**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 April 30,
                2005




**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**
            
            **74-2849995**(State
                or Other Jurisdiction of
              Incorporation
                or Organization)
            
            (IRS
                Employer
              Identification
                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 [X] No [ ]





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 June 14, 2005**Common
                Stock, $.001 par
            
            9,514,190





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 APRIL 30, 2005**





**INDEX**




**PART
                I. FINANCIAL INFORMATION**
            PageItem
                1.Financial
                Statements (Unaudited)Consolidated
                Balance Sheet as of April 30, 2005
            1Consolidated
                Statements of Operations for the Three and Nine Months Ended April
                30,
                2005 and 2004
            2


Consolidated
              Statements of Comprehensive Income (Loss) for the Three and Nine Months
              Ended
              April 30, 2005 and 2004
            3Consolidated
                Statements of Cash Flows for the Nine Months Ended April 30, 2005
                and 2004
            4Notes
                  to Consolidated Financial Statements
            5Item
                2.Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            12Item
                3. Controls and Procedures
            20**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            20Item
                2. Unregistered Sales of Equity Securities and use of
                proceeds
            21Item
                3. Default upon senior securities
            21Item
                6.Exhibits
            21










**Statement
      Regarding This Amendment**





This
      amendment to the Form 10-QSB for the period ended April 30, 2005, as previously
      filed on June 14, 2005 includes restated financial statements to properly
      reflect the 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
      derivative instrument
      liabilities instead of 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 6 further explaining
      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 nine months ended
      April
      30, 2005, was a increase in our net income attributable to common shareholders
      of $347,000 and $72,000, respectively. The effect on our consolidated balance
      sheet as of April 30, 2005 was a net decrease in stockholders equity of
      $398,000.





We
      have
      also recorded an additional liability and a corresponding adjustment of $404,774
      to additional paid in capital to present our Series E Convertible Preferred
      Stock at its full redemption value of $1,463,000.





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 June 14, 2005. 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 October
      31, 2005 and January 31, 2006, together with any subsequent amendments
      thereof.









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


April
                30,2005ASSETS
            
            (unaudited)CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            63Accounts
                receivable
            
            
            145Prepaid
                & other current assets
            
            
            44Total
                current assets
            
            
            252PROPERTY
                AND EQUIPMENT
            
            
            228Less
                - accumulated depreciation
            
            
            (65
            )Net
                property and equipment
            
            
            163OTHER
                ASSETSIntangible
                assets, net of accumulated amortization of $24
            
            
            8OTHER
                ASSETS, netNote
                receivable
            
            
            -Investment
                in joint venture
            
            
            -Total
                assets
            
            $
            423LIABILITIES
                AND STOCKHOLDERS' DEFICITCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            506Accrued
                liabilities
            
            
            558Current
                portion of obligation under capital leases
            
            
            3Notes
                payable, related party
            
            
            24Notes
                payable, Franklin, Cardwell & Jones
            
            
            77Convertible
                debentures
            
            
            234Series
                D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares
                issued
                and outstanding
            
            
            1,171Series
                E Cumulative Preferred Stock, 10,000 shares authorized, 1,170 shares
                issued and outstanding
            
            
            1,732Derivative
                financial instrument liabilities
            
            
            23Liabilities
                from discontinued operations, net of assets
            
            
            1,152Total
                current liabilities
            
            
            5,480LONG-TERM
                LIABILITIES:Notes
                payable
            
            
            500Obligation
                under capital leases, less current portion
            
            
            9Other
            
            
            8Total
                long-term liabilities
            
            
            517STOCKHOLDERS'
                DEFICIT:Series
                A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
                3,750
                issuedand
                outstanding
            
            
            -Series
                H Convertible Preferred Stock, 16,000,000 shares authorized, 13,912,572
                issuedand
                outstanding
            
            
            14Common
                stock, $0.001, 150,000,000 shares authorized, 9,514,190 issued and
                outstanding
            
            
            10Additional
                paid in capital
            
            
            66,771Accumulated
                deficit
            
            
            (72,871
            )Other
                comprehensive income
            
            
            502Total
                stockholders' deficit
            
            
            (5,574
            )Total
                liabilities and stockholders' deficit
            
            $
            423See
                accompanying summary of accounting policies and notes to financial
                statements.





1


ATSI
      COMMUNICATIONS, INC. AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS (RESTATED)
 (in
        thousands, except share information)
 (unaudited)


Three
                months ended April 30,
            
            Nine
                months ended April 30,2005
            
            2004
            
            2005
            
            2004OPERATING
                REVENUES:ServicesCarrier
                services
            
            $
            1,727
            
            $
            484
            
            $
            3,943
            
            $
            726Network
                services
            
            
            70
            
            
            77
            
            
            217
            
            
            161Total
                operating revenues
            
            
            1,797
            
            
            561
            
            
            4,160
            
            
            887OPERATING
                EXPENSES:Cost
                of services (exclusive of depreciationand
                amortization, shown below)
            
            
            1,660
            
            
            501
            
            
            3,854
            
            
            768Selling,
                general and administrative expense (exclusive of legal and professional
                fees,non
                cash stock compensation to employees and warrants for services, shown
                below)
            
            
            139
            
            
            164
            
            
            314
            
            
            413Legal
                and professional fees
            
            
            60
            
            
            52
            
            
            365
            
            
            201Non-cash
                issuance of common stock and warrants for services
            
            
            -
            
            
            -
            
            
            533
            
            
            30Non-cash
                stock-based compensation, employees
            
            
            -
            
            
            -
            
            
            474
            
            
            -Bad
                debt expense
            
            
            -
            
            
            -
            
            
            4
            
            
            4Depreciation
                and amortization
            
            
            32
            
            
            6
            
            
            79
            
            
            6Total
                operating expenses
            
            
            1,891
            
            
            723
            
            
            5,623
            
            
            1,422OPERATING
                INCOME (LOSS)
            
            
            (94
            )
            
            (162
            )
            
            (1,463
            )
            
            (535
            )OTHER
                INCOME (EXPENSE):Other
                income (expense)
            
            
            9
            
            
            -
            
            
            13
            
            
            1Debt
                forgiveness income
            
            
            -
            
            
            -
            
            
            460
            
            
            -Gain
                on disposal of investment
            
            
            12,104
            
            
            -
            
            
            12,104
            
            
            -Gain
                from sale of assets
            
            
            -
            
            
            25
            
            
            -
            
            
            25Loss
                on an unconsolidated affiliate
            
            
            -
            
            
            (25
            )
            
            -
            
            
            (85
            )Gain
                (loss) on derivative instrument liabilities
            
            
            135
            
            
            -
            
            
            (317
            )
            
            -Interest
                income (expense)
            
            
            11
            
            
            (32
            )
            
            (68
            )
            
            (90
            )Total
                other income (expense)
            
            
            12,259
            
            
            (32
            )
            
            12,192
            
            
            (149
            )NET
                INCOME (LOSS)
            
            
            12,165
            
            
            (194
            )
            
            10,729
            
            
            (684
            )LESS:
                PREFERRED DIVIDENDS
            
            
            (38
            )
            
            (82
            )
            
            (114
            )
            
            (268
            )NET
                INCOME (LOSS) TO COMMON STOCKHOLDERS
            
            $
            12,127
            
            
            ($276
            )
            $
            10,615
            
            
            ($952
            )BASIC
                AND DILUTED INCOME (LOSS) PER SHARE
            
            $
            1.39
            
            
            ($0.23
            )
            $
            1.69
            
            
            ($0.88
            )WEIGHTED
                AVERAGE COMMON SHARES OUTSTANDING
            
            
            8,719,307
            
            
            1,174,662
            
            
            6,272,332
            
            
            1,081,806See
                accompanying summary of accounting policies and notes to financial
                statements.





2




ATSI
      COMMUNICATIONS, INC.


AND
      SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (RESTATED)


(in
      thousands)


(unaudited)




Three
                months ended April 30,
            
            Nine
                months ended April 30,2005
            
            2004
            
            2005
            
            2004Net
                income (loss) to common stockholders
            
            $
            12,127
            
            
            ($276
            )
            $
            10,615
            
            
            ($952
            )Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            -Comprehensive
                income (loss) to common stockholders
            
            $
            12,127
            
            
            ($276
            )
            $
            10,615
            
            
            ($952
            )




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





3


ATSI
      COMMUNICATIONS, INC. AND
        SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS (RESTATED)
 (in
          thousands)
 (unaudited)




Nine
                months ended April 30,2005
            
            2004CASH
                FLOWS FROM OPERATING ACTIVITIES:NET
                INCOME (LOSS)
            
            $
            10,729
            
            
            ($684
            )Adjustments
                to net income (loss):Gain
                on disposal of investment
            
            
            (12,104
            )
            
            -Debt
                forgiveness income
            
            
            (460
            )
            
            -Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation
                and amortization
            
            
            79
            
            
            6Loss
                on an unconsolidated affiliate
            
            
            -
            
            
            85Non-cash
                issuance of stock grants and options, employees
            
            
            474
            
            
            -Non-cash
                issuance of common stock and warrants for services
            
            
            533
            
            
            32Provision
                for losses on accounts receivable
            
            
            4
            
            
            4Loss
                on derivative instrument liability
            
            
            317
            
            
            -Changes
                in operating assets and liabilities:Increase
                inAccounts
                receivable
            
            
            (120
            )
            
            (11
            )Prepaid
                expenses and other
            
            
            (18
            )
            
            (21
            )Increase
                inAccounts
                payable
            
            
            62
            
            
            116Accrued
                liabilities
            
            
            77
            
            
            86Net
                cash used in operating activities
            
            
            (427
            )
            
            (387
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property & equipment
            
            
            (8
            )
            
            -Cash
                proceeds from sale of ATSICOM
            
            
            -
            
            
            187Investment
                in joint venture in ATSICOM
            
            
            -
            
            
            (47
            )Acquisition
                of business
            
            
            (8
            )
            
            -Net
                cash (used in) provided by investing activities
            
            
            (16
            )
            
            140CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            810
            
            
            215Payments
                on notes payable
            
            
            (810
            )
            
            (6
            )Proceeds
                from the exercise of warrants
            
            
            414
            
            
            -Principal
                payments on capital lease obligation
            
            
            (2
            )
            
            -Net
                cash provided by financing activities
            
            
            412
            
            
            209DECREASE
                IN CASH
            
            
            (31
            )
            
            (38
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            94
            
            
            140CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            63
            
            $
            102NON-CASH
                TRANSACTIONSIssuance
                of common stock for conversion of debt
            
            $
            829
            
            $
            -Issuance
                of common stock for purchase of intangible assets
            
            
            24
            
            
            -Fair
                value of the derivative instrument
            
            
            26
            
            
            6,569Change
                in derivative liabilities on warrants exercised
            
            
            1,668
            
            
            1,668See
                accompanying summary of accounting policies and notes to financial
                statements.





4





**ATSI
      COMMUNICATIONS, INC.**


**AND
      SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited interim financial statements of ATSI Communications,
      Inc.
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America and the rules of the Securities and Exchange
      Commission (“SEC”), and should be read in conjunction with the audited financial
      statements and notes thereto of ATSI Communications Inc. filed with the SEC
      on
      Form 10-K for the year ended July 31, 2004. 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. The Company amended this quarterly report to
      reflect a net loss for the period ended April 30, 2005, related to embedded
      derivatives in certain securities. See Note 6 to the 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
      accounts for its employee stock-based compensation plans under Accounting
      Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
      Employees. ATSI granted 2,104,001 options to purchase common stock to employees
      in the nine months ending April 30, 2005. Sixty percent of these options vest
      immediately and the remaining balance vest over three years. ATSI recorded
      compensation expense of $42,000 under the intrinsic value method during the
      nine
      months ended April 30, 2005.





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, Accounting
      for Stock-Based Compensation, to stock-based employee compensation.




Three
                  months ended April 30,
              
              Nine
                  months ended April 30,2005
              
              2004
              
              2005
              
              2004(Restated)Net
                  income (loss) to commonshareholders,
                  as reported
              
              $
              12,127,000
              
              
              ($276,000
              )
              $
              10,615,000
              
              
              ($952,000
              )Add:
              stock
                based compensation determined under-the
                intrinsic value-based method
              
              
              -
              
              
              -
              
              
              42,080Less:
              stock
                based compensation determined under-the
                fair value-based method
              
              
              -
              
              
              
              
              
              (1,000,493
              )Pro
                  forma net income (loss)
              
              $
              12,127,000
              
              
              ($276,000
              )
              $
              9,656,587
              
              
              ($952,000
              )Basic
                  and diluted net income (loss) per shareAs
                  reported
              
              $
              1.39
              
              
              ($0.23
              )
              $
              1.69
              
              
              ($0.88
              )Pro
                  forma
              
              $
              1.39
              
              
              ($0.23
              )
              $
              1.54
              
              
              ($0.88
              )





5




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:




Nine
                Months Ended April 30,2005
            
            2004Expected
                dividends yield
            
            
            0.00
            %
            
            0.00
            %Expected
                stock price volatility
            
            
            126
            %
            
            248
            %Risk-free
                interest rate
            
            
            2
            %
            
            2
            %Expected
                life of options
            
            
            1-3
                years
            
            
            1-3
                years





Additionally,
      during the nine months ended April 30, 2005, ATSI issued 900,000 shares to
      its
      employees and
      333,170 shares to consultants with a market value of $432,000 and $132,240,
      respectively.





**NOTE
      3 - GAIN ON DISPOSAL OF INVESTMENT**





During
      the quarter ending April 30, 2005 ATSI recognized a gain on disposal of
      investment of approximately $12,104,000. The gain on disposal of investment
      was
      associated with the disposal of ATSI’s subsidiaries, American TeleSource
      International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
      filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
      4,
      2003 and February 18, 2003 respectively. The court ordered joint administration
      of both cases on April 9, 2003 and on May 14, 2003 the court converted the
      cases
      to Chapter 7. The two bankrupt subsidiaries were ATSI’s primary operating
      companies and they have ceased operations. These bankruptcies did not include
      ATSI Communications, Inc., the reporting entity. On July 2, 2003, the U.S.
      Bankruptcy Court handling the Chapter 7 cases for ATSI Texas and TeleSpan
      approved the sale of two of their subsidiaries, ATSI de Mexico S.A de C.V.
      (ATSI
      Mexico) and Servicios de Infraestructura S.A de C.V. (SINFRA), to Latingroup
      Ventures, L.L.C. (LGV), a non-related party. Under the purchase agreement LGV
      acquired all the communication center assets and assumed all related
      liabilities. Additionally, under the agreement, LGV acquired the *“Comercializadora”* License
      owned by ATSI Mexico and the Teleport and Satellite Network License and the
      20-year Packet Switching Network license owned by SINFRA. The Chapter 7
      Bankruptcy Trustee received $17,500, which represents all the proceeds from
      the
      sale of these entities. The Chapter 7 Bankruptcy Trustee has managed the
      designation of these funds for the benefit of the creditors of ATSI Texas and
      TeleSpan. Upon liquidation of all the assets owned by ATSI Texas and TeleSpan,
      the Chapter 7 Trustee will manage all claims with the related creditors. ATSI
      did not receive any creditor objections to these court proceedings.





The
      following represents the pre-petition liabilities of the bankrupt subsidiaries,
      net of assets (in thousands):





Accounts
                payable
            
            $
            7,496Accrued
                liabilities
            
            
            2,015Notes
                payable
            
            
            386Capital
                leases
            
            
            2,207TOTAL
                CURRENT LIABILITIES:
            
            $
            12,104





6




**NOTE
      4 - NOTES PAYABLE**





During
      the nine months of fiscal 2005, ATSI
      borrowed a total of $414,000 from Recap
      Marketing & Consulting, LLP and entered into a series of unsecured
      convertible promissory notes bearing interest at the rate of 12% per annum,
      with
      the following maturity dates:





**Origination
                Date**
            
            **Amount**
            
            **Maturity
                Date**August
                23, 2004
            
            $
            25,000
            
            
            August
                23, 2005August
                30, 2004
            
            
            25,000
            
            
            August
                30, 2005September
                15, 2004
            
            
            25,000
            
            
            September
                15, 2005September
                20, 2004
            
            
            150,000
            
            
            September
                20, 2005October
                8, 2004
            
            
            25,000
            
            
            October
                8, 2005October
                12, 2004
            
            
            25,000
            
            
            October
                12, 2005October
                15, 2004
            
            
            10,000
            
            
            October
                15, 2005October
                24, 2004
            
            
            15,000
            
            
            October
                24, 2005November
                5, 2004
            
            
            25,000
            
            
            November
                5, 2005November
                15, 2004
            
            
            15,000
            
            
            November
                15, 2005December
                1, 2004
            
            
            10,000
            
            
            December
                1, 2005December
                21, 2004
            
            
            10,000
            
            
            December
                21, 2005January
                4, 2005
            
            
            10,000
            
            
            January
                4, 2006February
                2, 2005
            
            
            10,000
            
            
            February
                2, 2006February
                3, 2005
            
            
            4,000
            
            
            February
                3, 2006February
                17, 2005
            
            
            10,000
            
            
            February
                3, 2006March
                22, 2005
            
            
            10,000
            
            
            March
                22, 2006April
                6, 2005
            
            
            10,000
            
            
            April
                6, 2006**Total
                During FY2005**
            
            **$**
            **414,000**





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. The promissory note payable has a maturity date of December
      1, 2005 and has an annual interest rate of 6%. The note is secured by ATSI
      equipment and accounts receivable. Beginning November 1, 2005, the holder of
      the
      note may 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. The 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 April 30, 2005, is $15,741 and is
      included in Derivative Financial Instrument Liabilities on the balance sheet.
      During the quarter end nine months ended April 30, 2005 we recognized a gain
      on
      derivative instrument liabilities of $24,138
      and $10,540, respectively **.**





**NOTE
      5 - WARRANTS**





On
      October 13, 2003, ATSI entered into consulting agreements for twelve months
      with
      certain individual affiliates of Recap Marketing & Consulting, LLP that
      provided for the issuance of compensation warrants to purchase a total of
      3,900,000 shares of ATSI’s common stock at prices as indicated in the following
      table. These warrants expire on November 30, 2005. At issuance ATSI recognized
      $6,569,000 of non-cash compensation expense associated with the issuance of
      these warrants.





COMMON
                SHARES
            
            EXERCISE
                PRICE2,000,000
            
            $
            0.01/share800,000
            
            $
            0.25/share850,000
            
            $
            0.50/share250,000
            
            $
            0.75/share





7





During
      the first nine months of fiscal 2005, individual affiliates of Recap Marketing
      & Consulting LLP elected to exercise 3,799,930 warrants and Recap Marketing
& Consulting LLP forgave notes in the amount of $810,000 as the conversion
      price. The exercise price of the warrants ranged from $0.01 per share to $0.50
      per share.





On
      November 1, 2004, ATSI extended the consulting agreements for an additional
      six
      months with certain individual affiliates of Recap Marketing & Consulting,
      LLP that provided for the issuance of compensation warrants to purchase a total
      of 1,000,000 shares of ATSI’s common stock at price of $0.50 per share. These
      warrants expire on October 31, 2005. At signing of the extension to the
      consulting agreements ATSI recognized $400,000 of non-cash compensation expense
      associated with the issuance of these warrants.





On
      March
      1, 2005, ATSI amended the extension to the consulting agreement with certain
      individuals’ affiliates of Recap Marketing & Consulting, LLP and extended
      the agreement for an additional 12 months. The amendment to the agreements
      allows for the repricing of 1,250,000 compensation warrants at a new exercise
      price’s ranging from $0.30 per share to $0.40 per share. At signing of the
      amendment to the extension of the consulting agreement, ATSI recognized $0 of
      non-cash compensation expense associated with the issuance of these warrants.





At
      issuance, ATSI recognized $7,053,000 of non-cash compensation expense. In
      connection with the restatement, these warrants have been accounted for as
      derivative instruments and, accordingly, ATSI
      reduced compensation expense in 2004 by $483,000. The
      embedded derivative value is $7,360 at April 30, 2005 and is included in
      Derivative Financial Instrument Liabilities on the balance sheet. A
      corresponding gain (loss) of $0 and $106,404 is reflected in the statement
      of
      operations for the quarter ended April 30, 2004 and 2005, respectively, as
      loss
      on derivative instrument liability. Additionally, a corresponding gain (loss)
      of
      $0 and ($327,552) is reflected in the statement of operations for the nine
      months ended April 30, 2004 and 2005, respectively, as loss on derivative
      instrument liability. See Note 6.





**NOTE
      6 - 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”)




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 and Jones, the 9% Convertible
      Debentures & warrants issued to consultants as embedded derivatives.





Pursuant
      to SFAS 133, ATSI bifurcated the conversion feature from the Note Payable to
      Franklin Cardwell and 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.




8




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
      April 30, 2005 and July 31, 2004 as follows:





Embedded
                derivative liability balance
            
            Net
                Change4/30/2005
            
            7/31/2004
            
            in
                valueNote
                Payable, Franklin Cardwell and Jones
            
            $
            15,741
            
            
            -
            
            $
            15,7419%
                Convertible Debenture & warrants
            
            
            6
            
            
            10,503
            
            
            (10,497
            )Consulting
                warrants
            
            
            7,360
            
            
            1,338,375
            
            
            (1,331,015
            )Total:
            
            $
            23,107
            
            $
            1,348,878
            
            
            ($1,325,771
            )





And
      the
      impact on the statements of operations as the quarter and nine months ended
      of
      April 30, 2005 and 2004 as follows:





Gain
                (loss) on embedded derivative liabilities:
            
            Three
                months ended April 30,
            
            Nine
                months ended April 30,4/30/2005
            
            4/30/2004
            
            4/30/2005
            
            4/30/2004Note
                Payable, Franklin Cardwell and Jones
            
            $
            24,138
            
            
            -
            
            $
            10,540
            
            
            -9%
                Convertible Debenture & warrants
            
            
            4,280
            
            
            -
            
            
            10,495
            
            
            -Consulting
                warrants
            
            
            106,404
            
            
            -
            
            
            (337,552
            )
            
            -Total
                gain (loss) on embedded derivative liabilities:
            
            $
            134,822
            
            
            -
            
            
            ($316,517
            )
            
            -





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 April 30, 2005, the carrying amount of
      the Series D Preferred Stock was $1,171,000, including accrued dividends of
      $229,000.





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
      April 30, 2005, the carrying amount of the Series E Preferred Stock was
      $1,732,000, including accrued dividends of $269,000.





9




**NOTE
      7 - RESTATEMENT**





ATSI
      has
      restated its 2005 and 2004 quarterly financial statement 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 & 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 & 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 nine months ended
      April
      30, 2005, was an increase in the net income attributable to common shareholders
      of $347,000 and $72,000, respectively. Basic and diluted earnings per share
      attributable to common shareholders for the quarter and nine months ended April
      30, 2005 increased by $0.04 and $0.01, respectively. The effect on the
      consolidated balance sheet as of April 30, 2005 was a decrease in stockholders
      equity of $398,000.





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




For
                the three months ended April 30, 2005
            
            For
                the three months ended April 30, 2004(in
                thousands, except share information)As
                Reported
            
            Adjustments
            
            As
                Restated
            
            As
                Reported
            
            Adjustments
            
            As
                Restated**Summary
                Balance Sheet**Total
                assets
            
            $
            423
            
            
            -
            
            $
            423
            
            $
            865
            
            
            -
            
            $
            865Pre-petition
                Liabilities of bankrupt subsidiaries, net of assets
            
            
            -
            
            
            -
            
            
            -
            
            
            12,354
            
            
            -
            
            
            12,354Accounts
                payable
            
            
            506
            
            
            -
            
            
            506
            
            
            427
            
            
            -
            
            
            427Accrued
                liabilities
            
            
            520
            
            
            38
            
            
            558
            
            
            2,472
            
            
            12
            
            
            2,484Current
                portion of obligation under capital leases
            
            
            3
            
            
            -
            
            
            3
            
            
            -
            
            
            -
            
            
            -Notes
                payable
            
            
            24
            
            
            -
            
            
            24
            
            
            654
            
            
            -
            
            
            654Notes
                payable, Franklin Cardwell & Jones
            
            
            104
            
            
            (27
            )
            
            77
            
            
            -
            
            
            -
            
            
            -Convertible
                debentures
            
            
            275
            
            
            (41
            )
            
            234
            
            
            275
            
            
            (41
            )
            
            234Series
                D Cumulative Preferred Stock
            
            
            1,171
            
            
            -
            
            
            1,171
            
            
            1,126
            
            
            -
            
            
            1,126Series
                E Cumulative Preferred Stock
            
            
            1,327
            
            
            405
            
            
            1,732
            
            
            1,257
            
            
            405
            
            
            1,662Derivative
                financial instrument liabilities
            
            
            -
            
            
            23
            
            
            23
            
            
            -
            
            
            38
            
            
            38Liabilities
                from discontinued operations
            
            
            1,152
            
            
            -
            
            
            1,152
            
            
            1,152
            
            
            -
            
            
            1,152Total
                current liabilities
            
            
            5,082
            
            
            398
            
            
            5,480
            
            
            19,717
            
            
            414
            
            
            20,131Total
                long-term liabilities
            
            
            517
            
            
            -
            
            
            517
            
            
            52
            
            
            -
            
            
            52Series
                A preferred stock
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Series
                H preferred stock
            
            
            14
            
            
            -
            
            
            14
            
            
            -
            
            
            -
            
            
            -Common
                stock
            
            
            10
            
            
            -
            
            
            10
            
            
            144
            
            
            -
            
            
            144Additional
                paid in capital
            
            
            72,185
            
            
            (5,414
            )
            
            66,771
            
            
            61,201
            
            
            (405
            )
            
            60,796Accumulated
                deficit
            
            
            (77,887
            )
            
            5,016
            
            
            (72,871
            )
            
            (80,751
            )
            
            (9
            )
            
            (80,760
            )Other
                comprehensive income
            
            
            502
            
            
            -
            
            
            502
            
            
            502
            
            
            -
            
            
            502Total
                Stockholder's deficit
            
            
            (5,176
            )
            
            (398
            )
            
            (5,574
            )
            
            (18,904
            )
            
            (414
            )
            
            (19,318
            )Total
                liabilities and stockholder's deficit
            
            $
            423
            
            
            -
            
            $
            423
            
            $
            865
            
            
            -
            
            $
            865**Summary
                statements of operations**Revenues
            
            $
            1,797
            
            
            -
            
            $
            1,797
            
            $
            561
            
            
            -
            
            $
            561Operating
                expenses, COGS & depreciation
            
            
            2,112
            
            
            (221
            )
            
            1,891
            
            
            723
            
            
            -
            
            
            723Operating
                loss
            
            
            (315
            )
            
            221
            
            
            (94
            )
            
            (162
            )
            
            -
            
            
            (162
            )Other
                Income
            
            
            12,133
            
            
            126
            
            
            12,259
            
            
            (29
            )
            
            (3
            )
            
            (32
            )Net
                income (loss) from continuing operations
            
            
            11,818
            
            
            347
            
            
            12,165
            
            
            (191
            )
            
            (3
            )
            
            (194
            )Net
                income from discontinued operations
            
            
            -
            
            
            
            
            
            -Preferred
                Dividends
            
            
            (38
            )
            
            -
            
            
            (38
            )
            
            (82
            )
            
            -
            
            
            (82
            )Net
                income (loss) to common stockholders
            
            $
            11,780
            
            
            347
            
            $
            12,127
            
            
            ($273
            )
            
            (3
            )
            
            ($276
            )Basic
                Earnings (loss) per share
            
            $
            1.35
            
            $
            0.04
            
            $
            1.39
            
            
            ($0.23
            )
            $
            0.00
            
            
            ($0.23
            )Diluted
                Earnings (loss) per share
            
            $
            1.35
            
            $
            0.04
            
            $
            1.39
            
            
            ($0.23
            )
            $
            0.00
            
            
            ($0.23
            )




For
                the nine months ended April 30, 2005
            
            
            For
                the nine months ended April 30, 2004(in
                thousands, except share information)As
                Reported
            
            
            Adjustments
            
            
            As
                Restated
            
            
            As
                Reported
            
            
            Adjustments
            
            
            As
                Restated**Summary
                statements of operations**Revenues
            
            $
            4,160
            
            
            -
            
            $
            4,160
            
            $
            887
            
            
            -
            
            $
            887Operating
                expenses, COGS & depreciation
            
            
            6,034
            
            
            (411
            )
            
            5,623
            
            
            1,422
            
            
            -
            
            
            1,422Operating
                loss
            
            
            (1,874
            )
            
            411
            
            
            (1,463
            )
            
            (535
            )
            
            -
            
            
            (535
            )Other
                Income
            
            
            12,531
            
            
            (339
            )
            
            12,192
            
            
            (141
            )
            
            (8
            )
            
            (149
            )Net
                income (loss) from continuing operations
            
            
            10,657
            
            
            72
            
            
            10,729
            
            
            (676
            )
            
            (8
            )
            
            (684
            )Net
                income from discontinued operations
            
            
            -
            
            
            
            
            
            -Preferred
                Dividends
            
            
            (114
            )
            
            -
            
            
            (114
            )
            
            (268
            )
            
            -
            
            
            (268
            )Net
                income (loss) to common stockholders
            
            $
            10,543
            
            
            72
            
            $
            10,615
            
            
            ($944
            )
            
            (8
            )
            
            ($952
            )Basic
                Earnings (loss) per share
            
            $
            1.68
            
            $
            0.01
            
            $
            1.69
            
            
            ($0.87
            )
            
            ($0.01
            )
            
            ($0.88
            )Diluted
                Earnings (loss) per share
            
            $
            1.68
            
            $
            0.01
            
            $
            1.69
            
            
            ($0.87
            )
            
            ($0.01
            )
            
            ($0.88
            )





**NOTE
      8 - SETTLEMENT AND RESTRUCTURING OF DEBT**





On
      October 1, 2004, ATSI entered into a Settlement Agreement and Mutual release
      with Alfonso Torres Roqueni, the former owner of the concession license
      purchased by ATSICOM in July 2000. Under the settlement agreement amounts owed
      of $1,360,000 were restructured and settled in exchange for the issuance by
      ATSI
      of 687,600 common shares for the payment of $860,000 of the related obligation.
      The common shares were considered issued at $1.25 per share. However, if on
      the
      measurement date of April 1, 2005, the average closing price of the ATSI common
      stock for the ten (10) trading days immediately preceding the measurement date
      is below $1.15, ATSI will be required to issue an additional 59,791 common
      shares. If, however, the average closing price of the ATSI common stock for
      the
      ten (10) trading days immediately preceding the measurement date is at or above
      $1.15, no other consideration will be given and the 687,600 shares issued will
      be considered as the final consideration. Additionally as part of the
      settlement, ATSI issued a promissory note for the remaining balance of $500,000.
      The note accrues interest at the rate of 6% per annum
      and has a maturity date of October 1, 2007, with no monthly payments. ATSI
      recognized a gain of $235,000 on the settlement of this debt.





10





On
      October 26, 2004, ATSI entered into a Settlement Agreement and Mutual release
      with Infraestructura Espacial, S.A de C.V. and Tomas Revesz, a former ATSI
      director. Under the settlement agreement, ATSI issued 30,000 shares of its
      common stock for the settlement of all principal and interest owed under a
      note
      payable in the amount of $250,000. This note was originally entered into on
      March 22, 2001 and subsequently restructured on September 12, 2002. ATSI
      recognized a gain of $225,000 on the settlement of this debt.




On
      March
      28, 2005, ATSI entered into a Settlement
      Agreement (at mediation) with James C. Cuevas, Raymond G. Romero, Texas
      Workforce Commission and ATSI-Texas .
      The
      Settlement Agreement was subject to board approval. The Board of Directors
      met
      on April 28, 2005 and approved the Settlement Agreement, subsequently; ATSI
      issued 169,280 shares of its common stock for the settlement of all unpaid
      wages
      in the amount of $90,000. This claim was originally filed in December 2003
      by
      ATSI as a cause of action in the 407th Judicial District of Bexar County, Texas
      against James C. Cuevas, Raymond G. Romero, Texas Workforce Commission and
      ATSI-Texas whereby ATSI was seeking judicial review on the decision issued
      by
      the Texas Workforce Commission were it awarded a claim for unpaid wages against
      ATSI.





**NOTE
      9 - ACQUISITION OF A LOCAL EXCHANGE CARRIER COMPANY**





On
      August
      1, 2004, ATSI entered into an Asset Purchase Agreement with Hinotel, Inc.,
      a
      Hispanic owned Competitive Local Exchange Carrier (“CLEC”) based in South Texas.
      The assets purchased under the agreement included Hinotel’s customer base, a
      customer management and billing system, and supplier contracts. Additionally,
      the transaction included the assignment and transfer of the CLEC license in
      the
      State of Texas. The purchase price of the assets was $32,000 paid in 40,000
      shares of ATSI common stock and $8,000 in cash.





**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,
      including those described in the Additional Risk Factors section of the Annual
      Report Form 10-K and other documents filed with the Securities and Exchange
      Commission. 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 nine months ended April 30, 2005 and 2004.
      As used in this section, the term “fiscal 2005” means the year ending July 31,
      2005 and “fiscal 2004” means the year ended July 31, 2004.





**General**





We
      are an
      international telecommunications carrier that utilizes the Internet to provide
      economical international telecommunications services. Our current operations
      consist of providing digital voice communications over data networks and 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 local service providers
      in the United States, Mexico, Asia, the Middle East and Latin America utilizing
      VoIP telephony services. Our services are as follows:




11




*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
      offer
      private communication links for multi-national and Latin American corporations
      or 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 available through public networks. These services include data, voice
      and fax transmission as well as Internet services between the customers multiple
      international offices and branches





On
      August
      1, 2004, we acquired a
      Local
      Exchange Carrier (“CLEC”) based in South Texas. This acquisition 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 $72,500 in retail services revenue
      during the nine months ended April 30, 2005.





We
      have
      incurred operating losses and deficiencies in operating cash flows in each
      year
      since our inception in 1994 and expect our losses to continue through July
      31,
      2005. We had an operating loss of $1,463,000, for the nine months ended April
      30, 2005 and a working capital deficit of $5,228,000 at April 30, 2005. Due
      to
      such recurring losses, as well as the negative cash flows generated from our
      operations and our substantial working capital deficit, the auditor’s opinion on
      our financial statements as of July 31, 2004 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 July
      31, 2005.





We
      have
      experienced difficulty in paying our vendors and lenders on time in the past.
      As
      a result, during the nine months ended April 30, 2005 management continued
      to
      pursue different avenues for funding and we entered into various short-term
      convertible promissory notes in the aggregate amount of $414,000. These funds
      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 additionally funding over the next twelve
      months. ****





12




**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
      and nine month period ended April 30, 2005 and 2004.




Three
                months ended April 30,
            
            Nine
                months ended April 30,2005
            
            2004
            
            2005
            
            2004(Unaudited)$
            
            %
            
            $
            
            %
            
            $
            
            %
            
            $
            
            %Operating
                revenuesServicesCarrier
                services
            
            $
            1,727
            
            
            96
            %
            $
            484
            
            
            86
            %
            $
            3,943
            
            
            95
            %
            $
            726
            
            
            82
            %Network
                services
            
            
            70
            
            
            4
            %
            
            77
            
            
            14
            %
            
            217
            
            
            5
            %
            
            161
            
            
            18
            %Total
                operating revenues
            
            
            1,797
            
            
            100
            %
            
            561
            
            
            100
            %
            
            4,160
            
            
            100
            %
            
            887
            
            
            100
            %Cost
                  of services (Exclusive of depreciationand amortization, shown
                  below)
            
            
            1,660
            
            
            92
            %
            
            501
            
            
            89
            %
            
            3,854
            
            
            93
            %
            
            768
            
            
            87
            %Gross
                Margin
            
            
            137
            
            
            8
            %
            
            60
            
            
            11
            %
            
            306
            
            
            7
            %
            
            119
            
            
            13
            %Selling,
                general and administrative expense (exclusive of legal and professional
                fees,non
                cash stock compensation to employees and warrants for services, shown
                below)
            
            
            139
            
            
            8
            %
            
            164
            
            
            29
            %
            
            314
            
            
            8
            %
            
            413
            
            
            47
            %Legal
                and professional fees
            
            
            60
            
            
            3
            %
            
            52
            
            
            9
            %
            
            365
            
            
            9
            %
            
            201
            
            
            23
            %Non-cash
                issuance of common stock and warrants for services
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            533
            
            
            13
            %
            
            30
            
            
            3
            %Non-cash
                stock-based compensation, employees
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            474
            
            
            11
            %
            
            -
            
            
            0
            %Bad
                debt expense
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            4
            
            
            0
            %
            
            4
            
            
            0
            %Depreciation
                and amortization
            
            
            32
            
            
            2
            %
            
            6
            
            
            1
            %
            
            79
            
            
            2
            %
            
            6
            
            
            1
            %Operating
                income (loss)
            
            
            (94
            )
            
            -5
            %
            
            (162
            )
            
            -29
            %
            
            (1,463
            )
            
            -35
            %
            
            (535
            )
            
            -60
            %Debt
                forgiveness income
            
            
            -
            
            
            0
            %
            
            -
            
            
            0
            %
            
            460
            
            
            11
            %
            
            -
            
            
            0
            %Gain
                on disposal of investment
            
            
            12,104
            
            
            674
            %
            
            -
            
            
            0
            %
            
            12,104
            
            
            291
            %
            
            -
            
            
            0
            %Gain
                (loss) on derivative instrument liabilities
            
            
            135
            
            
            8
            %
            
            -
            
            
            0
            %
            
            (317
            )
            
            -8
            %
            
            -
            
            
            0
            %Other
                income (expense)
            
            
            20
            
            
            1
            %
            
            (32
            )
            
            -6
            %
            
            (55
            )
            
            -1
            %
            
            (149
            )
            
            -17
            %Net
                income (loss)
            
            
            12,165
            
            
            677
            %
            
            (194
            )
            
            -35
            %
            
            10,729
            
            
            258
            %
            
            (684
            )
            
            -77
            %Less:
                preferred stock dividends
            
            
            (38
            )
            
            -2
            %
            
            (82
            )
            
            -15
            %
            
            (114
            )
            
            -3
            %
            
            (268
            )
            
            -30
            %Net
                income (loss) to applicable to common shareholders
            
            $
            12,127
            
            
            675
            %
            
            ($276
            )
            
            -49
            %
            $
            10,615
            
            
            255
            %
            
            ($952
            )
            
            -107
            %





**Three
      Months ended April 30, 2005 Compared to Three Months ended April 30,
      2004**





*Operating
      Revenues* .
      Consolidated operating revenues increased by 220% between periods from $561,000
      for the quarter ended April 30, 2004 to $1,797,000 for the quarter ended April
      30, 2005.





Carrier
      services revenues increased approximately by $1,243,000, or 257% from the
      quarter ended April 2004 to the quarter ended April 2005. Our carrier traffic
      increased from approximately 19.7 million minutes in the quarter ended April
      30,
      2004 to approximately 47.6 million minutes during the quarter ended April 30,
      2005. The increase in revenue and carrier traffic can mainly be attributed
      to
      the growth in VoIP carrier services since the implementation of the NexTone
      VoIP
      soft-switch during the last quarter of fiscal 2004.




Network
      services revenues decreased by approximately 9% or $7,000 from the quarter
      ended
      April 30, 2004 to the quarter ended April 30, 2005. The
      decrease in network services revenue is primarily due to termination of the
      network service agreement with one of our customers. As a result, ATSI will
      loss
      about $22,000 of monthly revenue.





*Cost
      of Services (Exclusive of depreciation and amortization).* The
      consolidated cost of services increased by approximately $1,159,000 from the
      quarter ended April 30, 2004 to the quarter ended April 30, 2005. The increase
      in cost of services is a direct result of the increase in carrier services
      revenue and network services revenue. As mentioned above, our carrier traffic
      increased from approximately 19.7 million minutes during the quarter ended
      April
      30, 2004 to approximately 47.6 million minutes in the quarter ended April 30,
      2005, thus increasing our cost of services between quarters.





13


*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 decreased by approximately $25,000, or 15% from the quarter ended
        April
        30, 2004 to the quarter ended April 30, 2005. The decrease is attributable
        to an
        adjustment of $16,408 in salaries and wages and a reversal of an over-accrual
        for services previously recognized.
 
 *Legal
        and professional Fees* .
        Legal
        and professional fees increased by approximately $8,000, or 15% from the
        quarter
        ended April 30, 2004 to the quarter ended April 30, 2005. During the quarter
        ended April 30, 2005, the company incurred approximately $20,000 in legal
        and
        professional services associated with various litigations and settlements.
        These
        legal and professional expenses were not incurred during the quarter ended
        April
        30, 2004.
 
 *Depreciation
        and Amortization* .
        Depreciation and amortization increased by $26,000 from the quarter ended
        April
        30, 2004 to the quarter ended April 30, 2005. The increase is attributed
        to the
        recognition of depreciation expense and amortization on the NexTone VoIP
        soft-switch that was acquired during the last quarter of fiscal
        2004.
  *Operating
        Income (Loss)* .
        The
        Company’s operating income (loss) improved by approximately $68,000 or 42% from
        the quarter ended April 30, 2004 to the quarter ended April 30, 2005. The
        improvement in operating income (loss) is attributed to increase in gross
        profit
        margin of $77,000 and decrease in SG&A of $25,000 from the quarter ended
        April 30, 2004 to the quarter ended April 30, 2005. The increase in gross
        profit
        margin and decrease in SG&A was slightly offset by the increase in
        depreciation of $26,000 between periods.
  *Gain
        on disposal of investment.*  During
        the quarter ending April 30, 2005 ATSI recognized a gain on disposal of
        investment of approximately $12,104,000. The gain on disposal of investment
        was
        associated with the disposal of ATSI’s subsidiaries, American TeleSource
        International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
        filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
        4,
        2003 and February 18, 2003 respectively. The court ordered joint administration
        of both cases on April 9, 2003 and on May 14, 2003 the court converted the
        cases
        to Chapter 7. The two bankrupt subsidiaries have ceased operations.
 
 *Gain
        (loss) on derivative instruments liabilities, net.* The
        Company recognized a gain on derivative instruments of $135,000 during the
        quarter ended April 30, 2005 compared to a gain of $0 during the quarter
        ended
        April 30, 2004, an increase of $135,000. The increase 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.
 
 *Other
        income (expense)* .
        Other
        (expense) decreased by approximately $52,000 or 163% from the quarter ended
        April 30, 2004 to the quarter ended April 30, 2005. The decrease in other
        income
        (expense) is attributed to the decrease in loss in investment in ATSICOM
        of
        approximately $25,000 recognized during the quarter ended April 30, 2004
        associated with our portion of the losses on our investment in ATSICOM. During
        the quarter ended April 30, 2005 the Company did not recognized any loss
        associated to ATSICOM.
 
 *Preferred
        Stock Dividends* .
        Preferred Stock Dividends expense decreased by approximately $44,000 between
        periods, from $82,000 for the quarter ended April 30, 2004 to $38,000 during
        the
        quarter ended April 30, 2005. During fiscal 2004 we converted all Redeemable
        Preferred Series F and Series G shares to common. As a result of these
        conversions, no dividends were incurred during the quarter ended April 2005
        related to these securities.
  *Net
        income (loss) to Common Stockholders* .
        The net
        income (loss) for the quarter ended April 30, 2005 decrease to $12,127,000
        net
        income from $276,000 net (loss) for the quarter ended April 30, 2004. The
        improvement in net income (loss) to common stockholders is mainly attributed
        to
        the recognition of a gain on disposal of investment of $12,104,000. The gain
        on
        disposal of investment was associated with the disposal of ATSI’s subsidiaries,
        American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc.
        (TeleSpan). These entities filed for protection under Chapter 11 of the U.S.
        Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
        court ordered joint administration of both cases on April 9, 2003 and on
        May 14,
        2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
        have ceased operations. Additionally, the improvement in net income (loss)
        is
        attributed to increase in gross profit margin of $77,000 and decrease in
        SG&A of $25,000 from the quarter ended April 30, 2004 to the quarter ended
        April 30, 2005. The increase in gross profit margin and decrease in SG&A was
        slightly offset by the increase in depreciation of $26,000 between periods.
  14
 
 **Nine
        months ended April 30, 2005 Compared to nine months ended April 30,
        2004**
 
 *Operating
        Revenues* .
        Consolidated operating revenues increased by 369% between periods from $887,000
        for the nine months ended April 30, 2004 to $4.2 million for the nine months
        ended April 30, 2005.
  Carrier
        services revenues increased by approximately $3.2 million, or 443% from the
        nine
        months ended April 2004 to the nine months ended April 2005. Our VoIP carrier
        traffic increased from approximately 19.1 million minutes during the nine
        months
        ended April 30, 2004 to approximately 113 million minutes during the nine
        months
        ended April 30, 2005. The increase in revenue and carrier traffic can mainly
        be
        attributed to the growth in VoIP carrier services since the implementation
        of
        the NexTone VoIP soft-switch during the last quarter of fiscal
        2004.
  Network
        services revenues increased approximately 35% or $56,000 from the nine month
        period ended April 30, 2004 to the nine month period ended April 30, 2005.
        The
        increase in network services revenue is primarily due to the purchase and
        assignment of a network services contract from American TeleSource International
        de Mexico S.A de C.V. (ASTIMEX). Under the assignment and purchase agreement
        with ATSIMEX, we acquired the remaining term of the contract, which extended
        from February 2004 through June 2004 and generated monthly revenues of
        approximately $22,000. The
        agreement was terminated during the quarter ended April 30, 2005 and as a
        result
        we expect a reduction of network service revenue by $22,000 per month.
  *Cost
        of Services (Exclusive of depreciation and amortization).* The
        consolidated cost of services increased by approximately $3.1 million, or
        402%
        from the nine months ended April 30, 2004 to the nine months ended April
        30,
        2005. The increase in cost of services is a direct result of the increase
        in
        carrier services revenue and network services revenue. As mentioned above,
        our
        carrier traffic increased from approximately 19.1 million minutes during
        the
        nine months ended April 30, 2004 to approximately 113 million minutes in
        the
        nine months ended April 30, 2005, thus increasing our cost of services between
        periods.
 
 *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 decreased by approximately $99,000, or 24% from the nine months
        ended
        April 30, 2004 to the nine months ended April 30, 2005. The decrease is
        attributable to an adjustment of $108,648 in salaries and wages and a reversal
        of an over-accrual for services previously recognized.
  *Legal
        and professional Fees* .
        Legal
        and professional fees increased by approximately $164,000, or 82% from the
        nine
        months ended April 30, 2004 to the nine months ended April 30, 2005. The
        increase is attributable to the recognition of approximately $150,000 in
        professional fees associated with a marketing campaign that commenced during
        the
        first quarter of fiscal 2005. Additionally, during the nine month period
        we
        recognized approximately $90,000 in legal fees associated to the lawsuit
        for
        stock fraud and manipulation by various institutions.
  15
  *Non-cash
        issuance of common stock and warrants for services* .
        Non-cash issuance of common stock and warrants for services increased by
        $503,000 from the nine months ended April 30, 2004 to the nine months ended
        April 30, 2005. This increase is primarily due to recognition of approximately
        $533,000 in non-cash compensation expense associated with the consulting
        agreements entered into with certain individual affiliates of Recap Marketing
        & Consulting, LLP.
 
 *Non-cash
        stock-based compensation, employees* .
        Non-cash compensation expense to employees increased by $474,000 from the
        nine
        months ended April 30, 2004 to the nine months ended April 30, 2005. This
        increase is attributed to recognition of approximately $474,000 in non-cash
        compensation expense associated with the grant of stock options and stock
        grants
        to our employees and board of directors.
 
 *Bad
        debt expense.* Bad
        debt
        expense remained consistent at $4,000 over the nine months ended April 30,
        2004
        and the nine months ended April 30, 2005. During the nine months ended April
        30,
        2005 we recognized $4,000 in bad debt expense associated with the write-off
        of a
        carriers services customer that ceased operations.
 
 *Depreciation
        and Amortization* .
        Depreciation and amortization increased by $73,000 from the nine months ended
        April 30, 2004 to the nine months ended April 30, 2005. The increase is
        attributed to the recognition of depreciation expense and amortization on
        the
        NexTone VoIP soft-switch that was acquired during the last quarter of fiscal
        2004.
 
 *Operating
        income (loss)* .
        The
        Company’s operating income (loss) increased by approximately $928,000 or 173%
        from the nine months ended April 30, 2004 to the nine months ended April
        30,
        2005. The increase in operating loss is attributed to the recognition of
        $533,000 in non-cash warrant expense associated with the consulting agreements
        entered into with certain individual affiliates of Recap Marketing &
Consulting, LLP and the recognition of $474,000 in non-cash stock based
        compensation expense associated with the stock options and stock grants awarded
        to the company employees and board of directors. The increase in non-cash
        warrant and compensation expense was offset slightly by the increase in gross
        margin of approximately $187,000.
 
 *Debt
        forgiveness income.* Our
        debt
        forgiveness income increased by approximately $460,000 from the nine months
        ended April 30, 2004 to the nine months ended April 30, 2005. During the
        nine
        month period ended April 30, 2005, we negotiated and exchanged various
        liabilities for equity. These settlements were related to the settlement
        of the
        $859,500 liability with Alfonso Torres Roqueni, the former owner of the
        concession license 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.
  *Gain
        on disposal of investment.* During
        the nine month period ended April 30, 2005 ATSI recognized a gain on disposal
        of
        investment of approximately $12,104,000. The gain on disposal of investment
        was
        associated with the disposal of ATSI’s subsidiaries, American TeleSource
        International, Inc. (ATSI Texas) and TeleSpan, Inc. (TeleSpan). These entities
        filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February
        4,
        2003 and February 18, 2003 respectively. The court ordered joint administration
        of both cases on April 9, 2003 and on May 14, 2003 the court converted the
        cases
        to Chapter 7. The two bankrupt subsidiaries have ceased operations.
 
 *Gain
        (loss) on derivative instruments liabilities, net.* The
        Company recognized a loss on derivative instruments of $317,000 during the
        quarter ended April 30, 2005 compared to a gain of $0 during the quarter
        ended
        April 30, 2004, an increase of $317,000. The increase 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.
  16
 
 *Other
        income (expense)* .
        Other
        income (expense) decreased by approximately $94,000 or 63% from the nine
        months
        ended April 30, 2004 to the nine months ended April 30, 2005. The decrease
        in
        other income (expense) is attributed to the decrease in loss in investment
        in
        ATSICOM of approximately $85,000 recognized during the nine months ended
        April
        30, 2004 associated with our portion of the losses on our investment in ATSICOM.
        During the nine months ended April 30, 2005 the Company did not incurred
        any
        loss in ATSICOM.
 
 *Preferred
        Stock Dividends* .
        Preferred Stock Dividends expense decreased by approximately $154,000 between
        periods, from $268,000 for the nine months ended April 30, 2004 to $114,000
        during the nine months ended April 30, 2005. During fiscal 2004 we converted
        all
        Redeemable Preferred Series F and Series G shares to common. As a result
        of
        these conversions, no dividends were incurred during the nine months ended
        April
        2005 related to these securities.
  *Net
        income ( loss) to Common Stockholders* .
        The net
        income (loss) for the nine months ended April 30, 2005 improved to $10,615,000
        net income from $952,000 net (loss) for the nine months ended April 30, 2004.
        The improvement in net income (loss) to common stockholders is mainly attributed
        to the recognition of a gain on disposal of investment of $12,104,000. The
        gain
        on disposal of investment was associated with the disposal of ATSI’s
        subsidiaries, American TeleSource International, Inc. (ATSI Texas) and TeleSpan,
        Inc. (TeleSpan). These entities filed for protection under Chapter 11 of
        the
        U.S. Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively.
        The
        court ordered joint administration of both cases on April 9, 2003 and on
        May 14,
        2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
        have ceased operations. The gain on disposal of investment was offset slightly
        by the recognition of $533,000 in non-cash warrant expense and $474,000 in
        non-cash stock based compensation expense associated with the stock options
        and
        stock grants awarded to the company employees and board of directors. Also,
        there was an increase in depreciation and amortization of approximately $73,000
        from the nine months ended April 30, 2004 to the nine months ended April
        30,
        2005.
 
 **Liquidity
        and Capital Resources**
 
 *Cash
        used in operating activities:* During
        the nine months ended April 30, 2005, operations consumed approximately $427,000
        in cash. This cash consumed by operations is primarily due to the recognition
        of
        $474,000 in non-cash compensation expense associated with the stock grants
        and
        stock options awarded to the employees and board of directors. Additionally,
        we
        recognized $533,000 in non-cash warrant expense associated with the consulting
        services agreement entered into during the second quarter of fiscal 2005.
        Furthermore, we recognized $317,000 as a loss on derivative instrument
        liabilities. We also recognized an increase in accounts payable of approximately
        $62,000 and an increase in accrued liabilities of approximately $77,000.
        The
        increase in accrued liabilities and accounts payable is primarily due to
        the
        company recognizing approximately $56,000 in interest expense associated
        with
        various notes and the accrual of preferred stock dividends of $114,000. Also,
        we
        recognized an increase in accounts receivables of $120,000 associated with
        the
        billing to our customers during the quarter ending April 30, 2005. We also
        recognized an increase in prepaid expenses for $18,000 related to the
        prepayments/retainers to our attorneys for legal services.
 
 *Cash
        provided used in investing activities:* During
        the nine months ended April 30, 2005, the Company made various payments for
        $8,000 related to the acquisition of some telecommunications equipment acquired
        during fiscal 2005. Additionally, during the quarter ended October 31,
        2004 ,
        ATSI
        entered into an Asset Purchase Agreement with Hinotel, Inc., a Hispanic owned
        Competitive Local Exchange Carrier (“CLEC”) based in South Texas. The assets
        purchase under the agreement included Hinotel’s customer base, a customer
        management and billing system, and supplier contracts. The transaction also
        included the assignment and transfer of the CLEC license in the State of
        Texas.
        The purchase price of the assets was $31,500, paid in 40,000 shares of ATSI
        common stock and $7,500 in cash.
 
 *Cash
        provided by financing activities:* During
        the nine months ended April 30, 2005 we made principal payments on our capital
        lease obligation for approximately $2,000 and we received $810,000 from the
        exercise of warrants and $414,000 from proceeds from various notes payables.
        In
        addition, a result of the exercise of warrants we also recognized payments
        of
        $810,000 on our notes payable.
  17
 
 Overall,
        our net operating, investing and financing activities during the nine months
        ended April 30, 2005 provided a decrease of approximately $31,000 in cash
        balances. We
        had a
        cash balance of $63,000 as of April 30, 2005.
 
 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 2005. 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 $160,000 in cash flow savings during the nine months ended
        April
        30, 2005.
  Our
        working capital deficit at April 30, 2005 was approximately $5,228,000. This
        represents a decrease of approximately $15,448,000 from our working capital
        deficit at July 31, 2004. The decrease can primarily be attributed to the
        recognition of a gain on disposal of investment of $12,104,000. The gain
        on
        disposal of investment was associated with the disposal of ATSI’s subsidiaries,
        American TeleSource International, Inc. (ATSI Texas) and TeleSpan, Inc.
        (TeleSpan). These entities filed for protection under Chapter 11 of the U.S.
        Bankruptcy Code on February 4, 2003 and February 18, 2003 respectively. The
        court ordered joint administration of both cases on April 9, 2003 and on
        May 14,
        2003 the court converted the cases to Chapter 7. The two bankrupt subsidiaries
        have ceased operations. Additionally, the decrease in working capital deficit
        is
        also attributed to the settlement of various liabilities through the issuance
        of
        common stock. These
        settlements were associated with the settlement of $859,500 liability with
        Alfonso Torres Roqueni, the former owner of the concession license 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.
 
 Our
        current liabilities include:
 
 ·
              $103,454
                  owed to Attorneys for legal services rendered during fiscal 2004.
 
 ·
              $1,171,000
                  associated with the Series D Cumulative preferred stock. Of this
                  balance,
                  $942,000 is associated with the full redemption of this security
                  and
                  $229,000 is related to the accrued dividends as of April 30, 2005.
 
 ·
              $1,732,000
                  associated with the Series E Cumulative preferred stock. Of this
                  balance,
                  $1,463,000 is associated with the full redemption of this security
                  and
                  $269,000 is related to the accrued dividends as of April 30, 2005.
                  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 Rose Glen Capital and Shaar
                  Fund,
                  the holders of our Series D and E Redeemable Preferred Stock, for,
                  among
                  other things, stock fraud and manipulation. On February 25, 2005,
                  Judge
                  Lewis A. Kaplan issued a memorandum opinion and order dismissing
                  the
                  complaint as to defendants that included the holders of our Series
                  D and E
                  Redeemable Preferred Stock. We plan to appeal that decision once
                  a final
                  judgment has been entered. These liabilities combined for a total
                  of
                  approximately $2,903,000. Accounting rules dictate that these liabilities
                  must remain on our books under Current Liabilities until the lawsuit
                  is
                  resolved in the judicial system or otherwise. At this time we cannot
                  predict the outcome or the time frame for this to
                  occur.
  18
  We
        also
        have approximately $1,152,000 of current liabilities (net of assets) associated
        to the discontinued operations of the retail services unit. This balance
        is
        composed primarily of approximately $453,000 owed to the Mexican taxing
        authorities related to a note assumed through the acquisition of Computel
        and
        approximately $699,000 related to income taxes owed as of April 30, 2005.
 
 **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. 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.
 
 As
        outlined in Note 4 to the financial statements, we have incurred amounts
        of debt
        to finance our working capital requirements. During the nine months ended
        April
        30, 2005, we borrowed a total of $414,000 from Recap Marketing & Consulting,
        LLP; to fund our operating expenses and other corporate expenses. This debt
        will
        be applied to the payment of warrants issued to certain individual affiliates
        of
        Recap Marketing & Consulting, LLP.
 
 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 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
        is required, and will likely not be on the terms favorable to the Company.
 
 **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 the evaluation
        of 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.
  19
 
 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 February
        25,
        2005, Judge Lewis A. Kaplan issued a memorandum opinion and order dismissing
        the
        complaint as to all defendants with prejudice. We plan to appeal that decision
        once a final judgment has been entered. On July 9, 2004, we filed a separate
        but
        related lawsuit in the same court against Sam Levinson and Uri Wolfson. On
        April
        27, 2005, the court entered a final judgment dismissing that 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. Our attorneys are also in the process
        of investigating whether any other institutions participated in the manipulation
        of the company's stock and to advise us whether to pursue other legal
        proceedings. 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. A hearing has been scheduled for
        September 7, 2005. Currently
        we cannot predict the outcome of this litigation or the financial impact
        on our
        ongoing operations.
 
 On
        March
        28, 2005, we entered into a Settlement Agreement, which resolved all claims
        in
        the case filed in the 407 th Judicial
        District Court of Bexar County Texas by with James C. Cuevas, Raymond G.
        Romero,
        Texas Workforce Commission and ATSI-Texas for unpaid wages. The Settlement
        Agreement was subject to board approval. The Board of Directors met on April
        28,2005 and approved the Settlement Agreement. We subsequently issued 169,280
        shares of our common stock.
 
 **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
 
 On
        April
        28, 2005, we issued 169,280 shares of our common stock in settlement of all
        claims made by James C. Cuevas, Raymond G. Romero, Texas Workforce Commission
        and ATSI-Texas for unpaid wages. These shares 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 direct relationship between us and the
        individuals to whom they were issued, the absence of public solicitation
        or
        advertising, and restrictions on resale of the shares.
  20
 
 **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
 
 As
        of
        April 30, 2005, 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
              
              $
              203,000Series
                D Cumulative Preferred Stock
              
              
              229,000Series
                E Cumulative Preferred Stock
              
              
              269,000TOTAL
              
              $
              701,000
 
 
 **ITEM
        6. EXHIBITS**
 
 (a)  Exhibits:
        The following documents are filed as exhibits to this report.
 
 **Exhibit**
 **Number** **Description**
 
 4.1
              ConvertiblePromissory
                  Notes issued to Recap Marketing & Consulting, LLP.
                  *
 
 10.1
              Extension
                  of consulting agreements (Amendment No:1) with Hunter M. A. Carr
                  and
                  Donald W. Sapaugh. *
  10.2
              Settlement
                  Agreement (at mediation) with James C. Cuevas, Raymond G. Romero,
                  Texas
                  Workforce Commission and ATSI-Texas.
                  *
 
 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.
                  *
 
 21
 
 
 **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. Smith
 Name:  Arthur
        L.
        Smith
 Title:  President
        and Chief
        Executive Officer
 
 Date:
        April 14, 2006       By:   /s/
        Antonio Estrada
 Name:  Antonio
        Estrada
 Title:  Corporate
        Controller (Principal
        Accounting and Principal Financial Officer)
  22