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**UNITED      STATES **

**SECURITIES      AND EXCHANGE COMMISSION**

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**FORM      10-QSB**

**(Mark      One**

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

**ATSI      COMMUNICATIONS, INC.**

| **Nevada**(State                or Other Jurisdiction of Incorporation                or Organization)                                                                         |   | **74-2849995**(IRS                Employer Identification                No.) |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------|
|                                                                                                                                                                           |   |                                                                          |
| **3201                Cherry Ridge****Building                C, Suite 300****San                Antonio, Texas 78230**(Address                of Principal Executive Offices) |
|                                                                                                                                                                           |
| **(210)                614-7240**(Issuer’s                Telephone Number, Including Area                Code)                                                          |

| **Class**                              | **Outstanding                as of December 13, 2006** |
|----------------------------------------|--------------------------------------------------------|
|                                   |                                                   |
| Common                Stock, $.001 par | 19,621,434                                             |

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**ATSI      COMMUNICATIONS, INC.**

**AND      SUBSIDIARIES**

**QUARTERLY      REPORT ON FORM 10-QSB**

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

**INDEX**

| **PART              I. FINANCIAL INFORMATION**                                                                                                | Page    |
|-----------------------------------------------------------------------------------------------------------------------------------------------|---------|
|                                                                                                                                          |    |
| Item                1. Financial                Statements (unaudited)                                                                        |    |
|                                                                                                                                          |    |
|  Consolidated                Balance Sheets as of October 31, 2006 and July 31,                2006                                      |  1 |
|  Consolidated                Statements of Operations for the Three Months                                                               |    |
|  Ended                October 31, 2006 and 2005                                                                                          | 2       |
|  Consolidated                Statements of Comprehensive Income (Loss) for the Three Months                                              |    |
|  Ended                October 31, 2006 and 2005                                                                                          | 3       |
|  Consolidated                Statements of Cash Flows for the Three Months Ended October 31, 2006                and                2005 | 4       |
|  Notes                to Consolidated Financial Statements                                                                               | 5       |
|                                                                                                                                          |    |
| Item                2. Management’s                Discussion and Analysis Or Plan of Operation                                         | 8       |
|                                                                                                                                          |    |
| Item                3. Controls                and Procedures                                                                            | 13      |
|                                                                                                                                          |    |
| **PART                II. OTHER INFORMATION**                                                                                                 |    |
|                                                                                                                                          |    |
| Item                1. Legal                Proceedings                                                                                       | 14      |
|                                                                                                                                          |    |
| Item                2. Unregistered                Sales of Equity Securities and use of proceeds                                             | 14      |
|                                                                                                                                          |    |
| Item                3. Default                Upon Senior Securities                                                                          | 14      |
|                                                                                                                                          |    |
| Item                4. Submission                of Matters to a Vote of Security Holders                                                     | 14      |
|                                                                                                                                          |    |
| Item                5. Other                Information                                                                                       | 14      |
|                                                                                                                                          |    |
| Item                6. Exhibits                                                                                                               | 14      |

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| **PART                  1. FINANCIAL INFORMATION**                                                                                                              |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                            |   |   |   |   |   |
| **ITEM                  1. FINANCIAL STATEMENTS**                                                                                                               |   |   |   |   |   |
| ATSI                  COMMUNICATIONS, INC. AND SUBSIDIARIES                                                                                                     |   |
| CONSOLIDATED                  BALANCE SHEETS                                                                                                                    |   |
| (In                  thousands, except share and per share amounts)                                                                                             |   |
|                                                                                                                                                            |   | October                  31, |   | July                  31, |   |
|                                                                                                                                                            |   | 2006 |   | 2006 |   |
|                                                                                                                                                            |   | (Unaudited) |   |   |   |
| ASSETS                                                                                                                                                          |   |   |   |   |   |
| CURRENT                  ASSETS:                                                                                                                                |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                                      |   | $ | 556 |   | $ | 36 |   |
| Accounts                  receivable, net of allowance for bad debt of $23 and $0,                  respectively                                                |   |   | 665 |   |   | 621 |   |
| Prepaid                  & other current assets                                                                                                             |   |   | 38 |   |   | 33 |   |
| Total                  current assets                                                                                                                           |   |   | 1,259 |   |   | 690 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| PROPERTY                  AND EQUIPMENT                                                                                                                         |   |   | 295 |   |   | 284 |   |
| Less                  - accumulated depreciation                                                                                                                |   |   | (200 | ) |   | (182 | ) |
| Net                     property and equipment                                                                                                                  |   |   | 95 |   |   | 102 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| Total                  assets                                                                                                                                   |   | $ | 1,354 |   | $ | 792 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| LIABILITIES                  AND STOCKHOLDERS' DEFICIT                                                                                                          |   |   |   |   |   |   |   |
| CURRENT                  LIABILITIES:                                                                                                                           |   |   |   |   |   |   |   |
| Accounts                  payable                                                                                                                               |   | $ | 691 |   | $ | 676 |   |
| Accounts                  payable, related parties                                                                                                              |   |   | 57 |   |   | 42 |   |
| Line                  of credit, CSI Business Finance                                                                                                           |   |   | 150 |   |   | 150 |   |
| Accrued                  liabilities                                                                                                                            |   |   | 2,307 |   |   | 2,389 |   |
| Advances                  from shareholders                                                                                                                     |   |   | 408 |   |   | - |   |
| Current                  portion of obligation under capital leases                                                                                             |   |   | 3 |   |   | 3 |   |
| Notes                  payable                                                                                                                                  |   |   | 550 |   |   | 50 |   |
| Notes                  payable, related party                                                                                                                   |   |   | 16 |   |   | 106 |   |
| Convertible                  debentures                                                                                                                         |   |   | 93 |   |   | 74 |   |
| Total                  current liabilities                                                                                                                      |   |   | 4,275 |   |   | 3,490 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| LONG-TERM                  LIABILITIES:                                                                                                                         |   |   |   |   |   |   |   |
| Notes                  payable                                                                                                                                  |   |   | - |   |   | 500 |   |
| Convertible                  debentures                                                                                                                         |   |   | 217 |   |   | 234 |   |
| Obligation                  under capital leases, less current portion                                                                                          |   |   | 5 |   |   | 6 |   |
| Other                                                                                                                                                           |   |   | 4 |   |   | 4 |   |
| Total                  long-term liabilities                                                                                                                    |   |   | 226 |   |   | 744 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| Total                  liabilities                                                                                                                              |   |   | 4,501 |   |   | 4,234 |   |
|                                                                                                                                                            |   |   |   |   |   |   |   |
| STOCKHOLDERS'                  DEFICIT:                                                                                                                         |   |   |   |   |   |   |   |
| Series                  A Cumulative Convertible Preferred Stock, $0.001, 50,000                  shares authorized, 2,750 shares                               |   |   |   |   |   |   |   |
| issued                  and outstanding                                                                                                                         |   |   | - |   |   | - |   |
| Series                  D Cumulative Preferred Stock, $0.001, 3,000 shares authorized,                  742                  shares issued and outstanding      |   |   | 1 |   |   | 1 |   |
| Series                  E Cumulative Preferred Stock, $0.001, 10,000 shares authorized,                  1,170                  shares issued and outstanding   |   |   | 1 |   |   | 1 |   |
| Series                  H Convertible Preferred Stock, $0.001, 16,000,000 shares authorized,                  10,969,100                  and 11,802,353 shares |   |   |   |   |   |   |   |
| issued                  and outstanding, respectively                                                                                                           |   |   | 11 |   |   | 12 |   |
| Common                  stock, $0.001 par value, 150,000,000 shares authorized, 18,935,336                  and                  16,444,768 shares              |   |   |   |   |   |   |   |
| issued                  and outstanding, respectively                                                                                                           |   |   | 19 |   |   | 16 |   |
| Additional                  paid in capital                                                                                                                     |   |   | 69,252 |   |   | 68,775 |   |
| Accumulated                  deficit                                                                                                                            |   |   | (72,432 | ) |   | (72,248 | ) |
| Other                  comprehensive income                                                                                                                     |   |   | 1 |   |   | 1 |   |
| Total                  stockholders' deficit                                                                                                                    |   |   | (3,147 | ) |   | (3,442 | ) |
| Total                  liabilities and stockholders' deficit                                                                                                    |   | $ | 1,354 |   | $ | 792 |   |

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

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| ATSI                  COMMUNICATIONS, INC. AND SUBSIDIARIES                                                              |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|
| CONSOLIDATED                  STATEMENTS OF OPERATIONS                                                                   |   |
| (In                  thousands, except share and per share amounts)                                                      |   |
| (Unaudited)                                                                                                              |   |
|                                                                                                                     |   |
|                                                                                                                     |   | Three                  months ended October 31, |   |
|                                                                                                                     |   | 2006 |   | 2005 |   |
| OPERATING                  REVENUES:                                                                                     |   |   |   |   |   |
| Carrier                  services                                                                                        |   | $ | 6,495 |   | $ | 2,291 |   |
| Communication                  services                                                                                  |   |   | 33 |   |   | 22 |   |
| Network                  services                                                                                        |   |   | 4 |   |   | 9 |   |
| Total                  operating revenues                                                                                |   |   | 6,532 |   |   | 2,322 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| OPERATING                  EXPENSES:                                                                                     |   |   |   |   |   |   |   |
| Cost                  of services (exclusive of depreciation and amortization, shown                  below)             |   |   | 6,019 |   |   | 2,240 |   |
| Selling,                  general and administrative expense (exclusive of legal and professional                  fees, |   |   |   |   |   |   |   |
| non-cash                  stock compensation to employees and warrants for services, shown                  below)       |   |   | 210 |   |   | 149 |   |
| Legal                  and professional fees                                                                             |   |   | 58 |   |   | 27 |   |
| Non-cash                  issuance of common stock and warrants for services                                             |   |   | 46 |   |   | 64 |   |
| Non-cash                  stock-based compensation, employees                                                            |   |   | 315 |   |   | 180 |   |
| Bad                  debt expense                                                                                        |   |   | 23 |   |   | - |   |
| Depreciation                  and amortization expense                                                                   |   |   | 17 |   |   | 22 |   |
| Total                  operating expenses                                                                                |   |   | 6,688 |   |   | 2,682 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| OPERATING                  (LOSS)                                                                                        |   |   | (156 | ) |   | (360 | ) |
|                                                                                                                     |   |   |   |   |   |   |   |
| OTHER                  INCOME (EXPENSE):                                                                                 |   |   |   |   |   |   |   |
| Loss                  on derivative instrument liabilities                                                               |   |   | - |   |   | (26 | ) |
| Interest                  expense                                                                                        |   |   | (28 | ) |   | (26 | ) |
| Total                  other income (expense), net                                                                       |   |   | (28 | ) |   | (52 | ) |
|                                                                                                                     |   |   |   |   |   |   |   |
| (LOSS)                  FROM CONTINUING OPERATIONS                                                                       |   |   | (184 | ) |   | (412 | ) |
|                                                                                                                     |   |   |   |   |   |   |   |
| DISCONTINUED                  OPERATIONS                                                                                 |   |   |   |   |   |   |   |
| Gain                  on disposal of discontinued operations                                                             |   |   | - |   |   | 1,652 |   |
| INCOME                  FROM DISCONTINUED OPERATIONS                                                                     |   |   | - |   |   | 1,652 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| NET                  INCOME (LOSS)                                                                                       |   | $ | (184 | ) | $ | 1,240 |   |
| LESS:                  PREFERRED DIVIDEND                                                                                |   |   | (2 | ) |   | (23 | ) |
|                                                                                                                     |   |   |   |   |   |   |   |
| NET                  INCOME (LOSS) TO COMMON STOCKHOLDERS                                                                |   | $ | (186 | ) | $ | 1,217 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| BASIC                  INCOME (LOSS) PER SHARE:                                                                          |   |   |   |   |   |   |   |
| From                  continuing operations                                                                              |   | $ | (0.01 | ) | $ | (0.04 | ) |
| From                  discontinued operations                                                                            |   |   | - |   |   | 0.15 |   |
| Total                                                                                                                    |   | $ | (0.01 | ) | $ | 0.11 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| DILUTED                  INCOME (LOSS) PER SHARE                                                                         |   |   |   |   |   |   |   |
| From                  continuing operations                                                                              |   | $ | (0.01 | ) | $ | (0.04 | ) |
| From                  discontinued operations                                                                            |   |   | - |   |   | 0.05 |   |
| Total                                                                                                                    |   | $ | (0.01 | ) | $ | 0.01 |   |
|                                                                                                                     |   |   |   |   |   |   |   |
| WEIGHTED                  AVERAGE COMMON SHARES OUTSTANDING                                                              |   |   |   |   |   |   |   |
| BASIC                                                                                                                    |   |   | 17,569,410 |   |   | 10,945,338 |   |
| DILUTED                                                                                                                  |   |   | 17,569,410 |   |   | 10,945,338 |   |

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

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| ATSI                COMMUNICATIONS, INC. AND SUBSIDIARIES                                                        |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| CONSOLIDATED                STATEMENTS OF COMPREHENSIVE INCOME (LOSS)                                            |   |
| (In                thousands)                                                                                    |   |
| (Unaudited)                                                                                                      |   |
|                                                                                                             |   |
|                                                                                                             |   | Three                months ended October 31, |   |
|                                                                                                             |   | 2006 |   | 2005 |   |
|                                                                                                             |   |   |   |   |   |
| Net                income (loss) to common stockholders                                                          |   | $ | (186 | ) | $ | 1,217 |   |
|                                                                                                             |   |   |   |   |   |   |   |
| Foreign                currency translation adjustment                                                           |   |   | - |   |   | - |   |
|                                                                                                             |   |   |   |   |   |   |   |
| Comprehensive                income (loss) to common stockholders                                                |   | $ | (186 | ) | $ | 1,217 |   |
|                                                                                                             |   |   |   |   |   |   |   |
| See                accompanying summary of accounting policies and notes to financial                statements. |   |

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| ATSI                  COMMUNICATIONS, INC. AND SUBSIDIARIES |
|-------------------------------------------------------------|
| CONSOLIDATED                  STATEMENTS OF CASH FLOWS      |
| (In                  thousands)                             |
| (Unaudited)                                                 |

|                                                                                                      |   | Three                  months ended October 31, |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                      |   | 2006                                            |   | 2005 |   |
|                                                                                                      |   |                                            |   |   |   |
| CASH                  FLOWS FROM OPERATING ACTIVITIES:                                                    |   |                                            |   |   |   |
| NET                  INCOME                                                                               |   | $                                               | (184   | ) | $ | 1,240 |   |
| Adjustments                  to reconcile net loss to cash used in operating                  activities: |   |                                            |   |   |   |   |   |
| Gain                  in disposal of investment                                                           |   |                                            | -      |   |   | (1,652 | ) |
| Depreciation                  and amortization                                                            |   |                                            | 17     |   |   | 22 |   |
| Issuance                  of stock grants and options, employees for services                             |   |                                            | 315    |   |   | 180 |   |
| Issuance                  of common stock and warrants for services                                       |   |                                            | 11     |   |   | 64 |   |
| Provisions                  for losses on accounts receivables                                            |   |                                            | 23     |   |   | - |   |
| Loss                  on derivative instrument liabilities                                                |   |                                            | -      |   |   | 26 |   |
| Amortization                  of BCF                                                                      |   |                                            | 2      |   |   | - |   |
| Changes                  in operating assets and liabilities:                                             |   |                                            |   |   |   |   |   |
| Accounts                  receivable                                                                      |   |                                            | (67    | ) |   | (59 | ) |
| Prepaid                  expenses and other                                                               |   |                                            | (4     | ) |   | 15 |   |
| Accounts                  payable                                                                         |   |                                            | 31     |   |   | 67 |   |
| Accrued                  liabilities                                                                      |   |                                            | 36     |   |   | 29 |   |
| Net                  cash (used) / provided in operating activities                                       |   |                                            | 180    |   |   | (68 | ) |
|                                                                                                      |   |                                            |   |   |   |   |   |
| CASH                  FLOWS FROM INVESTING ACTIVITIES:                                                    |   |                                            |   |   |   |   |   |
| Purchases                  of property & equipment                                                    |   |                                            | (12    | ) |   | (3 | ) |
| Net                  cash used in investing activities                                                    |   |                                            | (12    | ) |   | (3 | ) |
|                                                                                                      |   |                                            |   |   |   |   |   |
| CASH                  FLOWS FROM FINANCING ACTIVITIES:                                                    |   |                                            |   |   |   |   |   |
| Payments                  on notes payable, related party                                                 |   |                                            | (90    | ) |   | - |   |
| Advances                  from shareholders                                                               |   |                                            | 408    |   |   | - |   |
| Proceeds                  from the exercise of warrants                                                   |   |                                            | 35     |   |   | 46 |   |
| Principal                  payments on capital lease obligation                                           |   |                                            | (1     | ) |   | (1 | ) |
| Net                  cash provided by financing activities                                                |   |                                            | 352    |   |   | 45 |   |
|                                                                                                      |   |                                            |   |   |   |   |   |
| INCREASE                  (DECREASE) IN CASH                                                              |   |                                            | 520    |   |   | (26 | ) |
| CASH                  AND CASH EQUIVALENTS, beginning of period                                           |   |                                            | 36     |   |   | 29 |   |
|                                                                                                      |   |                                            |   |   |   |   |   |
| CASH                  AND CASH EQUIVALENTS, end of period                                                 |   | $                                               | 556    |   | $ | 3 |   |
|                                                                                                      |   |                                            |   |   |   |   |   |
| SUPPLEMENTAL                  DISCLOSURES:                                                                |   |                                            |   |   |   |   |   |
| Cash                  paid for interest                                                                   |   | $                                               | 12     |   | $ | - |   |
|                                                                                                      |   |                                            |   |   |   |   |   |
| NON-CASH                  INVESTING AND FINANCING TRANSACTIONS                                            |   |                                            |   |   |   |   |   |
| Issuance                  of common stock for conversion of debt                                          |   | $                                               | 15     |   | $ | 58 |   |
| Conversion                  of preferred stock to common stock                                            |   |                                            | 106    |   |   | 17 |   |
| Fair                  value of derivatives transferred to equity                                          |   |                                            | -      |   |   | 22 |   |
| Preferred                  stock dividends                                                                |   |                                            | 2      |   |   | 23 |   |

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

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**ATSI      COMMUNICATIONS, INC. AND SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE      1 - BASIS OF PRESENTATION**

**NOTE      2 - GOING CONCERN**

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

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|                                                       |                                                              |       | Three                months ended October 31, |
|------------------------------------------------------------|-------------------------------------------------------------------|------------|-----------------------------------------------|
|                                                       |                                                              |       | 2006                                          |   | 2005 |
|                                                       |                                                              |       |                                          |   |   |
| Net                income (loss) to common                 |                                                              |       |                                          |   |
| shareholders,                as reported                   |                                                              | ($186,000) |                                          | $1,217,000 |
| Add:                                                       | stock                based compensation determined                |       |                                          |   |   |
|                                                       | under                intrinsic value based method                 |       | -                                             |   | - |
| Less:                stock based compensation determined   |                                                              |       |                                          |   |
|                                                       | under                fair value based method                      |       | -                                             |   | (281,499) |
|                                                       |                                                              |       |                                          |   |   |
|                                                       | Pro                forma net income (loss) to common stockholders |       | ($186,000)                                    |   | $935,501 |
|                                                       |                                                              |       |                                          |   |   |
| Basic                net income (loss) per common share:   |                                                              |       |                                          |   |
|                                                       | As                reported                                        |       | ($0.01)                                       |   | $0.11 |
|                                                       | Pro                forma                                          |       | ($0.01)                                       |   | $0.09 |
|                                                       |                                                              |       |                                          |   |   |
| Diluted                net income (loss) per common share: |                                                              |       |                                          |   |
|                                                       | As                reported                                        |       | ($0.01)                                       |   | $0.01 |
|                                                       | Pro                forma                                          |       | ($0.01)                                       |   | $0.03 |

|                                           |   | For                the Quarter Ended October 31, |                   |
|------------------------------------------------|--------|--------------------------------------------------|------------------------|
|                                           |   |                                             |                   |   |   |
|                                           |   | 2006                                             |                   | 2005 |   |
| Expected                dividends yield        |   |                                             | 0.00                   | % |   | 0.00 | % |
| Expected                stock price volatility |   |                                             | 80                     | % |   | 50 | % |
| Risk-free                interest rate         |   |                                             | 4.51                   | % |   | 3.5 | % |
| Expected                life of options        |   |                                             | 7                years |   |   | 10                years |   |

**NOTE      4 - STOCK COMPENSATION **

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| · | During                the three months ended October 31, 2006, ATSI granted 1,345,000 options                to                purchase common stock to employees and members of the Board of Directors                with an exercise price of $0.21, the closing price of ATSI’s stock on the                grant date, September 25, 2006. One third of the options vested at                issuance and the remaining two-thirds will vest equally over a period                of                two years. Under the fair value option method, ATSI recognized at                issuance                $71,000 of compensation expense associated with the vested options.                Additionally, ATSI will amortize $142,000 of noncash compensation                expense                related to non-vested options during the service period |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | During                the three months ended October 31, 2006, ATSI issued 980,000 shares                of                common stock to its employees and directors for services with a market                value of $206,000. We recorded compensation expense in our statement                of                operations for the aggregate market value of the stock at the date                of                issuance.                                                                                                                                                                                                                                                                                                                                                                                                                                       |

|                                              |   |    |      |                          |   | Weighted-Average                     |   |
|---------------------------------------------------|--------|---------|-----------|-------------------------------|--------|--------------------------------------|--------|
|                                              |   |    |      | Weighted-Average              |   | Remaining                Contractual |   |
| **2005                Stock Compensation Plan**   |   | Options |      | Exercise                Price |   | Term                                 |   |
|                                              |   |    |      |                          |   |                                 |   |
| Outstanding                as of July 31, 2006    |   |    | 4,354,000 |                          | $      | 0.16                                 |   |   | 9.0 |   |
|                                              |   |    |      |                          |   |                                 |   |   |   |   |
| Granted                                           |   |    | 1,345,000 |                          | $      | 0.21                                 |   |   | 7.0 |   |
| Exercised                                         |   |    | -         |                          |   | -                                    |   |   | - |   |
| Forfeited                                         |   |    | -         |                          |   | -                                    |   |   | - |   |
| Expired                                           |   |    | -         |                          |   | -                                    |   |   | - |   |
|                                              |   |    |      |                          |   |                                 |   |   |   |   |
| Outstanding                as of October 31, 2006 |   |    | 5,699,000 |                          | $      | 0.17                                 |   |   | 8.5 |   |
|                                              |   |    |      |                          |   |                                 |   |   |   |   |
| Exercisable                at October 31, 2006    |   |    | 1,888,333 |                          | $      | 0.17                                 |   |   | 8.5 |   |

**NOTE      5 - DEBT **

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**NOTE      6 - EQUITY **

**NOTE      7- RELATED PARTY **

**NOTE      8- SUBSEQUENT EVENTS**

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**ITEM          2. MANAGEMENT’S DISCUSSION AND ANALYSIS          OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
*SPECIAL        NOTE: This Quarterly Report on Form 10-QSB contains “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, as amended,        and        Section 21E of the Securities Exchange Act of 1934, as amended. “Forward looking        statements” are those statements that describe management’s beliefs and        expectations about the future. We have identified forward-looking statements        by        using words such as “anticipate,” “believe,” “could,” “estimate,” “may,”“expect,” and “intend.” Although we believe these expectations are reasonable,        our operations involve a number of risks and uncertainties. Some of these        risks        include the availability and capacity of competitive data transmission networks,        the continued effectiveness of our concession from the government of Mexico,        and        or ability to raise sufficient capital to continue operations. Therefore,        these        types of statements may prove to be incorrect. *

**General**

* *

* *

** **

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**Results      of Operations**

|                                                                                                                 |   | Three                months ended October 31, |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                 |   | 2006                                          |   | 2005 |   | Variances |   | %  |   |
| OPERATING                REVENUES:                                                                                   |   |                                          |   |   |   |   |   |   |   |
| Carrier                services                                                                                      |   | $                                             | 6,495  |   | $ | 2,291 |   | $ | 4,204 |   |   | 184 | % |
| Communication                services                                                                                |   |                                          | 33     |   |   | 22 |   |   | 11 |   |   | 50 | % |
| Network                services                                                                                      |   |                                          | 4      |   |   | 9 |   |   | (5 | ) |   | -56 | % |
| Total                operating revenues                                                                              |   |                                          | 6,532  |   |   | 2,322 |   |   | 4,210 |   |   | 181 | % |
|                                                                                                                 |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Cost                of services (exclusive of depreciation and                amortization, shown below)             |   |                                          | 6,019  |   |   | 2,240 |   |   | (3,779 | ) |   | -169 | % |
| Selling,                general and administrative expense (exclusive                of legal and professional fees, |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| non-cash                stock compensation to employees and                warrants for services, shown below)       |   |                                          | 210    |   |   | 149 |   |   | (61 | ) |   | -41 | % |
| Legal                and professional fees                                                                           |   |                                          | 58     |   |   | 27 |   |   | (31 | ) |   | -115 | % |
| Non-cash                issuance of common stock and                warrants for services                            |   |                                          | 46     |   |   | 64 |   |   | 18 |   |   | 28 | % |
| Non-cash                stock-based compensation, employees                                                          |   |                                          | 315    |   |   | 180 |   |   | (135 | ) |   | -75 | % |
| Bad                debt expense                                                                                      |   |                                          | 23     |   |   | - |   |   | (23 | ) |   | -100 | % |
| Depreciation                and amortization expense                                                                 |   |                                          | 17     |   |   | 22 |   |   | 5 |   |   | 23 | % |
| OPERATING                (LOSS)                                                                                      |   |                                          | (156   | ) |   | (360 | ) |   | 204 |   |   | 57 | % |
|                                                                                                                 |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| OTHER                INCOME (EXPENSE):                                                                               |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Loss                on derivative instrument liabilities                                                             |   |                                          | -      |   |   | (26 | ) |   | 26 |   |   | 100 | % |
| Interest                expense                                                                                      |   |                                          | (28    | ) |   | (26 | ) |   | (2 | ) |   | -8 | % |
| Total                other income (expense), net                                                                     |   |                                          | (28    | ) |   | (52 | ) |   | 24 |   |   | -46 | % |
|                                                                                                                 |   |                                          |        |   |   |  |   |   |  |   |   |  |   |
| (LOSS)                FROM CONTINUING OPERATIONS                                                                     |   |                                          | (184   | ) |   | (412 | ) |   | 228 |   |   | -55 | % |
|                                                                                                                 |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| DISCONTINUED                OPERATIONS                                                                               |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| Gain                on disposal of discontinued operations                                                           |   |                                          | -      |   |   | 1,652 |   |   | (1,652 | ) |   | 100 | % |
| INCOME                FROM DISCONTINUED OPERATIONS                                                                   |   |                                          | -      |   |   | 1,652 |   |   | (1,652 | ) |   | 100 | % |
|                                                                                                                 |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME (LOSS)                                                                                     |   | $                                             | (184   | ) | $ | 1,240 |   | $ | (1,424 | ) |   | -115 | % |
| LESS:                PREFERRED DIVIDEND                                                                              |   |                                          | (2     | ) |   | (23 | ) |   | 21 |   |   | 91 | % |
|                                                                                                                 |   |                                          |   |   |   |   |   |   |   |   |   |   |   |
| NET                INCOME (LOSS) TO COMMON STOCKHOLDERS                                                              |   |                                          | ($186  | ) | $ | 1,217 |   |   | ($1,403 | ) |   | -115 | % |

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

*Operating      Revenues*

*ost      of Services. (Exclusive of depreciation and amortization).*

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*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). *

*Legal      and professional fees*

*Non-cash      issuance of common stock and warrants for services*

*Non-cash      stock-based compensation, employees*

*Bad      debt expense. *

*Depreciation      and amortization*

*Operating      loss*

*Gain      (loss) on derivative instruments liabilities, net. *

*Interest      expense*

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*Income      (loss) from continuing operations*

*Income      from discontinued operations. *

*Preferred      stock dividends*

*Net      income (loss) applicable to common stockholders*

**Liquidity      and Capital Resources**

*Cash      Position:*

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**Ongoing      operations**

**ITEM      3. CONTROLS AND PROCEDURES**

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**PART      II. OTHER INFORMATION**

**ITEM      1. LEGAL PROCEEDINGS**

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

**ITEM      3. DEFAULTS UPON SENIOR SECURITIES**

| Series                A Cumulative Preferred Stock |   | $      | 191,000 |   |
|----------------------------------------------------|--------|--------|---------|--------|
| Series                D Cumulative Preferred Stock |   |   | 296,000 |   |
| TOTAL                                              |   | $      | 487,000 |   |

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

**ITEM      5. OTHER INFORMATION**

**ITEM      6. EXHIBITS **

| **Exhibit** |                                                                                                                                                                                                 |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | **Description**                                                                                                                                                                                      |
|        |                                                                                                                                                                                                 |
| 4.1         | Secured                Promissory Note and Security Agreement dated November 3, 2006 between                ATSI                Communications, Inc. and CCA                Financial Services, Inc. |

|   |                                                                                                                                                                                        |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1   | Factoring                Agreement dated November 3, 2006 between ATSI Communications, Inc.                and                CCA                Financial Services, 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. |

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**SIGNATURE**

|                                   |   | **ATSI              COMMUNICATIONS, INC**.                                           |
|----------------------------------------|--------|--------------------------------------------------------------------------------------|
|                                   |   | (Registrant)                                                                         |
|                                   |   |                                                                                 |
|                                   |   |                                                                                 |
| Date:                December 14, 2006 | By:    | /s/                Arthur L. Smith                                                   |
|                                   | Name:  | Arthur                L. Smith                                                       |
|                                   | Title: | President                and                                                         |
|                                   |   | Chief                Executive Officer                                               |
|                                   |   |                                                                                 |
| Date:                December 14, 2006 | By:    | /s/                Antonio Estrada                                                   |
|                                   | Name:  | Antonio                Estrada                                                       |
|                                   | Title: | (Principal                Accounting and Principal Financial                Officer) |
|                                   |   |                                                                                      |

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