            
            -
            
            
            -
            
            
            (281,499
            )Pro
                forma net income (loss) to common stockholders
            
            $
            230,000
            
            
            ($222,000
            )
            $
            44,000
            
            $
            713,501Basic
                net income (loss) per common share:As
                reported
            
            $
            0.01
            
            
            ($0.02
            )
            $
            0.00
            
            $
            0.08Pro
                forma
            
            $
            0.01
            
            
            ($0.02
            )
            $
            0.00
            
            $
            0.06Diluted
                net income (loss) per common share:As
                reported
            
            $
            0.01
            
            
            ($0.02
            )
            $
            0.00
            
            $
            0.08Pro
                forma
            
            $
            0.01
            
            
            ($0.02
            )
            $
            0.00
            
            $
            0.06





**NOTE
      4 - STOCK-BASED COMPENSATION**





In
      September 2005, ATSI adopted the “2005 Stock Compensation Plan”. The “2005 Stock
      Compensation Plan” authorizes the grant of up to 7.5 million of warrants, stock
      options, restricted common stock, non-restricted common stock and other awards,
      or a combination, to employees, directors, and certain other persons. The “2005
      Stock Compensation Plan” is intended to permit ATSI to retain and attract
      qualified individuals who will contribute to the overall success of ATSI. The
      exercise price of all of the warrants, stock options, restricted common stock,
      non-restricted common stock and other awards will vary based on the market
      price
      of the shares of common stock as of the date of grant. The warrants, stock
      options, restricted common stock, non-restricted common stock and other awards
      vest based on the individual security granted.





The
      issuances under the “2005 Stock Compensation Plan” during the six months ended
      January 31, 2007 are:





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





-
      ATSI
      issued 980,000 shares of common stock to its employees and directors for
      services. See Note 6 for details.





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





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





8


A
      summary
      of the options as of January
      31, 2007 and
      the
      changes during the six months ended January
      31, 2007 is
      presented below:





Weighted-averageWeighted-average
            
            remaining
                contractual**2005
                Stock Compensation Plan**
            
            Options
            
            exercise
                price
            
            term
                (years)Outstanding
                at July 31, 2006
            
            
            4,354,000
            
            $
            0.16
            
            
            9.0Granted
            
            
            1,345,000
            
            
            0.21
            
            
            9.0Exercised
            
            
            (100,000
            )
            
            0.16
            
            
            -Outstanding
                at January 31, 2007
            
            
            5,599,000
            
            
            0.17
            
            
            9.0Exercisable
                at January 31, 2007
            
            
            2,937,000
            
            $
            0.17
            
            
            9.0





**NOTE
      5 - DEBT**





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





On
      November 3, 2006, ATSI also entered into an accounts receivable factoring
      agreement with CCA Financial Services, Inc. Under the agreement, CCA
      Financial Services committed to purchase up to $1,000,000 of ATSI’s accounts receivables. The
      factoring agreement is for twelve months, ATSI can terminate this agreement
      at
      its sole discretion at any time, subject to a $10,000 early termination fee.
      The
      factoring rate ranges from 1.00%-1.25% per factored amount. The
      accounts receivable factoring agreement is secured by ATSI’s accounts
      receivables. As of
      January 31, 2007, ATSI did not have any outstanding factored receivables under
      this agreement.





On
      November 28, 2006, ATSI entered into various notes payable with accredited
      investors for net proceeds of $514,600. These promissory notes mature on May
      28,
      2007 and an annual interest rate of 12%. These notes are part of a private
      placement offering for the sale of ATSI’s common stock.





**NOTE
      6 - COMMON STOCK**





During
      the six months ended January 31, 2007:





-
      ATSI
      issued 89,585 of its common shares valued at $23,500 for legal and consulting
      services rendered by various individuals during this period.





-
      ATSI
      issued 4,095,588 common shares associated with the conversion of 2,739,121
      shares of Series H Convertible Preferred Stock.





-
      ATSI
      issued 111,909 common shares associated with the conversion of 2,750 shares
      of
      Series A Convertible Preferred Stock.





-
      ATSI
      issued 150,000 shares of common stock related to the exercise of warrants and
      received proceeds of $34,500.





-
      ATSI
      issued 66,116 shares of its common stock to Richard Benkendorf as a payment
      of
      $15,229 associated with the settlement agreement between ATSI and Mr.
      Benkendorf.





-
      ATSI
      issued 980,000 shares of common stock to its employees and directors for
      services. ATSI recorded compensation expense of $206,000 in its statement of
      operations for the aggregate market value of the stock at the date of issuance.





-
      ATSI
      issued 100,00 shares of common stock related to the exercise of stock options
      by
      one of its employees and received proceeds of $16,000.





9


**NOTE
      7 - PREFERRED STOCK DIVIDEND**





During
      the six months ended January 31, 2006 ATSI recognized a reversal of previously
      recorded accrued dividend of $228,000. This
      reversal of the previously recorded accrued dividend occurred as a 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. As a result, a reversal of preferred dividends was recognized during
      the period.





**NOTE
      8 - SUBSEQUENT EVENTS**





On
      February 1, 2007, ATSI notified the holders of the $514,600 notes payable of
      its
      intent to convert the outstanding principal and interest into common stock.
      The
      conversion price was set by the Company at $0.22 per share, which is
      approximately 80% of the market price at February 1, 2007. As a result, ATSI
      will issue 2,332,781 common
      shares and recognize $130,580 in discount from the beneficial conversion feature
      at the time of the issuance. Additionally, ATSI will issue 234,000 of its common
      stock with a fair value of $51,460 for services provided by the placement
      agents. The common stock to be issued as a result of the conversion of notes
      payable will not be registered under the Securities Act of 1933.





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





On
      March
      5, 2007, ATSI announced that the Company will redeem all shares of its outstanding
      Series H Convertible Preferred Stock on
      and as
      of April 26, 2007 (the “Redemption Date”) for one (1) fully paid and
      non-assessable share of the Company’s common stock, $.001 par value per share.
      As of March 5, 2007, ATSI had 8,905,940 Series H Convertible Preferred Stock
      outstanding.





**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 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. Some of these risks
      include the availability and capacity of competitive data transmission networks,
      the continued effectiveness of our concession from the government of Mexico,
      and
      or ability to raise sufficient capital to continue operations. Therefore, these
      types of statements may prove to be incorrect.*





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, 2007 and
      2006.
      As used in this section, the term “fiscal 2007” means the year ending July 31,
      2007 and “fiscal 2006” means the year ended July 31, 2006.





**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:





10


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





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 through our prepaid VoIP network platform. Customers
      access this platform and complete the call by using their local phone number
      as
      a “PIN” or personal identification number.





Network
      Services : We
      provide private communication links and VoIP gateway services to multi-national
      and 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 the foreign
      telecommunication networks. These services include data, voice and fax
      transmission between multiple international offices and branches as well as
      Internet and co-location services in the United States. **





**Results
      of Operations**





The
      following table sets forth certain items included in our results of operations
      in thousands of dollar amounts and variances between periods for the three
      month
      and six month periods ended January 31, 2007 and 2006.




Three
                months ended January 31,
            
            
            
            Six
                months ended January 31,2007
            
            2006
            
            Variances
            
            %
            
            2007
            
            2006
            
            Variances
            
            %OPERATING
                REVENUES:Carrier
                services
            
            $
            7,041
            
            $
            2,913
            
            $
            4,128
            
            
            142
            %
            $
            13,536
            
            $
            5,205
            
            $
            8,331
            
            
            160
            %Communication
                services
            
            
            27
            
            
            29
            
            
            (2
            )
            
            -7
            %
            
            60
            
            
            52
            
            
            8
            
            
            15
            %Network
                services
            
            
            5
            
            
            5
            
            
            -
            
            
            0
            %
            
            9
            
            
            13
            
            
            (4
            )
            
            -31
            %Total
                operating revenues
            
            
            7,073
            
            
            2,947
            
            
            4,126
            
            
            140
            %
            
            13,605
            
            
            5,270
            
            
            8,335
            
            
            158
            %Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            6,509
            
            
            2,769
            
            
            (3,740
            )
            
            -135
            %
            
            12,528
            
            
            5,009
            
            
            (7,519
            )
            
            -150
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            380
            
            
            224
            
            
            (156
            )
            
            -70
            %
            
            954
            
            
            625
            
            
            (329
            )
            
            -53
            %Legal
                and professional fees
            
            
            59
            
            
            55
            
            
            (4
            )
            
            -7
            %
            
            115
            
            
            75
            
            
            (40
            )
            
            -53
            %Bad
                debt expense
            
            
            25
            
            
            -
            
            
            (25
            )
            
            -100
            %
            
            47
            
            
            -
            
            
            (47
            )
            
            -100
            %Depreciation
                and amortization expense
            
            
            21
            
            
            26
            
            
            5
            
            
            19
            %
            
            38
            
            
            48
            
            
            10
            
            
            21
            %OPERATING
                INCOME (LOSS)
            
            
            79
            
            
            (127
            )
            
            206
            
            
            162
            %
            
            (77
            )
            
            (487
            )
            
            410
            
            
            84
            %OTHER
                INCOME (EXPENSE):Loss
                on derivative instrument liabilities
            
            
            -
            
            
            (69
            )
            
            69
            
            
            100
            %
            
            -
            
            
            (95
            )
            
            95
            
            
            100
            %Debt
                forgiveness income
            
            
            -
            
            
            38
            
            
            (38
            )
            
            -100
            %
            
            -
            
            
            38
            
            
            (38
            )
            
            -100
            %Interest
                expense
            
            
            (41
            )
            
            (28
            )
            
            (13
            )
            
            -46
            %
            
            (69
            )
            
            (54
            )
            
            (15
            )
            
            -28
            %Total
                other income (expense), net
            
            
            (41
            )
            
            (59
            )
            
            18
            
            
            31
            %
            
            (69
            )
            
            (111
            )
            
            42
            
            
            38
            %INCOME
                (LOSS) FROM CONTINUING OPERATIONS
            
            
            38
            
            
            (186
            )
            
            224
            
            
            120
            %
            
            (146
            )
            
            (598
            )
            
            452
            
            
            76
            %DISCONTINUED
                OPERATIONSGain
                on disposal of discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,652
            
            
            (1,652
            )
            
            -100
            %INCOME
                FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,652
            
            
            (1,652
            )
            
            -100
            %NET
                INCOME (LOSS)
            
            $
            38
            
            $
            (186
            )
            $
            224
            
            
            120
            %
            $
            (146
            )
            $
            1,054
            
            $
            (1,200
            )
            
            -114
            %LESS:
                PREFERRED DIVIDEND
            
            
            (19
            )
            
            (36
            )
            
            17
            
            
            47
            %
            
            (38
            )
            
            (59
            )
            
            21
            
            
            36
            %ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            211
            
            
            -
            
            
            211
            
            
            100
            %
            
            228
            
            
            -
            
            
            228
            
            
            100
            %NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            $
            230
            
            $
            (222
            )
            $
            452
            
            
            204
            %
            $
            44
            
            $
            995
            
            $
            (951
            )
            
            -96
            %





11


**Three
      Months ended January 31, 2007 Compared to Three Months ended January 31,
      2006**





*Operating
      Revenues* .
      Consolidated operating revenues increased 140% between periods from $2,947,000
      for the quarter ended January 31, 2006 to $7,073,000 for the quarter ended
      January 31, 2007.





Carrier
      services revenue increased $4,128,000, or 142% from the quarter ended January
      31, 2006 to the quarter ended January 31, 2007. Our carrier traffic increased
      58
      % from approximately 62,921,500 minutes in the second quarter of fiscal 2006
      to
      approximately 99,343,000 minutes in the quarter ended January 31, 2007. The
      increase in revenue and carrier traffic can mainly be attributed to an increase
      in customers over the last twelve months.





Communication
      services revenue decreased approximately 7% or $2,000 from the quarter ended
      January 31, 2006 to the quarter ended January 31, 2007. The decrease in
      communication services revenue is primarily due to a decrease in retail
      customers from 150 during the quarter ended January 31, 2006 to 123 during
      the
      quarter ended January 31, 2007.





Network
      services revenue was comparable between quarters at $5,000.




C *ost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by $3,740,000 or 135% from the quarter
      ended January 31, 2006 to the quarter ended January 31, 2007. The increase
      in
      cost of services is a direct result of the increase in carrier services revenue.
      As mentioned above, our carrier traffic increased from approximately 62,921,500
      minutes in the second quarter of fiscal 2006 to approximately 99,343,000 minutes
      in the quarter ended January 31, 2007, thus increasing our cost of services
      between quarters. Consolidated cost of services, as a percentage of revenue
      decreased from 94% during the quarter ended January 31, 2006 to 92% during
      the
      quarter ended January 31, 2007. Additionally, as a result of the increase in
      total revenue our gross profits increased from $178,000 during the quarter
      ended
      January 31, 2006 to $564,000 during the quarter ended January
      31, 2007 .





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased $156,000, or 70% from the quarter ended January 31,
      2006  to
      the
      quarter ended January 31, 2007. The increase is primarily attributable to an
      increase in salaries of $86,000 as a result of the hiring of two new employees
      and bonuses paid to officers, increase in consulting fees of approximately
      $29,000 and the increase in bank fees and accounts receivable factoring fees
      of
      approximately $12,000 during the quarter ended January 31, 2007 .
      Additionally, non-cash issuance of common stock and warrants for services
      decreased by $53,000 from the quarter ended January 31, 2006 to the quarter
      ended January 31, 2007. The decrease is primarily due to recognition during
      the
      quarter ended January 31, 2006 of approximately $28,000 in non-cash compensation
      expense associated with consulting agreements entered into with certain
      individuals and legal services paid in common stock during the quarter. And,
      non-cash compensation expense to employees increased by $55,000 from the quarter
      ended January 31, 2006 to the quarter ended January 31, 2007. The increase
      is
      attributed to the recognition during the quarter ended January 31, 2007 of
      approximately $55,000 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 did not incur this type of
      expense during the quarter ended January 31, 2006.





*Legal
      and professional fees* .
      Legal
      and professional fees increased $4,000, or 7% from the quarter ended January
      31,
      2006  to
      the
      quarter ended January 31, 2007. The increase is attributable to the recognition
      of approximately $8,000 in professional fees associated with the preparation
      of
      various notes payable and restructuring of debt. We did not incur these types
      of
      expenses during the quarter ended January 31, 2006.





12


*Bad
      debt expense.* Bad
      debt
      expense increased by $25,000 from the quarter ended January 31, 2006 to the
      quarter ended January 31, 2007. During the quarter ended January 31, 2007 we
      recognized $25,000 in bad debt expense. We did not recognize any bad debt
      expense during the second quarter of fiscal 2006.





*Depreciation
      and amortization* .
      Depreciation and amortization decreased by $5,000 or 19% from the quarter ended
      January 31, 2006 to the quarter ended January 31, 2007. The decrease is
      attributed to the full amortization during fiscal 2006 of the initial
      installation and maintenance of the Nextone Soft-switch.





*Operating
      income (loss)* .
      The
      Company’s operating income increased by $206,000 or 162% from the quarter ended
      January 31, 2006 to the quarter ended January 31, 2007. The increase in
      operating income is attributed to the increase between quarters in gross profit
      margin of approximately $386,000. The increase in gross profit margin was offset
      by the increase of approximately $156,000 in selling, general and administrative
      expenses due to an increase of $53,000 non-cash issuance of common stock for
      services. And an increase of $55,000 in non-cash stock-based compensation to
      employees during the quarter ended January 31, 2007.





*Gain
      (loss) on derivative instruments liabilities, net.* The
      Company recognized a loss on derivative instruments of $69,000 during the
      quarter ended January 31, 2006. No gain or loss was recognized during the
      quarter ended January 31, 2007. 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. Due to
      the
      elimination of certain conversion features and derivative instruments, ATSI
      has
      no derivative liabilities at the end the current period.





*Debt
      forgiveness income.* Debt
      forgiveness income decreased by $38,000 from the quarter ended January 31,
      2006
      to the quarter ended January 31, 2007. The
      decrease is primarily due to the recognition during the quarter ended January
      31, 2006 of $38,000 in debt forgiveness income associated with the settlement
      of
      debt for the issuance of common stock. This
      transaction was related to the settlement of $49,000 in debt with a consultant,
      this debt was incurred during fiscal 2000 and associated with the commissions
      incurred as part of the acquisition of the concession license in Mexico. The
      debt
      forgiveness income was based on the difference between the market price of
      ATSI’s equity at the time of issuance and the market price calculated at the
      time of the settlement of the debt.




*Interest
      expense* .
      Interest expense increased by $13,000 from the quarter ended January 31, 2006
      to
      the quarter ended January 31, 2007. The increase can be attributed to the
      interest of approximately $13,000 associated with a note payable and accounts
      receivable credit facility with CCA Financial Services.





*Income
      (loss) from continuing operations* .
      Net
      income from continuing operations increased by $224,000. The increase in
      operating income is attributed to the
      increase between quarters in gross profit margin of approximately $386,000.
      The
      increase in gross profit margin and other income were offset by the increase
      of
      approximately $156,000 in selling, general and administrative expenses due
      to an
      increase of $55,000 in non-cash stock-based compensation to employees. And
      an
      increase in bad debt expense of $25,000 and an increase in interest expense
      of
      $13,000.





*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $17,000 or 47% between periods, from
      $36,000 for the quarter ended January 31, 2006 to $19,000 during the quarter
      ended January 31, 2007. The decrease in preferred dividends during the quarter
      ended January 31, 2007 is mainly attributed to decrease in dividends associated
      with Series A Convertible Preferred Stock and Series H Convertible Preferred
      Stock.





*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.





13


*Net
      income (loss) applicable to common stockholders* .
      Net
      income applicable to common stockholders increased by $452,000. The increase
      in
      net income applicable to common stockholders is attributed to the increase
      between quarters in gross profit margin of approximately $386,000 and a reversal
      of previously recorded preferred stock divided of approximately $211,000. The
      increase in gross profit margin, other income and decrease in dividend expense
      were offset by the increase of approximately $156,000 in selling, general and
      administrative expenses due to an increase of $55,000 in non-cash stock-based
      compensation to employees. And increase in dab debt expense of $25,000 and
      an
      increase in interest expense of $13,000.





**Six
      Months ended January 31, 2007 Compared to Six Months ended January 31,
      2006**





*Operating
      Revenues* .
      Consolidated operating revenues increased 158% between periods from $5,270,000
      for the six months ended January 31, 2006 to $13,605,000 for the six months
      ended January 31, 2007.




Carrier
      services revenues increased $8,331,000, or 160% from the six months ended
      January 31, 2006 to the six months ended January 31, 2007. Our carrier traffic
      increased 84% from approximately 111,433,832 minutes in the six months ended
      January 31, 2006 to approximately 204,556,730 minutes in the six months ended
      January 31, 2007. The increase in revenue and carrier traffic can mainly be
      attributed to increase in customers during fiscal 2007 compared to fiscal 2006.




Communication
      services revenue increased approximately 15% or $8,000 from the six months
      ended
      January 31, 2006 to the six months ended January 31, 2007. The increase in
      communication services revenue is primarily due to an increase in average
      revenue per customer due to seasonality of the business.




Network
      services revenues decreased approximately 31% or $4,000 from the six months
      ended January 31, 2006 to the six months ended January 31, 2007. 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 $7,519,000 or 150% from the six
      months ended January 31, 2006 to the six months ended January 31, 2007. The
      increase in cost of services is a direct result of the increase in carrier
      services revenue. As mentioned above, our carrier traffic increased 84% from
      approximately 111,433,832 minutes in the six months ended January 31, 2006
      to
      approximately 204,556,730 minutes in the six months ended January 31, 2007,
      thus
      increasing our cost of services between periods. Consolidated cost of services
      as a percentage of sales decreased from 95% in the six months of fiscal 2006
      to
      92% in the six months of fiscal 2007. Additionally, as a result of the increase
      in total revenue our gross profits increased from $261,000 during the six months
      ended January 31, 2006 to $1,077,000 during the six months ended January 31,
      2007.





*Selling,
      General and Administrative (SG&A) Expenses*  *(exclusive
      of legal and professional fees).* SG&A
      expenses increased $329,000, or 53% from the six months ended January 31, 2006
      to the six months ended January 31, 2007. The increase is primarily attributable
      to an increase in salaries and wages of approximately $125,000 as a result
      of
      the hiring of two new employees and bonuses paid to officers, increase in
      consulting fees of approximately $52,000 and an increase in bank fees and
      accounts receivable factoring fees of approximately $22,000 during the six
      months ended January 31, 2007 .
      Furthermore, n on-cash
      issuance of common stock and warrants for services decreased by $68,000 from
      the
      six months ended January 31, 2006 to the six months ended January 31, 2007.
      The
      decrease is primarily due to recognition during the six months ended January
      31,
      2006 of approximately $35,000 in non-cash compensation expense associated with
      consulting agreements entered into with certain individual and legal services
      paid in common stock during the period. We did not incur these types of expenses
      during the six months ended January 31, 2007. And, non-cash compensation expense
      to employees increased by $190,000 from the six months ended January 31, 2006
      to
      the six months ended January 31, 2007. The increase is attributed to the
      recognition during the six months ended January 31, 2007 of approximately
      $164,000 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 did not incur this type of expense during
      the six months ended January 31, 2007.




14


*Legal
      and Professional Fees* .
      Legal
      and professional fees increased $40,000, or 53% from the six months ended
      January 31, 2006 to the six months ended January 31, 2007. The increase is
      attributable to the recognition of approximately $7,500 associated with the
      preparation of the closing documents for the new accounts receivable factoring
      agreement. Additionally, during the six months ended January 31, 2007 we
      recognized approximately $31,000 in professional fees associated with the
      evaluation of derivative instruments and restructuring of debt. We did not
      incur
      these types of expenses during the six months ended January 31, 2006.





*Bad
      debt expense.* Bad
      debt
      expense increased by $47,000 from the six months ended January 31, 2006 to
      the
      six months ended January 31, 2007. During
      the six months ended January 31, 2007 we recognized $47,000 in bad debt expense.
      We did not recognize any bad debt expense during the six months ended January
      31, 2006.





*Depreciation
      and amortization* .
      Depreciation and amortization decreased by $10,000 or 21% from the six months
      ended January 31, 2006 to the six months ended January 31, 2007. The decrease
      is
      attributed to the full amortization during the fiscal 2006 of the installation
      and maintenance agreement associated with the Nextone Soft-switch.





*Operating
      Loss* .
      The
      Company’s operating loss decreased by $410,000 or 84% from the six months ended
      January 31, 2006 to the six months ended January 31, 2007. The reduction in
      operating loss between periods is attributed to the increase in gross profit
      margin of $816,000. The
      increase in gross profit margin was offset by the increase of approximately
      $329,000 in selling, general and administrative expenses due to an increase
      of
      $40,000 in non-cash issuance of common stock for services and an increase of
      $190,000 in non-cash stock-based compensation to employees. And an increase
      of
      $47,000 in bad debt expense during the six months ended January 31, 2007.





*Gain
      (loss) on derivative instruments liabilities, net.* The
      Company recognized a loss on derivative instruments of $95,000 during the six
      months ended January 31, 2006. No gain or loss was recognized during the six
      months ended January 31, 2007. 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. Due to the elimination
      of certain conversion features and derivative instruments, ATSI has no
      derivative liabilities at the end the current period.





*Debt
      forgiveness income.* Debt
      forgiveness income decreased by $38,000 from the six months ended January 31,
      2006 to the six months ended January 31, 2007. The
      decrease is primarily due to the recognition during the six months ended January
      31, 2006 of $38,000 in debt forgiveness income associated with the settlement
      of
      debt for the issuance of common stock. This
      transaction was related to the settlement of $49,000 in debt with a consultant,
      this debt was incurred during fiscal 2000 and associated with the commissions
      incurred as part of the acquisition of the concession license in Mexico. The
      debt
      forgiveness income was based on the difference between the market price of
      ATSI’s equity at the time of issuance and the market price calculated at the
      time of the settlement of the debt.




*Interest
      expense* .
      Interest expense increased by $15,000 from the six months ended January 31,
      2006
      to the six months ended January 31, 2007. The increase can be attributed to
      the
      increase of approximately $13,000 associated with a note payable and accounts
      receivable credit facility with CCA Financial Services.





*Income
      (loss) from continuing operations* .
      Net
      income from continuing operations increased by $452,000. The increase in
      operating income is attributed to the increase between periods in gross profit
      margin of approximately $816,000. The increase in gross profit margin was offset
      by the increase of approximately $329,000 in selling, general and administrative
      expenses due to an increase of $40,000 in non-cash issuance of common stock
      for
      services and an increase of $190,000 in non-cash stock-based compensation to
      employees. And an increase of $47,000 in bad debt expense during the six months
      ended January 31, 2007.





15


*Net
      income from discontinued operations.* During
      the six months ended January 31, 2006 we recognized a gain on disposal of
      discontinued operations of $1,652,000. No
      gain
      on disposal of discontinued operation was recognized during the six months
      ended
      January 31, 2007. 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 decreased by $21,000 or 36% between periods, from
      $59,000 for the six months ended January 31, 2006 to $38,000 during the six
      months ended January 31, 2007. The decrease in preferred dividends between
      periods is mainly attributed to decrease in dividends associated with Series
      A
      Convertible Preferred Stock and Series H Convertible Preferred Stock.





*Reversal
      of previously recorded preferred stock dividends.* 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, 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 decreased by $951,000. The decrease
      in
      net income applicable to common stockholders is attributed to the decrease
      in
      gain on disposal of discontinued operations of approximately $1,652,000
      recognized during the prior period, the increase of approximately $40,000 in
      legal and professional fees and an increase of approximately $329,000 in
      selling, general and administrative expenses during the six months ended January
      31, 2007. These increases were offset between periods by the increase in gross
      profit margin of approximately $816,000.





**Liquidity
      and Capital Resources**





*Cash
      Position:* We had a
      cash balance of $786,000 as of January 31, 2007. Net cash provided by operating
      activities during the six months ended January 31, 2007, was approximately
      $102,000, attributable to improved operating results from an increase in gross
      margins offset by working capital changes.





Investing
      activities during the six
      months ended January 31, 2007, consumed
      $13,000 associated with the acquisition of various monitors, equipment and
      furniture. Financing activities during the six months ended January 31, 2007,
      generated $661,000 in cash. This cash was primarily generated from proceeds
      of
      our private placement of $663,000, proceeds from a note payable of $250,000, cash
      proceeds of $35,000 from the exercise of 150,000 warrants and
      cash
      proceeds of $16,000 from the exercise of 100,000 stock options. These cash
      proceeds were offset by the $90,000 of principal payments associated with a
      related party note payable, $212,000 of principal payments associated with
      various notes payable and $1,000 associated with the principal payments under
      capital leases. Overall, our net operating, investing and financing activities
      during the six months ended January 31, 2007 provided an increase of $750,000
      in
      cash.





Our
      current cash expenses are expected to be approximately $70,000 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 initial monthly cash expenses with our
      available cash from operations and advances received from shareholders. We
      expect to continue conserving cash resources by paying executive compensation,
      fees for certain consultants and professional services with shares of our common
      stock. Additionally, on November 3, 2006, we entered into a factoring agreement
      with CCA Financial Services, Inc. Under the agreement, CCA Financial Services
      committed to purchase up to $1,000,000 of ATSI’s monthly receivables. As our
      ongoing operations require, we will factor our receivables under this new
      agreement. As of date of this filing, we did not have any outstanding factored
      receivables under this 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 financial condition may be adversely affected.





16


We
      are
      not presently paying quarterly interest and dividends on our outstanding
      convertible debentures. However, we have continued to accrue dividends and
      interest on such debentures. The increase in accrued liabilities related to
      the
      dividends and interest in arrears contributed approximately $37,000 in cash
      flow
      savings during the six months e nded
      January 31, 2007 .




Our
      working capital deficit was $2,545,000 as of the six months ended
      January 31, 2007 .
      This
      represents a decrease of approximately $255,000 from our working capital deficit
      at July 31, 2006. The decrease can primarily be attributed to the
      reclassification from long term to current of note payable of $500,000. This
      note is due in October 2007.





**Ongoing
      operations**





We
      generated sufficient income from operations to cover our operating expenses
      during the six months ended January 31, 2007. However, 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. These matters raise 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 continue
      generating sufficient income from operations to cover our operating expense
      and
      our ability to obtain capital resources to support expansion.





During
      the six months ended
      January 31, 2007 ,
      we
      received $663,000
      from our private placement, $35,000
      from the exercise of warrants and $16,000 from the exercise of stock options.
      These funds, along with funds generated from sales, allowed us to cover our
      operating expenses and other corporate expenses during the six months ended
      January 31, 2007 .
      Additionally, on November 3, 2006, we entered into a factoring agreement with
      CCA Financial Services, Inc. Under the agreement, CCA Financial Services
      committed to purchase up to $1,000,000 of our monthly receivables. As our
      ongoing operations require, we will factor our receivables under this new
      agreement. As of date of this filing, we did not have any outstanding factored
      receivables under this agreement.





We
      will
      continue to pursue cost cutting strategies in order to conserve working capital.
      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 fully implement our business plan. If
      we
      are unable to continue producing positive cash flow from operations or raise
      sufficient capital, we will be required to delay or forego some portion of
      our
      business plan, which will have 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.





**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





17


**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. Our attorneys presented their argument
      for the appeal on November
      29, 2006. Currently
      we cannot predict the outcome of this litigation or the financial impact on
      our
      ongoing operations.




On
      April
      13, 2006, ATSI filed suit in a state District Court in Bexar County, Texas
      and
      obtained injunctive relief against former ATSI consultant Diane Huth and her
      associate, John Highland. The lawsuit involves a dispute relating to who has
      prior claim and rightful ownership of the trade name "Telefamilia," which
      Defendants had undertaken to trademark for their own purposes. Defendants filed
      an answer denying any liability. Temporary Injunctive relief was granted
      preserving ATSI's claims to such trade name. Currently, the parties are in
      the
      process of consummating a settlement wherein ATSI obtains all right, title
      and
      interest to the tradename and transfer of the trademark for which the Company
      will $336.





In
      December 2006, ATSI filed suit in Bexar County District Court to recover
      approximately $63,000 (plus attorneys fees, legal interest, and court
      costs) against Lightspeed Telecom, Inc. and its principals or alter egos
      for telecommunications services provided.  Currently, the Company
      is in the discovery process and a deposition has been set in April 2007 for
      David R. Dragon, one of Lighspeed’s principals. As of the date of this filing no
      trial date has been set.







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





NONE




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





As
      of
      January 31, 2007, the Company was in arrears with respect to the declaration
      of
      the following dividends payable on outstanding shares of its Preferred
      Stock:


Series
                  D Cumulative Preferred Stock
              
              
              307,000TOTAL
              
              $
              307,000





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





NONE





**ITEM
      5. OTHER INFORMATION**





NONE





**ITEM
      6. EXHIBITS**





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





18


**Exhibit****Number**
            **Description**4.1
            Promissory
                Note dated November 28, 2006 between ATSI Communications, Inc. andvarious
                individuals.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.








19


**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
              19, 2007
            By:
            /s/ Arthur
              L.
              SmithName:Arthur
              L. SmithTitle: President
              and Chief Executive Officer Date: March
              19, 2007
            By:
            /s/ Antonio
              EstradaName:Antonio
              EstradaTitle:Corporate
              Controller (Principal Accounting and Principal Financial
              Officer)


20