**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-QSB/A**





**(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,
                2006




**o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the transition period from _____________ to
                _________________





Commission
      File Number 001-15687





**ATSI
      COMMUNICATIONS, INC.**


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





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes xNo 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 22, 2006**Common
                Stock, $.001 par
            14,797,460





Transitional
      Small Business Disclosure Format: Yes  o No x








**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**





**QUARTERLY
      REPORT ON FORM 10-QSB/A**


**FOR
      THE QUARTER ENDED JANUARY 31, 2006**





**INDEX**











**PART
      I. FINANCIAL INFORMATION**




PageItem 1.Financial
              StatementsConsolidated
                Balance Sheets as of January 31, 2006 and July 31, 2005
            1Consolidated
                Statements of Operations for the Three and Six MonthsEnded
                January 31, 2006 and 2005
            2Consolidated
                Statements of Comprehensive Loss for the Three and Six MonthsEnded
                January 31, 2006 and 2005
            3Consolidated
                Statements of Cash Flows for the Six Months Ended January 31, 2006
                and
                2005
            4Notes
                to Consolidated Financial Statements
            5Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            12Item
                3. Controls and Procedures
            21**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            21Item
                2. Unregistered Sales of Equity Securities and use of
                proceeds
            22Item
                3. Default upon senior securities
            22Item
                5. Other Information
            23Item
                6. Exhibits
            23









**Statement
      Regarding This Amendment**





We
      are
      amending our Form 10-QSB for the period ended January 31, 2006, as previously
      filed on March 23, 2006. We have had correspondence with the Staff of the
      Securities and Exchange Commission concerning the appropriate accounting of
      warrants issued to consultants, the
      conversion features of the Note Payable to Franklin Cardwell & Jones and the
      accounting of the 9% Convertible Debentures and associated
      warrants.





As
      a
      result of these discussions, warrants issued to consultants, the
      conversion features of the Note Payable to Franklin Cardwell & Jones and the
      9% Convertible Debentures and associated warrants have
      been
      accounted for as derivative instrument liabilities rather than as equity.
      Additionally, the embedded conversion
      features of the Note Payable to Franklin Cardwell and Jones and the embedded conversion
      features of the 9% Convertible Debentures and warrants related
      to the debt, have been bifurcated from the debt and accounted for separately
      as
      derivative instrument liabilities. We have added footnote 7 to disclose the
      derivative instrument liabilities and provided information on subsequent
      changes. In addition, we have modified the estimated volatility used in the
      Black-Scholes option pricing model used to value the warrants issued to
      consultants, the warrants issued to the 9% Convertible Debentures holders and
      the
      conversion features embedded in our Note payable to Franklin, Cardwell &
Jones and 9%
      Convertible Debentures.





We
      are
      required to record the fair value of the conversion features and the warrants
      on
      our balance sheet at fair value with changes in the values of these derivatives
      reflected in the consolidated statement of operations as “Gain (loss) on
      embedded derivative liability.” T he
      effect
      of the (non-cash) changes related to accounting separately for these derivative
      instrument liabilities and modifying the estimated volatility, on our
      consolidated statement of operations for the quarter and six months ended
      January 31, 2006, was a decrease in our net loss attributable to common
      shareholders of $16,000 and $38,000, respectively. The effect on our
      consolidated balance sheet as of January 31, 2006 was a reclassification between
      accumulated deficit and additional paid in capital of $3,440,000.





In
      all
      other material respects, this Amended Quarterly Report on Form 10-QSB is
      unchanged from the Quarterly Report on Form 10-QSB previously filed by the
      Company on March 23, 2006. This amendment should also be read in conjunction
      with our amended Annual Report on Form 10-KSB/A for the fiscal year ended July
      31, 2005 and our Quarterly Reports on Form 10-QSB/A for the quarters ended
      April
      30, 2005 and October 31, 2005, together with any subsequent amendments
      thereof.








**PART
                1. FINANCIAL INFORMATION****ITEM
                1. FINANCIAL STATEMENTS**ATSI
                COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                BALANCE SHEETS (RESTATED)(in
                thousands, except share
                information)




January
                31,
            
            
            July
                31,2006
            
            
            2005(unaudited)ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            190
            
            $
            29Accounts
                receivable
            
            
            278
            
            
            170Prepaid
                & other current assets
            
            
            20
            
            
            44Total
                current assets
            
            
            488
            
            
            243PROPERTY
                AND EQUIPMENT
            
            
            281
            
            
            228Less
                - accumulated depreciation
            
            
            (138
            )
            
            (90
            )Net
                property and equipment
            
            
            143
            
            
            138Total
                assets
            
            $
            631
            
            $
            381LIABILITIES
                AND STOCKHOLDERS' DEFICITCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            702
            
            $
            606Accounts
                payable, CSI Business Finance
            
            
            150
            
            
            -Accrued
                liabilities
            
            
            932
            
            
            1,033Current
                portion of obligation under capital leases
            
            
            3
            
            
            3Notes
                payable
            
            
            50
            
            
            -Notes
                payable, related party
            
            
            16
            
            
            16Notes
                payable, Franklin, Cardwell & Jones (see note 4)
            
            
            69
            
            
            77Convertible
                debentures
            
            
            234
            
            
            234Series
                D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
                issued
                and outstanding
            
            
            1,204
            
            
            1,182Series
                E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
                issued and outstanding
            
            
            1,785
            
            
            1,749Derivative
                financial instrument liabilities (see note 7)
            
            
            90
            
            
            24Liabilities
                from discontinued operations, net of assets
            
            
            -
            
            
            1,152Total
                current liabilities
            
            
            5,235
            
            
            6,076LONG-TERM
                LIABILITIES:Notes
                payable
            
            
            500
            
            
            500Obligation
                under capital leases, less current portion
            
            
            8
            
            
            9Other
            
            
            6
            
            
            8Total
                long-term liabilities
            
            
            514
            
            
            517Total
                liabilities
            
            
            5,749
            
            
            6,593STOCKHOLDERS'
                DEFICIT:Series
                A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
                3,750
                sharesissued
                and outstanding
            
            
            -
            
            
            -Series
                H Convertible Preferred Stock, 16,000,000 shares authorized, 12,477,851
                and 13,912,372 sharesissued
                and outstanding, respectively
            
            
            12
            
            
            14Common
                stock, $0.001, 150,000,000 shares authorized, 14,610,848 and 10,397,222
                sharesissued
                and outstanding, respectively
            
            
            15
            
            
            10Additional
                paid in capital
            
            
            66,996
            
            
            66,458Accumulated
                deficit
            
            
            (72,142
            )
            
            (73,196
            )Other
                comprehensive income
            
            
            1
            
            
            502Total
                stockholders' deficit
            
            
            (5,118
            )
            
            (6,212
            )Total
                liabilities and stockholders' deficit
            
            $
            631
            
            $
            381





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






1





ATSI
                COMMUNICATIONS, INC.AND
                SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF OPERATIONS (RESTATED)(In
                thousands, except per share amounts)(unaudited)




Three
                months ended January 31,
            
            Six
                months ended January 31,2006
            
            2005
            
            2006
            
            2005OPERATING
                REVENUES:Carrier
                services
            
            $
            2,942
            
            $
            1,446
            
            $
            5,257
            
            $
            2,215Network
                services
            
            
            5
            
            
            74
            
            
            13
            
            
            147Total
                operating revenues
            
            
            2,947
            
            
            1,520
            
            
            5,270
            
            
            2,362OPERATING
                EXPENSES:Cost
                of services (exclusive of depreciationand
                amortization, shown below)
            
            
            2,769
            
            
            1,422
            
            
            5,009
            
            
            2,194Selling,
                general and administrative expense (exclusive of legal and professional
                fees,non
                cash stock compensation to employees and warrants for services, shown
                below)
            
            
            158
            
            
            82
            
            
            319
            
            
            306Legal
                and professional fees
            
            
            55
            
            
            40
            
            
            75
            
            
            305Non-cash
                issuance of common stock and warrants for services
            
            
            66
            
            
            400
            
            
            126
            
            
            400Non-cash
                stock-based compensation, employees
            
            
            -
            
            
            474
            
            
            180
            
            
            474Bad
                debt
            
            
            -
            
            
            4
            
            
            -
            
            
            4Depreciation
                and amortization
            
            
            26
            
            
            24
            
            
            48
            
            
            47Total
                operating expenses
            
            
            3,074
            
            
            2,446
            
            
            5,757
            
            
            3,730OPERATING
                (LOSS)
            
            
            (127
            )
            
            (926
            )
            
            (487
            )
            
            (1,368
            )OTHER
                INCOME (EXPENSE):Other
                Expense
            
            
            -
            
            
            4
            
            
            -
            
            
            4Gain
                (loss) on derivative instrument liabilities
            
            
            (69
            )
            
            1,379
            
            
            (95
            )
            
            (451
            )Debt
                forgiveness income
            
            
            38
            
            
            -
            
            
            38
            
            
            460Interest
                expense
            
            
            (28
            )
            
            (43
            )
            
            (54
            )
            
            (77
            )Total
                other income (expense), net
            
            
            (59
            )
            
            1,340
            
            
            (111
            )
            
            (64
            )NET
                LOSS FROM CONTINUING OPERATIONS
            
            
            (186
            )
            
            414
            
            
            (598
            )
            
            (1,432
            )DISCONTINUED
                OPERATIONS (NOTE 6)Gain
                on disposal of discontinued operations
            
            
            -
            
            
            -
            
            
            1,652
            
            
            -NET
                INCOME FROM DISCONTINUED OPERATIONS
            
            
            -
            
            
            -
            
            
            1,652
            
            
            -NET
                INCOME (LOSS):
            
            
            ($186
            )
            $
            414
            
            
            1,054
            
            
            ($1,432
            )LESS:
                PREFERRED DIVIDENDS
            
            
            (54
            )
            
            (38
            )
            
            (95
            )
            
            (76
            )NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            
            ($240
            )
            $
            376
            
            $
            959
            
            
            ($1,508
            )BASIC
                INCOME (LOSS) PER SHARE
            
            
            ($0.02
            )
            $
            0.06
            
            $
            0.08
            
            
            ($0.30
            )From
                continuing operations
            
            
            ($0.02
            )
            $
            0.06
            
            
            ($0.06
            )
            
            ($0.30
            )From
                discontinued operations
            
            $
            0.00
            
            $
            0.00
            
            $
            0.14
            
            $
            0.00DILUTED
                INCOME (LOSS) PER SHARE
            
            
            ($0.01
            )
            $
            0.02
            
            $
            0.04
            
            
            ($0.30
            )From
                continuing operations
            
            
            ($0.01
            )
            $
            0.02
            
            
            ($0.02
            )
            
            ($0.30
            )From
                discontinued operations
            
            $
            0.00
            
            $
            0.00
            
            $
            0.06
            
            $
            0.00WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            12,927,793
            
            
            6,346,695
            
            
            11,936,566
            
            
            5,088,741See
                accompanying summary of accounting policies and notes to financial
                statements.









2





ATSI
                COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (RESTATED)(In
                thousands)(unaudited)Three
                months ended January 31,
            
            Six
                months ended January 31,2006
            
            2005
            
            2006
            
            2005Net
                income (loss) to common stockholders
            
            
            ($240
            )
            $
            376
            
            $
            959
            
            
            ($1,508
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            (501
            )
            
            -Comprehensive
                income (loss) to common stockholders
            
            
            ($240
            )
            $
            376
            
            $
            458
            
            
            ($1,508
            )


See
        accompanying summary of accounting policies and notes to financial statements.
   3


ATSI
                COMMUNICATIONS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF CASH FLOWS (RESTATED)(In
                thousands)(unaudited)Six
                months ended January 31,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:NET
                INCOME (LOSS)
            
            $
            1,054
            
            
            ($1,432
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Gain
                in disposal of discontinued operations
            
            
            (1,652
            )
            
            -Debt
                forgiveness income
            
            
            -
            
            
            (460
            )Depreciation
                and amortization
            
            
            48
            
            
            47Non-cash
                issuance of stock grants and options, employees
            
            
            180
            
            
            474Non-cash
                issuance of common stock and warrants for services
            
            
            126
            
            
            471Provisions
                for losses on accounts receivables
            
            
            -
            
            
            4Loss
                on derivative instrument liabilities
            
            
            95
            
            
            451Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (108
            )
            
            (150
            )Prepaid
                expenses and other
            
            
            24
            
            
            (42
            )Accounts
                payable
            
            
            146
            
            
            130Accrued
                liabilities
            
            
            33
            
            
            39Net
                cash used in operating activities
            
            
            (54
            )
            
            (468
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property & equipment
            
            
            (4
            )
            
            (8
            )Acquisition
                of business
            
            
            -
            
            
            (8
            )Net
                cash used in investing activities
            
            
            (4
            )
            
            (16
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            50
            
            
            370Payments
                on notes payable
            
            
            -
            
            
            (774
            )Proceeds
                from factoring line of credit
            
            
            150
            
            
            -Processing
                fees, factoring line of credit
            
            
            (26
            )
            
            -Proceeds
                from the exercise of warrants
            
            
            46
            
            
            788Principal
                payments on capital lease obligation
            
            
            (1
            )
            
            (1
            )Net
                cash provided by financing activities
            
            
            219
            
            
            383INCREASE
                (DECREASE) IN CASH
            
            
            161
            
            
            (101
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            29
            
            
            94CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            190
            
            
            ($7
            )SUPPLEMENTAL
                DISCLOSURES:Cash
                paid for interest
            
            
            -
            
            
            -Cash
                paid for income taxes
            
            
            -
            
            
            -NON-CASH
                TRANSACTIONSIssuance
                of common stock for conversion of debt
            
            $
            115
            
            $
            733Issuance
                of common stock for purchase of fixed & Intangible
                assets
            
            
            -
            
            
            24Conversion
                of preferred stock to common stock
            
            
            92
            
            
            206Change
                in derivative liabilities on warrants exercised
            
            
            22
            
            
            1,229




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




4


**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**





**NOTES
      TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited interim financial statements of ATSI Communications,
      Inc.
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America and the rules of the United States Securities
      and Exchange Commission (“SEC”). In the opinion of management, these interim
      financial statements contain all adjustments, consisting of normal recurring
      adjustments, necessary for a fair presentation of financial position and the
      results of operations for the interim periods presented. The results of
      operations for interim periods are not necessarily indicative of the results
      to
      be expected for the full year. Notes to the financial statements, which would
      substantially duplicate the disclosure contained in the audited financial
      statements for the most recent fiscal year ended July 31, 2005, as reported
      in
      the amended Form 10-KSB/A filed April 14, 2006, have been omitted. The Company
      amended this quarterly report to reflect a net loss for the period ended January
      31, 2006, related to embedded derivatives in certain securities. See Note 7
      to
      the Interim Financial Statements.




Derivative
      financial instruments




The
      Company does not use derivative instruments to hedge exposures to cash flow,
      market, or foreign currency risks. Derivative financial instruments are
      initially measured at their fair value. For derivative financial instruments
      that are accounted for as liabilities, the derivative instrument is initially
      recorded at its fair value and is then re-valued at each reporting date, with
      changes in the fair value reported as charges or credits to income. For
      option-based derivative financial instruments, ATSI uses the Black-Scholes
      option-pricing model to value the derivative instruments. The classification
      of
      derivative instruments, including whether such instruments should be recorded
      as
      liabilities or as equity, is re-assessed at the end of each reporting period.
      Derivative instrument liabilities are classified in the balance sheet as current
      or non-current based on whether or not net-cash settlement of the derivative
      instrument could be required within 12 months of the balance sheet date.





**NOTE
      2 - STOCK BASED COMPENSATION**





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





ATSI
      applies APB No. 25 in accounting for its stock option plans and, accordingly,
      no
      compensation cost has been recognized in ATSI financial statements for stock
      options under any of the stock plans which on the date of grant the exercise
      price per share was equal to or exceeded the fair value per share. However,
      compensation cost has been recognized for warrants and options granted to
      non-employees for services provided. 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. 123, to stock-based employee compensation.







5





Three
                months ended January 31,
            
            Six
                months ended January 31,2006
            
            2005
            
            2006
            
            2005Net
              income (loss) to commonshareholders,
              as reported
            
            $
            (240,000
            )
            $
            376,000
            
            $
            959,000
            
            $
            1,508,000
            )Add:stock
              based compensation determinedunder
                intrinsic value based method
            
            
            -
            
            
            -
            
            
            -
            
            
            -Less:
              stock based compensation determinedunder
                fair value based method
            
            
            -
            
            
            -
            
            
            (281,499
            )
            
            -Pro
              forma net income (loss)
            
            $
            (240,000
            )
            $
            376,000
            
            $
            677,501
            
            $
            (1,508,000
            )Basic
              net income (loss) per common share:As
                reported
            
            $
            (0.02
            )
            $
            0.06
            
            $
            0.08
            
            $
            (0.30
            )Pro
                forma
            
            $
            (0.02
            )
            $
            0.06
            
            $
            0.06
            
            $
            (0.30
            )Diluted
              net income (loss) per common share:As
                reported
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.04
            
            $
            (0.30
            )Pro
                forma
            
            $
            (0.01
            )
            $
            0.02
            
            $
            0.03
            
            $
            (0.30
            )




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:




Six
              Months Ended January 31,2006
            
            2005Expected
                dividends yield
            
            
            0.00
            %
            
            N/AExpected
                stock price volatility
            
            
            139
            %
            
            N/ARisk-free
                interest rate
            
            
            4.42
            %
            
            N/AExpected
                life of options
            
            
            3
                years
            
            
            N/A




During
      the six months ended January 31, 2006, ATSI granted 2,450,000 options to
      purchase common stock to employees and members of the Board of Directors with
      an
      exercise price of $0.16, the average closing price of ATSI’s stock on September
      29, 2005. These options will vest over a period of three years. ATSI did not
      recognize any expense at the time these options were granted since the exercise
      price on the options was equal to the average market price at the grant date.
      The compensation expense determined under the fair value option method for
      these
      options was $257,275.




Additionally,
      during the six months ended January 31, 2006 ATSI granted 1,904,000 options
      to
      purchase common stock to employees and members of the Board of Directors with
      an
      exercise price of $0.16, the average closing price of ATSI’s stock on September
      29, 2005. Seventy three percent
      of these options vest immediately and the remaining balances vest over three
      years. ATSI
      did
      not recognize any expense at the time these options were granted since the
      exercise price on the options was equal to the average market price at the
      grant
      date. The compensation expense determined under the fair value option method
      for
      these options was $24,224.




During
      the six months ended January 31, 2006, ATSI’s Board of Directors approved the
      issuance of 1,125,000 shares to its employees and directors and 385,709 shares
      to consultants with a market value of $180,000 and $78,066, respectively.





**NOTE
      3 - SETTLEMENT OF NOTE RECEIVABLE**





On October
      31, 2005, ATSI Communications, Inc. and Telemarketing de Mexico S.A de C.V.
      reached a “Confidential Settlement Agreement and Mutual Release”. Under the
      settlement agreement the parties agreed to release all claims and liabilities
      between the parties. ATSI agreed to release Telemarketing de Mexico S.A de
      C.V.
      of a note receivable with a balance $598,000. ATSI
      previously recognized an allowance for this receivable and the balance reflected
      in our balance sheet was $0. Additionally,
      as part of the settlement ATSI agreed to release 10% of ATSI
      Communicaciones S.A de C.V. total outstanding common stock, that was held as
      collateral on the note receivable.





6


**NOTE
      4 - NOTES PAYABLE**





On
      November 1, 2004, ATSI entered into a note payable with Franklin, Cardwell
&
Jones, PC, for $103,454 associated with legal and professional services
      previously rendered. As per the terms in the note, the holder at any time after
      November 1, 2005 can convert all or any part of the outstanding balance and
      accrued and unpaid interest to shares of ATSI’s common stock equal to the amount
      converted divided by the product of (a) 0.90 times (b) the five-day average
      of
      the last sales of the common stock prior to the conversion day. This conversion
      feature was determined to be an embedded derivative and, accordingly, the
      embedded derivative portion of the value of the note is attributable to the
      conversion feature. The embedded derivative value at January 31, 2006, is
      $43,476 and is included in Derivative Financial Instrument Liabilities on the
      balance sheet. A corresponding, loss on derivative instrument liabilities of
      $32,257 is reflected in the statement of operations for the six months ended
      January 31, 2006. Additionally, on November 1, 2005, the holder of the note
      elected to convert $13,454 of the principal balance and $6,207 of the accrued
      interest into 66,603 common shares of ATSI. Furthermore,
      on January 6, 2006, the holder elected to convert $20,000 of the principal
      balance and $1,632 of accrued interest into 98,328 common shares of ATSI stock. The
      promissory note payable had a maturity date of December 1, 2005 and has an
      annual interest rate of 6%. On December 1, 2005 Franklin, Cardwell & Jones
      agreed to extend the maturity date on this note until December 1,
      2006.




On
      November 4, 2005, ATSI entered into a note payable with CSI Business Finance,
      Inc. for $50,000. The promissory note payable has a maturity date of November
      6,
      2006 and an annual interest rate of 18%. The
      note
      is secured by ATSI’s equipment, deposit accounts and accounts receivables.
      Beginning on December 4, 2005 the
      Company initiated making monthly interest payments of $750. The full principal
      balance on this note is due at maturity. The Company has the option of paying
      off the total outstanding principal balance at any time, but there’s a $10,000
      early termination fee.





**NOTE
      5 - ACCOUNTS RECEIVABLE CREDIT FACILITY**





On
      November 4, 2005 ATSI entered into a credit facility agreement with CSI Business
      Finance, Inc. Under the agreement, CSI Business Finance, Inc. committed to
      loan
      up to $150,000 secured by ATSI’s monthly receivables. The agreement expires on
      November 4, 2006 and it has an annual interest rate of 18%. As part of the
      transaction ATSI paid an application, legal and documentation fee of $6,000
      and
      a brokerage fee of $20,000 to Corporate Strategies, Inc. As of January 31,
      2006
      we have fully drawn the available credit facility of $150,000.





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





During
      the six months ended January 31, 2006, ATSI recognized a gain on disposal of
      discontinued operations of $1,652,000. The gain on disposal of discontinued
      operations was associated with the sale in October 2005 of ATSI’s Mexican
      subsidiary, ATSIMex Personal S.A de C.V. This entity discontinued all operations
      in May 2003. The total liabilities of this entity, net of assets, were
      approximately $1,652,000 and were assumed by the purchaser.





**NOTE
      7 - DERIVATIVES**




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





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







7


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





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





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





Furthermore,
      ATSI concluded that the exercise price and the number of shares to be issued
      under the “Consulting Warrants” to two individuals are fixed. However, since the
      9% Convertible debenture was issued prior to these warrants and these debentures
      might result in issuing an indeterminate number of shares, it cannot be
      concluded that the Company has a sufficient number of authorized shares to
      settle these warrants. As such, the warrants were accounted for as derivative
      instrument liabilities. ATSI is required to record the fair value of the
      conversion features and the warrants on its balance sheet at fair value with
      changes in the values of these derivatives reflected in the consolidated
      statement of operations as “Gain (loss) on embedded derivative liability.” The
      derivative liabilities were not previously classified as such in ATSI’s
      historical financial statements. In order to reflect these changes, ATSI has
      restated its financial statements for the year ended July 31, 2005 and the
      three
      months ended April 31, 2005, October 31, 2005 and January 31, 2006.




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





Embedded
                derivative liability balance
            
            Net
                change1/31/2006
            
            7/31/2005
            
            in
                valueNote
                Payable, Franklin Cardwell & Jones
            
            
            43,476
            
            
            18,851
            
            
            24,6259%
                Convertible Debenture & warrants
            
            
            -
            
            
            -
            
            
            -Consulting
                warrants
            
            
            46,293
            
            
            5,353
            
            
            40,940Total:
            
            
            89,769
            
            
            24,204
            
            
            65,565





And
      the
      impact on statements of operations as of the three and six months ended January
      31, 2006 and 2005 is as follows:


8





Gain
                (loss) on embedded derivative liabilities:
            
            Three
                months ended January 31,
            
            Six
                months ended January 31,2006
            
            2005
            
            2006
            
            2005Note
                Payable, Franklin Cardwell & Jones
            
            $
            (38,615
            )
            $
            (13,598
            )
            $
            (33,257
            )
            $
            (13,598
            )9%
                Convertible Debenture & warrants
            
            
            -
            
            
            10,143.00
            
            
            -
            
            
            6,255Consulting
                warrants
            
            
            (31,189
            )
            
            1,382,211.00
            
            
            (62,480
            )
            
            (443,956
            )Total
                gain (loss) on embedded derivative liabilities:
            
            $
            (69,804
            )
            $
            1,378,756
            
            $
            (95,737
            )
            $
            (451,299
            )





Since
      the
      conversion option for the Series D Preferred Stock is contingent, as a result
      of
      the ongoing litigation with the holders of these securities, the Series D
      Preferred Stock is not within the scope of SFAS 133 and EITF 00-19. If the
      contingency and lawsuit is resolved in the future and the holder becomes
      able to convert, ATSI will assess whether the conversion option meets the
      definition of a derivative under SFAS 133. However, as of July 31, 2003, the
      Series D Preferred Stock, which is carried as a current liability, is recorded
      at its stated redemption amount of $1,270 per share or approximately $942,000.
      ATSI continues to accrue dividends on the Series D Preferred Stock, pending
      resolution of the Company’s lawsuit. At January 31, 2006, the carrying amount of
      the Series D Preferred Stock was $1,204,000, including accrued dividends of
      $262,000.





9


Because
      the conversion option for the Series E Preferred Stock is contingent, as a
      result of the ongoing litigation with the holders of these securities, the
      Series E Preferred Stock is not within the scope of SFAS 133 and EITF 00-19.
      If
      the contingency and lawsuit is resolved in the future and the holder
      becomes able to convert, ATSI will assess whether the conversion option meets
      the definition of a derivative under SFAS 133. However, as of July 31, 2003,
      the
      Series E Preferred Stock, which is carried as a current liability, is recorded
      at its stated redemption amount of $1,250 per share or approximately $1,463,000.
      ATSI continues to accrue an amount equivalent to dividends of 6% per annum
      on
      the Series E Preferred Stock, pending resolution of the Company’s lawsuit. At
      January 31, 2006, the carrying amount of the Series E Preferred Stock was
      $1,785,000, including accrued dividends of $322,000.





**NOTE
      8 - RESTATEMENT**





ATSI
      has
      restated its 2005 and 2004 quarterly financial statements from amounts
      previously reported. ATSI has determined that certain financial instruments issued by the Company contain
      features that require the Company to account for these features as derivative
      instruments. Accordingly, warrants issued to consultants, the
      conversion features of the Note Payable to Franklin Cardwell and Jones and
      the
      9% Convertible Debentures and associated warrants have
      been
      accounted for as derivative instrument liabilities rather than as equity.
      Additionally, the embedded conversion
      features of the Note Payable to Franklin Cardwell and Jones and the embedded conversion
      features of the 9% Convertible Debentures and warrants related
      to the debt, have been bifurcated from the debt and accounted for separately
      as
      derivative instrument liabilities. Note 7 was added to disclose the derivative
      instrument liabilities and provided information on subsequent changes. In
      addition, ATSI has modified the estimated volatility used in the Black-Scholes
      option pricing model used to value the warrants issued to consultants, the
      warrants issued to the 9% Convertible Debentures holders and
      the
      conversion features embedded in the note payable to Franklin, Cardwell &
Jones and 9%
      Convertible Debentures.





ATSI
      is
      required to record the fair value of the conversion features and the warrants
      on
      the balance sheet at fair value with changes in the values of these derivatives
      reflected in the consolidated statement of operations as “Gain (loss) on
      derivative instrument liabilities.” T he
      effect
      of the (non-cash) changes related to accounting separately for these derivative
      instrument liabilities and modifying the estimated volatility, on the
      consolidated statement of operations for the quarter and six months ended
      January 31, 2006, was a decrease in the net income attributable to common
      shareholders of $16,000 and $38,000, respectively. Basic earnings (loss)
      attributable to common shareholders per share for the quarter and six months
      ended January 31, 2006 remind the same at ($0.02) and $0.08, respectively.
      Diluted earnings (loss) attributable to common shareholders per share for the
      quarter and six months ended January 31, 2006 remind the same at ($0.01) and
      ($0.02), respectively. The effect on the consolidated balance sheet as of
      January 31, 2006 was a reclassification between accumulated deficit and
      additional paid in capital of $3,440,000.





In
      all
      other material respects, the financial statements are unchanged.  Following
      is a summary of the restatement adjustments:




10






For
                the three months ended January 31, 2006
            
            For
                the three months ended January 31, 2005As
                Reported
            
            Adjustments
            
            As
                Restated
            
            As
                Reported
            
            Adjustments
            
            As
                Restated**Summary
                Balance Sheet**Total
                assets
            
            $
            631
            
            
            -
            
            $
            631
            
            $
            373
            
            
            -
            
            $
            373Pre-petition
                Liabilities of bankrupt subsidiaries, net of assets
            
            
            -
            
            
            -
            
            
            -
            
            
            12,104
            
            
            -
            
            
            12,104Accounts
                payable
            
            
            702
            
            
            -
            
            
            702
            
            
            542
            
            
            -
            
            
            542Accounts
                payable, CSI Business Finance
            
            
            150
            
            
            
            
            
            150
            
            
            -
            
            
            -
            
            
            -Accrued
                liabilities
            
            
            932
            
            
            -
            
            
            932
            
            
            593
            
            
            27
            
            
            620Current
                portion of obligation under capital leases
            
            
            3
            
            
            -
            
            
            3
            
            
            3
            
            
            -
            
            
            3Notes
                payable, related party
            
            
            16
            
            
            -
            
            
            16
            
            
            16
            
            
            -
            
            
            16Notes
                payable
            
            
            50
            
            
            -
            
            
            50
            
            
            -
            
            
            -
            
            
            -Notes
                payable, Franklin Cardwell & Jones
            
            
            69
            
            
            -
            
            
            69
            
            
            103
            
            
            (26
            )
            
            77Convertible
                debentures
            
            
            234
            
            
            -
            
            
            234
            
            
            275
            
            
            (41
            )
            
            234Series
                D Cumulative Preferred Stock
            
            
            1,204
            
            
            -
            
            
            1,204
            
            
            1,159
            
            
            -
            
            
            1,159Series
                E Cumulative Preferred Stock
            
            
            1,785
            
            
            -
            
            
            1,785
            
            
            1,310
            
            
            404
            
            
            1,714Derivative
                financial instrument liabilities
            
            
            90
            
            
            -
            
            
            90
            
            
            -
            
            
            597
            
            
            597Liabilities
                from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            1,152
            
            
            -
            
            
            1,152Total
                current liabilities
            
            
            5,235
            
            
            -
            
            
            5,235
            
            
            17,257
            
            
            961
            
            
            18,218Total
                long-term liabilities
            
            
            514
            
            
            -
            
            
            514
            
            
            517
            
            
            -
            
            
            517Series
                A preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Series
                H preferred stock
            
            
            12
            
            
            -
            
            
            12
            
            
            14
            
            
            -
            
            
            14Common
                stock
            
            
            15
            
            
            -
            
            
            15
            
            
            9
            
            
            -
            
            
            9Additional
                paid in capital
            
            
            70,436
            
            
            (3,440
            )
            
            66,996
            
            
            71,859
            
            
            (5,633
            )
            
            66,226Accumulated
                deficit
            
            
            (75,582
            )
            
            3,440
            
            
            (72,142
            )
            
            (89,785
            )
            
            4,672
            
            
            (85,113
            )Other
                comprehensive income
            
            
            1
            
            
            -
            
            
            1
            
            
            502
            
            
            -
            
            
            502Total
                Stockholder's deficit
            
            
            (5,118
            )
            
            -
            
            
            (5,118
            )
            
            (17,401
            )
            
            (961
            )
            
            (18,362
            )Total
                liabilities and stockholder's deficit
            
            $
            631
            
            
            -
            
            $
            631
            
            $
            373
            
            
            -
            
            $
            373**Summary
                statements of operations**Revenues
            
            $
            2,947
            
            
            -
            
            $
            2,947
            
            $
            1,520
            
            
            -
            
            $
            1,520Operating
                expenses, COGS & depreciation
            
            
            3,074
            
            
            -
            
            
            3,074
            
            
            2,637
            
            
            (191
            )
            
            2,446Operating
                loss
            
            
            (127
            )
            
            -
            
            
            (127
            )
            
            (1,117
            )
            
            191
            
            
            (926
            )Other
                Income
            
            
            (43
            )
            
            (16
            )
            
            (59
            )
            
            2,023
            
            
            (683
            )
            
            1,340Net
                income (loss) from continuing operations
            
            
            (170
            )
            
            (16
            )
            
            (186
            )
            
            906
            
            
            (492
            )
            
            414Net
                income from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Preferred
                Dividends
            
            
            (54
            )
            
            -
            
            
            (54
            )
            
            (38
            )
            
            -
            
            
            (38
            )Net
                income (loss) to common stockholders
            
            $
            (224
            )
            $
            (16
            )
            $
            (240
            )
            $
            868
            
            $
            (492
            )
            $
            376Basic
                Earnings (loss) per share
            
            $
            (0.02
            )
            $
            0.00
            
            
            (0.02
            )
            $
            0.14
            
            
            ($0.08
            )
            $
            0.06From
                continuing operations
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.02
            )
            $
            0.14
            
            $
            (0.08
            )
            $
            0.06From
                discontinued operations
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00Diluted
                Earnings (loss) per share
            
            $
            (0.01
            )
            $
            0.00
            
            $
            (0.01
            )
            $
            0.04
            
            $
            0.02
            
            $
            0.06From
                continuing operations
            
            $
            (0.01
            )
            $
            0.00
            
            $
            (0.01
            )
            $
            0.04
            
            $
            0.02
            
            $
            0.06From
                discontinued operations
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00For
                the six months ended January 31, 2006
            For
                the six months ended January 31, 2005(in
                thousands, except share information)As
                Reported
            
            
            Adjustments
            
            
            As
                Restated
            
            
            As
                Reported
            
            
            Adjustments
            
            
            As
                Restated**Summary
                statements of operations**Revenues
            
            $
            5,270
            
            
            -
            
            $
            5,270
            
            $
            2,362
            
            
            -
            
            $
            2,362Operating
                expenses, COGS & depreciation
            
            
            5,757
            
            
            -
            
            
            5,757
            
            
            3,921
            
            
            (191
            )
            
            3,730Operating
                loss
            
            
            (487
            )
            
            -
            
            
            (487
            )
            
            (1,559
            )
            
            191
            
            
            (1,368
            )Other
                Income
            
            
            (73
            )
            
            (38
            )
            
            (111
            )
            
            1,565
            
            
            (1,629
            )
            
            (64
            )Net
                income (loss) from continuing operations
            
            
            (560
            )
            
            (38
            )
            
            (598
            )
            
            6
            
            
            (1,438
            )
            
            (1,432
            )Net
                income from discontinued operations
            
            
            1,652
            
            
            -
            
            
            1,652
            
            
            -
            
            
            -
            
            
            -Preferred
                Dividends
            
            
            (95
            )
            
            -
            
            
            (95
            )
            
            (76
            )
            
            -
            
            
            (76
            )Net
                income (loss) to common stockholders
            
            $
            997
            
            
            (38
            )
            $
            959
            
            $
            -70
            
            
            (1,438
            )
            $
            -1,508Basic
                Earnings (loss) per share
            
            $
            0.08
            
            $
            0.00
            
            $
            0.08
            
            $
            (0.01
            )
            $
            (0.29
            )
            $
            (0.30
            )From
                continuing operations
            
            $
            (0.05
            )
            $
            (0.01
            )
            $
            (0.06
            )
            $
            (0.01
            )
            $
            (0.29
            )
            $
            (0.30
            )From
                discontinued operations
            
            $
            0.13
            
            $
            0.01
            
            $
            0.14
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00Diluted
                Earnings (loss) per share
            
            $
            0.04
            
            $
            0.00
            
            $
            0.04
            
            $
            0.00
            
            $
            (0.30
            )
            $
            (0.30
            )From
                continuing operations
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.02
            )
            $
            0.00
            
            $
            (0.30
            )
            $
            (0.30
            )From
                discontinued operations
            
            $
            0.06
            
            $
            0.00
            
            $
            0.06
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00





11


**NOTE
      9-SUBSEQUENT EVENTS** ****





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





On
      March
      22, 2006, the board of directors determined that the previously issued financial
      statements for the fiscal year ended July 31, 2005 and for the three months
      ended October 31, 2005 should no longer be relied upon because they do not
      correctly reflect a net gain or benefit relating to embedded derivatives in
      certain securities issued by ATSI. The previously issued financial statements
      will be promptly amended and restated.





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





*SPECIAL
      NOTE: This Quarterly Report on Form 10-QSB/A contains “forward-looking
      statements” within the meaning of Section 27A of the Securities Act of 1933, as
      amended and Section 21E of the Securities and Exchange Act of 1934, as amended.
      “Forward looking statements” are those statements that describe management’s
      beliefs and expectations about the future. We have identified forward-looking
      statements by using words such as “anticipate,” “believe,” “could,” “estimate,”
“may,” “expect,” and “intend.” Although we believe these expectations are
      reasonable, our operations involve a number of risks and uncertainties.
      Therefore, these types of statements may prove to be incorrect.*





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, 2006 and
      2005.
      As used in this section, the term “fiscal 2006” means the year ending July 31,
      2006 and “fiscal 2005” means the year ended July 31, 2005.





**General**





We
      are an
      international telecommunications carrier that utilizes the Internet to provide
      cost-efficient and economical international telecommunications services. Our
      current operations consist primarily of providing digital voice communications
      over the Internet using Voice-over-Internet-Protocol ("VoIP"). We
      provide high quality voice and enhanced telecommunication services to carriers,
      telephony resellers and other VoIP carriers through various agreements with
      service providers in the United States, Mexico, Asia, the Middle East and Latin
      America utilizing VoIP telephony services. Our services are as follows:





12


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




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





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





Our
      Retail business was launched during the first quarter of Fiscal 2005 through
      the
      acquisition of a Competitive
      Local Exchange Carrier (“CLEC”) based in South Texas. This acquisition has
      served as a gateway to reach out to the Hispanic communities residing along
      the
      US and Mexico border. Our strategy is to provide reliable and affordable local
      and long distance services to the underserved Hispanic community through Texas.
      Our entry to the retail services under our TeleFamilia brand and subsidiary
      will
      allow us to leverage our existing international VoIP network with additional
      services that have the potential to deliver higher margins than our wholesale
      international VoIP services. We have deployed various postpaid and prepaid
      retail services and generated approximately $52,000 in retail services revenue
      during the six months ended January 31, 2006.





Additionally,
      during the second quarter of Fiscal 2006, we expanded our NexTone ’ Communications Session Controller (soft-switch) by 65% to enhance our VoIP
      network. This network expansion has allowed us to route our traffic more
      efficiently, improve our call processing, monitor quality of service and enable
      us to share port resources with our customers. The NexTone technology has
      allowed us to be more competitive and to improve our margins in our wholesale
      international telecommunication services. As a result of these enhancements
      to
      our VoIP Network our customer base has grown to approximately 68 customers
      and
      our revenue increased from $2,362,000 during the six months ended January 31,
      2005 to $5,270,000 for the six months ended January 31, 2006.




We
      have
      had operating losses for almost every quarter since we began operations in
      1994. Our
      operating losses from continuing operations were approximately $487,000 and
      $1,368,000, for the six months ended January 31, 2006 and 2005, respectively.
      Additionally, we had a working capital deficit of approximately $4,747,000
      at
      January 31, 2006. We
      have
      experienced difficulty in paying our vendors and lenders on time in the past,
      and we expect this trend to continue over the next 12 months as we continue
      to
      build our customer base and increase our operations. Moreover, we are currently
      pursuing various alternatives including equity offerings, accounts receivable
      factoring, exchanging some portion or all of our debt for equity, and
      restructuring our debt to extend the maturity. However, in the event we fail
      to
      execute on our current plan or that circumstances currently unknown or
      unforeseen by us arise, we may not succeed in re-capitalizing the Company or
      be
      able to obtain additional funding to allow us to meet our
      obligations.





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





13


As
      a
      result of the recurring losses, negative cash flows from operations and our
      substantial working capital deficit, during the six months ended January 31,
      2006 management continued to pursue different avenues for funding. During the
      six months ended January 31, 2006 we received $46,000 from the exercise of
      331,084 warrants. Additionally, as mentioned on footnotes 4 and 5, o n
      November 4, 2005 we entered into a note payable with CSI Business Finance,
      Inc.
      for $50,000 and also signed an accounts receivable credit facility with CSI
      Business Finance, Inc. and as of the end of the second quarter we had drawn
      $150,000 of this facility. The
      proceeds from the exercise of warrants, note payable and accounts
      receivable credit facility have
      allowed the Company to pay those operating and corporate expenses that were
      not
      covered by our current cash inflows from operations. We will continue to require
      additional funding until the cash inflows from operations are sufficient to
      cover the monthly operating expenses. There is no assurance that we will be
      successful in securing additional funding over the next twelve months.





**Results
      of Operations**





The
      following table sets forth certain items included in the Company’s results of
      operations in dollar mounts and as a percentage of total revenues for the three
      month and six month periods ended January 31, 2006 and 2005.





Three
                Months Ended January 31,
            
            Six
                Months Ended January 31,2006
            
            2005
            
            2006
            
            2005$
            
            %
            
            $
            
            %
            
            $
            
            %
            
            $
            
            %Operating
                revenuesCarrier
                services
            
            $
            2,942
            
            
            100
            %
            $
            1,446
            
            
            95
            %
            $
            5,257
            
            
            100
            %
            $
            2,215
            
            
            94
            %Network
                services
            
            
            5
            
            
            0
            %
            
            74
            
            
            5
            %
            
            13
            
            
            0
            %
            
            147
            
            
            6
            %Total
                operating revenues
            
            
            2,947
            
            
            100
            %
            
            1,520
            
            
            100
            %
            
            5,270
            
            
            100
            %
            
            2,362
            
            
            100
            %Cost
                of services (Exclusive of depreciationand
                amortization, shown below)
            
            
            2,769
            
            
            94
            %
            
            1,422
            
            
            94
            %
            
            5,009
            
            
            95
            %
            
            2,194
            
            
            93
            %Gross
                Margin
            
            
            178
            
            
            6
            %
            
            98
            
            
            6
            %
            
            261
            
            
            5
            %
            
            168
            
            
            7
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees,non
                cash stock compensation to employees and warrants for services, shown
                below)
            
            
            158
            
            
            5
            %
            
            82
            
            
            5
            %
            
            319
            
            
            6
            %
            
            306
            
            
            13
            %Legal
                and professional fees
            
            
            55
            
            
            2
            %
            
            40
            
            
            3
            %
            
            75
            
            
            1
            %
            
            305
            
            
            13
            %Non-cash
                issuance of common stock and warrants for services
            
            
            66
            
            
            2
            %
            
            400
            
            
            26
            %
            
            126
            
            
            2
            %
            
            400
            
            
            17
            %Non-cash
                stock-based compensation, employees
            
            
            -
            
            
            0
            %
            
            474
            
            
            31
            %
            
            180
            
            
            3
            %
            
            474
            
            
            20
            %Bad
                debt
            
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %Depreciation
                and amortization
            
            
            26
            
            
            1
            %
            
            24
            
            
            2
            %
            
            48
            
            
            1
            %
            
            47
            
            
            2
            %Operating
                loss
            
            
            (127
            )
            
            -4
            %
            
            (926
            )
            
            -61
            %
            
            (487
            )
            
            -9
            %
            
            (1,368
            )
            
            -58
            %Other
                Expense
            
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %Gain
                (loss) on derivative instrument liabilities
            
            
            (69
            )
            
            -2
            %
            
            1,379
            
            
            91
            %
            
            (95
            )
            
            -2
            %
            
            (451
            )
            
            -19
            %Debt
                forgiveness income
            
            
            38
            
            
            1
            %
            
            -
            
            
            0
            %
            
            38
            
            
            1
            %
            
            460
            
            
            19
            %Interest
                expense
            
            
            (28
            )
            
            -1
            %
            
            (43
            )
            
            -3
            %
            
            (54
            )
            
            -1
            %
            
            (77
            )
            
            -3
            %Net
                loss from continuing operations
            
            
            ($186
            )
            
            -6
            %
            $
            414
            
            
            27
            %
            
            ($598
            )
            
            -11
            %
            $
            (1,432
            )
            
            -61
            %Discontinued
                operations (Note 6)Gain
                on disposal of discontinued operations
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            1,652
            
            
            31
            %
            
            -
            
            
            0
            %Net
                income from discontinued operations
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            1,652
            
            
            31
            %
            
            -
            
            
            0Less:
                preferred stock dividends
            
            
            (54
            )
            
            -2
            %
            
            (38
            )
            
            -3
            %
            
            (95
            )
            
            -2
            %
            
            (76
            )
            
            -3
            %Net
                income (loss) applicable to common stockholders
            
            
            ($240
            )
            
            -8
            %
            $
            376
            
            
            25
            %
            $
            959
            
            
            18
            %
            
            ($1,508
            )
            
            -64
            %





**Three
      Months ended January 31, 2006 Compared to Three Months ended January 31,
      2005**







14


*Operating
      Revenues* .
      Consolidated operating revenues increased 94% between periods from $1,520,000
      for the quarter ended January 31, 2005 to $2,947,000 for the quarter ended
      January 31, 2006.





Carrier
      services revenues increased $1,496,000, or 103% from the quarter ended January
      31, 2005 to the quarter ended January 31, 2006. Our carrier traffic increased
      from approximately 44,725,986 minutes in the second quarter of fiscal 2005
      to
      approximately 62,921,500 minutes in the quarter ended January 31, 2006. The
      increase in revenue and carrier traffic can mainly be attributed to an increase
      in customers during the second quarter of fiscal 2006 compared to the second
      quarter of fiscal 2005. Network services revenues decreased approximately 93%
      or
      $69,000 from the quarter ended January 31, 2005 to the quarter ended January
      31,
      2006. The decrease in network services revenue is primarily due to the decrease
      in network services customers. Currently we provide network services to only
      one
      customer.




C *ost
      of Services. (Exclusive of depreciation and amortization)* The
      consolidated cost of services increased by $1,347,000 or 95% from the quarter
      ended January 31, 2005 to the quarter ended January 31, 2006. The increase
      in
      cost of services is a direct result of the increase in carrier services revenue.
      As mentioned above, our carrier traffic increased from approximately 44,725,986
      minutes in the second quarter of fiscal 2005 to approximately 62,921,500 minutes
      in the quarter ended January 31, 2006, thus increasing our cost of services
      between quarters. Consolidated cost of services, as a percentage of revenue
      remained consistent between quarters at 94%. However, as a result of the
      increase in total revenue our gross profit margin increased from $98,000 during
      the quarter ended January 31, 2005 to $178,000 during the quarter ended January
      31, 2006.





*Selling,
      General and Administrative (SG&A) Expenses (exclusive of legal and
      professional fees, non-cash stock compensation to employees and common stock
      and
      warrants for services).* SG&A
      expenses increased $76,000, or 93% from the quarter ended January 31, 2005
      to
      the quarter ended January 31, 2006. The increase is primarily attributable
      to
      an adjustment of $92,000 in salaries and wages associated with a reversal of an
      over-accrual for services recognized during the second quarter of Fiscal 2005.
      We did not recognize any adjustments during the second quarter ended January
      31,
      2006.




*Legal
      and professional Fees* .
      Legal
      and professional fees increased $15,000, or 38% from the quarter ended January
      31, 2005 to the quarter ended January 31, 2006. The increase is attributable
      to
      the recognition of approximately $15,000 in professional fees associated with
      arbitration with a vendor, as described in the legal proceeding section of
      this
      report. We did not incur these types of expenses during the quarter ended
      January 31, 2005.




*Non-cash
      issuance of common stock and warrants for services* .
      Non-cash issuance of common stock and warrants for services decreased by
      $334,000 from the quarter ended January 31, 2005 to the quarter ended January
      31, 2006. The decrease is
      primarily due to recognition during the quarter ended January 31, 2005 of
      approximately $400,000 in non-cash compensation expense associated with the
      consulting agreements entered into with certain individual affiliates of Recap
      Marketing & Consulting, LLP. We
      did
      not incur these types of expenses during the quarter ended January 31, 2006.


*Non-cash
      stock-based compensation, employees* .
      Non-cash compensation expense to employees decreased by $474,000 from the
      quarter ended January 31, 2005 to the quarter ended January 31, 2006. The
      decrease is attributed to the recognition during the quarter ended January
      31,
      2005 of approximately $474,000 of non-cash compensation expense associated
      with
      the stock grants to our employees and board of directors. We did not incur
      these
      types of expenses during the quarter ended January 31, 2006.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $4,000 from the quarter ended January 31, 2005 to the
      quarter ending January 31, 2006. During the quarter ending January 31, 2005
      we
      recognized $4,000 in bad debt expense associated with the write-off of a
      receivable from a carrier services customer that ceased operations.





*Depreciation
      and Amortization* .
      Depreciation and amortization increased by $2,000 or 8% from the quarter ended
      January 31, 2005 to the quarter ended January 31, 2006. The increase in
      depreciation expense is attributed to the increase in port capacity in our
      Nextone soft-switch and the acquisitions of various computers during the second
      quarter of fiscal 2006.





15


*Operating
      Loss* .
      The
      Company’s operating loss decreased by $799,000 or 86% from the quarter ended
      January 31, 2005 to the quarter ended January 31, 2006. The reduction in
      operating loss is attributed to the increase in gross profit margin of $80,000
      between quarters, the decrease between quarters in non-cash issuance of common
      stock and warrants expense for services of $334,000 and the decrease in non-cash
      stock based compensation expense to employees of $474,000.





*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 compared to a gain of $1,379,000 during the
      quarter ended January 31, 2005, a decrease of $1,448,000. The decrease is as
      a
      result of the net unrealized (non-cash) change in the fair value of our
      derivative instrument liabilities related to certain, warrants, and embedded
      derivatives in our debt instruments that have been bifurcated and accounted
      for
      separately.





*Debt
      forgiveness income.* Debt
      forgiveness income increased by $38,000 from the quarter ended January 31,
      2005
      to the quarter ended January 31, 2006. The
      increase 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
      equity at the time of issuance and the market price calculated at the time
      of
      the settlement of the debt.




*Interest
      expense* .
      Interest expense decreased by $15,000 or 35% from the quarter ended January
      31,
      2005 to the quarter ended January 31, 2006. The decrease can be attributed
      to
      the decrease in interest expense associated with various note payables with
      Recap Marketing that were fully paid during fiscal 2005. As a result during
      the
      quarter ended January 31, 2006 we did not incur any interest expense with Recap
      Marketing.





*Net
      loss from continuing operations* .
      Net
      loss from continuing operations increased by $600,000. The increase in net
      loss
      from continuing operations is attributed to the decrease of $1,448,000 in
      derivative instrument income between periods. The increase in net loss from
      continuing operations was slightly offset by the increase in gross profit margin
      of $80,000 between quarters, the decrease in non-cash issuance of common stock
      and warrant expense for services of $334,000 and the decrease in non-cash stock
      based compensation expense to employees of $474,000.





*Preferred
      Stock Dividends* .
      Preferred Stock Dividends expense increased by $16,000 or 42% between periods,
      from $38,000 for the quarter ended January 31, 2005 to $54,000 during the
      quarter ended January 31, 2006. The increase in preferred dividend expense
      during the quarter ended January 31, 2006 is attributed to the recognition
      of
      preferred dividend expense associated with the conversion of 1,292,048
      Redeemable Preferred Series H shares to 1,550,153 shares of common stock.





*Net
      income (loss) applicable to common stockholders* .
      Net
      loss applicable to common stockholders increased by $616,000. The increase
      in
      net loss applicable to common stockholders is attributed to the decrease of
      $1,448,000 in derivative instrument income between periods. The increase in
      net
      loss applicable to common stockholders was slightly offset by the increase
      in
      gross profit margin of $80,000 between quarters, the decrease in non-cash
      issuance of common stock and warrant expense for services of $400,000 and the
      decrease in non-cash stock based compensation expense to employees of $474,000.





**Six
      Months ended January 31, 2006 Compared to Six Months ended January 31,
      2005**





*Operating
      Revenues* .
      Consolidated operating revenues increased 123% between periods from $2,362,000
      for the six months ended January 31, 2005 to $5,270,000 for the six months
      ended
      January 31, 2006.





16


Carrier
      services revenues increased $3,042,000, or 137% from the six months ended
      January 31, 2005 to the six months ended January 31, 2006. Our carrier traffic
      increased from approximately 68,129,356 minutes in the six months ended January
      31, 2005 to approximately 111,433,832 minutes in the six months ended January
      31, 2006. The increase in revenue and carrier traffic can mainly be attributed
      to increase in customers during fiscal 2006 compared to fiscal 2005. Network
      services revenues decreased approximately 91% or $134,000 from the six months
      ended January 31, 2005 to the six months ended January 31, 2006. The decrease
      in
      network services revenue is primarily due to the decrease in network services
      customers.




C *ost
      of Services. (Exclusive of depreciation and amortization)* The
      consolidated cost of services increased by $2,815,000 or 128% from the six
      months ended January 31, 2005 to the six months ended January 31, 2006. The
      increase in cost of services is a direct result of the increase in carrier
      services revenue. As mentioned above, our carrier traffic increased from
      approximately 68,129,356 minutes in the six months ended January 31, 2005 to
      approximately 111,433,832 minutes in the six months ended January 31, 2006,
      thus
      increasing our cost of services between quarters. Consolidated cost of services
      as a percentage of sales increased from 93% in the six months of fiscal 2005
      to
      95% in the six months of fiscal 2006. As a result, gross margins declined from
      7% of revenue in the six months of fiscal 2005 to 5% of revenue in the six
      months of fiscal 2006. However, as a result of the increase in total revenue
      our
      gross profit margin increased from $168,000 during the period ended January
      31,
      2005 to $261,000 during the quarter ended January 31, 2006.





*Selling,
      General and Administrative (SG&A) Expenses*  *(exclusive
      of legal and professional fees, non-cash stock compensation to employees and
      common stock and warrants for services).* SG&A
      expenses increased $13,000, or 4% from the six months ended January 31, 2005
      to
      the six months ended January 31, 2006.  The
      increase is primarily attributable to an adjustment of $92,000 in salaries and wages and a reversal of an over-accrual
      for services recognized during the second quarter of Fiscal 2005. We did not
      recognize any adjustments during the second quarter ended January 31, 2006.




*Legal
      and professional Fees* .
      Legal
      and professional fees decreased $230,000, or 75% from the six months ended
      January 31, 2005 to the six months ended January 31, 2006.  The
      decrease is attributable to the recognition of approximately $150,000 in
      professional fees associated with a marketing campaign that commenced during
      the
      six months ended January 31, 2005. Additionally, during the six months ended
      January 31, 2005 we recognized approximately $90,000 in legal fees associated
      with a lawsuit filed by the Company for stock fraud and manipulation by various
      institutions, as described in the legal proceeding section of this report.
      We
      did not incur these types of expenses during the six months ended January 31,
      2006.




*Non-cash
      issuance of common stock and warrants for services* .
      Non-cash issuance of common stock and warrants for services decreased by
      $274,000 from the six months ended January 31, 2005 to the six months ended
      January 31, 2006. The decrease is primarily due to recognition during the
      quarter ended January 31, 2005 of approximately $400,000 in non-cash
      compensation expense associated with the consulting agreements entered into
      with
      certain individual affiliates of Recap Marketing & Consulting, LLP. We did
      not incur these types of expenses during the six months ended January 31, 2006.




*Non-cash
      stock-based compensation, employees* .
      Non-cash compensation expense to employees decreased by $294,000 from the six
      months ended January 31, 2005 to the six months ended January 31, 2006. The
      decrease is attributed to the recognition during the six months ended January
      31, 2005 of approximately $474,000 of non-cash compensation expense associated
      with the stock grants to our employees and board of directors. We incurred
      $180,000 of non-cash compensation expense associated with the stock grants
      to
      our employees and board of directors issued during the six months ended January
      31, 2006.





*Bad
      debt expense.* Bad
      debt
      expense decreased by $4,000 from the six months ended January 31, 2005 to the
      six months ended January 31, 2006. During the six months ended January 31,
      2005
      we recognized $4,000 in bad debt expense associated with the write-off of a
      receivable from carrier services customer that ceased operations.





*Depreciation
      and Amortization* .
      Depreciation and amortization increased by $1,000 or 2% from the six months
      ended January 31, 2005 to the six months ended January 31, 2006. The increase
      in
      depreciation expense is attributed to the increase in port capacity in our
      Nextone Soft-switch and the acquisition of various computers during the second
      quarter of fiscal 2006.





17


*Operating
      Loss* .
      The
      Company’s operating loss decreased by $881,000 or 64% from the six months ended
      January 31, 2005 to the six months ended January 31, 2006. The reduction in
      operating loss between periods is attributed to the increase in gross profit
      margin of $93,000; the decrease between periods in non-cash issuance of common
      stock and warrants expense for services of $274,000 and the decrease in non-cash
      stock based compensation expense to employees of $294,000 and the decrease
      in
      legal and professional fees of $230,000.





*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 compared to a loss of $451,000 during the six
      months ended January 31, 2005, a decrease of $356,000. The decrease is as a
      result of the net unrealized (non-cash) change in the fair value of our
      derivative instrument liabilities related to certain, warrants, and embedded
      derivatives in our debt instruments that have been bifurcated and accounted
      for
      separately.





*Debt
      forgiveness income.* Debt
      forgiveness income decreased by 92% from $460,000 during the six months ended
      January 31, 2005 to $38,000 during the six months ended January 31, 2006. The
      decrease is primarily due to the recognition during the six months ended January
      31, 2005 of $460,000 in debt forgiveness income associated with the settlement
      of various liabilities for the issuance of common stock. These transactions
      were
      related to the settlement of $859,500 liability with Alfonso Torres Roqueni,
      the
      former owner of the concession license that we acquired in July 2000, and the
      settlement of a $250,000 note payable with Infraestructura Espacial, S.A de
      C.V.
      and Tomas Revesz, a former ATSI director. The debt forgiveness income was based
      on the difference between the market price of ATSI equity at the time of
      issuance and the market price calculated at the time of the settlement of the
      debt.





*Interest
      expense* .
      Interest expense decreased by $23,000 or 30% from the six months ended January
      31, 2005 to the six months ended January 31, 2006. The decrease can be
      attributed to the decrease in interest expense associated with the various
      note
      payables with Recap Marketing fully paid during fiscal 2005. As a result during
      the six months ended January 31, 2006 we did not incur any interest expense
      with
      Recap Marketing.





*Net
      loss from continuing operations* .
      Net
      loss from continuing operations decreased by $834,000. The decrease in operating
      loss between periods is attributed to the decrease between periods of $274,000
      in non-cash issuance of common stock and warrants expense for services and
      the
      decrease of $294,000 in non-cash stock based compensation expense to employees
      and the decrease between periods of $230,000 in legal and professional fees.
      The
      decrease in operating loss from continuing operations was slightly offset by
      the
      increase in gross profit margin of $93,000,




*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. The
      gain
      on disposal of discontinued operations arose from the sale of ATSI’s ownership
      in ATSIMex Personal S.A de C.V. Under the share purchase agreement the buyer
      acquired the total ownership and assumed all related liabilities on this entity
      of $1,652,000 and as a result we recognized a gain of $1,652,000 .




*Preferred
      Stock Dividends* .
      Preferred Stock Dividends expense increased by $19,000 or 25% between periods,
      from $76,000 for the six months ended January 31, 2005 to $95,000 during the
      six
      months ended January 31, 2006. The increase in preferred dividend expense during
      the six months ended January 31, 2006 is attributed to the recognition of
      preferred dividend expense associated with the conversion of 1,634,562
      Redeemable Preferred Series H shares to 1,961,157 shares of common stock.





*Net
      income (loss) to Common Stockholders* .
      During
      the six months ended January 31, 2006 we recognized $959,000 in net income
      to
      common stockholders, this represented an improvement of $2,467,000 from the
      six
      months ended January 31, 2005. The improvement in net income to common
      stockholders is primarily due to the recognition of $1,652,000 from the gain
      on
      disposal of discontinued operations associated with to the sale of ATSIMex
      Personal S.A de C.V. Additionally, the improvement in net income to common
      stockholders between periods is attributed to the increase in gross profit
      margin of $93,000. Further, the improvement in net loss from continuing
      operations is attributed to the decrease between periods of $274,000 in non-cash
      issuance of common stock and warrants expense for services, the decrease of
      $294,000 in non-cash stock based compensation expense to employees and the
      decrease between periods of $230,000 in legal and professional fees. The
      decrease in these expenses was slightly offset by the decrease during the same
      period in debt forgiveness income of $422,000.





18


**Liquidity
      and Capital Resources**





*Cash
      Position:* During
      the six months ended January 31, 2006, operations consumed approximately $54,000
      in cash, primarily due to the operating loss offset by non-cash expenses
      compared to the prior period. Investing activities during the six months of
      fiscal 2006 consumed an additional $4,000 relating to the acquisition of various
      computers and routers. Financing activities during the six months of fiscal
      2006
      generated $219,000 in cash. This cash was primarily generated from proceeds
      from
      an accounts receivable credit facility of $150,000 and cash proceeds from a
      note
      payable of $50,000 from CSI Business Finance, Inc. as previously described
      in
      the footnotes to the financial statements. Additionally, we received $46,000
      from the exercise of 331,084 warrants. These cash proceeds were offset by the
      $26,000 paid to Corporate Strategies, Inc. for the factoring and processing
      fees
      and the $1,000 associated with the principal payments under the lease of certain
      equipment. Overall, our net operating, investing and financing activities during
      the six months ended January 31, 2006 provided an increase of $161,000 in cash.
      We had a cash balance of $190,000 as of January 31, 2006.





Our
      current operating expenses are expected to be approximately $70,000 per month,
      including wages, rent, utilities, litigation fees and corporate professional
      fees. We will require approximately $30,000 per month to cover the deficiencies
      in cash from operations during Fiscal 2006. We intend to cover our initial
      monthly operating expenses with our available cash and the factoring of our
      receivables. We expect to continue conserving cash resources by paying executive
      compensation, fees for certain consultants and professional services with shares
      of our common stock. In addition, outstanding indebtedness payable to a law
      firm
      is being paid through conversions to common stock. Furthermore, we will continue
      to pursue additional debt and equity financings to cover our deficiencies in
      cash reserves. However, we presently do not have a definitive agreement in
      place
      to obtain such financing. Any additional debt or equity financing may not be
      available in sufficient amounts or on acceptable terms. If such financing is
      not
      available in sufficient amounts or on acceptable terms, the Company's results
      of
      operations and financial condition may be adversely affected.





Additionally,
      in an effort to continue to conserve cash, we are not presently paying quarterly
      interest and dividends on our outstanding convertible debentures and Redeemable
      Preferred stock. However, we have continued to accrue dividends and interest
      on
      such debentures and Redeemable Preferred stock. The increase in accrued
      liabilities related to the dividends and interest in arrears contributed
      approximately $107,000 in cash flow savings during the six months ended January
      31, 2006.





Our
      working capital deficit was $4,747,000 as of January 31, 2006. This represents
      a
      decrease of approximately $1,086,000 from our working capital deficit at July
      31, 2005. The decrease can primarily be attributed to the recognition of a
      gain
      from discontinued operations associated with the disposal of investment of
      $1,652,000. The gain on disposal of investment is associated with the sale
      of
      ATSI’s ownership in ATSIMex Personal S.A de C.V.





Our
      current liabilities include:





·
            $70,000
                owed to Attorneys for legal services rendered during fiscal
                2004.





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






19





·
            $1,204,000
                associated with the Series D Cumulative preferred stock. Of this
                balance,
                $942,000 is associated with the full redemption of this security
                and
                $262,000 is related to the accrued dividends as of January 31,
                2006.





·
            $1,785,000
                associated with the Series E Cumulative preferred stock. Of this
                balance,
                $1,463,000 is associated with the full redemption of this security
                and
                $322,000 is related to the accrued dividends as of January 31, 2006.
                During the fiscal year ended July 31, 2003, the Company was de-listed
                from
                AMEX and according to the terms of the Series E Cumulative preferred
                stock
                Certificate of Designation, if the Company fails to maintain a listing
                on
                NASDAQ, NYSE or AMEX the Series E preferred stockholder could request
                a
                mandatory redemption of the total outstanding preferred stock. As
                of the
                date of this filing we have not received such redemption notice.
                On
                October 31, 2002, we filed a lawsuit in the United States District
                Court
                for the Southern District Court of New York against several individuals
                and financial institutions, including the holders of our Series D
                and E
                Redeemable Preferred Stock, for, among other things, stock fraud
                and
                manipulation. On July 9, 2004, we filed a separate but related lawsuit
                in
                the same court against Sam Levinson and Uri Wolfson. On February
                25, 2005,
                Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
                the
                complaint in the first action as to all defendants with prejudice.  A
                judgment was entered in that action on September 8, 2005.  We
                appealed that judgment on September 20, 2005 to the United States
                Court of
                Appeals for the Second Circuit.  On April 27, 2005, the court entered
                a final judgment dismissing the second action with prejudice based
                on the
                February 25, 2005, decision in the first action. On May 25, 2005,
                we
                appealed the dismissal of the second action to the United States
                Court of
                Appeals for the Second Circuit. The defendants' briefs are due to be
                filed in both appeals on March 29, 2006, and our reply briefs are
                due to
                be filed April 12, 2006. Currently we cannot predict the outcome
                of this
                litigation or the financial impact on our ongoing
                operations.





**Ongoing
      operations**





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





During
      the six months ended January 31, 2006, we received $150,000
      from an accounts receivable credit facility, $50,000 from a Note Payable with
      CSI Business Finance, Inc. and $46,000
      from the exercise of warrants. These funds allowed us to cover our operating
      expenses and other corporate expenses during the period ended January 31, 2006.
      Additionally, on February 20, 2006 we entered into a factoring agreement with
      CSI Business Finance, Inc. Under the agreement, CSI Business committed to
      purchase up to $400,000 of ATSI’s monthly receivables. As our ongoing operations
      require, we will factor our receivables under this new agreement. Currently
      we
      have not factored any receivables under the new arrangement.





We
      will
      continue to pursue cost cutting or expense deferral strategies in order to
      conserve working capital. These strategies will limit the implementation of
      our
      business plan and increase our future liabilities. We are dependent on our
      operations and the proceeds from future debt or equity investments to fund
      our
      operations and fully implement our business plan. If we are unable to raise
      sufficient capital, we will be required to delay or forego some portion of
      our
      business plan, which will have a material adverse effect on our anticipated
      results from operations and our financial condition. Alternatively, we may
      seek
      interim financing in the form of private placement of debt or equity securities.
      Such interim financing may not be available in the amounts or at the time when
      it is required, and will likely not be on terms favorable to the
      Company.





20


**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 identified weaknesses in the accounting for convertible instruments and
      disclosure of embedded derivatives.





Specifically,
      we identified deficiencies in our internal controls and disclosure controls
      related to the accounting for convertible debt with conversion features
      contingent upon future prices of our stock and convertible debt with detachable
      warrants, primarily with respect to accounting for derivative liabilities in
      accordance with EITF 00-19 and SFAS 133. We restated our consolidated financial
      statements for the year ended July 31, 2005 and for each of the interim periods
      ending April 30, 2005, October 31, 2005 and January 31, 2006, in order to
      correct the accounting in such financial statements with respect to derivative
      liabilities in accordance with EITF 00-19 and SFAS 133. Since January 2006,
      we
      have undertaken improvements to our internal controls in an effort to remediate
      these deficiencies through the following efforts: 1) implementing a review
      of
      all convertible securities to identify any securities that are not conventional
      convertible securities and 2) improving supervision and training of our
      accounting staff to understand and implement the requirements of EITF 00-19
      and
      SFAS 133.




**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 are due to be filed
      in both appeals on March 29, 2006, and our reply briefs are due to be filed
      April 12, 2006. Currently we cannot predict the outcome of this litigation
      or
      the financial impact on our ongoing operations.





On
      February 3, 2005 Helen G. Schwartz, Trustee for ATSI Communications, Inc. (a
      Texas corporation) and TeleSpan, Inc. filed in the U.S. Bankruptcy Court for
      the
      Western District of Texas an Adversary Proceeding against ATSI Communications,
      Inc., a Nevada corporation alleging that ATSI-Nevada had received preferential
      payments as defined by the U.S. Bankruptcy Code in the amount of $510,836.
      On
      March 31, 2005, ATSI filed its response denying any such payments were received
      by ATSI Nevada, formerly ATSI Delaware. On August 29, 2005 the U.S. Bankruptcy
      Court for the Western District of Texas dismissed this proceeding against ATSI
      Communications, Inc., a Nevada Corporation for lack of merit.




In
      January 2004, we filed a petition in the 150 th Judicial
      District of Bexar County, Texas against Inter-tel.net, Inc. and Vianet
      Communications, Inc. d/b/a Inter-tel.net seeking declaratory relief that ATSI
      Communications, Inc. is not bound by the Carrier Services Agreement between
      Vianet Communications, Inc. and ATSI-Texas. On February 27, 2004 the Bankruptcy
      Court in the ATSI-Texas Bankruptcy case allowed Vianet Communications, Inc.
      to
      amend its claim against ATSI-Texas that was pending in the Bankruptcy of
      ATSI-Texas and assert its claim for breach of contract against ATSI. The
      Bankruptcy Court then ordered the lawsuit to be remanded back to state court
      for
      hearing. On August 10, 2005 a settlement was reached with Vianet Communications.
      As part of the settlement, we issued 200,000 warrants to purchase ATSI stock,
      the exercise price on the warrants range from $0.12 to $0.23. Additionally,
      we
      issued 200,000 shares of Series H preferred Stock that can be converted into
      1.2
      shares of common stock after it’s been held for (1) one year and into 1.5 shares
      of common stock if held for (2) two years.





21


On
      June
      17, 2005, ATSI Communications, Inc. filed an arbitration claim against Ntera
      Holdings, Inc. for $100,000 and attorney’s fees. The claim is associated with a
      dispute over alleged debt incurred under a Reciprocal Network Carrier Service
      Agreement between the parties. On July 7, 2005 Ntera Holdings, Inc. filed a
      counterclaim. Under the arbitration claim we are not disputing all of the
      alleged indebtedness but we are alleging the offset of services and that the
      payment should be in the form of exchange of services, as implied in the
      Reciprocal Network Carrier Service Agreement with Ntera Holdings, Inc. Currently
      we can not predict the result of the arbitration or the financial impact on
      our
      ongoing operations.




We
      may
      become a party to future claims and legal proceedings arising in the ordinary
      course of business. Due to the inherent uncertainty of litigation, the range
      of
      possible loss, if any, cannot be estimated with a reasonable degree of precision
      and there can be no assurance that the resolution of any particular claim or
      proceeding would not have an adverse effect on our results of operations in
      the
      period in which it occurred.





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





On
      October 25, 2005, we issued 180,272 shares of our common stock to Nextone
      Communications, Inc. as a payment of $58,000 on the principal balance associated
      with the Nextone soft Switch. Additionally, we issued 69,180 and 95,238 common
      shares to Vianet Communications, Inc. on August 23, 2005 and September 14,
      2005,
      respectively, as part of the settlement agreement for certain litigation. The
      shares issued to Nextone Communications, Inc. and Vianet Communications, Inc.
      were issued pursuant to an exemption from registration under Section 4(2) of
      the
      Securities Act because of the limited size of the group, the absence of public
      solicitation or advertising, and restrictions on resale of the
      shares.





Additionally,
      we issued 66,603 and 98,328 common shares to Franklin, Cardwell and Jones on
      November 1, 2005 and January 6, 2006, respectively, for a payment of $10,000
      of
      accrued interest and principal payment of $33,000 on the current note payable.
      The shares issued to Franklin, Cardwell and Jones were issued pursuant to an
      exemption from registration under Section 4(2) of the Securities Act because
      of
      the limited size of the group, the absence of public solicitation or
      advertising, and restrictions on resale of the shares.





On
      December 2, 2005, we issued 50,000 shares of our common stock to Carlos
      Kauachi/Dean Witter Reynolds as a settlement of debt of $49,000 associated
      with
      the commissions incurred as part of the acquisition of the concession license
      in
      Mexico during fiscal 2000. The shares issued to Carlos Kauachi/Dean Witter
      Reynolds were issued pursuant to an exemption from registration under Section
      4(2) of the Securities Act because of the limited size of the group, the absence
      of public solicitation or advertising, and restrictions on resale of the
      shares.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





As
      of
      January 31, 2006, the Company was in arrears with respect to the declaration
      of
      the following dividends payable on outstanding shares of its Preferred
      Stock:





Series
                A Cumulative Preferred Stock
            
            $
            200,000Series
                D Cumulative Preferred Stock
            
            
            262,000Series
                E Cumulative Preferred Stock
            
            
            322,000TOTAL
            
            $
            784,000





22


**ITEM
      5. OTHER INFORMATION**





On
      January 31, 2006, we received comments from the Securities and Exchange
      Commission to our Annual Report on Form 10-KSB for the year ended July 31,
      2005
      and our Quarterly Report on Form 10-QSB for the three months ended October
      31,
      2005. One of the comments relates to the separate valuation of and accounting
      for the embedded derivative obligation in our promissory note payable to
      Franklin, Cardwell & Jones and other outstanding securities. On March 21,
      2006, our board of directors determined that the previously issued financial
      statements for the fiscal year ended July 31, 2005 and for the three months
      ended October 31, 2005 should no longer be relied upon because they do not
      correctly reflect a net gain or benefit relating to the embedded derivatives
      in
      such instruments. The board of directors has reviewed the accounting treatment
      of its convertible securities with the Company’s independent accountants and
      intends to promptly amend and restate any affected financial statements
      previously filed with the Securities and Exchange Commission.





**ITEM
      6. EXHIBITS**





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





**Exhibit
                Number**
            **Description**10.1
            Confidential
                Settlement Agreement and Mutual release dated December 2, 2005 between
                ATSI Communications, Inc. and Carlos Kauachi/Dean Witter
                Reynolds.10.2
            Factoring
                Agreement dated February 20, 2006 between ATSI Communications, Inc.
                and
                CSI Business Finance, Inc.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.








(b)
            
            The
                following Current Reports on Form 8-K were filed during the second
                quarter
                of fiscal 2006.





On
      November 1, 2005, we filed a Current Report on Form 8-K under Item 3 the
      issuance of 66,603 shares of our common stock, $.001 par value per share to
      Franklin, Cardwell & Jones pursuant to the partial conversion of principal
      of and accrued and unpaid interest on a promissory note dated November 1, 2004.





On
      January 6, 2006, we filed a Current Report on Form 8-K under Item 3 the issuance
      of 98,328 shares of our common stock, $.001 par value per share to Franklin,
      Cardwell & Jones pursuant to the partial conversion of principal of and
      accrued and unpaid interest on a promissory note dated November 1, 2004.





On
      February 1, 2006 we filed a Current Report on Form 8-K reporting under Item
      8
      the formation of a new wholly owned subsidiary, Digerati Networks,
      Inc.  Digerati
      Networks will market the Company’s VoIP services with the goal of achieving a
      leadership position in the industry while building brand and name
      recognition.





23





**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: April
                14, 2006
              By:
              /s/ Arthur
                L.
                SmithName:Arthur
                      L. Smith
                    Title:President
                      andChief
                      Executive OfficerDate:
                  April 14, 2006
              By:
              Antonio EstradaName:Antonio
                    Estrada
                  Title:Corporate
                    Controller
                  (Principal
                    Accounting and Principal Financial Officer)







24