**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549








**FORM
      10-QSB**





**[** **Mark
      One** **]**


**x**
                **QUARTERLY
                    REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934**For
                    the quarterly period ended April 30,
                    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
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





The
      aggregate market value of the common equity held by non-affiliates of the issuer
      was $7,836,533 based on the closing price of $0.20 per share on June 11, 2008
      as
      reported on the over-the-counter bulletin board.





There
      were 39,182,669 shares of issuer’s Common Stock outstanding as of June
      11,
      2008.





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
















**ATSI
      COMMUNICATIONS, INC.**


**QUARTERLY
      REPORT ON FORM 10-QSB**


**FOR
      THE QUARTER ENDED APRIL 30, 2008**





**INDEX**




Page**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial StatementsConsolidated
                Balance Sheets as of April 30, 2008 and July 31,
                2007(unaudited)
            
            3Consolidated
                Statements of Operations for the Three and Nine Months Ended April
                30,
                2008and
                2007 (unaudited)
            
            4Consolidated
                Statements of Comprehensive Income for the Three and Nine
                MonthsEnded
                April 30, 2008 and 2007(unaudited)
            
            5Consolidated
                Statement of Changes in Stockholders’ Deficit for the Nine
                MonthsEnded
                April 30, 2008 (unaudited)
            
            6Consolidated
                Statements of Cash Flows for the Nine MonthsEnded
                April 30, 2008 and 2007 (unaudited)
            
            7Notes
                to Consolidated Unaudited Financial Statements
            
            8Item
                2. Management’s Discussions and Analysis and Plan Of
                Operations
            
            13Item
                3. Controls and Procedures
            
            19**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            
            19Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            19Item
                3. Default Upon Senior Securities
            
            19Item
                4. Submission of Matters to a Vote of Security Holders
            
            19Item
                5. Other Information
            
            19Item
                6. Exhibits
            
            20





2




**PART
      1. FINANCIAL INFORMATION**





**ITEM
      1. FINANCIAL STATEMENTS**





ATSI
      COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS


(In
      thousands, except per share amounts)


(Unaudited)





April 30,
            
            July 31,2008
            
            2007ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            726
            
            $
            1,050Accounts
                receivable, net of allowance for bad debt of $95 and $98,
                respectively
            
            
            1,122
            
            
            866Note
                receivable, relaetd party
            
            
            15
            
            
            -Note
                receivable
            
            
            150
            
            
            50Prepaid
                & other current assets
            
            
            117
            
            
            94Total
                current assets
            
            
            2,130
            
            
            2,060LONG-TERM
                ASSETS:Certificates
                of deposit
            
            
            316
            
            
            306PROPERTY
                AND EQUIPMENT
            
            
            556
            
            
            499Less
                - accumulated depreciation
            
            
            (400
            )
            
            (281
            )Net
                property and equipment
            
            
            156
            
            
            218Total
                assets
            
            $
            2,602
            
            $
            2,584LIABILITIES
                AND STOCKHOLDERS' DEFICITCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            1,019
            
            $
            1,071Accrued
                liabilities
            
            
            128
            
            
            516Current
                portion of obligation under capital leases
            
            
            3
            
            
            3Notes
                payable
            
            
            596
            
            
            818Convertible
                debentures
            
            
            140
            
            
            76Total
                current liabilities
            
            
            1,886
            
            
            2,484LONG-TERM
                LIABILITIES:Notes
                payable
            
            
            631
            
            
            177Convertible
                debentures
            
            
            100
            
            
            158Obligation
                under capital leases, less current portion
            
            
            1
            
            
            3Other
            
            
            5
            
            
            4Total
                long-term liabilities
            
            
            737
            
            
            342Total
                liabilities
            
            
            2,623
            
            
            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, 39,182,669
                and
                37,620,513 shares issued and outstanding, respectively
            
            
            39
            
            
            38Additional
                paid in capital
            
            
            72,563
            
            
            72,222Accumulated
                deficit
            
            
            (72,624
            )
            
            (72,505
            )Other
                comprehensive income
            
            
            1
            
            
            1Total
                stockholders' deficit
            
            
            (21
            )
            
            (242
            )Total
                liabilities and stockholders' deficit
            
            $
            2,602
            
            $
            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 April 30,
            
            Nine months ended April 30,2008
            
            2007
            
            2008
            
            2007OPERATING
                REVENUES:Carrier
                services
            
            $
            11,147
            
            $
            8,113
            
            $
            30,832
            
            $
            21,658Communication
                services
            
            
            24
            
            
            27
            
            
            73
            
            
            87Total
                operating revenues
            
            
            11,171
            
            
            8,140
            
            
            30,905
            
            
            21,745OPERATING
                EXPENSES:Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            10,384
            
            
            7,647
            
            
            28,713
            
            
            20,175Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            555
            
            
            317
            
            
            1,916
            
            
            1,271Legal
                and professional fees
            
            
            86
            
            
            84
            
            
            239
            
            
            199Bad
                debt expense
            
            
            (23
            )
            
            29
            
            
            (2
            )
            
            76Depreciation
                and amortization expense
            
            
            42
            
            
            24
            
            
            120
            
            
            62Total
                operating expenses
            
            
            11,044
            
            
            8,101
            
            
            30,986
            
            
            21,783OPERATING
                INCOME (LOSS)
            
            
            127
            
            
            39
            
            
            (81
            )
            
            (38
            )OTHER
                INCOME (EXPENSE):Debt
                forgiveness income
            
            
            -
            
            
            -
            
            
            41
            
            
            -Interest
                income (expense)
            
            
            (32
            )
            
            (253
            )
            
            (79
            )
            
            (322
            )Total
                other income (expense), net
            
            
            (32
            )
            
            (253
            )
            
            (38
            )
            
            (322
            )NET
                INCOME (LOSS)
            
            
            95
            
            
            (214
            )
            
            (119
            )
            
            (360
            )LESS:
                PREFERRED DIVIDEND
            
            
            -
            
            
            (7
            )
            
            (12
            )
            
            (45
            )ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            -
            
            
            600
            
            
            340
            
            
            828NET
                INCOME TO COMMON STOCKHOLDERS
            
            $
            95
            
            $
            379
            
            $
            209
            
            $
            423BASIC
                INCOME PER SHARE:
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.02DILUTED
                INCOME PER SHARE
            
            $
            0.00
            
            $
            0.01
            
            $
            0.01
            
            $
            0.02WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            39,186,590
            
            
            37,005,780
            
            
            39,036,705
            
            
            24,712,414DILUTED
                COMMON SHARES OUTSTANDING
            
            
            38,778,587
            
            
            39,842,780
            
            
            39,286,505
            
            
            27,549,414





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





4





ATSI
      COMMUNICATIONS, INC. AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(In
      thousands, except per share amounts)


(Unaudited)





Three months ended April 30,
            
            Nine months ended April 30,2008
            
            2007
            
            2008
            
            2007Net
                income to common stockholders
            
            $
            95
            
            $
            (214
            )
            $
            (119
            )
            $
            (360
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -Comprehensive
                income (loss) to common stockholders
            
            $
            95
            
            $
            (214
            )
            $
            (119
            )
            $
            (360
            )





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****Preferred (D)**
            
            **Preferred (E)**
            
            **Common**
            
            **Paid-in**
            
            **Retained**
            
            **Other 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**
            **)**Acquisition
                of Common Shares
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            **(20,400**
            **)**
            
            **(0**
            **)**
            **$**
            **(5**
            **)**
            
            
            
            
            
            
            
            (5
            )Shares
                issued for Services
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,448,686
            
            
            1
            
            
            348
            
            
            
            
            
            
            
            
            349Common
                shares issued for Preferred Stock Conversion
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,434
            
            
            -
            
            
            1
            
            
            
            
            
            
            
            
            1Dividends
                declared
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (12
            )
            
            
            
            
            
            
            
            (12
            )Reversal
                of previously recorded preferred dividend
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            340
            
            
            
            
            
            
            
            
            340Stock
                option expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            339
            
            
            
            
            
            
            
            
            339Shares
                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)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (119
            )
            
            
            
            
            (119
            )**BALANCE,
                APRIL 30, 2008**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **39,182,669**
            
            
            **39**
            
            **$**
            **72,563**
            
            **$**
            **(72,624**
            **)**
            **$**
            **1**
            
            **$**
            **(21**
            **)**





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)





Nine months ended April 30,2008
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIES:NET
                INCOME (LOSS)
            
            $
            (119
            )
            $
            (360
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Debt
                forgiveness income
            
            
            (41
            )
            
            -Depreciation
                and amortization
            
            
            120
            
            
            62Issuance
                of stock grants and options, employees for services
            
            
            612
            
            
            422Issuance
                of common stock and warrants for services
            
            
            77
            
            
            38Provisions
                for losses on accounts receivables
            
            
            (2
            )
            
            76Amortization
                of debt discount
            
            
            6
            
            
            151Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (253
            )
            
            (308
            )Prepaid
                expenses and other
            
            
            (23
            )
            
            (17
            )Accounts
                payable
            
            
            (91
            )
            
            (1
            )Accrued
                liabilities
            
            
            (30
            )
            
            54Net
                cash provided by operating activities
            
            
            256
            
            
            117CASH
                FLOWS FROM INVESTING ACTIVITIES:Investment
                in certificates of deposit
            
            
            (10
            )
            
            (302
            )Note
                receivable
            
            
            (100
            )
            
            -Note
                receivable, related party
            
            
            (15
            )
            
            -Purchases
                of property & equipment
            
            
            (20
            )
            
            (101
            )Net
                cash used in investing activities
            
            
            (145
            )
            
            (403
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                on notes payable, related party
            
            
            -
            
            
            (106
            )Payments
                on notes payable
            
            
            (178
            )
            
            (78
            )Payments
                on advances from shareholders
            
            
            
            
            
            (148
            )Retirement
                of redeemable preferred stock series D&E
            
            
            (250
            )
            
            -Acquisition
                of common stock
            
            
            (5
            )
            
            -Proceeds
                from advances from shareholders
            
            
            -
            
            
            713Proceeds
                from Notes payables
            
            
            -
            
            
            350Issuance
                of common stock, cost of financing services
            
            
            -
            
            
            67Proceeds
                from the exercise of stock options
            
            
            -
            
            
            16Proceeds
                from the exercise of warrants
            
            
            -
            
            
            35Principal
                payments on capital lease obligation
            
            
            (2
            )
            
            (2
            )Net
                cash (used in) / provided by financing activities
            
            
            (435
            )
            
            847DECREASE
                / INCREASE IN CASH
            
            
            (324
            )
            
            561CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            1,050
            
            
            36CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            726
            
            $
            597SUPPLEMENTAL
                DISCLOSURES:Cash
                paid for interest
            
            $
            34
            
            $
            43Cash
                paid for income tax
            
            
            -
            
            
            -NON-CASH
                INVESTING AND FINANCING TRANSACTIONSIssuance
                of common stock for conversion of debt
            
            $
            30
            
            $
            572Issuance
                of common stock for accounts payable
            
            
            -
            
            
            58Conversion
                of preferred stock to common stock
            
            
            1
            
            
            1,141Preferred
                stock dividends
            
            
            12
            
            
            45Reversal
                of previously recorded preferred stock dividend
            
            
            (340
            )
            
            (828
            )Discount
                for beneficial conversion feature on convertible debt
            
            
            -
            
            
            144





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 – 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 nine months ended April 30, 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.





-
      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.




8




-
      ATSI
      granted options to purchase 100,000 common shares to an employee with an
      exercise price of $0.18 per share, the closing price of ATSI’s common stock on
      the grant date, January 28, 2008. 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 $14,753 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 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
            
            
            75%-105
            %Risk-free
                interest rate
            
            
            3.15%-4.65
            %Expected
                life of options
            
            
            4-6
                years





A
      summary
      of the options as of April 30 ,
      2008 and
      the
      changes during the nine months ended April 30,
      2008 is
      presented below:





Weighted-average
            
            remaining contractual**2005 Stock Compensation Plan**
            
            Options
            
            exercise price
            
            term (years)Outstanding
                at July 31, 2007
            
            
            5,598,998
            
            $
            0.17
            
            
            6Granted
            
            
            2,715,000
            
            
            0.22
            
            
            6Forfeited
            
            
            (74,999
            )
            
            0.21
            
            
            6Outstanding
                at April 30, 2008
            
            
            8,238,999
            
            
            0.19
            
            
            6Exercisable
                at April 30, 2008
            
            
            4,673,666
            
            $
            0.18
            
            
            6




**NOTE
      3 – 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. On April 30, 2008, ATSI and
      CCA Financial Services, Inc. agreed to extend the term of the note to June
      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.




9




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 April
      30, 2008, the principal balance and accrued interest on the New Debenture were
      $240,000 and $21,000, respectively.





On
      March
      28, 2007, ATSI borrowed $100,000 from Wells Fargo Bank. This
      note
      bears interest at 7%, provides for twenty-four monthly payments of principal
      and
      interest in the amount 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 in the amount 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 surrendered for cancellation 742 shares of ATSI’s 6% Series D Cumulative
      Convertible Preferred Stock and forgave approximately $340,000 in dividends
      accrued thereon as of October 24, 2007.





**NOTE
      4 - 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. On March 26, 2008, WFBC increased the accounts receivable financing
      to $5,000,000. ATSI may offer to sell with recourse not less than $350,000
      and
      no more than $5,000,000 of its accounts receivable to WFBC each month. WFBC
      pays
      to ATSI 85% of the aggregate amount of each account transferred under the
      Account Transfer Agreement. Once the account is collected by WFBC, it retains
      the amount originally paid for the account plus a daily factoring rate of
      0.0349% for each day outstanding measured from the funding date and until the
      account is paid by ATSI’s customer. If an account is not paid within 90 days,
      ATSI must repurchase the account for the amount that it originally received
      for
      the account and pay the factor rate that has accrued prior to repurchase. The
      factoring agreement is for twelve months and ATSI can terminate this agreement
      upon 30 days written notice, subject to a $15,000 early termination fee. Under
      the receivable financing agreement with WFBC, ATSI is factoring approximately
      $875,000 of its monthly receivables. As of April 30, 2008, ATSI had
      approximately $11,000 of factored account receivables outstanding; ATSI will
      continue to factor its receivables on a monthly basis as services are rendered
      to its customers.




10




**NOTE
      5 – COMMON STOCK**





During
      the nine months ended April 30, 2008 ATSI issued the following:





-
            149,288
                shares of common stock valued at $30,820 to its placement agent and
                consultants for their services
                rendered.





-
            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
      6 –WARRANTS ISSUED FOR SERVICES**





During
      the nine months ended April 30, 2008 ATSI granted 375,000 warrants for
      consulting services. The exercise price of the warrants was set at $.18 per
      warrant. ATSI recognized a non-cash warrant expense of $45,753 during the
      quarter ended April 30, 2008.





The
      fair
      value of each 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
            
            
            105
            %Risk-free
                interest rate
            
            
            3.62
            %Expected
                life of options
            
            
            4
                years





**NOTE
      7 –NOTE RECEIVABLE**





As
      of
      April 30, 2008, ATSI had
      loaned a total of $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., whereby ATSI provides accounting and
      administrative support to Fiesta for $2,500 per month. As of April 30, 2008,
      Fiesta owed ATSI $52,500 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 July 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.




11




**NOTE
      9 – PREFERRED STOCK SETTLEMENTS**





In
      August
      2007, ATSI reached a 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
      pays the principal amount in full within the first 18 months.





**NOTE
      10 – SETTLEMENT AGREEMENT REACHED WITH LIGHTSPEED TELECOM,
      INC.**




On
      April
      30, 2008 ATSI and Lightspeed Telecom, Inc. entered into a settlement agreement
      in which ATSI is to receive some software from Lightspeed and some pecuniary
      consideration. This settlement arouse from a suit filed in December 2006 by
      ATSI
      against Lightspeed Telecom, Inc. in the 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 was for unpaid telecommunications services
      provided at the instance of the individual Defendants.  ATSI asserted such
      services were obtained by or at the direction of Defendants without intent
      to
      pay.





**NOTE
      11 – SHARE REPURCHASE PROGRAM**





On
      April
      16, 2008 ATSI’s Board of Directors approved a share buyback plan allowing the
      Company to purchase up to $1 million of its common stock. The shares will be
      bought through the open market through December 31, 2008 based on price and
      market conditions. As of April 30, 2008 the Company has repurchased 20,400
      of
      its common stock at an average purchase price of $0.21.




**NOTE
      12 – SUBSEQUENT EVENTS**





On
      May 1,
      2008, ATSI entered into a “Purchase Agreement” with Fiesta Communications, Inc.
      Under the agreement ATSI agreed to sell all of the outstanding shares of
      Telefamilia Communications, Inc. to Fiesta Communications, Inc. for 975,000
      shares of common stock in Fiesta Communications and $30,000 in cash to be paid
      in June 2008. Fiesta Communications issued a three-year promissory note in
      the
      amount of $52,984 for the services rendered by ATSI under the joint management
      agreement dated January 1, 2006. The three-year promissory note will be paid
      quarterly starting July 31, 2008 and has a maturity date of May 1, 2010 and
      an
      annual interest rate of 8%. The note will be secured by all assets of the new
      combined entity of Fiesta. **** Additionally,
      on May 1, 2008 Fiesta and ATSI entered into a note payable to ATSI for $10,000,
      which has a maturity date of July 30, 2008 and an interest rate of
      8%.




12




A
      summary
      of Telefamilia’s financial information is as follow:




Telefamilia
                Communications, Inc.(In
                thousands)(Unaudited)


**As
                of April 30, 2008**BalanceCurrent
                assets
            
            $
            78Non-current
                assets
            
            $
            4Total
                assets
            
            $
            82Current
                liabilities
            
            $
            48Non-current
                liabilities
            
            $
            3Total
                liabilities
            
            $
            51Total
                stockholders' equity
            
            $
            31Total
                liabilities and stockholders' equity
            
            $
            82




**For
                the nine months ended April 30, 2008**AmountRevenues
            
            $
            73Cost
                of services
            
            
            47Gross
                profits
            
            $
            26Operating
                expenses
            
            
            70Net
                income (loss)
            
            $
            (44
            )





**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.*





The
      following is a discussion of the consolidated financial condition and results
      of
      operations of ATSI for the three and nine months ended April 30, 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.


13


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 nine months ended April 30,
      2008
      and 2007. All dollar amounts are in thousands.




Three months ended April 30,
            
            Nine months ended April 30,2008
            
            2007
            
            Variances
            
            %
            
            2008
            
            2007
            
            Variances
            
            %OPERATING
                REVENUES:Carrier
                services
            
            $
            11,147
            
            $
            8,113
            
            $
            3,034
            
            
            37
            %
            $
            30,832
            
            $
            21,658
            
            $
            9,174
            
            
            42
            %Communication
                services
            
            
            24
            
            
            27
            
            
            (3
            )
            
            -11
            %
            
            73
            
            
            87
            
            
            (14
            )
            
            -16
            %Total
                operating revenues
            
            
            11,171
            
            
            8,140
            
            
            3,031
            
            
            37
            %
            
            30,905
            
            
            21,745
            
            
            9,160
            
            
            42
            %Cost
                of services (exclusive of depreciation and amortization, shown
                below)
            
            
            10,384
            
            
            7,647
            
            
            2,737
            
            
            36
            %
            
            28,713
            
            
            20,175
            
            
            8,538
            
            
            42
            %GROSS
                MARGIN
            
            
            787
            
            
            493
            
            
            294
            
            
            60
            %
            
            2,192
            
            
            1,570
            
            
            622
            
            
            40
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees)
            
            
            555
            
            
            317
            
            
            238
            
            
            75
            %
            
            1,916
            
            
            1,271
            
            
            645
            
            
            51
            %Legal
                and professional fees
            
            
            86
            
            
            84
            
            
            2
            
            
            2
            %
            
            239
            
            
            199
            
            
            40
            
            
            20
            %Bad
                debt expense
            
            
            (23
            )
            
            29
            
            
            (52
            )
            
            -179
            %
            
            (2
            )
            
            76
            
            
            (78
            )
            
            -103
            %Depreciation
                and amortization expense
            
            
            42
            
            
            24
            
            
            18
            
            
            75
            %
            
            120
            
            
            62
            
            
            58
            
            
            94
            %OPERATING
                INCOME (LOSS)
            
            
            127
            
            
            39
            
            
            88
            
            
            226
            %
            
            (81
            )
            
            (38
            )
            
            (43
            )
            
            -113
            %OTHER
                INCOME (EXPENSE):Debt
                forgiveness income
            
            
            -
            
            
            -
            
            
            -
            
            
            0
            %
            
            41
            
            
            -
            
            
            41
            
            
            100
            %Interest
                income (expense)
            
            
            (32
            )
            
            (253
            )
            
            221
            
            
            87
            %
            
            (79
            )
            
            (322
            )
            
            243
            
            
            75
            %Total
                other income (expense), net
            
            
            (32
            )
            
            (253
            )
            
            221
            
            
            87
            %
            
            (38
            )
            
            (322
            )
            
            284
            
            
            88
            %NET
                INCOME (LOSS)
            
            
            95
            
            
            (214
            )
            
            309
            
            
            -144
            %
            
            (119
            )
            
            (360
            )
            
            241
            
            
            67
            %LESS:
                PREFERRED DIVIDEND
            
            
            -
            
            
            (7
            )
            
            7
            
            
            100
            %
            
            (12
            )
            
            (45
            )
            
            33
            
            
            73
            %ADD:
                REVERSAL OF PREVIOUSLY RECORDED PREFERRED DIVIDEND
            
            
            -
            
            
            600
            
            
            (600
            )
            
            -100
            %
            
            340
            
            
            828
            
            
            (488
            )
            
            -59
            %NET
                INCOME TO COMMON STOCKHOLDERS
            
            $
            95
            
            $
            379
            
            $
            (284
            )
            
            -75
            %
            $
            209
            
            $
            423
            
            $
            (214
            )
            
            -51
            %





**Three
      Months ended April 30, 2008 Compared to Three Months ended April 30,
      2007**





*Operating
      Revenues* .
      Consolidated operating revenues increased $3,031,000, or 37%, between periods
      from $8,140,000 for the quarter ended April 30, 2007 to $11,171,000 for the
      quarter ended April 30, 2008.





Carrier
      services revenue increased by $3,034,000, or 37%, from the quarter ended April
      30, 2007 to the quarter ended April 30, 2008. Our carrier traffic increased
      by
      30 % from approximately 111,878,669 minutes of voice traffic during the quarter
      ended April 30, 2007 to approximately 145,481,136 minutes
      of voice traffic during the quarter ended April 30, 2008. The increase in
      revenue and VoIP minutes is attributable primarily to the upgrade to our
      Nextone® Soft Switch, which allows us to offer high quality and dependable VoIP
      services, serve more customers and efficiently process greater volume of data
      records and calls.





Communication
      services revenue decreased approximately 11%, or $3,000 from the quarter ended
      April 30, 2007 to the quarter ended April 30, 2008. The decrease in
      communication services revenue is primarily due to a decrease in retail
      customers from 111 during the quarter ended April 30, 2007 to 97 during the
      quarter ended April 30, 2008.


14





C *ost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by $2,737,000, or 36%, from the quarter
      ended April 30, 2007 to the quarter ended April 30, 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 111,878,669
      minutes of voice traffic during the quarter ended April 30, 2006 to
      approximately 145,481,136 minutes of voice traffic during the quarter ended
      April 30, 2008, thus increasing our cost of services between quarters.
      Consolidated cost of services, as a percentage of revenue was comparable between
      quarters at 93%. Additionally, as a result of the increase in total revenue,
      our
      gross profits increased from $493,000 during the quarter ended April 30, 2007
      to
      $787,000 during the quarter ended April 30, 2008.





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased by $238,000, or 75%, from the quarter ended April 30,
      2007  to
      the
      quarter ended April 30, 2008. The increase is primarily attributable to an
      increase in salaries of $120,000 as a result of the hiring of three new
      employees and bonuses paid to officers. Additionally, non-cash compensation
      expense to employees and warrant expense increased by $79,000 from the quarter
      ended April 30, 2007  to
      the
      quarter ended April 30, 2008.





*Legal
      and professional fees* .
      Legal
      and professional fees increased by $2,000, or 2%, from the quarter ended April
      30, 2007  to
      the
      quarter ended April 30, 2008. The increase is attributable to $35,000 in legal
      fees incurred during the quarter ended April 30, 2008 in connection with an
      investor relations campaign. We did not incur similar expenses during the
      quarter ended April 30, 2007.





*Bad
      debt expense.* Bad debt
      expense decreased by $52,000, or 179%, from the quarter ended April 30, 2007
      to
      the quarter ended April 30, 2008. During the quarter ended April 30, 2008 we
      recognized a $25,000 adjustment
      in bad debt expense as a result of changes in the VoIP market and historical
      uncollectible accounts, thus decreasing bad debt expense between periods.





*Depreciation
      and amortization* .
      Depreciation and amortization increased by $18,000 or 75%, from the quarter
      ended April 30, 2007  to
      the
      quarter ended April 30, 2008. The increase is attributed to the amortization
      during fiscal 2008 of the new computers and upgrades to our Nextone soft-switch
      acquired during the third quarter of fiscal 2008.





*Operating
      income (loss)* .
      The
      Company’s operating income increased by $88,000, or 226%, from the quarter ended
      April 30, 2007  to
      the
      quarter ended April 30, 2008. The improvement in operating income is attributed
      to the increase between quarters in gross profit margin of approximately
      $294,000. The increase in gross profit margin was offset by an increase of
      approximately $238,000 in selling, general and administrative expenses due
      to an
      increase in salaries of $120,000 as a result of the hiring of three new
      employees and bonuses paid to officers. Additionally, non-cash compensation
      expense to employees and warrant expense increased by $79,000 from the quarter
      ended April 30, 2007  to
      the
      quarter ended April 30, 2008.





*Interest
      income (expense)* .
      Interest (expense) decreased by $221,000, or 87%, from the quarter ended April
      30, 2007  to
      the
      quarter ended April 30, 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 April 30, 2008. Additionally,
      during the quarter ended April 30, 2007 we recognized $143,723 attributed to
      the
      beneficial conversion feature associated with the conversion of various notes
      payable and accrued interest and the amortization of approximately $93,000
      in
      deferred financing fees as part of a private placement common stock financing.




*Net
      income (loss)* .
      Net
      income increased by $309,000, or 144%, from the quarter ended April 30,
      2007  to
      the
      quarter ended April 30, 2008. The improvement in net income is attributed to
      the
      increase between quarters in operating income and a decrease in interest expense
      between quarters.





*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $7,000, or 100%, between periods, from
      $7,000 for the quarter ended April 30, 2007 to $0 during the quarter ended
      April
      30, 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 April 30, 2008.


15





*Reversal
      of previously recorded preferred stock dividends.* During
      the quarter ended April 30, 2007 we recognized a reversal of previously recorded
      dividend expense of $600,000, this reversal occurred as result of the conversion
      into common stock of 9,063,260 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 applicable to common stockholders* .
      Net
      income applicable to common stockholders decreased by $284,000, or 75%, from
      the
      quarter ended April 30, 2007  to
      the
      quarter ended April 30, 2008, although we recognized an increase in gross margin
      between periods of $294,000 and an increase in operating income between quarters
      of $88,000. The decrease in net income applicable to common stockholders is
      attributed to the ** reversal
      of previously recorded preferred stock dividends of $600,000 recognized during
      the quarter ended April 30, 2007. We did not recognize this type of adjustment
      during the quarter ended April 30, 2008.





**Nine
      Months ended April 30, 2008 Compared to Nine Months ended April 30,
      2007**





*Operating
      Revenues* .
      Consolidated operating revenues increased by $9,160,000, or 42%, between periods
      from $21,745,000 for the nine months ended April 30, 2007 to $30,905,000 for
      the
      nine months ended April 30, 2008.





Carrier
      services revenue increased $9,174,000, or 42%, from the nine months ended April
      30, 2007 to the nine months ended April 30, 2008. The
      increase in carrier services revenue is attributed to the increase in carrier
      minutes. Our carrier services minutes increased by 33% from approximately
      316,435,399 minutes of voice traffic during the nine months ended April 30,
      2007
      to approximately 419,571,789 minutes of voice traffic during the nine months
      ended April 30, 2008. The
      increase in revenue and VoIP minutes is attributable primarily to the upgrade
      to
      our Nextone® Soft Switch, which allows us to offer high quality and dependable
      VoIP services, serve more customers and efficiently process greater volume
      of
      data records and calls.





Communication
      services revenue decreased approximately 16%, or $14,000, from the nine months
      ended April 30, 2007 to the nine months ended April 30, 2008. The decrease
      in
      communication services revenue is primarily due to a decrease in the average
      monthly retail customers from 113 during the nine months ended April 30, 2007 to
      100 during the nine months ended April 30, 2008.





C *ost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by $8,538,000, or 42%, from the nine
      months ended April 30, 2007 to the nine months ended April 30, 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, was comparable between periods at 93%. Despite the increase in cost
      of
      service (exclusive of depreciation and amortization), gross profits increased
      from $1,570,000 during the nine months ended April 30, 2007 to $2,192,000 during
      the nine months ended April 30, 2008 as a result of the increase in revenues.
      As
      previously mentioned, our carrier traffic increased by 33 % from approximately
      316,435,399 minutes of voice traffic during the nine months ended April 30,
      2007
      to approximately 419,571,789 minutes of voice traffic during the nine months
      ended April 30, 2008. The increase in carrier minutes can mainly be attributed
      to an increase in customers during fiscal 2008 compared to fiscal 2007.





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees).* SG&A
      expenses increased by $645,000, or 51%, from the nine months ended April 30,
      2007 to the nine months ended April 30, 2008. The increase is primarily
      attributable to an increase in salaries and wages of approximately $354,000
      as a
      result of the hiring of three new employees and bonuses paid to officers.
      Furthermore, non-cash compensation expense to employees and warrant expense
      increased by $235,000 from the nine months ended April 30, 2007 to the nine
      months ended April 30, 2008. The increase is attributed to the recognition
      during the nine months ended April 30, 2008 of approximately $612,000 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 $422,000 on non-cash compensation
      expense during the nine months ended April 30, 2007.


16


*Legal
      and Professional Fees* .
      Legal
      and professional fees increased by $40,000, or 20%, from the nine months ended
      April 30, 2007 to the nine months ended April 30, 2008. The increase is
      attributable to $57,000 in legal fees incurred during the nine months ended
      April 30, 2008 in connection with the litigation and settlement of a dispute
      between ATSI and the holders of the 6% Series D Cumulative Convertible Preferred
      Stock. We did not incur similar expenses during the nine months ended April
      30,
      2007.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $78,000, or 103%, from the nine months ended April 30,
      2007
      to the nine months ended April 30, 2008. During the nine months ended April
      30,
      2007 we recognized $76,000 in bad debt expense associated with uncollectible
      accounts. During the nine months ended April 30, 2008 we recognized an
      adjustment in bad debt of $2,000 as a result of changes in the VoIP market
      and
      historical uncollectible accounts, thus decreasing bad debt expense between
      periods.





*Depreciation
      and amortization* .
      Depreciation and amortization increased by $58,000, or 94%, from the nine months
      ended April 30, 2007 to the nine months ended April 30, 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 3 rd quarter
      of fiscal 2008.





*Operating
      income (loss)* .
      The
      Company’s operating loss increased by $43,000, or 113%, from the nine months
      ended April 30, 2007 to the nine months ended April 30, 2008. The increase
      in
      operation loss is primarily attributable to an increase in salaries and wages
      of
      approximately $354,000 as a result of the hiring of three new employees and
      bonuses paid to officers. Furthermore, the increase in non-cash compensation
      expense to employees and warrant expense of $235,000 from the nine months ended
      April 30, 2007 to the nine months ended April 30, 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 offset the increase in gross margin of approximately
      $622,000 and the reduction in bad debt expense of $78,000 between periods.





*Debt
      forgiveness income* .
      Debt
      forgiveness income increased by $41,000, or 100%, from the nine months ended
      April 30, 2007 to the nine months ended April 30, 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 $243,000, or 75%, from the nine months
      ended April 30, 2007 to the nine months ended April 30, 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 nine months ended
      April 30, 2008. Additionally, during the nine months ended April 30, 2007 we
      recognized $143,723 attributed to the beneficial conversion feature associated
      with the conversion of various notes payable and accrued interest and the
      amortization of approximately $93,000 in deferred financing fees as part of
      a
      private placement common stock financing.





*Net
      income (loss)* .
      Net
      income (loss) decreased by $241,000 from the nine months ended April 30, 2007
      to
      the nine months ended April 30, 2008. The improvement in net income (loss)
      is
      attributed to the increase between periods in gross profit margin of
      approximately $622,000, the reduction in interest expense of $243,000, and
      increase in debt forgiveness income. These improvements were partially offset
      by
      the increase of approximately $645,000 in selling, general and administrative
      expenses.




*Preferred
      stock dividends* .
      Preferred stock dividends decreased by $33,000, or 73%, between periods, from
      $45,000 for the nine months ended April 30, 2007 to $12,000 during the nine
      months ended April 30, 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 April 30, 2008 all Convertible Preferred
      Stock has been converted or redeemed to common stock.





*Reversal
      of previously recorded preferred stock dividends.* During
      the nine months ended April 30, 2008, we recognized a reversal of previously
      recorded dividend expense of $340,000. This reversal occurred as result of
      the
      settlement agreement reached between ATSI and The Shaar Fund. 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 nine months ended
      April 30, 2007 we recognized a reversal of previously recorded dividend expense
      of $828,000. This reversal occurred as result of the conversion into common
      stock of 2,750 shares of Series A Convertible Preferred Stock and 11,802,381
      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.


17




*Net
      income (loss) applicable to common stockholders* .
      Net
      income applicable to common stockholders decreased by $214,000, or 51%, from
      the
      nine months ended April 30, 2007  to
      the
      nine months ended April 30, 2008 even though we recognized an increase in net
      income of $241,000. The decrease in net income applicable to common stockholders
      is attributed to the ** reversal
      of previously recorded preferred stock dividends of $828,000 recognized during
      the nine months ended April 30, 2007 compared to a reversal of previously
      recorded preferred stock dividend in the amount of $340,000 during the nine
      months ended April 30, 2008.





**Liquidity
      and Capital Resources**




*Cash
      Position:* We had a
      cash balance of $726,000 as of April 30, 2008. Net cash provided by operating
      activities during the nine months ended April 30, 2008 was approximately
      $256,000. Net cash provided by operating activities was as a result of
      adjustments for non-cash charges for depreciation of $120,000, debt forgiveness
      income of $41,000, charges associated with issuance of stock grants and options
      to employees for services of $612,000, issuance of common stock and warrants
      for
      services of $77,000 and provisions for losses on accounts receivables of $2,000.
      Cash provided by operating activities was slightly offset by the cash used
      by
      changes in accounts payable of $91,000, accrued liabilities of $30,000 and
      accounts receivables of $253,000.





Investing
      activities during the nine months ended April 30, 2008 consumed $145,000 as
      a
      result of advances of $100,000 to NetSapiens, notes receivables of $15,000
      with
      Fiesta Communications, a related party, investments in certificates of deposit
      and purchases of $20,000 of equipment.





Financing
      activities during the nine months ended April 30, 2008 consumed $435,000 in
      cash. This cash was primarily consumed by debt principal payments of $178,000
      associated with various notes payable, acquisition of the Redeemable Preferred
      stock Series D&E of $250,000, acquisition of our common stock of $5,000 and
      principal payments of $2,000 associated with a capital lease obligation.
      Overall, our net operating, investing and financing activities during the nine
      months ended April 30, 2008 resulted in a decrease of $324,000 in our available
      cash.





Our
      current cash expenses are expected to be approximately $150,000 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. We anticipate that the April 30, 2008 balance of $726,000
      in cash combined with expected net cash flow generated from operations and
      the
      factoring agreement with Wells Fargo Bank, will be sufficient to fund our
      operations, capital asset expenditures and potential common stock repurchases
      for the next twelve months. 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 $5,000,000 of our monthly accounts
      receivable. On average, we are factoring account receivables of $875,000 per
      month. As of April 30, 2008 we had $11,000 of outstanding receivables under
      the
      Wells Fargo Factoring agreement. We believe that the improvement in our cash
      flows from operations as a result of our growth will facilitate our ability
      to
      obtain debt and/or equity funding from institutional investors. However, we
      presently do not have a definitive agreement to obtain such
      financing.





Our
      working capital was $244,000 as of April 30, 2008. This represents an
      improvement of approximately $668,000 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 and the net operating income generated from
      operations through April 30, 2008.


18


**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 Sr. VP of Finance & Corporate 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 Sr. VP of Finance & Corporate 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.





**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 effect on internal control over
      financial reporting.





**PART
      II. OTHER INFORMATION**





**ITEM
      1. LEGAL PROCEEDINGS**




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 the individual Defendants.  ATSI asserts such services
      were obtained by or at the direction of Defendants without intent to pay, which
      the individual Defendants denied.  Lightspeed admitted liability but the
      two individual Defendants denied liability.  In light of Lightspeed being
      out of business and having virtually no confirmable hard assets, in April,
      2008
      the parties entered into a settlement agreement in which ATSI is to receive
      some
      software from Lighspeed and some pecuniary consideration from the individual
      Defendants.  In the event the Defendants perform such settlement agreement,
      the lawsuit will be dismissed.   Therefore, such case is currently
      abated pending the performance of such settlement by Defendants.




**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


19


**ITEM
      6. EXHIBITS**





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





**EXHIBIT
      INDEX**





**Number**
            **Description**10.1
            Stock
                Purchase Agreement between ATSI Communications, Inc. and Fiesta
                Communications, Inc. dated May 1, 2008.10.2
            9.0%
                Convertible Note due 2011 between ATSI Communications, Inc. and Fiesta
                Communications, Inc. dated May 1, 2008.10.3
            Promissory
                Note between ATSI Communications, Inc. and Fiesta Communications,
                Inc.
                dated May 1, 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:
                June 13, 2008
            By:
            /s/ Arthur L. SmithName:
            Arthur
                L. SmithTitle:
            President
                andChief
                Executive OfficerDate:
                June 13, 2008
            By:
            /s/ Antonio EstradaName:
            Antonio
                EstradaTitle:
            Sr.
                VP of Finance & Corporate Controller(Principal
                Accounting and PrincipalFinancial
                Officer)





20