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================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                       ----------------------------------
                             Washington, D.C. 20549

                               ___________________

                                    FORM 10-K
              [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     For the Fiscal Year Ended July 31, 2001

                                       OR

              [_] 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:

                            ATSI COMMUNICATIONS, INC.
             (Exact Name of Registrant as Specified in its Charter)

            Delaware                                       74-2849995
     (State of Incorporation)                           (I.R.S. Employer
                                                       Identification No.)

  6000 Northwest Parkway, Suite 110
         San Antonio, Texas
        (Address of Principal                              78249
          Executive Office)                              (Zip Code)

                                 (210) 547-1000
              (Registrant's Telephone Number, Including Area Code)

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:
                    Common Stock, Par Value $0.001 Per Share
                                (Title of Class)

                             _______________________
     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]

     The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at October 25, 2001, was approximately
$23,000,000. There were 80,600,302 shares of Common Stock outstanding at October
25, 2001, and the closing sales price on the American Stock Exchange for our
Common Stock was $0.30 on such date.

                      DOCUMENTS INCORPORATED BY REFERENCE:
     Portions of the Registrant's Proxy Statement for the 2001 Annual Meeting of
Stockholders to be held in January 2002, are incorporated by reference in Part
III hereof.

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                                TABLE OF CONTENTS

<TABLE>
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<S>                                                                                              <C>
                                                PART I
Item 1.  Business .............................................................................    3
          Overview and Recent Developments ....................................................    3
          Strategy and Competitive Conditions .................................................    4
         Retail Distribution Network ..........................................................    7
         Services and Products ................................................................    7
               Telco Services .................................................................    7
               Electronic Commerce Via Internet ...............................................   10
         Network ..............................................................................   10
          Licenses/Regulatory .................................................................   11
          Employees ...........................................................................   13
          Additional Risk Factors .............................................................   14
Item 2.  Properties ...........................................................................   25
Item 3.  Legal Proceedings ....................................................................   25
Item 4.  Submission of Matters to a Vote of Security Holders ..................................   26

                                                PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters ................   26
Item 6.  Selected Financial and Operating Data ................................................   28
Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations ................................................................   29
          General .............................................................................   30
          Results of Operations ...............................................................   31
          Liquidity and Capital Resources .....................................................   39
          Inflation/Foreign Currency ..........................................................   41
          Seasonality .........................................................................   42
          Market Risk .........................................................................   42
Item 8.  Financial Statements and Supplementary Data ..........................................   43
Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures ................................................................   81

                                                PART III

Item 10. Directors and Officers of the Registrant .............................................   81
Item 11. Executive Compensation ...............................................................   81
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................   81
Item 13. Certain Relationships and Related Transactions .......................................   81

                                                PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .....................   82
</TABLE>

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         This Annual Report on Form 10-K and the documents incorporated by
reference in this Annual Report contain "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 this Annual Report and other
documents filed with the Securities and Exchange Commission. Therefore, these
types of statements may prove to be incorrect.

                                     PART I.
                                     -------

ITEM I.           BUSINESS

Overview and Recent Developments

          We are a telecommunications provider, focusing on the market for
carrier and retail services between the United States and Latin America, and
within Latin America. Most of our current operations involve services between
the U.S. and Mexico or within Mexico. We own various transmission facilities and
lease facilities of other providers as necessary to complete our network.
Specifically, we own teleports, which are the earth stations where satellite
transmission and receiving equipment are located, and switches, which are
computers which route calls to their intended destination by opening and closing
appropriate circuits. We lease fiber optic cable and satellite capacity to
connect our teleports and switches in the United States to our teleports and
switches in Mexico and other Latin countries, and rely on other carriers to
complete the long distance portion of our traffic within the U.S. and Mexico.

         Our subsidiary GlobalSCAPE, Inc. sells and distributes Internet
productivity software.

         We began operations in 1994 as a Canadian holding company, Latcomm
International, Inc. with a Texas operating subsidiary, Latin America Telecomm,
Inc. Both corporations were renamed "American TeleSource International, Inc." in
1994. In May 1998, the Canadian corporation completed a share exchange with a
newly formed Delaware corporation, also called American TeleSource
International, Inc., which resulted in the Canadian corporation becoming the
wholly owned subsidiary of the Delaware corporation. In February 2001, our
shareholders voted to change our name from American TeleSource International,
Inc. to ATSI Communications, Inc.

         We have had operating losses for almost every quarter since we began
operations in 1994. The auditor's opinion on our financial statements as of July
31, 2001 calls attention to substantial doubts about our ability to continue as
a going concern. This means that they question whether we can continue in
business. We have experienced difficulty in paying our vendors and lenders on
time in the past, and may experience difficulty in the future. If we are unable
to pay our vendors and lenders on time, they may stop providing critical
services or repossess critical equipment that we need to stay in business.

         Our principal operating subsidiaries are:

  .          ATSI Comunicaciones, S.A. de C.V. or ATSI Comunicaciones, which we
         acquired in 2000, possesses a concession from the Mexican government to
         provide long distance services and the right to interconnect with local
         providers in Mexico;

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  .          American TeleSource International de Mexico, S.A. de C.V. or ATSI
         Mexico, which was formed in 1995 to support our operations in Mexico,
         and perform regulatory, sales, marketing, planning, and technical
         maintenance services; this subsidiary possesses a comercialazidora
         license;

  .          Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom, which
         we acquired in August 1997; this subsidiary owns 134 communication
         centers in 66 cities in Mexico;

  .          Servicios de Infraestructura, S.A. de C.V. or Sinfra, which we
         acquired in June 1997; this subsidiary owns certain transmission
         equipment and valuable long term licenses in Mexico;

  .          TeleSpan, Inc. which was formed in February 1998 to transport our
         carrier and private network services traffic between the U.S. and Latin
         America; and

  .          GlobalSCAPE, Inc. which was formed in April 1996 to implement
         Internet strategies which are not currently consistent with our core
         business.

Recent Developments

         During our fiscal year ending July 31, 2001, we:

         .   completed our partial distribution of GlobalSCAPE to our
             shareholders

         .   hired a former Comdisco Executive, Tim Nicolaou as CEO of
             GlobalSCAPE

         .   closed a $10 million equity funding, $4.5 million of which was
             funded during the year

         .   announced that John Fleming, founder and principle of Vision Corp.,
             and a founder of IXC Communications, had joined the ATSI Board of
             Directors

         .   installed next generation VoIP equipment in Mexico making ATSI the
             first company to implement a true VoIP solution utilizing Nortel
             Networks packet switching equipment in Mexico

         .   terminated the acquisition agreement of Genesis Communications,
             Inc., due to deteriorating market valuations within the
             telecommunications sector

         .   announced a name change to ATSI Communications, Inc.

         .   raised approximately $4.0 million in additional equity

         .   partnered with SoftChina to deliver CuteFTP to the Greater China
             marketplace through our majority owned subsidiary GlobalSCAPE

Strategy and Competitive Conditions

         Our strategy is to position ourselves to take advantage of the
demonopolization of the Latin American telecommunications markets, as well as
the increasing demand for international communications services between these
markets and the United States. Historically, telecommunications

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services in Latin America have been provided by state-run companies operating as
a legal or de facto monopoly. Although these companies failed to satisfy the
demand for services in their countries, the regulatory scheme effectively
precluded competition by foreign carriers. Currently, there is a trend toward
demonopolization of the telecommunications industry in Latin America, and many
of these countries are in various stages of migration toward a competitive,
multi-carrier market. Many Latin American countries produce significant number
of immigrants to the United States, or are becoming homes to U.S. based
corporations serving seeking lower labor costs.

         At the same time that Latin American markets have been opening up, the
demand for telecommunications services between the United States and Latin
America (particularly Mexico) has been strengthened by:

         .   rapid growth of the Latino segment of the United States population
         .   increase in trade and travel between Latin America and the United
             States
         .   the build-out of local networks and corresponding increase in the
             number of telephones in homes and businesses in Latin countries
         .   proliferation of communications devices such as faxes, mobile
             phones, pagers, and personal computers
         .   declining rates for services as a result of increased competition.

         Our strengths as a company include our knowledge of, and relationships
within, the telecommunications industry in the United States and certain
countries within Latin America. Our management and employees have in-depth
knowledge of the Mexican culture, business environment and telecommunications
industry. As a result, we have been able to produce steadily increasing volumes
of communications traffic between the United States and Mexico, and have been
able to obtain several key licenses that allow us to both generate and carry
traffic within Mexico. It has always been the Company's strategy to build a
customer base first, and then smart-build a network underneath those customers'
calling patterns in an effort to maximize returns on invested capital.
Technological advances have provided emerging carriers with the means to provide
high quality transmission on a cost-effective basis. Most notably, we as well as
other emerging carriers now use packet switching technology, which is a method
of transmitting telecommunications traffic by breaking the information into
packets. The packets can then be organized in a way that permits the information
to be transmitted over long distances more quickly and using less capacity than
traditional methods. The packets are reassembled at the receiving end to
re-create the message. We have also incorporated asynchronous transfer mode or
"ATM" technology into our network. ATM is a high-speed, packet switching
technology that allows voice, facsimile, video and data packets to be carried
simultaneously on the same network.

         We have focused most of our efforts on Mexico, but have some
operations, primarily private networks, in Costa Rica and El Salvador and intend
to expand our services as regulatory and market conditions permit. Ultimately we
would like to provide services throughout Latin America.

         Strategy and Competitive Conditions - Mexican Market. Telefonos de
Mexico (or Telmex) had a legal franchise to control the entire market for local
and long distance telecommunications in Mexico until June of 1995, when new laws
began to open the market to competition. This means that Telmex owned or
controlled all of the physical infrastructure needed to transport
telecommunications traffic, including the local network of telephone lines to
homes and business in a given area, and the long distance network of lines
between the local networks. In January 1997, the Mexican government began
granting licenses to provide long distance service to competing companies, and
has licensed at least 21 new long distance providers. Two of these new license
holders are Mexican based affiliates of top tier U.S. carriers MCI/Worldcom and
AT&T. Although the Mexican government has also licensed

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additional local competitors, the build out of additional local infrastructure
is just beginning, and the local network in Mexico is still dominated by Telmex.
We began assembling a framework of licenses, reciprocal services agreements with
other carriers, other service agreements, network facilities, and distribution
channels in Mexico, in 1994, in anticipation of the demonopolization of this
market. In 1994, we began providing private network services between the U.S.
and Mexico via satellite. Since then, we have established a retail distribution
network in Mexico through the acquisition and/or installation of public
payphones and communication centers, have entered the U.S. market for carrier
termination services to Mexico, and have begun implementation of a U.S. consumer
strategy through the introduction of our enhanced prepaid calling card targeted
to the Latino market in the U.S, through an alliance with Natel, LLC. We have
also invested in our own transmission facilities, beginning in 1994 with
satellite teleport equipment and in the last several years the acquisition of a
new Nortel International Gateway Switch and the deployment of packet switching
technology in our network. As true competition has emerged in Mexico, we have
been able to negotiate increasingly more favorable rates for local network
access and long distance services with the newly licensed long distance
carriers. In fiscal year 2000 we secured our own long distance license, which
will permit us to interconnect directly with the local network and build out our
own long distance network, further reducing our costs. We believe that our
establishment of a solid framework of licenses, proprietary network and
favorable services agreements have positioned us to take advantage of the
benefits to be reaped as the Mexican telecommunications industry enters a truly
competitive phase. We believe that we have a clear competitive advantage over
pure resellers, and that we have overcome significant hurdles that are a barrier
to entry in this market even for large carriers. We intend to use our framework
to capture increased amounts of the communications traffic in the Mexican
market.

         Retail. Although Telmex and the Mexican affiliates of several large
U.S. based carriers are active participants in the Mexican retail market, we
believe that these carriers will focus on the most lucrative sectors of the
market, leaving many opportunities to further develop the large portion of the
market that continues to be underserved, both in the U.S. and Mexico. We will
devote most of our new resources on deploying innovative new public and prepaid
services that will function in the same manner regardless of the consumer's
location north or south of the U.S./Mexico border, such as enhanced prepaid
calling services. Our marketing term for these types of services is
"borderless." We will use our existing retail distribution network, and may
pursue acquisitions of established distribution channels from others. We believe
that our focus on a retail strategy, combined with the cost reductions to come
from additional network build-out under our Mexican long distance license, will
permit us to improve overall corporate profit margins and secure a stable
customer base.

         Carrier. The U.S. market for termination to Mexico has become
increasingly dynamic as competition, call volumes and industry capacity along
U.S. -Mexico routes have all increased. Although the volume of carrier services
minutes we transmitted to Mexico increased by approximately 43% during fiscal
year 2001, downward pricing pressure in this market resulted in a less than
proportional increase in revenues. We continue to expect our carrier services
volume of traffic transported to increase during the upcoming year.
Additionally, we plan to explore ways to exploit our carrier services operation
without the investment of significant new resources (see Telco Services -
Carrier Services).

         Although we have succeeded in obtaining reciprocal services agreements
with various Mexican-based providers that permit us to terminate northbound
traffic in the U.S., we have not realized substantial revenue from these
arrangements. We believe that the additional network build-out under our own
long distance license will permit us to lower costs significantly, improving our
competitive position in the carrier services market for both north and
southbound services.

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Retail Distribution Network

     Our Mexican retail distribution network currently consists of communication
centers and public pay telephones.

     Communication centers. Communication centers, formerly called casetas, are
indoor calling centers strategically located to serve travelers and the large
population of the country who do not have personal telephones. Communications
centers are a widely recognized and utilized medium in Mexico, but do not
currently have a real equivalent in the U.S. Our centers have traditionally
offered local, domestic Mexico and international long distance calling and in
fiscal 2000, we began offering additional enhanced services such as prepaid and
Internet services. We are the largest communication center operator in Mexico
with approximately 134 communication centers in 66 cities operating under the
trade name "ComputelTM". Each location employs at least one attendant, who
processes calls, monitors call duration, collects money and runs daily reports
on call activity. As compared to public pay telephones, our centers offer
privacy and comfort as well as the personalized attention needed by customers
who are not accustomed to using a telephone. Key factors favoring us over
competing communication centers operators are the well-recognized Computel name,
a reliable platform and billing system, the provision of facsimile services
(which are not offered by many other operators) and a larger distribution
network. The next largest competitor in Mexico has only 70 locations. Using
these communication centers as the cornerstone, we intend to further increase
our retail presence in Mexico and the U.S.

     Pay Telephones. We also own and operate approximately 515 pay telephones in
various Mexican cities and resort areas, including Acapulco, Cancun, Cozumel,
Mazatlan, Puerto Vallarta, Tijuana, Huatulco, Puerto Escondido, Cabo San Lucas,
and Puerto Angel. All of our pay telephones are "intelligent" phones, meaning
that certain features are fully automated, reducing operating costs. Our
telephones accept pesos and U.S. quarters.

Services and Products

     In the presentation of our historical financial results, we have divided
our revenues into two categories: Telco Services, consisting of carrier
services, network services, retail services; and Internet e-commerce.

Telco Services

Carrier Services

     We offer termination services to U.S. and Latin American carriers who lack
transmission facilities, require additional capacity or do not have regulatory
permission to terminate traffic in Mexico. Revenues from this service accounted
for approximately 57% of our overall revenues in fiscal 2000 and approximately
64% in fiscal 2001. The percentage of our total volume of carrier services
traffic sent by customers can fluctuate dramatically, on a quarterly, and
sometimes, daily basis. Historically, two customers have accounted for
approximately 60-80% of the total carrier services volume, although not
necessarily the same two customers. In general, our agreements with these
customers do not require significant volume commitments from them, so they are
free to re-route their traffic away from us to a lower priced carrier at will.
While we are the primary route choice for certain customers and certain segments
of some customer's traffic, we maybe a secondary route choice for other
customers, meaning that they send us their overflow traffic if their primary
route choice does not have sufficient capacity to meet their demand. The volume
of this overflow traffic may fluctuate dramatically from day to day. For fiscal
2001, we had two customers, each of whose traffic accounted for more than 10% of
our

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consolidated revenues. Through the high quality and reliability of our service
and the underlying infrastructure we have been able to maintain the combined
volume of traffic carried with these large customers during a period in which
the market continued to experience downward pricing pressure. This pricing
pressure is due to a combination of several factors, most notably an increase in
the activation of fiber optic cable along U.S.-Mexico routes and regulatory
changes which permitted the top tier carriers to lower their international
carrier services rates. Therefore, although we experienced significant increased
volumes in this line of business during the year, the increased additional
revenue was not proportional. We have seen a substantial increase in volume
since we activated our high-quality fiber route in July 1999, and believe this
fiber network will continue to attract increased volumes from top tier carriers.
Additionally, we believe it will generate opportunities to transport traffic for
Mexican carriers. We should be able to use the increased volumes to negotiate
more favorable termination costs in Mexico, and with the receipt of our Mexican
long distance license, we should be able to cut our costs for carrying this
traffic by further extending our own network facilities in Mexico.

     We occupy a unique position in the market for carrier services. Our unique
licenses from the Mexican government allow us to transport traffic from the
United States to Mexico as data/IP or packetized data and outside of the
International Settlement Policy, which is the international accounting and
settlements policy governing the methods that U.S. and foreign carriers use to
settle the cost of carrying traffic over each other's network. The International
Settlements Policy causes MCI/Worldcom and AT&T to charge higher rates than they
might otherwise charge. Additionally, the receipt of our Mexican long distance
license should help with a historical disadvantage we had when competing with
several of these larger carriers. We have been at a disadvantage with respect to
these large carriers because we did not have a Mexican license to carry our own
long distance traffic within Mexico and had to pay a licensed carrier, such as
the Mexican affiliate of MCI/Worldcom or AT&T, to carry our traffic from our
Mexican points of presence to its final destination. At the other end of the
spectrum, we compete with numerous small companies who illegally carry traffic
into and within Mexico. These companies do not pay the fees charged by
Mexican-licensed carriers and are therefore able to offer very low prices.
However, these companies do not typically own their own transmission facilities,
and are not able to control costs or transport large volumes of traffic as
effectively as us for long periods of time because they are also subject to
having their operations shut down by Mexican regulators.

     We believe that we have less than 1% of the market for carrier termination
services. See our Risk Factor captioned "We may not successfully compete with
others in the industry" for additional description of the competition in this
market.

 Network Services

     We offer private communications links for multi-national and Latin American
corporate or enterprise customers who use a high volume of telecommunications
services and need greater dependability than is available through public
networks. These services include data, voice, and fax transmission as well as
Internet. During fiscal 2001, we did not devote significant resources toward the
development of this business in Mexico. However, expansion of this line of
business is consistent with our plans to build out our network in Mexico, since
many of the same facilities that would be used for delivery of retail consumer
products could be used for private network services or virtual private network
services as well.

     We have and will continue to use the provision of private network services
as an entry into new Latin markets that are in the process of migrating from
state-run systems to competitive systems.

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     We compete with MCI/Worldcom and Americatel, as well as the former
telecommunication monopolies in the Latin American countries in providing
private network services. Factors contributing to our competitiveness include
reliability, network quality, speed of installation, and in some cases,
geography, network size, and hauling capacity. We believe we have a reputation
as a responsive service provider capable of processing all types of network
traffic. We are at a competitive disadvantage with respect to larger carriers
who are able to provide networks for corporations that encompass more countries
in Latin America, as well as Europe, Asia and other parts of the globe. Prices
in this market are also generally declining as fiber optic cable is activated.

     We believe that we have less than 1% of the market for private network
services.

Retail Services

     Our principal retail services product during fiscal 2001 is integrated
prepaid services, which are generated by calls processed by us without live or
automated operator assistance. A majority of these calls are generated by our
public telephones and communication centers in Mexico in exchange for immediate
cash payment in pesos.

     In Mexico, we compete with other companies who have a comercializadora
license for integrated prepaid or sent paid traffic. The comercializadora
license allows companies to interconnect with the local telecommunications
infrastructure in order to resell local and long distance services from public
telephones or calling stations.

     An additional product is operator-assistance for international collect,
person-to-person, third party, calling card and credit card calls originating in
Mexico. Again the primary sources of demand for operator assistance are our pay
telephones and communication centers in Mexico.

     As part of our ongoing efforts to minimize costs, we began outsourcing our
live operator services in July 1999, and executed an agreement with another
operator service provider to handle our call services traffic on a transaction
basis. The vendor will continue our practice of providing bilingual service 24
hours per day, 7 days per week.

     In the U.S., on a very limited basis, we provided 1+ and MEXICOnnect (SM)
service to residential and business customers in the San Antonio metropolitan
area. MEXICOnnect allows customers to dial-around their presubscribed carrier by
dialing 10-10-624 + the area code + the telephone number. Under the 1+ program,
customers presubscribe to our network for all long distance calls made from
their telephone number, eliminating the need to dial any extra digits to reach
our network. In the U.S., we compete with large carriers such as AT&T,
MCI/Worldcom, and Sprint as well as numerous smaller companies for presubscribed
long distance. Price remains a primary concern for many consumers since the
technology is not distinguishable from one provider to another. We are focused
on the Latino market and offer an aggressive international rate to Mexico as
well as competitive domestic rates. The Company is currently re-evaluating its
consumer plan and developing a product portfolio that will address the current
market environment.

     Our postpaid services product has declined due to lower volumes of
operator-assisted calls originating in Mexico and terminating in the U.S, new
services such as prepaid cellular being introduced into the market by our
competitors, and Mexican cellular providers recently introducing the concept of
"calling party pays." In spite of these declines we believe our owned retail
distribution network will continue to generate call services traffic.
Competition for traffic from third parties in this market revolves largely
around the amount of commissions the operator services provider is willing to
pay. We

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are currently focusing more on improving our profitability rather than
simply generating additional revenues, and we have therefore lost ground to
competitors willing to accept lower profit margins by paying higher commissions.
However, we believe we have a reputation as a reliable provider, and we are also
able to offer the value-added service of intelligent pay telephones in hotel
lobbies.

     Other than Telmex we compete with BBG Communications, Servitel, Sendetel,
Ahorratel and Modutel in the Call Services area.

     We believe that we have less than 1% of the market for retail services.

Electronic Commerce via Internet

     GlobalSCAPE was formed in April 1996 to implement Internet related
strategies that are not complementary to our core business. GlobalSCAPE's
revenues are attributable to sales of Internet productivity software, primarily
its flagship product CuteFTP(R), which it distributes via its web site.
GlobalSCAPE operates autonomously, generating substantially all funds for its
development and expansion internally from its own operations. In fiscal year
2001, we completed the distribution of a portion of our ownership in our wholly
owned subsidiary GlobalSCAPE to our shareholders. The distribution was part of a
plan to distribute or spin-off a portion of our ownership in GlobalSCAPE in
advance of a public offering to raise funds for GlobalSCAPE's growth and ATSI's
general corporate purposes. GlobalSCAPE and ATSI decided not to make a public
offering of GlobalSCAPE common stock in light of market conditions at the time.

     GlobalSCAPE's target market includes all computer users on the Internet.
Users may download and use the products for free on a trial basis for a limited
time. After the expiration of the trial period, the user must purchase the
product to be in compliance with the license agreement and to obtain product
support. GlobalSCAPE's primary source of revenue is generated through product
registration. For the year ended July 31, 2001, GlobalSCAPE sold approximately
177,000 licenses for the use of its software products, of which approximately
6,000 were upgrades of previously registered products.

     GlobalSCAPE's's flagship product, CuteFTP(R), is a Windows(R)-based file
transfer protocol (FTP) utility allowing users to transfer and manage files via
the Internet. We believe that CuteFTP(R) and CuteFTP Pro(R) have approximately
30% of the U.S. market share for FTP programs. GlobalSCAPE's portfolio of
products also includes CuteHTML(R), an advanced HTML editor for developing web
sites, CuteMAP(R), an image mapping utility for graphic navigation through web
sites and CuteZIP(R), a compression utility, and others in various stages of
alpha and beta testing.

     GlobalSCAPE intends to leverage its strong brand recognition into a full
suite of client and server side software in the content delivery and content
management market space.

     GlobalSCAPE operates in a highly competitive environment with respect to
all its products. CuteFTPs primary competitors are WS_FTP, FTP Voyager and
Bulletproof FTP. While there are more than one hundred FTP products on the
market, most have failed to gain significant market share.

Network

     We have established a technologically advanced network which uses both
satellite and fiber optic cable to transmit telecommunications traffic between
the U.S. and Mexico. Our network incorporates ATM technology, which is
compatible with other transmission technologies such as frame relay and Internet
protocols, permitting us to explore even more cost-effective transmission
methods in

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the future. See page 4, "Strategy and Competitive Conditions" for a
description of ATM technology. Frame relay is a method of allocating capacity on
demand so that a customer's needs may be filled with less capacity than the
traditional system of dedicating a certain amount of capacity to a particular
purpose. Internet protocol refers to a method of organizing information such
that it may be carried on the Internet. Our network also employs compression
technology to carry greater volumes on the same facilities.

     Generally, our strategy is to use the fiber optic arm to access major
metropolitan areas in Mexico and the satellite arm to access semi-rural and
smaller metropolitan areas. If there is a problem in either portion of the
network, we will be able to minimize service interruptions by transferring
traffic to the other portion until the problem is resolved. Our fiber route runs
from our facility at the Infomart in Dallas, Texas to Mexico City, Mexico. We
own or have the right to use satellite transmission and receiving equipment in
1) San Antonio, Texas, 2) Mexico City and Monterrey, Mexico, 3) San Salvador, El
Salvador, and 4) San Jose, Costa Rica.

     We lease fiber capacity from third parties, primarily Bestel USA, Inc. with
whom we have a 3-year lease for fiber optic cable from San Antonio, Texas to
Mexico City, Mexico until March 2002. We lease satellite capacity on the Mexican
satellites Solidaridad I and II, from COMSAT, S.A. de C.V. or "COMSAT, with whom
we have an agreement for capacity through April 2002. ATSI has leased a fixed
amount of capacity from each of these vendors for a fixed monthly price. Each of
these vendors has the right to terminate service for non-payment.

     We own switching and other equipment in the U.S. and Mexico. In April 1999,
we began using our new Nortel DMS 300/250 International Gateway Switch in our
Dallas location. This advanced switch will permit us to deploy the new retail
and wholesale products that are key to our competitive strategy.

     All aspects of our owned network facilities are designed to allow for
modular expansion, permitting us to increase capacity as needed.

     Until we have completed the build-out of our own network under the terms of
our recently acquired long distance concession license we must contract with
others to complete the intra-Mexico and domestic U.S. portions of our network.
We have reciprocal service agreements in place with five Mexican long distance
license holders, Operadora Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel,
S.A. de C.V., Iusacell, S.A. de C.V. and Bestel, S.A. de C.V. Our Mexican long
distance license will allow us to interconnect directly with Telmex and other
local carriers and should lower our transmission costs. We have reciprocal
service agreements with Radiografica Costarricense, S.A. for transmission
services in Costa Rica and El Salvador. In the U.S., we purchase long distance
capacity from various companies.

     We purchase local line access in Mexico for our payphones and communication
centers from Telmex, and various cellular companies including SOS
Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Iusacell,
S.A. de C.V., Movitel del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A.
de C.V.


Licenses/Regulatory

     Our operations are subject to federal, state and foreign laws and
regulations.

                                       11

<PAGE>

Federal

     Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted us global authority to provide
switched international telecommunications services between the U.S. and certain
other countries. We maintain informational tariffs on file with the FCC for our
international retail rates and charges.

     The Telecommunications Act of 1996, which became law in February 1996, was
designed to dismantle the monopoly system and promote competition in all aspects
of telecommunications. The FCC has promulgated and continues to promulgate major
changes to their telecommunications regulations. One aspect of the Telecom Act
that is of particular importance to us is that it allows Bell Operating
Companies or BOCs to offer in-region long distance service once they have taken
certain steps to open their local service monopoly to competition. Given their
extensive resources and established customer bases, the entry of the BOCs into
the long distance market, specifically the international market, will create
increased competition for us. Southwestern Bell's application to offer in region
long distance was approved in June 2000.

     Although we do not know of any other specific new or proposed regulations
that will affect our business directly, the regulatory scheme for competitive
telecommunications market is still evolving and there could be unanticipated
changes in the competitive environment for communications in general. For
example, the FCC is currently considering rules that govern how Internet
providers share telephone lines with local telephone companies and compensate
local telephone companies. These rules could affect the role that the Internet
ultimately plays in the telecommunications market.

     The International Settlements Policy governs settlements between top tier
U.S. carriers' and foreign carriers' costs of terminating traffic over each
other's networks. The FCC recently enacted certain changes in our rules designed
to allow U.S. carriers to propose methods to pay for international call
termination that deviate from traditional accounting rates and the International
Settlement Policy. The FCC has also established lower benchmarks for the rates
that U.S. carriers can pay foreign carriers for the termination of international
services and these benchmarks may continue to decline. These rule changes have
lowered the costs of our top tier competitors and are contributing to the
substantial downward pricing pressure facing us in the carrier market.

State

     Many states require telecommunications providers operating within the state
to maintain certificates and tariffs with the state regulatory agencies, and to
meet various other requirements (e.g. reporting, consumer protection,
notification of corporate events). We believe we are in compliance with all
applicable State laws and regulations governing our services.

Mexico

     The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL
(Comision Federal de Telecomunicaciones or Federal Telecommunications
Commission) have issued our Mexican subsidiaries the following licenses:

     Comercializadora License - a 20-year license issued in February 1997
allowing for nationwide resale of local calling and long distance services from
public pay telephones and communication centers.

                                       12

<PAGE>

         Teleport and Satellite Network License - a 15-year license issued in
May 1994 allowing for transport of voice, data, and video services domestically
and internationally. The license allows for the operation of a network utilizing
stand-alone VSAT terminals and/or teleport facilities, and connection to the
local network via carriers having a long distance license. A shared teleport
facility enables us to provide services to multiple customers through a single
teleport.

     Packet Switching Network License - a 20-year license issued in October 1994
allowing for the installation and operation of a network interconnecting packet
switching nodes via our proprietary network or circuits leased from other
licensed carriers. The license supports any type of packet switching technology,
and can be utilized in conjunction with the Teleport and Satellite Network
License to build a hybrid nationwide network with international access to the
U.S.

     Value-Added Service License - an indefinite license allowing us to provide
a value added network service, such as delivering public access to the Internet.

     Concession License - a 30-year license granted in June 1998 to install and
operate a public network.

     Like the United States, Mexico is in the process of revising its regulatory
scheme consistent with its new competitive market. Various technical and pricing
issues related to connections between carriers are the subject of regulatory
actions which will effect the competitive environment in ways we are not able to
determine at this time.

 Other Foreign Countries

     In addition to Mexico, we currently have operations in Costa Rica and El
Salvador. The telecommunications markets in these countries are in transition
from monopolies to functioning, competitive markets. We have established a
presence in those countries by providing a limited range of services, and intend
to expand the services we offer as regulatory conditions permit. We do not
believe that any of our current operations in those countries require licensing,
and we believe we will be in compliance with applicable laws and regulations
governing our operations in those countries.

Employees

     At October 1, 2001, we (excluding ATSI-Mexico) had 64 employees, of whom 8
were sales and marketing personnel, and 56 performed operational, technical and
administrative functions, and 2 part-time employees. Of the foregoing, 29 were
employed by GlobalSCAPE, and three were employed by Sinfra.

     We believe our future success will depend to a large extent on our
continued ability to attract and retain highly skilled and qualified employees.
We consider our employee relations to be good. None of these aforementioned
employees belong to labor unions.

     At October 1, 2001, ATSI-Mexico had 446 full-time employees of whom 411
were operators and 35 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.

                                       13

<PAGE>

ADDITIONAL RISK FACTORS

         The purchase of our common stock is very risky. You should not invest
any money that you cannot afford to lose. Before you buy our stock, you should
carefully read our entire 10-K. We have highlighted for you below all of the
material risks to our business of which we are aware.

                           RISKS RELATED TO OPERATIONS

 .    Our auditors have questioned our viability

     Our auditors' opinion on our financial statements as of July 31, 2001 calls
     attention to substantial doubts as to our ability to continue as a going
     concern. This means that they question whether we can continue in business.
     If we cannot continue in business, our common stockholders would likely
     lose their entire investment. Our financial statements are prepared on the
     assumption that we will continue in business. They do not contain any
     adjustments to reflect the uncertainty over our continuing in business.

 .    We expect to incur losses, so if we do not raise additional capital we may
     go out of business

     We have never been profitable and may not become profitable in the near
     future. We have invested and will continue to invest significant amounts of
     money in our network and personnel in order to maintain and develop the
     infrastructure we need to compete in the markets for our services and
     achieve profitability. Our investment in our network may not generate the
     savings and revenues that we anticipate because of a variety of factors,
     such as:

        - delays in negotiating acceptable interconnection agreements with
          Telmex, the former monopoly carrier in Mexico;
        - delays in construction of our network; and
        - operational delays caused by our inability to obtain additional
          financing in a timely fashion.

     In the past we have financed our operations almost exclusively through the
     private sales of securities. Since we are losing money, we must raise the
     money we need to continue operations and expand our network either by
     selling more securities or borrowing money. We are not able to sell
     additional securities or borrow money on terms as desirable as those
     available to profitable companies, and may not be able to raise money on
     any acceptable terms. If we are not able to raise additional money, we will
     not be able to implement our strategy for the future, and we will either
     have to scale back our operations or stop operations.

     As of July 31, 2001, we had negative working capital of approximately $9.3
     million. In order to maintain our financial position going forward it will
     be necessary for us to raise funds necessary to cover our recurring
     negative cash flows from operations. We cannot estimate what that amount
     will be with reasonable certainty. For the twelve months ended July 31,
     2001, our negative cash flows from operations prior to debt service and
     capital expenditures were approximately $6.0 million. Conservatively, we
     will need to be able to raise similar capital over the next nine to twelve
     months.

 .    We must expand and operate our network

     Our success and ability to increase our revenues depends upon our ability
     to deliver telecommunication services which, in turn, depends on our
     ability to integrate new and emerging

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<PAGE>

technologies and equipment into our network and to successfully expand our
network. Our ability to continue to expand, operate and develop our network will
depend on, among other factors, our ability to accomplish the following:

        - obtain switch sites;
        - interconnect with the local, public switched telephone network and/or
          other carriers; and
        - obtain access to or ownership of transmission facilities that link our
          switches to other network switches.

     When we expand our network, we will incur additional fixed operating costs
     that will exceed revenues until we generate additional traffic. We may not
     be able to expand our network in a cost-effective manner, generate
     additional revenues which cover or exceed the expansion costs or operate
     the network efficiently.

     Our network and operations face risks that we cannot control, such as
     damages caused by fire, power loss and natural disasters. Any failure of
     our network or other systems our hardware could damage our reputation,
     result in loss of customers and harm our ability to obtain new customers.

 .    It is difficult for us to compete with much larger companies such as
     AT&T, Sprint, MCI-Worldcom and Telmex

     The large carriers such as AT&T, Sprint and MCI/Worldcom in the U.S., and
     Telmex in Mexico, have more extensive owned networks than we do, which
     enables them to control costs more easily than we can. They are also able
     to take advantage of their large customer base to generate economies of
     scale, substantially lowering their per-call costs. Therefore, they are
     better able than we are to lower their prices as needed to retain
     customers. In addition, these companies have stronger name recognition and
     brand loyalty, as well as a broader portfolio of services, making it
     difficult for us to attract new customers. Our competitive strategy in the
     U.S. revolves around targeting markets that are largely underserved by the
     big carriers. However, some larger companies are beginning efforts or have
     announced that they plan to begin efforts to capture these markets.

     Mergers, acquisitions and joint ventures in our industry have created and
     may continue to create more large and well-positioned competitors. These
     mergers, acquisitions and joint ventures could increase competition and
     reduce the number of customers that purchase carrier service from us.

 .    Competition could harm us

     International telecommunications providers like us compete based on price,
     customer service, transmission quality and breadth of service offerings.
     Our carrier and prepaid card customers are especially price sensitive. Many
     of our larger competitors enjoy economies of scale that can result in lower
     termination and network costs. This could cause significant pricing
     pressures within the international communications industry. In recent
     years, prices for international and other telecommunications services have
     decreased as competition continues to increase in most of the markets in
     which we currently compete or intend to compete. Although we carried 43%
     more carrier services traffic in fiscal year 2001 than in fiscal year 2000,
     we only recognized an increase in revenues of approximately 21%. If these
     pricing pressures continue, we must continue to lower our costs in order to
     maintain sufficient profits to continue in this market. We believe
     competition will intensify as new entrants increase as a result of the new
     competitive opportunities created by the Telecommunications Act of 1996,
     implementation by the Federal Communications Commission of the United
     States' commitment to the World Trade Organization, and privatization,
     deregulation and

                                       15

<PAGE>

     changes in legislation and regulation in many of our foreign target
     markets. We cannot assure you that we will be able to compete successfully
     in the future, or that such intense competition will not have a material
     adverse effect on our business, financial condition and results of
     operations.

 .    Competition in Mexico is increasing

     Mexican regulatory authorities have granted concessions to 20 companies,
     including Telmex, to construct and operate public, long distance
     telecommunications networks in Mexico. Some of these new competitive
     entrants have as their partners major U.S. telecommunications providers
     including AT&T (Alestra), MCIWorldcom (Avantel) and Verizon. (Iusatel).
     Mexican regulatory authorities have also granted concessions to provide
     local exchange services to several telecommunications providers, including
     Telmex and Telefonia Inalambrica del Norte S.A. de C.V., Megacable
     Comunicaciones de Mexico and several of Mexico's long distance
     concessionaires. We compete or will compete to provide services in Mexico
     with numerous other systems integration, value-added and voice and data
     services providers, some of which focus their efforts on the same customers
     we target. In addition to these competitors, recent and pending
     deregulation in Mexico may encourage new entrants.

     Moreover, while the WTO Agreement could create opportunities to enter new
     foreign markets, the United States' and other countries' implementation of
     the WTO Agreement could result in new competition from operators previously
     banned or limited from providing services in the United States. This could
     result in increased competition, which could materially and adversely
     effect our business, financial condition and results of operations.

 .    Our Mexican facilities-based license poses risks

     Our Mexican concession is regulated by the Mexican government. The Mexican
     government could grant similar concessions to our competitors, or affect
     the value of our concession. In addition, the Mexican government also has
     (1) authority to temporarily seize all assets related to the Mexican
     concession in the event of natural disaster, war, significant public
     disturbance and threats to internal peace and for other reasons of economic
     or public order and (2) the statutory right to expropriate any concession
     and claim all related assets for public interest reasons. Although Mexican
     law provides for compensation in connection with losses and damages related
     to temporary seizure or expropriation, we cannot assure you that the
     compensation will be adequate or timely.

     The Mexican concession contains several restraints. Specifically, it limits
     the scope and location of our Mexican network and has minimum invested
     capital requirements and specific debt to equity requirements. We cannot
     assure you that:

        - we will be able to obtain financing to finish the Mexican network;
        - if we obtain financing it will be in a timely manner or on favorable
          terms; or
        - we will be able to comply with the Mexican concession's conditions.

     If we fail to comply with the terms of the concession, the Mexican
     government may terminate it without compensation to us. A termination would
     prevent us from engaging in our proposed business.

 .    Rapid changes in technology could place us at a competitive disadvantage

     The markets that we service are characterized by:

                                       16

<PAGE>


        - rapidly changing technology;
        - evolving industry standards;
        - emerging competition; and
        - the frequent introduction of new services, software and other
          products.

     Our success partially depends upon our ability to enhance existing
     products, software and services and to develop new products, software and
     services that meet changing customer requirements on a timely and
     cost-effective basis. We cannot assure you that we can successfully
     identify new opportunities and develop and bring new products, software and
     services to the market in a timely and cost effective manner. We also
     cannot assure you that the products, software, services or technologies
     that others develop will not render our products, software, services or
     technologies non-competitive or obsolete. Furthermore, there is no
     guarantee that products, software or service developments or enhancements
     we introduce will achieve or sustain market acceptance or that they will
     effectively address the compatibility and interoperability issues raised by
     technological changes or new industry standards.

 .    We may not be able to collect large receivables, which could create
     serious cash flow problems

     Some of our carrier services network customers generate large receivable
     balances, often over $500,000 per weekly period. We incur substantial
     direct costs to provide this service since we must pay our carriers in
     Mexico to terminate these calls. If a customer fails to pay a large balance
     on time, our cash flow may be substantially reduced and we would have
     difficulty paying our carriers in Mexico on time. If our Mexican carriers
     suspend services to us, it may affect all our customers.

 .    We may not be able to pay our suppliers on time, causing them to
     discontinue critical services

     We have not always paid all of our suppliers on time due to temporary cash
     shortfalls. Our critical suppliers are COMSAT for satellite transmission
     capacity and Bestel for fiber optic cable. We also rely on various Mexican
     and U.S. long distance companies to complete the intra-Mexico and
     intra-U.S. long distance portion of our calls. For fiscal 2001, the monthly
     average amount due to these suppliers as a group was approximately
     $2,000,000. Critical suppliers may discontinue service if we are not able
     to make payments on time in the future. In addition, equipment vendors may
     refuse to provide critical technical support for their products if they are
     not paid on time under the terms of support arrangements. Our ability to
     make payments on time depends on our ability to raise additional capital or
     improve our cash flow from operations.

 .    We may not be able to make our debt payments on time or meet financial
     covenants in our loan agreements, causing our lenders to repossess critical
     equipment

     We purchased some of our significant equipment with borrowed money,
     including a substantial number of our payphones located in Mexico, our DMS
     250/350 International gateway switch from Nortel, and packet-switching
     equipment from Network Equipment Technologies. We pay these three lenders
     approximately $171,165 on a monthly basis. The Notes to our Consolidated
     Financial Statements included in this Form 10-K include more information
     about our equipment, equipment debt and capital lease obligations. The
     lenders have a security interest in the equipment to secure
     repayment of the debt. This means that the lenders may take possession of
     the equipment and sell it to repay the debt if we do not make our payments
     on time. We have not always paid all of our equipment lenders on time due
     to temporary cash shortfalls. These lenders may exercise their right to
     take possession of certain critical equipment if we are not able to make
     payments on time in the

                                       17

<PAGE>


     future. Our ability to make our payments on time depends on our ability to
     raise additional capital or improve our cash flow from operations. We
     defaulted on our Nortel switch loan agreement as of the end of our fiscal
     year, July 31, 2001, by failing to meet financial covenants related to
     revenues, gross margins and EBITDA. Though we have requested a waiver for
     that default, it appears likely that we will be in default of those
     financial covenants again at the end of the quarter ending October 31,
     2001. Accordingly, we have accounted for our capital lease obligation with
     NTFC as a current liability in our accompanying consolidated financial
     statements. For more information on this expected default, you should see
     the Liquidity and Capital Resources section of this 10-K for the year
     ending July 31, 2001. As of October 29, 2001, we had not yet made payments
     totaling approximately $743,305 related to our capital lease with IBM de
     Mexico. Per the terms of our agreement with IBM de Mexico they have the
     right to call all of the outstanding capital lease facility should we be in
     arrears with our monthly payments. While IBM has not called the capital
     lease facility as of October 29, 2001 the Company has reclassified the
     entire facility to current liabilities as of July 31, 2001. For more
     information on our other loans and capital leases you should see the
     footnotes of this 10-K for the year ended July 31, 2001.

 .    A large portion of our revenue is concentrated among a few customers,
     making us vulnerable to sudden revenue declines

     Our revenues from carrier services currently comprise about 64% of our
     total revenues. The volume of business sent by each customer fluctuates,
     but this traffic is often heavily concentrated among three or four
     customers. During some periods in the past, two of these customers have
     been responsible for 60%-80% of this traffic. Generally, our customers are
     able to re-route their traffic to other carriers very quickly in response
     to price changes. If we are not able to continue to offer competitive
     prices, these customers will find some other supplier and we will lose a
     substantial portion of our revenue very quickly. In addition, mergers and
     acquisitions in our industry may reduce the already limited number of
     customers for our carrier services.

 .    We may not be able to lease transmission facilities we need at cost-
     effective rates

     We do not own all of the transmission facilities we need to complete calls.
     Therefore, we depend on contractual arrangements with other
     telecommunications companies to complete our network. For example, although
     we own the switching and transport equipment needed to receive and transmit
     calls via satellite and fiber optic lines, we do not own a satellite or any
     fiber optic lines and must therefore lease transmission capacity from other
     companies. We may not be able to lease facilities at cost-effective rates
     in the future or enter into contractual arrangements necessary to expand
     our network or improve our network as necessary to keep up with
     technological change.

 .    The carriers on whom we rely for intra-Mexico long distance may not stay in
     business leaving us fewer and more expensive options to complete calls

     There are only 21-licensed Mexican long distance companies, and we
     currently have agreements with five of them. One of these, Avantel, S.A. de
     C.V. has said publicly that it may not continue in the business because of
     its difficulty in achieving a desired profit margin. If the number of
     carriers who provide intra-Mexico long distance is reduced, we will have
     fewer route choices and may have to pay more for this service.

 .    We may have service interruptions and problems with the quality of
     transmission, causing us to lose call volume and customers

                                       18

<PAGE>


     To retain and attract customers, we must keep our network operational 24
     hours per day, 365 days per year. We have experienced service interruptions
     and other problems that affect the quality of voice and data transmission.
     We may experience more serious problems. In addition to the normal risks
     that any telecommunications company faces (such as fire, flood, power
     failure, equipment failure), we may have a serious problem if a meteor or
     space debris strikes the satellite that transmits our traffic, or a
     volcanic eruption or earthquake interferes with our operations in Mexico
     City. If a portion of our network is effected by such an event, a
     significant amount of time could pass before we could re-route traffic from
     one portion of our network to the other, and there may not be sufficient
     capacity on only one portion of the network to carry all of our traffic at
     any given time.

 .    Changes in telecommunications regulations may harm our competitive position

     Historically, telecommunications in the U.S. and Mexico have been closely
     regulated under a monopoly system. As a result of the Telecommunications
     Act of 1996 in the U.S. and new Mexican laws enacted in the 1990's, the
     telecommunications industry in the U.S. and Mexico are in the process of a
     revolutionary change to a fully competitive system. U.S. and Mexican
     regulations governing competition are evolving as the market evolves. For
     example, FCC regulations now permit the regional Bell operating companies
     (former local telephone monopolies such as Southwestern Bell) to enter the
     long distance market if certain conditions are met. The entry of these
     formidable competitors into the long distance market will make it more
     difficult for us to establish a consumer customer base. There may be
     significant regulatory changes that we cannot even predict at this time. We
     cannot be sure that the governments of the U.S. and Mexico will even
     continue to support a migration toward a competitive telecommunications
     market.

 .    Regulators may challenge our compliance with laws and regulations causing
     us considerable expense and possibly leading to a temporary or permanent
     shut down of some operations

     Government enforcement and interpretation of the telecommunications laws
     and licenses is unpredictable and is often based on informal views of
     government officials and ministries. This is particularly true in Mexico
     and certain of our target Latin American markets, where government
     officials and ministries may be subject to influence by the former
     telecommunications monopoly, such as Telmex. This means that our compliance
     with the laws may be challenged. It could be very expensive to defend this
     type of challenge and we might not win. If we were found to have violated
     the laws that govern our business, we could be fined or denied the right to
     offer services.

 .    Our operations may be affected by political changes in Mexico and other
     Latin American countries

     The majority of our foreign operations are in Mexico. The political and
     economic climate in Mexico is more uncertain than in the United States and
     unfavorable changes could have a direct impact on our operations in Mexico.
     The Mexican government exercises significant influence over many aspects of
     the Mexican economy. For example, a newly elected set of government
     officials could decide to quickly reverse the deregulation of the Mexican
     telecommunications industry economy and take steps such as seizing our
     property, revoking our licenses, or modifying our contracts with
     Mexican suppliers. A period of poor economic performance could reduce the
     demand for our services in Mexico. There might be trade disputes between
     the United States and Mexico that result in trade barriers such as
     additional taxes on our services. The Mexican government might also decide
     to restrict the conversion of pesos into dollars or restrict the transfer
     of dollars out of Mexico. These types of changes, whether they occur or are
     only threatened, could have a material adverse

                                       19

<PAGE>


     effect on our results of operations and would also make it more difficult
     for us to obtain financing in the United States.

 .    If the value of the Mexican Peso declines relative to the Dollar, we
     will have decreased revenues as stated Dollars

     Approximately 15% of ATSI's revenue is collected in Mexican Pesos. If the
     value of the Peso relative to the Dollar declines, that is, if Pesos are
     convertible into fewer Dollars, then our revenues, which are stated in
     dollars, will decline. We do not engage in any type of hedging transactions
     to minimize this risk and do not intend to do so.

                           RISKS RELATED TO FINANCING

 .    The terms of our preferred stock include disincentives to a merger or other
     change of control, which could discourage a transaction that would
     otherwise be in the interest of our stockholders

     In the event of a change of control of ATSI, the terms of the Series D
     Preferred Stock permit the holder to choose either to receive whatever cash
     or stock the common stockholders receive in the change of control
     transaction as if the Series D stock Preferred Stock had been converted, or
     to require us to redeem the Series D Preferred Stock at $1,560 per share.
     If all of the current 1,642 shares currently outstanding were outstanding
     at the time of a change of control, this could result in a payment to the
     holder of approximately $2,560,000. The possibility that we might have to
     pay this large amount of cash would make it more difficult for us to agree
     to a merger or other opportunity that might arise even though it would
     otherwise be in the best interest of the stockholders.

 .    We may have to redeem the Series D and Series E Preferred Stock for a
     substantial amount of cash, which would severely restrict the amount of
     cash available for our operations.

     The terms of the Series D Preferred Stock require us to redeem the stock
     for cash in two circumstances in addition to the change of control
     situation described in the immediately preceding risk factor.

     First, the terms of the Series D Preferred Stock prohibit the holder from
     acquiring more than 11,509,944 shares of our common stock, which is 20% of
     the amount of shares of common stock outstanding at the time we issued the
     Series D Preferred Stock. The terms of the Series D Preferred Stock also
     prohibit the holder from holding more than 5% of our common stock at any
     given time. Due to the floating conversion rate, the number of shares of
     common stock that may be issued on the conversion of the Series D Preferred
     Stock increases as the price of our common stock decreases, so we do not
     know the actual number of shares of common stock that the Series D
     Preferred Stock will be convertible into. On the second anniversary of the
     issuance of the Series D Preferred Stock we are required to convert all
     remaining unconverted Series D Preferred Stock. If this conversion would
     cause the holder to exceed either of these limits, then we must redeem the
     excess shares of Series D Preferred Stock for cash equal to $1,270 per
     share, plus accrued but unpaid dividends.

     Second, if we refuse to honor a conversion notice or a third party
     challenges our right to honor a conversion notice by filing a lawsuit, the
     holder may require us to redeem any shares it then holds for $1,270 per
     share. If all 1,642 shares currently outstanding were outstanding at the
     time of redemption, this would result in a cash payment of approximately
     $2,085,000 plus accrued and

                                       20

<PAGE>

     unpaid dividends. If we were required to make a cash payment of this size,
     it would severely restrict our ability to fund our operations.

     Similarly, the Series E Preferred Stock requires mandatory redemption if
     (a) we fail to: issue shares of common stock upon conversion, remove
     legends on certificates representing shares of common stock issued upon
     conversion or to fulfill certain covenants set forth in the Securities
     Purchase Agreement between ATSI and the holders of the Series E Preferred
     Stock; (b) we fail to obtain effectiveness of the registration statement
     covering the shares of common stock to be issued upon the conversion of the
     Series E Preferred Stock prior to March 11, 2001; (c) certain bankruptcy
     and similar events occur; (d) we fail to maintain the listing of the common
     stock on the Nasdaq National Market, the Nasdaq Small Cap Market, the AMEX
     or the NYSE; or (e) our long distance concession license from the Republic
     of Mexico is terminated or limited in scope by any regulatory authorities.
     The Redemption Price equals the greater of (x) 125% of the stated value
     ($1,000) plus 6% per annum of the stated value plus any conversion default
     payments due and owing by ATSI and (y) the product of (i) the highest
     number of shares of common stock issuable upon conversion times (ii) the
     highest closing price for the common stock during the period beginning on
     the date of first occurrence of the mandatory redemption event and ending
     one day prior to the date of redemption minus the amount of money we
     receive upon the exercise of the investment options provided in the Series
     E Preferred Stock which, upon conversion allows the holders to purchase an
     additional 0.8 share of ATSI common stock for each share of ATSI common
     stock received upon conversion.

 .    We may redeem our preferred stock only under certain circumstances, and
     redemption requires us to pay a significant amount of cash and issue
     additional warrants; therefore we are limited as to what steps we may take
     to prevent further dilution to the common stock if we find alternative
     forms of financing

     We may redeem the Series A Preferred Stock only after the first anniversary
     of the issue date, and only if the market price for our common stock is
     200% or more of the conversion price for the Series A Preferred Stock. The
     redemption price for the Series A stock is $100 per share plus accrued and
     unpaid dividends. We may redeem the Series D Preferred Stock only if the
     price of our common stock falls below $9.00, the price on the date of
     closing the Series D Preferred Stock. The redemption price is $1,270 per
     share, plus accrued but unpaid dividends, plus an additional warrant for
     the purchase of 150,000 shares of common stock. Subject to certain
     conditions, we have the right to redeem the Series E Preferred Stock if, at
     any time after October 11, 2001, on any trading day and for a period of 20
     consecutive trading days prior thereto, the closing bid price is less than
     $1.24. In the event that we are able to find replacement financing that
     does not require dilution of the common stock, these restrictions would
     make it difficult for us to "refinance" the preferred stock and prevent
     dilution to the common stock.

                  RISKS RELATING TO MARKET FOR OUR COMMON STOCK

 .    The price of our common stock has been volatile and could continue to
     fluctuate substantially

     Our common stock is traded on the AMEX. The market price of our common
     stock has been volatile and could fluctuate substantially based on a
     variety of factors, including the following:

         -     announcements of new products or technologies innovations by us
               or others;
         -     variations in our results of operations;
         -     the gain or loss of significant customers;
         -     the timing of acquisitions of businesses or technology licenses;

                                       21

<PAGE>

         -     legislative or regulatory changes;

         -     general trends in the industry;

         -     market conditions; and

         -     analysts' estimates and other events in our industry.

 .    Future sales of our common stock in the public market could lower our stock
     price

     Future sales of our common stock in the public market could lower our
     stock price and impair our ability to raise funds in new stock offerings.
     As of October 25, 2001, we had 80,600,302 shares of common stock
     outstanding, of which our affiliates held approximately 3,908,667 shares,
     and 14,916,837 shares issuable upon exercise of outstanding options and
     warrants, of which approximately 4,560,170 were held by affiliates. In
     addition, we had 13,132,307 shares reserved for issuance upon conversion of
     our outstanding Series A, D and E Preferred Stock (subject to adjustment).
     The shares held by our affiliates are "restricted shares" and, accordingly,
     may not be sold publicly except in compliance with Rule 144. The remaining
     outstanding shares of our common stock and the shares issuable upon
     conversion of our preferred stock and exercise of warrants are freely
     tradable. Our recent Series F and Series G Preferred Stock could result in
     an approximate increase of 3,100,00 shares of common stock, although they
     are not freely tradable and could not be sold publicly except in compliance
     with Rule 144. In addition, we may issue a significant number of additional
     shares of common stock as consideration for acquisitions or other
     investments as well as for working capital. Sales of a substantial amount
     of common stock in the public market, or the perception that these sales
     may occur, could adversely affect the market price of our common stock
     prevailing from time to time in the public market and could impair our
     ability to raise funds in additional stock offerings.

 .    We will likely continue to issue common stock or securities convertible
     into common stock to raise funds we need, which will further dilute your
     ownership of ATSI and may put additional downward pricing pressure on the
     common stock

     Since we continue to operate at a cash flow deficit, we will continue to
     need additional funds to stay in business. At this time, we are not likely
     to be able to borrow enough money to continue operations on terms we find
     acceptable so we expect to have to sell more shares of common stock or more
     securities convertible in common stock. Convertible securities will likely
     have similar features to our existing preferred stock, including conversion
     at a discount to market. The sale of additional securities will further
     dilute your ownership of ATSI and put additional downward pricing pressure
     on the stock.

     From August 1, 2000 through October 25, 2001, we issued approximately
     25,600,000 new shares of common stock on a fully diluted basis, which
     represents approximately 24% of our fully diluted outstanding common stock.
     The fully diluted outstanding common stock includes an assumed number of
     shares of common stock that have not yet been issued, but are issuable upon
     conversion of convertible preferred stock, warrants and stock options

 .    The potential dilution of your ownership of ATSI will increase as our stock
     price goes down, since our preferred stock is convertible at a floating
     rate that is a discount to the market price

     Our Series A, D, E, F and G Preferred Stock is convertible into common
     stock based on a conversion price that is a discount to the market price
     for ATSI's common stock. The conversion price for the Series A, Series F
     and Series G Preferred Stock is reset each year on the anniversary of the
     issuance of the stock, and the conversion price for the Series D and Series
     E Preferred Stock floats with the

                                       22

<PAGE>

     market on a day-to-day basis. For each series, the number of shares of
     common stock that will be issued on conversion increases as the price of
     our common stock decreases. Therefore, as our stock price falls, the
     potential dilution to the common stock increases, and the amount of pricing
     pressure on the stock resulting from the entry of the new common stock into
     the market increases.

 .    Sales of common stock by the preferred holders may cause the stock price to
     decrease, allowing the preferred stock holders to convert their preferred
     stock into even greater amounts of common stock, the sales of which would
     further depress the stock price

     The terms of the preferred stock may amplify a decline in the price of our
     common stock since sales of the common stock by the preferred holders may
     cause the stock price to fall, allowing them to convert into even more
     shares of common stock, the sales of which would further depress the stock
     price.

 .    The potential dilution of your ownership of ATSI resulting from our Series
     D and Series E Preferred Stock will increase if we sell additional common
     stock for less than the conversion price applicable to the Series D and
     Series E Preferred Stock

     The terms of the Series D and Series E Preferred Stock require us to adjust
     the conversion price if we sell common stock or securities convertible into
     common stock at a greater discount to market than that provided for the
     Series D Preferred Stock and at less than the lower of the market price or
     the conversion price with respect to the Series E Preferred Stock.
     Therefore, if we sell common stock or securities convertible into common
     stock in the future on more favorable terms than the discounted terms, we
     will have to issue even more shares of common stock to the holders than
     initially agreed on.

 .    The issuance of our convertible preferred stock may violate the rules of
     The American Stock Exchange, which could result in the delisting of our
     common stock causing us to be traded as an on over-the-counter bulletin
     board stock which could negatively impact our stock price and our ability
     to raise additional capital

     The rules of The American Stock Exchange, or the AMEX, require that the
     voting rights of existing stockholders may not be disparately reduced or
     restricted through any corporate action or issuance. The AMEX has stated in
     its interpretive materials relating to the exchange rules that floating
     priced convertible securities that vote on an as converted basis, such as
     our Series A Preferred Stock, raise voting rights concerns because of the
     possibility that, due to a decline in the price of the underlying common
     stock the preferred stock holder will having voting rights disproportionate
     to its investment in our company. These interpretive materials also
     indicate that the AMEX may view the issuance of floating rate convertible
     securities, such as our Series D or Series E Preferred Stock as a violation
     of their rule against engaging in operations which are contrary to the
     public interest since the returns on securities of this type may become
     excessive compared with those of public investors in our common stock.

     Should we be delisted from the AMEX, it would be necessary for us to trade
     as an over-the-counter bulletin board stock. It is likely that the act of
     being delisted would depress our stock price allowing preferred stock
     holders to convert their preferred stock into greater amounts of common
     stock, the sale of which could further depress our stock price.
     Additionally, it is likely that it may be more difficult for us to raise
     additional capital on favorable terms if we were no longer listed on a
     national exchange.

                                       23

<PAGE>

 .    We expect to issue additional shares of common stock to pay dividends on
     the preferred stock, further diluting your ownership of ATSI and putting
     additional downward pricing pressure on the common stock

     The Series A and Series D Preferred Stock require quarterly dividends of
     10% and 6% per annum, while our Series F and Series G Preferred Stock
     requires quarterly dividends of 15% per annum. We have the option of paying
     these dividends in shares of common stock instead of cash and we expect to
     use that option. The number of shares of common stock that are required to
     pay the dividends is calculated based on the same floating conversion price
     applicable to the conversion of the preferred stock, so the lower our
     common stock price, the more shares of common stock it takes to pay the
     dividends. The issuance of these additional shares of common stock will
     further dilute your ownership of ATSI and put additional downward pricing
     pressure on the common stock. The amount of dividends accrued as of July
     31, 2001 is approximately $282,294 for our Series A, D, F and G Preferred
     Stock.

 .    You will almost certainly not receive any cash dividends on the common
     stock in the foreseeable future

     Sometimes investors buy common stock of companies with the goal of
     generating periodic income in the form of dividends. You may receive
     dividends from time to time on stock you own in other companies. We have no
     plan to pay dividends in the near future.

 .    If the price of common stock falls to a low price for a substantial period
     of time, the AMEX may delist our common stock

     The AMEX has in the past delisted stock that traded at a minimal price per
     share for an extended period of time. If our common stock falls to this
     level and is delisted, trading in our common stock would be conducted in
     the over-the-counter market on the electronic bulletin board or in the pink
     sheets administered by the NASD. This would likely adversely affect the
     liquidity of the common stock because it would be more difficult for
     stockholders to obtain accurate stock quotations. In addition, if our stock
     were not traded on a national exchange, sales of our stock would likely be
     subject to the SEC's penny stock rules which generally create a delay
     between the time that a stockholder decides to sell shares and the time
     that the sale may be completed.

 .    Our Certificate of Incorporation and Bylaws and Delaware law could make it
     less likely that our stockholders receive a premium for their shares in an
     unsolicited takeover attempt

     Certain provisions of our certificate of incorporation, our bylaws and the
     Delaware General Corporation Law could, together or separately, discourage
     potential acquisition proposals or delay or prevent a change in control.
     Currently, those provisions include a classified board of directors, a
     prohibition on written consents in lieu of meetings of the stockholders and
     the authorization to issue up to 10,000,000 shares of preferred stock and
     up to 200,000,000 shares of common stock. Our board of directors has the
     power to issue any or all of these additional shares without stockholder
     approval, subject to the rules of the AMEX that require stockholder
     approval of the issuance of common stock or securities convertible into
     common stock equal to or in excess of 20.0% of the number of shares of
     common stock or the voting power outstanding before the issuance. The
     preferred shares can be issued with such rights, preferences and
     limitations as may be determined by the board. The rights of the holders of
     common stock will be subject to, and may be adversely affected by, the
     commitments or contracts to issue any additional shares of common stock or
     any shares of preferred stock. Authorized and unissued preferred stock and
     common stock could delay,

                                       24

<PAGE>

     discourage, hinder or preclude our unsolicited acquisition, could make it
     less likely that the stockholders receive a premium for their shares as a
     result of any such attempt and could adversely affect the market price of,
     and the voting and other rights of, the holders of outstanding shares of
     common stock.

ITEM 2.  PROPERTIES

     Our executive offices, principal teleport facility and control center are
located at our leased facilities in San Antonio, Texas, consisting of 23,100
square feet. The lease expires July 2008, and has two five-year renewal options.
We pay annual rent of $244,850 (increasing to $282,705 for the remaining term)
under the lease and are responsible for taxes and insurance. GlobalSCAPE, Inc.'s
offices are located at its leased facility in San Antonio, Texas, consisting of
14,553 square feet. The lease expires July 2008. GlobalSCAPE, Inc. pays annual
rent of $174,636 per year and is responsible for taxes and insurance. Management
believes our leased facilities are suitable and adequate for their intended use.

ITEM 3.  LEGAL PROCEEDINGS

     In March 2001, ATSI-Texas was sued by Comdisco for breach of contract for
failing to pay lease amounts due under a lease agreement for telecommunications
equipment. Comdisco claims that the total amount loaned pursuant to the lease
was $926,185 and that the lease terms called for 36 months of lease payments.
Comdisco is claiming that ATSI only paid thirty months of lease payments. ATSI
disputes that the amount loaned was $926,185 since we only received $375,386 in
financing. We have paid over $473,000 in lease payments and, thus, believe that
we have satisfied our obligation under the lease terms. Although Comdisco has
since filed for bankruptcy protection, we are still in the midst of litigation.
We believe that we have a justifiable basis for our position in the litigation
and that we will be able to resolve the dispute without a material adverse
effect on our financial condition.

     In July 2001, we were notified by the Dallas Appraisal District that our
administrative appeal of the appraisal of our office in the Dallas InfoMart was
denied. The property was appraised at over $6 million dollars. The property
involved includes our Nortel DMS 250/300 switch, associated telecommunications
equipment and office furniture and computers.

     In September 2001, ATSI filed an appeal in Dallas County Court. While this
appeal will likely be settled, we believe the possible impact, if any would not
have an adverse effect on our results of operations.

     In 1999 ATSI filed a Demand for Arbitration seeking damages for breach of
contract from Twister Communications. Twister had previously filed a Demand for
Arbitration against ATSI, but has since filed for bankruptcy and has not pursued
any discovery in this matter. We have a filed a creditor's claim in the
bankruptcy proceeding but it is unlikely that we will be able to recover any
value from Twister. Additionally, there has been no activity in the arbitration
matter for over eighteen months and it is unlikely that Twister will be able to
pursue this matter.

     On June 16, 1999, our subsidiary, ATSI Texas initiated a lawsuit in
District Court, Bexar County, Texas against PrimeTEC International, Inc., Mike
Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of
conduct. Under an agreement signed in late 1998, PrimeTEC was to provide quality
fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's former president
who negotiated the fiber lease and Vartec is PrimeTEC's parent, which was to
provide the fiber capacity. The delivery of the route in early 1999 was a
significant component of our operational and sales goal for the

                                       25

<PAGE>

year and the failure of our vendor to provide the capacity led to our
negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher cost.

     In November 2000, ATSI -Texas settled its lawsuit against PrimeTEC and
Vartec. The settlement called for a cash payment to ATSI of $500,000 and an
additional $500,000 in services purchased from ATSI by Vartec. The services were
provided during a period of approximately four months. Vartec has continued as a
customer of ATSI after finishing the settlement period.

     We are also a party to additional claims and legal proceedings arising in
the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.

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

     There were no submissions of matters to a vote of security holders during
the fourth quarter of our fiscal year.

                                    PART II.
                                    --------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our Common Stock is quoted on the AMEX under the symbol "AI". From December
1997 to February 14, 2000 our Common Stock was traded on the NASD: OTCBB under
the symbol "AMTI". The table below sets forth the high and low bid prices for
the Common Stock from August 1, 1999 through February 14, 2000 as reported by
NASD: OTCBB and from February 15, 2000 through October 25, 2001 as reported by
AMEX. These price quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
               Fiscal 2000                                         High               Low
               ----------------------------------------------------------------------------------
<S>                                                               <C>                 <C>
               First - ........................................   $ 1 11/32           $ 45/64
               Second - .......................................   $ 2 29/32           $ 45/64
               Third - ........................................   $ 9 7/16            $21/2
               Fourth - .......................................   $ 6 5/16            $4 1/2

               Fiscal 2001 ....................................   High                Low
               ------------------------------------------------   -------------------------------
               First - ........................................   $ 4                 $1 3/8
               Second - .......................................   $ 1 13/16           $  3/8
               Third - ........................................   $ 1.34              $ 0.40
               Fourth - .......................................   $ 0.70              $ 0.36

               Fiscal 2002 ....................................   High                Low
               -----------------------------------------------------------------------------------
               First - (through October 25, 2001) .............   $ 0.42              $ 0.30
</TABLE>

         At October 25, 2001, the closing price of our Common Stock as reported
by AMEX was $0.30 per share. As of October 25, 2001, we had approximately 15,000
stockholders, including both beneficial

                                       26

<PAGE>

and registered owners. The terms of our Series A, Series D, Series E, Series F
and Series G Preferred Stock restrict us from paying dividends on our Common
Stock until such time as all outstanding dividends have been fulfilled related
to the Preferred Stock. ATSI has not paid dividends on our common stock the past
three years and does not expect to do so in the foreseeable future.

         During the three most recent fiscal years, we have had sales of
unregistered securities as follows:

         On January 6, 1999, we issued 20,000 shares of our common stock for
services related to a previous private placement. We also issued 16,643 shares
to an individual for consulting services provided for the month of January in
the amount of $7,500.

         In February 1999, we issued 279,430 shares of our common stock with a
market value of approximately $203,750 in completion of our acquisition in 1998
of certain customer contracts.

         In March 1999 we issued 11,330 shares of Series A preferred stock for
approximately $1,133,000. Additionally, we issued 1,141 shares of Series A
preferred stock to a company for services rendered in connection with placement
of the Series A preferred stock. As noted in Note 8 of the accompanying
financial statements, the Series A preferred stock converts to common stock at a
discount to market at an Initial Conversion Price calculated at closing. The
conversion price is reset each anniversary date at the lower of 75% of the then
calculated conversion price or 75% of the initial conversion price. At no time
can the conversion price be reset lower than 75% of the initial conversion
price. The Series A preferred stock accrues dividends at the rate of 10% per
annum.

         In April 1999, we issued 12,416 shares of Series A preferred stock for
approximately $1.2 million. Additionally, we issued 700 shares of Series A
preferred stock and paid $14,556 to two companies for services rendered in
connection with the placement of the Series A preferred stock. As noted above
the Series A preferred stock converts at a discount to market at an Initial
Conversion Price calculated at closing. The conversion price is reset each
anniversary date at the lower of 75% of the then calculated conversion price or
75% of the initial conversion price. At no time can the conversion price be
reset lower than 75% of the initial conversion price. The Series A preferred
stock accrues dividends at the rate of 10% per annum. In April 1999, we also
issued 59,101 shares in lieu of $25,000 cash to an individual in accordance with
an agreement signed previously in which he guaranteed up to $500,000 of our
debt. Lastly, we issued 503,387 shares of common stock in a private placement at
a price of $0.60 per share on April 13, 1999. For each share purchased the
investors received a warrant entitling them to purchase an additional share at
an exercise price of $0.70 per share for a period of one year. In conjunction
with this private placement we issued 58,339 to two companies for services
rendered in connection with the private placement of common stock.

         In July 1999 we issued 2,000 shares of Series B preferred stock for
approximately $2 million. Additionally, we issued a warrant for 50,000 shares of
common stock at an exercise price of $1.25 to the purchaser of the Series B
preferred stock. We also issued a warrant for an additional 50,000 shares of
common stock at an exercise price of $1.25 and paid $200,000 to a company as a
finder's fee for introducing us to the investor. As noted in Note 8 the Series B
preferred stock also converts to common stock at a discount to market at the
lower of an initial conversion price or 78% of the five lowest closing
bid prices of the ten days preceding conversion. The Series B preferred stock
accrues dividends at the rate of 6% per annum. Subsequent to July 31, 1999, the
Series B preferred stock was registered with the SEC in a Registration Statement
on Form S-3 (File No. 333-84115) filed August 19, 1999.

         A Registration Statement on Form S-3 (File No. 333-89683) on which we
registered 2,076,001 shares of common stock was declared effective September 8,
2000. This common stock was issuable

                                       27

<PAGE>

under the terms of our 6% Series C Cumulative Convertible Preferred Stock and
our 6% Series D Cumulative Convertible Preferred Stock. We did not receive any
of the proceeds of the sale of common stock registered on this Form S-3. We
received $500,000 and $3,000,000 of proceeds upon the issuance of the Series C
Preferred Stock in September 1999 and the Series D Preferred Stock in February
2000. We incurred expenses in connection with the issuance of the Series C and
Series D Preferred Stock and the registration of the underlying common stock as
follows (approximate amounts):

               Legal fees                         $25,000.00
               Registration fees                    2,910.94
               Printing & Miscellaneous            13,500.00
                                                  ----------
               Total                              $41,410.94

         A Registration Statement on Form S-3 (File No. 333-35846) on which we
registered 3,227,845 shares of common stock was declared effective September 8,
2000. This common stock was issuable under the terms of our 10% Series A
Cumulative Convertible Preferred Stock, $2.2 million of convertible notes plus
accrued interest and the conversion of a note payable for approximately
$440,000. We did not receive any of the proceeds of the sale of common stock
registered on this Form S-3. We received $1,000,000, $2.2 million and $1,000,000
of proceeds upon the original issuance of the Series A Preferred Stock in
February 2000, the convertible notes issued in March 1997 and the note payable
issued in October 1997. We incurred expenses in connection with the issuance of
the Series A Preferred Stock and the registration of the underlying common
stock, of all the above shares, as follows (approximate amounts):

               Legal fees                         $25,000.00
               Registration fees                    4,306.51
               Printing & Miscellaneous            10,500.00
                                                  ----------
               Total                              $39,806.51

         In our second and third quarter 10-Q's for fiscal 2000 and the first,
second and third quarter 10-Q's for fiscal 2001 we noted additional sales of
unregistered securities. Further detail regarding these issuances can be found
in the 2/nd/ and 3/rd/ quarter 10-Q's for fiscal 2000 and the 1/st/, 2/nd/ and
3/rd/ quarter 10-Q's for fiscal 2001.

         In June 2001, we issued 6,500 shares of our Series G preferred stock
for approximately $650,000 of cash proceeds. As noted in Note 3 of our
consolidated financial statements, our Series G preferred stock converts to
common stock at a discount to market originally defined as the Initial
Conversion Price. On each Anniversary Date up to and including the second
Anniversary Date, the Conversion Price on any unconverted Preferred Stock plus
any accumulated, unpaid dividends will be reset to be equal to the average
closing price of the stock for the five (5) preceding trading days. The Series G
preferred stock accrues dividends at 15% per annum. We currently have not filed
a Registration statement on Form S-3 to register these shares. The cash proceeds
were used for working capital needs.

         For those securities not registered with the SEC exemptions are claimed
according to Section 4(2) of the Securities Act of 1933 and SEC Regulation (D).


ITEM 6.  SELECTED FINANCIAL AND OPERATING DATA.

The following selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and The Company's Consolidated Financial Statements
and the Notes thereto included elsewhere herein.

                                       28

<PAGE>

<TABLE>
<CAPTION>
                                                                                 Years ended July 31,
                                                                                 --------------------
                                                                1997         1998         1999       2000        2001
                                                                ----         ----         ----       ----        ----
                                                                       (In thousands of $, except per share data)
<S>                                                            <C>         <C>         <C>         <C>         <C>
Consolidated Statement of Operations
Data:
Operating revenues:
 Retail services                                                $ 13,976    $ 19,632    $ 12,626    $  9,572    $  6,836
 Network services                                                  1,698      13,362      19,250      24,729      29,063
 Internet e-commerce                                                 564       1,526       2,642       5,128       5,445
                                                                --------    --------    --------    --------    --------
 Total operating revenues                                         16,228      34,520      34,518      39,429      41,344
Operating expenses:
 Cost of services                                                 12,792      22,287      21,312      26,798      28,539
 Selling, general and administrative                               6,312      12,853      12,652      14,884      17,786
 Bad debt                                                            735       1,024       2,346         898         241
 [GRAPHIC REMOVED HERE]Depreciation and amortization                 591       1,822       3,248       4,681       4,434
                                                                --------    --------    --------    --------    --------

 Total operating expenses                                         20,430      37,986      39,558      47,261      51,000
 Loss from operations                                             (4,202)     (3,466)     (5,040)     (7,832)     (9,656)
                                                                --------    --------    --------    --------    --------
 Net loss                                                       $ (4,695)   $ (5,094)   $ (7,591)   $(17,138)   $(12,784)
                                                                ========    ========    ========    ========    ========
Per share information:
 Net loss                                                       $  (0.18)   $  (0.12)   $  (0.16)   $  (0.30)   $  (0.18)
                                                                --------    --------    --------    --------    --------
 Weighted average common shares outstanding                       26,807      41,093      47,467      56,851      71,180
                                                                --------    --------    --------    --------    --------

Consolidated Balance Sheet Data:
 Working capital (deficit)                                      $    195    $ (5,687)   $ (6,910)   $ (5,251)   $ (9,345)
 Current assets                                                    5,989       5,683       5,059       5,441       3,631
 Total assets                                                     15,821      24,251      24,154      26,894      23,363
 Long-term obligations, including current portion                  3,912       8,303      10,168       6,750       5,738
 Total stockholders' equity                                        6,936       7,087       6,137      10,978       6,256
</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

SPECIAL NOTE: Certain Statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Securities Act. See page
3 for additional factors relating to such statements.

     The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three fiscal years ended July 31, 1999,
2000, and 2001. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information included
elsewhere in this annual report on Form 10-K. For purposes of the following
discussion, fiscal 1999 or 1999 refers to the year ended July 31, 1999, fiscal
2000 or 2000 refers to the year ended July 31, 2000 and fiscal 2001 or 2001
refers to the year ended July 31, 2001.

                                       29

<PAGE>

General

         ATSI Communications, Inc. is an international carrier serving the
rapidly expanding communications markets in and between Latin America and the
United States. The Company's mission is to connect the Americas with exceptional
communications services guided by our core values that drive everything we do.
The Company's strategy is to become a dominant provider of services to
businesses and consumers in this American/Latin American corridor through the
deployment of a high quality, `next generation' network. Founded in 1993, the
Company generates its traffic from more than 650 retail points of presence
throughout Mexico, as well as from relationships with major carriers based in
the United States. ATSI carries the traffic generated from these sources over a
hybrid, redundant satellite and fiber-based ATM network between the United
States and Mexico, as well as a satellite-based network between the United
States, Costa Rica and El Salvador.

         The Company's current core focus today is on the communications
corridor between the United States and Mexico. Already one of the two largest
international communications corridors in the world, this corridor is growing
due to increasing phone density in Mexico and large-scale emigration of Mexicans
to the United States. The Company is uniquely positioned within this growing
market niche as one of only a handful of viable carriers, and the only operating
company whose focus is international services, as opposed to domestic services.

         Operationally, the Company's strength lies in its framework of
licenses, interconnection agreements and business relationships in Mexico, as
well as in its customer relationships and industry knowledge in the United
States. The Company has over 400 employees based in Mexico, and operates Mexican
subsidiaries with licenses that allow it to sell local and long distance
traffic, transport long distance traffic, and operate a network utilizing
packet-switching technology. Utilizing these strengths, the Company has
leveraged off of the networks of third parties to build a reliable customer
base, and has established its own international satellite and fiber-based
network to long haul consumer, corporate and carrier-generated traffic between
the U.S. and Mexico.

         We also own approximately 70% of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies.

         As discussed in Note 12 to our consolidated financial statements we
have determined that we have three reportable operating segments: 1) U.S Telco;
2) Mexico Telco; and 3) Internet e-commerce.

         Additionally, we have determined that our U.S. and Mexican subsidiaries
should be reported as separate segments although many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Network services and Retail services. All of the carrier services revenues is
recorded in the U.S. Telco segment. GlobalSCAPE, Inc. and its operations are
accounted for exclusively as a part of the Internet e-commerce operating
segment.

         Our consolidated financial statements have been prepared assuming that
we will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of July 31, 2001. Additionally, we have had
recurring negative cash flows from operations with the exception of the
three-month period ended January 31, 1998. For the reasons stated in Liquidity
and Capital Resources and subject to the risks referred to in Liquidity and
Capital Resources, we expect improved results of operations and liquidity in
fiscal 2002. However, we cannot assure you that this will be the case.

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Results of Operations

         The following table sets forth certain items included in our results of
operations in thousands of dollar amounts and as a percentage of total revenues
for the years ended July 31, 1999, 2000 and 2001.

<TABLE>
<CAPTION>
                                                                 Year Ended July 31,
                                        -------------------------------------------------------------------
                                            1999                        2000                    2001
                                        ----------------          ----------------       ------------------
                                         $            %            $            %          $             %
                                         -            -            -            -          -             -
<S>                                     <C>         <C>           <C>           <C>      <C>             <C>
Operating revenues
------------------
Telco services
   Carrier services                      $  14,123   41%           $   22,191    57%       $   26,349     64%
   Network services                          5,127   15%                2,538     6%            2,714      7%
   Retail services                          12,626   37%                9,572    24%            6,836     16%
Internet e-commerce                          2,642    7%                5,128    13%            5,445     13%
                                        ----------                -----------            ------------
Total operating revenues                    34,518  100%               39,429   100%           41,344    100%

Cost of services                            21,312   62%               26,798    68%           28,539     69%
                                        ----------                -----------            ------------

Gross margin                                13,206   38%               12,631    32%           12,805     31%

Selling, general and
  administrative expenses                   12,652   37%               14,884    38%           17,786     43%

Bad debt expenses                            2,346    7%                  898     2%              241      0%

Depreciation and amortization                3,248    9%                4,681    12%            4,434     11%
                                        ----------                -----------            ------------

Operating loss                              (5,040) -15%               (7,832)  -20%           (9,656)   -23%

Other income (expense), net                 (1,696)  -5%               (2,221)   -5%             (919)    -2%
                                        ----------                ------------           -------------

Income tax                                       -    0%                    -     0%              223      0%

Minority interest                                -    0%                    -     0%              246      0%

Net loss                                    (6,736) -20%              (10,053)  -25%          (10,552)   -26%

Less: preferred stock dividends               (855)  -2%               (7,085)  -18%           (2,232)    -5%
                                        ----------                ------------           -------------

Net loss to common shareholders          $  (7,591) -22%           $  (17,138)  -43%       $  (12,784)   -31%
                                        ==========                ============           =============
</TABLE>

Year Ended July 31, 2001 Compared to Year ended July 31, 2000

     Operating revenues. Operating revenues increased each successive quarter
during the last three quarters of the year to total $41.3 million for fiscal
2001, a 5% increase over the prior year's total. Each of the last two quarters
during the year produced record revenue results since the Company began
operating in 1994 as the Company experienced increasing demand for its services.
In order for this revenue trend to continue, the Company will need to expand its
network and switch capacity to allow it to process additional volumes of
traffic, as it was operating at near-peak capacity as of July 31, 2001. In
October 2001, the Company began adding capacity to both its switch and its
network backbone to allow

                                       31

<PAGE>

it to do so. The Company will also need to increase its terminating capacity
with third party carriers to process traffic outside of its own network backbone
in Mexico. Because some of these third party carriers experienced network
problems during August 2001, total revenues for the quarter ending October 31,
2001 will not be as high as for the quarter ending July 31, 2001. However,
monthly revenues for both September and October 2001 returned to the same levels
experienced during the quarter ended July 31, 2001.

     Carrier services revenues increased approximately $4.2 million, or 19% from
2000 to 2001. Although the average price per unit decreased approximately $0.02
between years our international communications traffic increased approximately
34.0 million units, or 43%. This increase in units somewhat offset the declining
average price per unit caused by competitive market pressures. Beginning in
January 2001, the Company began to experience a stabilization of its underlying
cost structure, and the prices at which it could provide its services. During
the last two quarters of 2001, the Company did not experience a decline in the
average price of its carrier services revenues.

     Retail services revenues significantly decreased by approximately $2.7
million, or 29% between periods. This decrease was primarily a result of the
decline in postpaid revenues, as the Company's integrated prepaid revenues
increased approximately $176,000 between years. As a result of the decreasing
volumes of postpaid calls generated and processed by the Company, and lower
margin associated with those calls, the Company stopped providing these services
to most non-owned locations, closed its operator center in November 1999 and
began utilizing the services of third-party owned operator centers. Management
does not expect postpaid revenues to contribute significantly to the Company's
operating results in 2002.

     Our Internet e-commerce services increased approximately $317,000, or 6%
between periods. This increase was due primarily to increases in the average
price per unit as registrations remained relatively flat year to year. The
increase in price per unit was due primarily to two factors. In fiscal 2001,
GlobalSCAPE sold fewer multi-seat licenses than in fiscal 2000. Additionally,
the introduction of CuteFTP Pro led to an increase in the average price per unit
of total registrations.

     Cost of Services. Cost of services increased approximately $1.7 million, or
6%, between years and increased slightly as a percentage of revenues from 68% to
69%. During the first half of fiscal 2001, the variable cost associated with our
carrier services product was a much higher percentage of revenues. In response
to this trend, management focused its efforts on improving carrier services
margins. Two key responses were the installation of Nortel Passport equipment,
which allowed us to increase the capacity of our packet-switching network
backbone, and the addition of alternate carriers of our traffic in Mexico, which
allowed us to lower our cost per unit for international traffic. Each alternate
carrier offers additional capacity to the Company, as well as lower variable
costs of transporting traffic into areas into which they have their own
proprietary network. As a result of the reductions in cost and the improvements
realized from the installation of the Nortel Passport equipment, the Company
recognized improved carrier service gross margins during the latter half of 2001
as compared to the first half of 2001. In an effort to maintain or improve
margins, management is focusing its efforts on increasing the terminating
capacity within Mexico and enhancing routing diversity so that it can provide
additional carrier services and do so in a more cost efficient manner.
Management believes its efforts will allow the Company to offer a competitively
priced service to our existing and potential customers as well as manage our
costs. In addition, the Company will increase its efforts to utilize its long
distance concession in Mexico. In order to do so, the Company will need to
extend its network beyond its current backbone to extend to the local
telecommunications infrastructure available in Mexico. By doing so, it should be
able to lower its cost per call by reducing its reliance on third party long
distance carriers.

                                       32

<PAGE>

     Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
19%, or approximately $2.9 million, between periods. As a percentage of
revenues, these expenses increased from 38% to 43% year to year. Our e-commerce
subsidiary's SG&A increased $2.5 million, or 86% between periods. The majority
of the subsidiary's increase relates to increased salaries and wages,
professional fees related to SEC filings and financial audits, R&D costs related
to existing product enhancements and the development of new products, and
approximately $636,000 of non-cash compensation expense associated with the
granting of stock options. SG&A costs associated with our telco operations
increased approximately $400,000, due primarily to expenses of approximately
$1.0 million related to severance packages and professional fees related to SEC
filings, strategic research services and the terminated Genesis transaction.
Exclusive of these non-recurring transactions telco operation's SG&A decreased
approximately $600,000 between the two periods compared. This decrease is
attributable to management implementing expense cutting measures as well as
maintaining its focus on necessary SG&A spending.

     Depreciation and Amortization. Depreciation and amortization decreased
approximately $247,000, or 5%, between periods and declined slightly as a
percentage of revenues from 12% to 11%. The principal reason for the decrease is
related to the Company fully amortizing acquisition cost during fiscal 2000.
This decrease was offset somewhat by depreciation expense associated with new
capital expenditures and amortization related to the purchase of our concession
license.

     Operating Loss. Our operating loss increased approximately $1.8 million, or
23% between periods and increased as a percentage of revenues from 20% to 23%,
due primarily to increased selling, general and administrative expenses.

     Other Income (Expense). Other expense improved approximately $1.3 million,
or 59% between periods. The improvement was primarily a result of three factors.
The first was approximately $495,000 of debt discount expense recognized in
fiscal 2000 associated with our convertible notes and a note payable that was
fully converted in fiscal 2000. Second, in fiscal 2001, we recognized a gain of
$500,000 as a result of a settlement regarding a litigation case with one of our
carrier customers. And finally, in fiscal 2001 we recorded a gain related to the
extinguishment of a liability of approximately $184,000.

     Preferred Dividends. During the year ended July 31, 2001, we recorded
approximately $650,000 of non-cash dividends along with approximately $1.6
million of beneficial conversion feature expense related to our cumulative
convertible preferred stock. This compares to approximately $400,000 of non-cash
dividends and approximately $6.7 million of beneficial conversion feature
expense recognized during the year ended July 31, 2000.

     Minority Interest. As a result of the approximately 27% distribution of
GlobalSCAPE, the consolidated entity recognized minority interest of
approximately $246,000 for the year.

     Net loss to Common Stockholders. The net loss for 2001 improved by
approximately $4.3 million to $12.8 million from the $17.1 million net loss for
2000. The improvement was due primarily to a significant decrease in preferred
dividends recognized during 2001, as well as the improvements in other income
year to year. These improvements were somewhat offset by the increase in
selling, general and administrative expenses from 2000 to 2001.

                                       33

<PAGE>

Year ended July 31, 2000 Compared to Year Ended July 31, 1999

         Operating Revenues. Consolidated revenues for fiscal 2000 totaled $39.4
million, a 14% increase over fiscal 1999's amount of $34.5 million. Telco
revenues (all revenues other than e-commerce) and e-commerce revenues generated
by GlobalSCAPE each increased by approximately $2.4 million between years.
During fiscal 2000, we continued to shift our focus away from certain services,
such as Retail Services and Network Services, toward others services, such as
Carrier Services. This shifting of revenues has been the result of the changing
face of the telecommunications market in Mexico since the demonopolization of
Telmex on January 1, 1997, as well as regulatory and technological advances made
by the Company. Prior to January 1997, limited avenues existed for callers to
make calls from Mexico to the United States. The vast majority of the calls
placed in Mexico had to be made from either a subscribed Telmex line, from a
Telmex payphone on a prepaid basis, or on a postpaid basis by accessing a
U.S.-based operator and billing the call on collect to a valid U.S. address, or
to a valid dollar-denominated credit card. Almost all calls utilized the Telmex
local and long distance network infrastructure. Because of the limited calling
options available in Mexico at the time, the Company set up its own operator
center and processed calls from its own phones and communication centers, as
well as locations owned by others, and did so at premium prices. During this
same time frame, we also focused on selling satellite-based private networks in
an effort to establish a satellite-based network infrastructure between the U.S.
and Mexico, which we felt we would eventually utilize to carry our own
international calls at some point and decrease our dependence on the more
expensive Telmex network infrastructure.

         As of July 31, 2000, 19 long distance concessions had been granted to
companies desiring to compete against the former Telmex monopoly. The entrance
of these alternative long distance providers into the Mexican market has
resulted in several changes, most notably more fiber optic capacity,
particularly in the crystal triangle made up of Mexico City, Guadalajara and
Monterrey; a steady increase in the calling options available within Mexico; and
a decrease in the cost of long distance phone calls on both a retail and
wholesale basis due to more competition. Callers now have a variety of ways to
make calls from public telephones or cellular telephones, many of which are made
on a prepaid basis at lower premiums than postpaid calls used to be. As a result
of the decreasing volumes of postpaid calls generated and processed by the
Company, and lower margin associated with those calls, the Company stopped
providing these services to most non-owned locations, closed its operator center
in November 1999 and began utilizing the services of third-party owned operator
centers. As such, revenues generated from postpaid services declined from $7.2
million in fiscal 1999 to $3.6 million in fiscal 2000. During fiscal 2000, we
processed approximately 50,000 calls from Mexico as compared to approximately
160,000 in fiscal 1999.

         Fiber optic lines installed during fiscal 2000 have also reduced
satellite-based private network demand in Mexico, causing us to reduce our focus
on selling satellite-based private networks within Mexico. Network services
revenues declined from $5.1 million in fiscal 1999 to $2.5 million in fiscal
2000 due to the loss of customers upon expiration or termination of their
contracts.

     In 1997, the Company acquired Sinfra, which owns licenses allowing the
Company to transport traffic internationally on a packet-switched basis.
Utilizing these licenses, the Company set up a satellite-based network between
San Antonio, Texas and Monterrey and Mexico City, Mexico. The Company also
leased fiber optic capacity between San Antonio, Dallas, Monterrey and Mexico
City in July 1999. Together, these two networks represent the Company's fixed
costs of operation today. Armed with this hybrid network, the Company has
focused its efforts during the past two years on maintaining its retail presence
of payphones and communications centers in Mexico, and adding third party
traffic to its network between the U.S. and Mexico. As such, integrated prepaid
traffic from its

                                       34

<PAGE>

Mexican locations has remained relatively constant during the past three years,
and the amount of carrier traffic transported by the Company has increased
dramatically during this time frame. However, increased fiber optic capacity
into the major metropolitan areas of Mexico has resulted in pricing pressures
and much lower per-minute revenues for carrier services. Large increases in
volumes have resulted in comparatively smaller revenue increases, and lower
margins on carrier services. While the number of minutes of carrier traffic
processed by the Company increased by 146% from 78.6 million minutes in fiscal
1999 to 193.4 million minutes in fiscal 2000, revenues increased by only 57%
from $14.1 million in fiscal 1999 to $22.2 million in fiscal 2000.

         All of the above revenues are included in our U.S. Telco results in
Footnote 12 in the accompanying financial statements as external revenues with
the exception of approximately $483,000 of Network services revenues and
$535,000 of Retail services revenues included in our external Mexico Telco
results.

         Integrated prepaid service revenues, which are generated by calls
processed by us without live or automated operator assistance, increased only
slightly between years. A majority of these revenues, stated in U.S. dollars in
the accompanying consolidated financial statements, are generated by calls
processed by our public telephones and communication centers in Mexico in
exchange for immediate cash payment in pesos, the currency in Mexico. While the
number of these calls and consequently the pesos collected increased slightly
between years, those pesos converted into more U.S. dollars during fiscal 2000
as the average exchange rate between years went from 9.77 pesos to the dollar
for fiscal 1999 to 9.50 pesos to the dollar for fiscal 2000. During fiscal 2000,
we generated approximately $70,000 in revenues from the sale of other companies'
services, primarily prepaid calling cards and prepaid cellular packages. These
revenues, included in integrated prepaid, were generated in the U.S. and Mexico
communication centers. With the exception of approximately $24,000 of retail
service revenues included in our U.S. Telco results as external revenues, all of
the above revenues are included in our Mexico Telco results.

         Revenues from GlobalSCAPE, Inc., our e-commerce subsidiary, increased
by approximately $2.5 million or 94% between years. This growth was due
primarily to the increased number of downloads and registrations of products
between periods. Downloads and registrations grew from nearly 4.1 million and
93,000 in fiscal 1999 to approximately 10.8 million and 183,000 in fiscal 2000,
respectively. The increase in downloads has resulted in a corresponding increase
in our revenues as downloads serve as the primary driver of revenues in coming
months as well as increasing the target audience for banner advertisements.

     Cost of Services. Cost of services increased approximately $5.5 million or
26% between years from $21.3 million in fiscal 1999 to $26.8 million in fiscal
2000, and increased as a percentage of revenues from 62% to 68%. The increase in
cost of services was principally attributable to the increased volume of carrier
service business. The shift toward prepaid services away from postpaid services,
which historically were sold at high premiums, in Mexico has also contributed to
lower margins. Our carrier services business is exclusively accounted for in our
U.S. Telco segment. Carrier services revenues increased from 41% to 57% of
overall corporate revenues, period to period. During this timeframe, variable
and fixed costs associated with the Company's carrier services business
increased, causing margins to decrease. This resultant change in our traffic mix
was the primary contributor to an increase in the combined telco operations cost
of services from 66% to 78% from fiscal 1999 to fiscal 2000. As long as carrier
services comprise a large percentage of our revenues, the trend of decreasing
margins as a percentage of revenues will continue unless the Company is able to
negotiate lower costs with its underlying carriers in Mexico, or is able to
extend its network under its long distance concession to decrease its reliance
on the underlying carriers. As such, we continue to desire to produce retail

                                       35

<PAGE>

growth, with a desired ultimate retail/wholesale mix of 70% retail and 30%
wholesale. We cannot estimate when we will be able to achieve this desired mix.

         Selling, General and Administrative (SG&A) Expenses. SG&A expenses
increased 18%, or approximately $2.2 million from fiscal 1999 to fiscal 2000. As
a percentage of revenue, these expenses increased slightly from 37% to 38%. The
increase in SG&A was primarily due to added costs incurred by GlobalSCAPE to
support the introduction of new products into the market, professional fees
related to SEC filings at both GlobalSCAPE and the Company, and personnel growth
within GlobalSCAPE as it prepared to spin-off from ATSI. GlobalSCAPE's increase
in SG&A costs from fiscal 1999 to fiscal 2000 was approximately $1.5 million.
SG&A costs associated with our telco businesses increased approximately $748,000
between periods. The increase is attributable to the opening of communication
centers in the U.S., costs related to our American Stock Exchange listing in
February 2000, professional fees related to SEC filings and merger and
acquisition services, and rent expense as a result of moving the corporate
location. These costs have been included in the SG&A expenses of our U.S. Telco
segment. Non-cash expenses, related to our option plans, decreased from
approximately $545,00 in fiscal 1999 to $346,000 in fiscal 2000.

         Bad Debt Expense. Bad Debt Expense significantly decreased from fiscal
1999 to fiscal 2000 by approximately $1.4 million. In the fourth quarter of
fiscal 1999, we incurred approximately $1.5 million of bad debt expense through
the establishment of reserves related to specific carrier services and private
network customers.

         Depreciation and Amortization. Depreciation and amortization rose
approximately $1.4 million, or 44%, and rose as a percentage of revenues from 9%
to 12% between years. The increased depreciation and amortization is
attributable to an approximate $2.0 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The Company also began providing additional depreciation expense
as a result of a change in accounting estimate for useful lives within its
Mexican subsidiaries. Additionally, the Company fully depreciated approximately
$165,000 of our fixed assets for which we believe there are no associated future
benefits.

         Operating Loss. Our operating loss increased approximately $2.8 million
from 1999 due primarily due to increased cost of services as both a percentage
and in actual dollars, increased SG&A and increased depreciation and
amortization, all of which were discussed above.

         Other Income(expense). Other income (expense) increased approximately
$525,000 between years. This increase was principally attributable to additional
debt discount expense associated with the Company's conversion of convertible
notes and a note payable during fiscal 2000. Other increases in interest expense
are a result of increased indebtedness and capital leases.

     Preferred Stock Dividends. During fiscal 2000, we recorded approximately
$7.1 million of non-cash expense related to cumulative convertible preferred
stock. In addition to cumulative dividends on our Series A, Series B, Series C,
and Series D Preferred Stock, which are accrued at 10%, 6%, 6%, and 6%,
respectively, we have recorded approximately $6.7 million related to the
discount or "beneficial conversion feature" associated with our various
preferred stock issuances. Accounting rules call for us to amortize as a
discount the difference between the market price and the most beneficial
conversion price to the holder over the lesser of the period most beneficial to
the holder or upon exercise of the conversion feature. Due to increases in our
stock price at the time such issuances occurred this "beneficial conversion
feature" has in some instances been substantial. The period over which this
amortization is recorded ranges from immediately for our Series D Preferred
Stock to one year for our

                                       36

<PAGE>

various Series A Preferred Stock issuances. The proceeds of the preferred stock
issuances during fiscal 2000 were approximately $5.7 million. As of July 31,
2000, we had approximately $335,000 of discount recorded related to the
beneficial conversion features of our Series A Preferred Stock issued in
December 1999 which will be amortized over the next four months.

         Net income (loss.) Net loss increased from approximately $7.6 million
to $17.1 million between years. The increase in net loss was due primarily to
increased cost of services as a percentage of revenues, increased SG&A expense,
increased depreciation and amortization and increased preferred stock dividend
expense between years.

Year ended July 31, 1999 Compared to Year Ended July 31, 1998

         Operating Revenues. Operating revenues were relatively flat between
fiscal 1999 and fiscal 1998, due primarily to the decline in retail services,
which was offset by the growth in carrier services, network services and
Internet e-commerce services.

         Carrier service revenues derived from the transport of traffic for
U.S.-based carriers increased as we processed approximately 78.6 million minutes
in 1999 as compared to 46.1 million minutes in 1998. The 70% increase in minutes
did not result in a proportional increase in revenues as competitive and other
market factors caused our revenue per minute to decline from period to period.
Our fourth quarter 1998 agreement with Satelites Mexicanos, S.A. de C.V., or
("SATMEX"), allowed us to secure and resell additional bandwidth capacity. This
increased capacity and flexibility allowed us to increase billings to existing
corporate clients who previously dealt with SATMEX directly and to add
additional retail corporate clients more quickly. All of the above revenues are
included in our U.S. Telco results in Footnote 12 in the accompanying financial
statements as external revenues with the exception of approximately $467,000 of
network services revenues included in our external Mexico Telco results.

         Postpaid service revenues, a component of retail services, decreased
approximately $6.7 million, or 48%, between fiscal 1998 and fiscal 1999. This
decline is principally attributable to our strategy of focusing on providing
international call services from our own payphones and communication centers
(casetas). In July 1998, we ceased providing call services for third-party owned
payphones and hotels in the U.S., Jamaica and the Dominican Republic and
decreased the level of services provided to third-party owned telephones and
hotels in Mexico, as these services did not utilize our core business and the
costs associated with further provision of services did not justify keeping the
business. During fiscal 1999, we processed approximately 160,000 calls from
Mexico as compared to approximately 314,000 for the same period in 1998 and no
calls for third-party owned telephones and hotels in the U.S., Jamaica and the
Dominican Republic as compared to approximately 350,000 calls in 1998. All of
the above revenue is included in our U.S. Telco results in Footnote 12 in the
accompanying consolidated financial statements with the exception of
approximately $465,000 of postpaid service revenues included in our Mexico Telco
results.

     Integrated prepaid service revenues, a second component of retail services,
which are generated by calls processed by us without live or automated operator
assistance, declined approximately $350,000, or 6% between years. A majority of
these revenues, stated in U.S. dollars in the accompanying consolidated
financial statements are generated by calls processed by our public telephones
and communication centers in Mexico in exchange for immediate cash payment in
pesos. While the number of these calls and consequently the pesos collected
increased between years, those pesos converted into fewer U.S. dollars as the
average exchange rate between years went from 8.33 pesos to the dollar for
fiscal 1998 to 9.77 pesos to the dollar for fiscal 1999. All of the above
revenues are included in our Mexico Telco results.

                                       37

<PAGE>

         Revenues from GlobalSCAPE increased approximately $1.1 million or 73%
between years. GlobalSCAPE's purchase of the rights to the source code of
CuteFTP, its flagship product in January 1999, resulted in an enhanced version
of CuteFTP which increased the number of downloads and subsequent purchases.
Additionally, GlobalSCAPE began using its Internet presence to produce ad
revenues in the fourth quarter of 1999.

         Cost of Services. Cost of services decreased approximately $975,000, or
4% between years, and decreased as a percentage of revenues from 65% to 62%. The
decline in cost of services between years was primarily a result of the
contributions of GlobalSCAPE. Prior to GlobalSCAPE's purchase of CuteFTP, it was
obligated to pay royalties to CuteFTP's original author for the right to sell
and distribute CuteFTP. The purchase of the source code eliminated such royalty
fees and improved GlobalSCAPE's and ATSI's gross margins. Gross margins for our
combined telco operations remained flat at 34% between years, in spite of
intense market pressures in our carrier services network transport services,
which is accounted for in our U.S. Telco segment. By eliminating and reducing
certain call services, such as those offered to third-party owned payphones and
hotels in the U.S., Jamaica, the Dominican Republic and Mexico, which did not
fully utilize our own network infrastructure, we were able to move toward
vertical integration of our services and operations and maximize our gross
margins using our own network where possible. As noted previously a majority of
our postpaid call services products are accounted for in our U.S. Telco segment.

         Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased 2%, or approximately $200,000 between years, as we did not incur
expenses incurred in the prior year associated with the exchange of shares
between ATSI-Canada and ATSI-Delaware. As a percentage of revenue, these
expenses remained flat at 37%. We had anticipated that these expenses would
decline as a percentage of revenues, but they did not do so as a result of the
delay of fiber capacity available to us. In the fourth quarter of 1999, we began
to further integrate our two primary operating subsidiaries in our Mexico Telco
segment, Computel and ATSI-Mexico, as we continued to seek ways to lower our
SG&A expenses. Net of non-cash expenses, related to our option plans, SG&A
expenses decreased approximately $300,000.

         Bad Debt Expense. Bad debt expense increased $1.3 million from fiscal
1998 to fiscal 1999. During the fourth quarter of 1999, we established specific
bad debt reserves of approximately $1.5 million related to retail and transport
of network management services. While we have reserved for these customers, we
are actively pursuing collection of amounts owed including legal proceedings
specifically related to approximately $1.2 million of the accounts reserved.
Excluding these specific reserves, bad debt expense declined both as a % of
revenues and in actual dollars between years.

         Depreciation and Amortization. Depreciation and amortization rose
approximately $1.4 million, or 78%, and rose as a percentage of revenues from 5%
to 9% between years. The increased depreciation and amortization is attributable
to an approximate $2.4 million increase in fixed assets between years as well as
increased amortization related to acquisition costs, trademarks and goodwill.
The majority of the assets purchased consisted of equipment which added capacity
to our existing international network infrastructure including the Network
Technologies (N.E.T.) equipment purchased in December 1998 and our new Nortel
DMS 250/300 International Gateway switch purchased in January 1999.

         Operating Loss. Our operating loss increased $1.6 million from 1998
primarily due to increased depreciation and amortization and increased bad debt
expense which more than offset the improvements in gross margin dollars produced
from 1998 to 1999.

                                       38

<PAGE>

         Other Income(expense). Other income (expense) decreased approximately
$70,000 between years. This decrease was principally attributable to the
increase in interest expense from approximately $1.6 million for 1998 to
approximately $1.7 million for 1999.

         Preferred Stock Dividends. During fiscal 1999, we recorded
approximately $855,000 of expense related to cumulative convertible preferred
stock. In addition to cumulative dividends on our Series A and Series B
Preferred Stock, which are accrued at 10% and 6%, respectively per annum, we
have recorded a discount or "beneficial conversion feature" associated with the
issuance of our preferred stock of approximately $1.6 million related to Series
A Preferred Stock, which is being amortized over a twelve-month period and $1.1
million related to Series B Preferred Stock, which is being amortized over a
three-month period.

         Net income (loss.) Net loss increased from approximately $5.1 million
to $7.6 million between years. The increase in net loss was due primarily to
increased bad debt expense, depreciation and amortization and preferred stock
dividends between years.

         Liquidity and Capital Resources

         During the year ended July 31, 2001, we generated negative cash flows
from operations of approximately $6.0 million. The amount of cash used in our
operations is a result of the net loss incurred during the period, the timing of
cash receipts from our customers, as well as activities related to payments to
our vendors. We have historically operated with negative cash flows and have
sought to fund those losses and deficits through the issuance of debt and the
completion of private equity placements.

         For the three-months ended July 31, 2001, after adjustments for
non-cash items (depreciation and amortization, amortization of debt discount,
deferred compensation, provision for losses on accounts receivable and minority
interest), we had a net loss of approximately $441,000. Management of the
operating assets and liabilities, which consist mainly of collections on
accounts receivable and payments made on outstanding payables and accrued
liabilities, produced negative cash flows of approximately $1.7 million,
resulting in negative operating cash flows for the period of $2.1 million. While
we fell short of producing positive cash flows during the quarter, our net loss,
after adjustments for non-cash items, represented a significant improvement over
the quarters ended October 31, 2000 and January 31, 2001, when our net loss,
after adjustments for non-cash items, were $3.2 million and $1.2 million,
respectively. Additionally, our net loss, after adjustments for non-cash items,
was relatively flat compared to the quarter ended April 30, 2001, when our net
loss, after adjustments for non-cash items, was approximately $424,000.

          For the year ended July 31, 2001, our net loss, after adjustments for
non-cash items (depreciation and amortization, amortization of debt discount,
deferred compensation, provision for losses on accounts receivable and minority
interest) was approximately $5.3 million. Management of the operating assets and
liabilities, which consists mainly of collections on accounts receivable and
payments made on outstanding payables and accrued liabilities, produced negative
cash flows of approximately $700,000, resulting in the negative operating cash
flows for the period of $6.0 million.

         During the year ended July 31, 2001, the Company acquired approximately
$1.1 million in equipment which was not financed through capital lease or
financing arrangements. Additional cash outflows included payments of
approximately $1.1 million towards our capital lease obligations and $560,000
towards notes payable.

                                       39

<PAGE>

         During fiscal 2001, we received cash proceeds, net of issuance costs,
of $5.6 million from the issuance of preferred stock, and approximately $900,000
from the issuance of common stock as a result of warrants, stock options, and
investment options exercises. These funds were used to pay down payable balances
as mentioned above, to make payments on our debt and capital lease obligations,
and to purchase additional equipment used in our network operations.

         Altogether, the Company's net operating, investing and financing
activities during the year used approximately $1.4 million in cash during the
year. The Company's working capital deficit at July 31, 2001 was approximately
$9.3 million. This represents a decline of approximately $4.0 million from the
working capital deficit of $5.3 million at July 31, 2000. The Company's current
liabilities include a total of $5.4 million owed to NTFC Capital Corporation and
IBM de Mexico. Although the Company's scheduled payments to these entities for
the twelve months ending July 31, 2002 total only $2.5 million, the Company has
classified all amounts outstanding under the notes as current because it is in
technical default of both notes. As such, each of the lenders could call their
notes as immediately due and payable. The Company does not anticipate this
happening, as the Company has been in various states of default under the notes
historically and the notes have not been called. However, no assurances can be
given that the notes will not be called. All scheduled payments have been made
to NTFC; as of July 31, 2001, the Company is approximately $743,000 behind in
payments to IBM. NTFC has expressed a desire to reset the covenants under the
note in an effort to cure past defaults and avoid future defaults; the Company
has had limited conversations with IBM concerning restructuring of its
obligation.

         The Company's current obligations also include notes payable of
approximately $677,000, approximately $1.2 million owed to Northern Telecom for
the purchase of equipment during the year, and approximately $500,000 owed to
the former owners of Grupo Intelcom, S.A. de C.V., the entity purchased by the
Company in July 2000 and through which the Company obtained its Mexican long
distance concession.

         During fiscal 2001, we focused on enhancing the capacity and efficiency
of our international network backbone between the U.S. and Mexico, adding
alternate carriers to transport our traffic outside of that backbone in Mexico,
and changing the mix of our traffic to better utilize our network capabilities.
The result was an increase in the volume of carrier services traffic transported
over our network quarter to quarter and positive EBITDA for the quarter ended
July 31, 2001. The Company plans to focus on this same revenue stream during at
least the first half of fiscal 2002, as it believes it can produce cash faster
by doing so. In order for these trends to continue, the Company will need to
expand its network and switch capacity to allow it to process additional volumes
of traffic, as it was operating at near-peak capacity as of July 31, 2001. The
Company estimates that it will need to spend approximately $5,000,000 on a pro
rata basis throughout fiscal 2002 for capital expenditures to add capacity to
its network in an effort to generate additional revenues and cut its direct
costs as a percentage of revenues.

         Until we are able to produce positive cash flows from operations on a
recurring basis, and reduce or eliminate our working capital deficit, management
will be faced with deciding whether to use available funds to pay vendors and
suppliers for services necessary for operations, to service our debt
requirements, or to purchase equipment to be used in the growth of our business.
Should our available funds not be sufficient to pay vendors and suppliers, to
service debt requirements and purchase equipment, we will need to continue to
raise additional capital. As noted in the risk factors of this Form 10-K, we
have not always paid all of our suppliers on time. Some of these suppliers are
critical to our operations. These suppliers have given us payment extensions in
the past, although there is no guarantee they will do so in the future.

                                       40

<PAGE>

         During fiscal 2001, we received cash proceeds, net of issuance costs,
of $5.6 million from the issuance of preferred stock, and approximately $900,000
from the issuance of common stock as a result of warrants, stock options, and
investment options exercises. These funds were used to pay down payable balances
as mentioned above, to make payments on our debt and capital lease obligations,
and to purchase additional equipment used in our network operations. The net
result of the Company's operating, investing and financing activities during the
year was a working capital deficit at July 31, 2001 of approximately $9.3
million and cash on hand of approximately $103,000. This represents a decline of
approximately $4.0 million from the working capital deficit of $5.3 million at
July 31, 2000.

         Although the Company produced positive EBITDA results during the last
quarter of fiscal 2001, it will most likely need to enhance those results in
order to obtain any significant amounts of debt funding to meet its capital
expenditure and working capital needs. As such, the Company will most likely
need to complete additional private placements in order to raise the funds to
purchase the equipment needed. Although capital markets have been difficult, the
Company showed an ability to raise funds over the past twelve months. In October
2000, the Company entered into a $10 million facility for the purchase of Series
E Preferred Stock. As of October 2001, approximately $5.5 million of capacity
remains outstanding on this facility, and the facility was extended until
October 2002. The Series E holder participated in two private equity raises in
March and June of 2001, in which the Company raised approximately $4 million.
The Series E holder contributed approximately half of the amount; the remainder
was contributed by individual shareholders. Altogether, the Company raised in
excess of $6.5 million during fiscal 2001, more than the total needed for capex
funding in fiscal 2002. The Company has been successful in raising funds because
of the improvements it has shown throughout the year in its financial
performance; however, no assurances may be given that it will be able to
continue to do so.

         We have limited capital resources available to us, and these resources
may not be available to support our ongoing operations until such time as we are
able to generate positive cash flows from operations. There is no assurance we
will be able to achieve future revenue levels sufficient to support operations
or recover our investment in property and equipment, goodwill and other
intangible assets. 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.

Inflation/Foreign Currency

         Inflation has not had a significant impact on our operations. With the
exception of integrated prepaid services from our communication centers and coin
operated public telephones, almost all of our revenues are generated and
collected in U.S. dollars. Services from our communication centers and public
telephones are generally provided on a "sent-paid" basis at the time of the call
in exchange for cash payment, so we do not maintain receivables on our books
that are denominated in pesos. In an effort to reduce foreign currency risk, we
attempt to convert pesos collected to U.S. dollars quickly and attempt to
maintain minimal cash balances denominated in pesos. Some expenses related to
certain services provided by us are incurred in foreign currencies, primarily
Mexican pesos. The devaluation of the Mexican peso over the past several years
has not had a material adverse effect on our financial condition or operating
results.

                                       41

<PAGE>

Seasonality

         Although it is not a significant portion of our overall revenues our
postpaid services revenues are typically higher on a per phone basis during
January through July, the peak tourism months in Mexico.

Market Risk

         We are subject to several market risks. Specifically, we face commodity
price risks, equity price risks and foreign currency exchange risk.

         Commodity Price Risk
         --------------------

         Certain of our businesses, namely carrier services, operate in an
extremely price sensitive environment. The carrier services business over the
past twelve months has seen significant reductions in the price per minute
charged for transporting minutes of traffic. While we have been able to
withstand these pricing pressures, certain of our competitors are much larger
and better positioned to continue to withstand these price reductions. Our
ability to further absorb these price reductions may be dependent on our ability
to further reduce our costs of transporting these minutes.

         Equity Price Risks
         ------------------

         Until such time as we are able to consistently produce positive cash
flows from operations, we will be dependent on our ability to continue to access
debt and equity sources of capital. While recent history has shown us capable of
raising equity sources of capital; future equity financings and the terms of
those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.

         Foreign Currency Exchange Risk
         ------------------------------

         We face two distinct risks related to foreign currency exchange risk;
transaction risk and translation risk.

         As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, integrated prepaid services
from our own Mexican communication centers and payphones and the transacting of
business in pesos as opposed to U.S. dollars. Historically, we have been able to
minimize foreign currency exchange risk by converting from pesos to U.S. dollars
quickly and by maintaining minimal cash balances denominated in pesos. As we
grow our retail business in Mexico it is likely that we will face increasing
foreign currency transaction risks.

           Historically, we have recorded foreign currency translation
gains/losses due to the volatility of the peso exchange rate as compared to the
U.S. dollar over time. We anticipate we will continue to experience translation
gains/losses in our assets and liabilities, specifically in fixed assets which
are accounted for at historical pesos amounts on the books of our Mexican
subsidiaries but converted to U.S. dollars for consolidation purposes at current
exchange rates.

                                       42

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                                       Page
                                                                                                                       ----
<S>                                                                                                                    <C>
Consolidated Financial Statements of ATSI Communications, Inc. and Subsidiaries

Report of Independent Public Accountants ............................................................................   44

Consolidated Balance Sheets as of July 31, 2000 and 2001 ............................................................   45

Consolidated Statements of Operations for the Years Ended July 31, 1999, 2000 and 2001 ..............................   46

Consolidated Statements of Comprehensive Loss for the Years Ended July 31, 1999, 2000 and 2001 ......................   47

Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1999, 2000 and 2001 ....................   48

Consolidated Statements of Cash Flows for the Years Ended July 31, 1999, 2000 and 2001 ..............................   49

Notes to Consolidated Financial Statements ..........................................................................   50
</TABLE>

                                       43

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Management, Directors and Shareholders of ATSI Communications, Inc.:


We have audited the accompanying consolidated balance sheets of ATSI
Communications, Inc. (a Delaware corporation) and subsidiaries (the Company) as
of July 31, 2000 and 2001, and the related consolidated statements of
operations, comprehensive loss, stockholders' equity and cash flows for the
years ended July 31, 1999, 2000 and 2001. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATSI Communications, Inc. and
subsidiaries as of July 31, 2000 and 2001, and the results of their operations
and their cash flows for the years ended July 31, 1999, 2000 and 2001, in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a working capital deficit,
has suffered recurring losses from operations since inception, has negative cash
flows from operations and has limited capital resources available to support
further development of its operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts including goodwill
and other intangibles or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.

                                                    /s/ ARTHUR ANDERSEN LLP


San Antonio, Texas
October 18, 2001

                                       44

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except share information)

<TABLE>
<CAPTION>
                                                                                         July 31,
                                                                                 --------------------------
                                                                                   2000            2001
                                                                                 ----------      ----------
ASSETS
------
<S>                                                                              <C>             <C>
CURRENT ASSETS:
 Cash and cash equivalents                                                          $1,550            $103
 Accounts receivable, net of allowance of $757 and $92, respectively                 3,186           2,667
 Inventory                                                                              74              75
 Prepaid expenses and other                                                            631             786
                                                                                 ----------      ----------
     Total current assets                                                            5,441           3,631
                                                                                 ----------      ----------

PROPERTY AND EQUIPMENT:                                                             19,393          21,784
 Less - Accumulated depreciation                                                    (8,335)        (11,993)
                                                                                 ----------      ----------
     Net property and equipment                                                     11,058           9,791
                                                                                 ----------      ----------

OTHER ASSETS:
 Goodwill, net                                                                       4,901           4,856
 Concession license, net                                                             4,422           4,208
 Trademarks, net                                                                       570             390
 Other assets                                                                          502             487
                                                                                 ----------      ----------
     Total assets                                                                  $26,894         $23,363
                                                                                 ==========      ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
 Accounts payable                                                                   $3,931          $4,714
 Accrued liabilities                                                                 2,350           2,528
 Notes payable                                                                         544             677
 Convertible debt                                                                      289               -
 Current portion of obligations under capital leases                                 3,411           4,938
 Deferred revenue                                                                      167             119
                                                                                 ----------      ----------
     Total current liabilities                                                      10,692          12,976
                                                                                 ----------      ----------

LONG-TERM LIABILITIES:
 Obligations under capital leases, less current portion                              2,506             123
 Other                                                                                  56             128
                                                                                 ----------      ----------
     Total long-term liabilities                                                     2,562             251
                                                                                 ----------      ----------

MINORITY INTEREST:                                                                       -             351

COMMITMENTS AND CONTINGENCIES:

REDEEMABLE PREFERRED STOCK:
 Series D Cumulative Preferred Stock, 3,000 shares authorized, 3,000
shares issued and                                                                    2,662           1,302
   outstanding at July 31, 2000, 1,642 shares issued and outstanding at
July 31, 2001
 Series E Cumulative Preferred Stock, 10,000 shares authorized, no shares
issued and                                                                               -           2,227
    outstanding at July 31, 2000, 3,490 shares issued and outstanding at
July 31, 2001
STOCKHOLDERS' EQUITY:
 Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A
  Cumulative Convertible Preferred Stock, 50,000 shares authorized, 24,370
  shares issued and outstanding at July 31, 2000, 4,370 shares issued and
  outstanding at July 31, 2001
  Series F Cumulative Convertible Preferred Stock, 10,000 shares
authorized, no shares                                                                    -               -
  issued and outstanding at July 31, 2000, 9,210 shares issued and
outstanding at July 31, 2001
  Series G Cumulative Convertible Preferred Stock, 42,000 shares
authorized, no shares issued                                                             -               -
  and outstanding at July 31, 2000, 6,500 shares issued and outstanding at
July 31, 2001
 Common stock, $0.001 par value, 200,000,000 shares authorized,
67,408,979 issued and
   outstanding at July 31, 2000, 77,329,379 issued and outstanding at July              67              77
31, 2001

 Additional paid in capital                                                         51,625          58,105
 Accumulated deficit                                                               (39,125)        (52,503)
 Warrants outstanding                                                                  417           1,835
 Notes issued to officers                                                           (1,108)              -
 Other comprehensive loss                                                             (779)         (1,246)
 Deferred compensation                                                                (119)            (12)
                                                                                 ----------      ----------
     Total stockholders' equity                                                     10,978           6,256
                                                                                 ----------      ----------

     Total liabilities and stockholders' equity                                    $26,894         $23,363
                                                                                 ==========      ==========
</TABLE>

         The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       45

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                     For the Years Ended July 31,
                                                             1999              2000              2001
                                                           --------          ---------          ---------
<S>                                                        <C>               <C>                <C>    <C>
OPERATING REVENUES:
  Telco services
      Carrier services                                     $ 14,123           $ 22,191           $ 26,349
      Network services                                        5,127              2,538              2,714
      Retail services                                        12,626              9,572              6,836
  Internet e-commerce                                         2,642              5,128              5,445
                                                           --------           --------           --------

     Total operating revenues                                34,518             39,429             41,344
                                                           --------           --------           --------

OPERATING EXPENSES:
  Cost of services                                           21,312             26,798             28,539
  Selling, general and administrative                        12,652             14,884             17,786
  Bad debt expense                                            2,346                898                241
  Depreciation and amortization                               3,248              4,681              4,434
                                                           --------           --------           --------

     Total operating expenses                                39,558             47,261             51,000
                                                           --------           --------           --------

OPERATING LOSS                                               (5,040)            (7,832)            (9,656)

OTHER INCOME (EXPENSE):
  Interest income                                                59                 77                109
  Other income (expense), net                                   (10)                50                981
  Interest expense                                           (1,745)            (2,348)            (2,009)
                                                           --------           --------           --------

     Total other income (expense)                            (1,696)            (2,221)              (919)
                                                           --------           --------           --------

LOSS BEFORE INCOME TAX EXPENSE
   MINORITY INTEREST                                         (6,736)           (10,053)           (10,575)

INCOME TAX EXPENSE                                                -                  -                223

MINORITY INTEREST                                                 -                  -                246
                                                           --------           --------           --------

NET LOSS                                                     (6,736)           (10,053)           (10,552)

LESS: PREFERRED STOCK DIVIDENDS                                (855)            (7,085)            (2,232)
                                                           --------           --------           --------

NET LOSS TO COMMON SHAREHOLDERS                             ($7,591)          ($17,138)          ($12,784)
                                                           ========           ========           ========

BASIC AND DILUTED LOSS PER COMMON SHARE                      ($0.16)            ($0.30)            ($0.18)
                                                           ========           ========           ========

WEIGHTED AVERAGE
   COMMON SHARES OUTSTANDING                                 47,467             56,851             71,180
                                                           ========           ========           ========
</TABLE>

        The accompanying notes are an integral part of these consolidated
                             financial statements.

                                       46

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                     For the Years Ended July 31,
                                                                 1999           2000            2001
                                                                 ----           ----            ----
<S>                                                             <C>             <C>            <C>
 Net loss to common shareholders                                ($7,591)       ($17,138)       ($12,784)

 Other comprehensive (loss) income, net of tax of $0:

     Foreign currency translation adjustments                     ($714)       $     79           ($467)
                                                               --------        --------        --------

 Comprehensive loss to common shareholders                      ($8,305)       ($17,059)       ($13,251)
                                                               ========        ========        ========
</TABLE>

        The accompanying notes are an integral part of these consolidated
                              financial statements

                                       47

<PAGE>


                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (In thousands)

<TABLE>
<CAPTION>

                                                          Preferred Stock      Common Stock         Additional      Accumulated
                                                        ------------------  ------------------
                                                         Shares    Amount    Shares    Amount    Paid In Capital       Deficit
                                                        --------  --------  --------  --------  -----------------  -------------
<S>                                                     <C>       <C>       <C>       <C>       <C>                <C>
BALANCE, July 31, 1998                                                  0    45,604       $46            $22,248       ($14,396)
  Issuances of common shares for cash                                         2,706         3              1,637
  Issuances of common shares for services                                        96                           40
  Issuances of common shares for acquisition                                    279                          179
  Issuances of preferred stock                               26                                            4,176
  Deferred compensation                                                                                      344
  Dividends                                                                                                                 (80)
  Amortization of equity discount                                                                            775           (775)
  Compensation expense
  Cumulative effect of translation adjustment
  Net loss                                                                                                               (6,736)
                                                        --------  --------  --------  --------  -----------------  -------------
BALANCE, July 31, 1999                                       26         0    48,685       $49            $29,399       ($21,987)
  Issuances of common shares for cash                                         8,470         8              6,279
  Issuances of common shares for services                                       419                           25
  Issuances of common shares for acquisition                                    400                        2,921
  Issuances of preferred stock                               25                                            2,646
  Conversion of preferred stock                             (27)              6,802         7                287
  Conversion of convertible debt to common shares                             2,633         3              3,115
  Dividends                                                                                                                (432)
  Amortization of equity discount                             -                                            6,653         (6,653)
  Compensation expense
  Warrants issued with redeemable preferred stock
  Warrants issued with debt                                                                                  300
  Notes receivable from shareholders
  Cumulative effect of translation adjustment
  Net loss                                                                                                              (10,053)
                                                        --------  --------  --------  --------  -----------------  -------------
BALANCE, July 31, 2000                                       24         0    67,409       $67            $51,625       ($39,125)
  Issuances of common shares for cash                                         1,943         2                931
  Issuances of common shares for services                                        80                           33
  Issuances of common shares for liquidating damages                            150                          250
  Issuances of common shares for acquisition                                                                (457)
  Issuances of preferred stock                               16                                            1,104
  Conversion of preferred stock                             (20)              8,181         8              2,655
  Notes receivable from shareholders                                         (2,033)       (2)            (1,106)
  Conversion of convertible debt to common shares                             1,600         2                802
  Dividends                                                                                                              (1,214)
  Amortization of equity discount                                                                          1,612         (1,612)
  Compensation expense                                                                                       661
  Warrants issued with redeemable preferred stock
  Warrants issued with liquidating damages                                                                    (5)
  Cumulative effect of translation adjustment
  Net loss                                                                                                              (10,552)
                                                        --------  --------  --------  --------  -----------------  -------------
BALANCE, July 31, 2001                                       20         0    77,330       $77            $58,105       ($52,503)
                                                        ========  ========  ========  ========  =================  =============

<CAPTION>
                                                                        Notes        Cumulative                         To
                                                    Warrants      receivable from    Translated      Deferred      Stockholders'

                                                   Outstanding        officers       Adjustment    Compensation        Equity
                                                  -------------  ------------------ ------------  --------------  ---------------
<S>                                               <C>            <C>                <C>           <C>             <C>
BALANCE, July 31, 1998                                       0                   0        ($144)          ($667)         $ 7,087
  Issuances of common shares for cash                                                                                      1,640
  Issuances of common shares for services                                                                                     40
  Issuances of common shares for acquisition                                                                                 179
  Issuances of preferred stock                                                                                             4,176
  Deferred compensation                                                                                    (344)               0
  Dividends                                                                                                                  (80)
  Amortization of equity discount                                                                                              0
  Compensation expense                                                                                      545              545
  Cumulative effect of translation adjustment                                              (714)                            (714)
  Net loss                                                                                                                (6,736)
                                                  -------------  ------------------ ------------  --------------  ---------------
BALANCE, July 31, 1999                                       0                   0        ($858)          ($466)         $ 6,137
  Issuances of common shares for cash                                                                                      6,287
  Issuances of common shares for services                                                                                     25
  Issuances of common shares for acquisition                                                                               2,921
  Issuances of preferred stock                                                                                             2,646
  Conversion of preferred stock                                                                                              294
  Conversion of convertible debt to common shares                                                                          3,118
  Dividends                                                                                                                 (432)
  Amortization of equity discount                                                                                              0
  Compensation expense                                                                                      347              347
  Warrants issued with redeemable preferred stock          417                                                               417
  Warrants issued with debt                                                                                                  300
  Notes receivable from shareholders                                        (1,108)                                       (1,108)
  Cumulative effect of translation adjustment                                                79                               79
  Net loss                                                                                                               (10,053)
                                                  -------------  ------------------ ------------  --------------  ---------------
BALANCE, July 31, 2000                                    $417             ($1,108)       ($779)          ($119)         $10,978
  Issuances of common shares for cash                                                                                        933
  Issuances of common shares for services                                                                                     33
  Issuances of common shares for liquidating damag                                                                           250
  Issuances of common shares for acquisition                                                                                (457)
  Issuances of preferred stock                                                                                             1,104
  Conversion of preferred stock                                                                                            2,663
  Notes receivable from shareholders                                         1,108                                             0
  Conversion of convertible debt to common shares                                                                            804
  Dividends                                                                                                               (1,214)
  Amortization of equity discount                                                                                              0
  Compensation expense                                                                                      107              768
  Warrants issued with redeemable preferred stock        1,418                                                             1,418
  Warrants issued with liquidating damages                                                                                    (5)
  Cumulative effect of translation adjustment                                              (467)                            (467)
  Net loss                                                                                                               (10,552)
                                                  -------------  ------------------ ------------  --------------  ---------------
BALANCE, July 31, 2001                                  $1,835              $    0      ($1,246)           ($12)         $ 6,256
                                                  =============  ================== ============  ==============  ===============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       48

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   For the Years Ended July 31,
                                                                        1999                  2000                  2001
                                                                -------------------   --------------------   -------------------
<S>                                                             <C>                   <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                 ($6,736)              ($10,053)             ($10,552)
  Adjustments to reconcile net loss to net cash used in
   operating activities-
     Depreciation and amortization                                           3,248                  4,681                 4,434
     Amortization of debt discount                                             346                    442                   372
     Deferred compensation                                                     545                    347                   768
     Foreign currency gain                                                       -                      -                  (326)
     Minority Interest                                                           -                      -                  (246)
     Provision for losses on accounts receivable                             2,346                    898                   241
     Changes in current assets and liabilities-
      Decrease (increase) in accounts receivable                            (2,568)                  (678)                  121
       (Increase) decrease in prepaid expenses and other                    (1,632)                    88                  (482)
       Decrease in accounts payable                                         (1,139)                  (776)                 (268)
       Increase (decrease) in accrued liabilities                            1,857                    462                    (3)
       Decrease in deferred revenue                                           (191)                   (66)                  (47)
                                                                -------------------   --------------------   -------------------
Net cash used in operating activities                                       (3,924)                (4,655)               (5,988)
                                                                -------------------   --------------------   -------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                          (956)                (1,993)               (1,122)
  Acquisition of business, net of cash acquired                               (171)                (1,334)                 (102)
                                                                -------------------   --------------------   -------------------
Net cash used in investing activities                                       (1,127)                (3,327)               (1,224)
                                                                -------------------   --------------------   -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of debt                                               437                    745                   776
  Net (decrease) increase in short-term borrowings                            (127)                    80                   116
  Payments on debt                                                            (802)                  (781)                 (560)
  Capital lease payments                                                      (941)                (1,424)               (1,106)
  Proceeds from issuance of preferred stock,
     net of issuance costs                                                   4,176                  5,646                 5,639
  Proceeds from issuance of common stock,
     net of issuance costs                                                   1,596                  4,887                   900
                                                                -------------------   --------------------   -------------------
Net cash provided by financing activities                                    4,339                  9,153                 5,765
                                                                -------------------   --------------------   -------------------

NET INCREASE (DECREASE) IN CASH                                               (712)                 1,171                (1,447)

CASH AND CASH EQUIVALENTS, beginning of year                                 1,091                    379                 1,550
                                                                -------------------   --------------------   -------------------

CASH AND CASH EQUIVALENTS, end of year                                     $   379               $  1,550              $    103
                                                                ===================   ====================   ===================
</TABLE>

   The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       49

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         1.    DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

       The accompanying consolidated financial statements are those of ATSI
Communications, Inc. and our subsidiaries ("ATSI" or the "Company"). We were
formed on June 6, 1996 under the laws of the state of Delaware for the express
purpose of effecting a "Plan of Arrangement" with American TeleSource
International, Inc., which was incorporated under the laws of the province of
Ontario, Canada (hereinafter referred to as "ATSI-Canada"). The Plan of
Arrangement called for the stockholders of ATSI-Canada to exchange their shares
on a one-for-one basis for shares of ATSI. On April 30, 1998, shareholders of
ATSI-Canada approved the Plan of Arrangement, and on May 11, 1998, ATSI-Canada
became a wholly owned subsidiary of ATSI. ATSI is publicly traded on the
American Stock Exchange ("AMEX") under the symbol "AI".

       Through our subsidiaries, we provide retail and carrier communications
services within and between the United States (U.S.) and select markets within
Latin America. Utilizing a framework of licenses, interconnection and service
agreements, network facilities and distribution channels, our intentions are to
provide U.S standards of reliability to Mexico and other markets within Latin
America which have historically been underserved by telecommunications
monopolies. As of July 31, 2001, our operating subsidiaries are as follows:

       ATSI Comunicaciones, S.A. de C.V., ("ATSI-COM" a Mexican corporation)
       ---------------------------------------------------------------------

       Utilizing our 30-year license which we acquired in July 2000, ATSI-COM
provides long distance services and the right to interconnect with local
providers in Mexico. See discussion of acquisition of this concession license in
Note 11.

       American TeleSource International, Inc. ("ATSI-Texas" a Texas
       -------------------------------------------------------------
       corporation)
       ------------

       ATSI-Texas contracts with third-party operator services companies for the
provision of postpaid services from public telephones and communication centers
owned by our subsidiaries in Mexico, as well as some third party-owned public
telephones, communication centers and hotels in Mexico. Although these calls
originate in Mexico, they are terminated and billed in the United States and
Mexico through agreements that ATSI-Texas has with these third party entities.
Additionally, ATSI-Texas contracts with third parties on behalf of TeleSpan and
Sinfra for some carrier services and private network contracts.

       American TeleSource International de Mexico, S.A. de C.V.
       ---------------------------------------------------------
                ("ATSI-Mexico" a Mexican corporation)
                -------------------------------------

       ATSI-Mexico owns and operates coin-operated public telephones in Mexico.
Utilizing our 20-year comercializadora license which expires in February 2017,
ATSI purchases telephone lines and resells local, long distance and
international calls from public telephones connected to the lines. Direct dial,
or integrated prepaid calls may be made from the telephones using pesos

                                       50

<PAGE>

or quarters, and users may use the services of ATSI-Texas to place calls to the
U.S. by billing calls to valid third parties, credit cards or calling cards.

       Sistema de Telefonia Computarizada, S.A. de C.V( "Computel"a Mexican
       --------------------------------------------------------------------
       corporation)
       ------------

       Computel is the largest private operator of communication centers in
Mexico, operating approximately 134 communication centers in 66 cities. Direct
dial calls may be made from the communication centers using cash or credit
cards, and users may use the services of ATSI-Texas to place calls to the U.S.
by billing calls to valid third parties, credit cards or calling cards. Computel
utilizes telephone lines owned by ATSI-Mexico.

       Servicios de Infraestructura, S.A. de C.V ("Sinfra"a Mexican corporation)
       -------------------------------------------------------------------------

       Utilizing our 15-year Teleport and Satellite Network license which
expires in May 2009, Sinfra owns and operates our teleport facilities in
Monterrey and Mexico City, Mexico. These facilities are used for the provision
of international private network services. Sinfra also owns a 20-year Packet
Switching Network license which expires in October 2014.

       TeleSpan, Inc. ("TeleSpan" a Texas corporation)
       -----------------------------------------------

       TeleSpan owns and operates our teleport facilities in the U.S. and Costa
Rica. TeleSpan contracts with U.S. based entities and carriers seeking
facilities or increased capacity into Mexico, Costa Rica and El Salvador. For
network services into Mexico, TeleSpan utilizes facilities owned by Sinfra.

       GlobalSCAPE, Inc. ("GlobalSCAPE" a Texas corporation)
       -----------------------------------------------------

       GlobalSCAPE markets CuteFTP(TM) and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD"). See Note 8 related to the distribution of a portion of
ATSI's ownership in GlobalSCAPE.

       ATSI de CentroAmerica (a Costa Rican corporation)
       -------------------------------------------------

       ATSI de CentroAmerica markets international private network services in
Costa Rica and other Latin American countries and looks to develop business
opportunities in Latin American countries through joint ventures and
interconnection agreements with existing telecommunication companies.

       2.    FUTURE OPERATIONS, LIQUIDITY, CAPITAL RESOURCES AND VULNERABILITY
             DUE TO CERTAIN CONDITIONS

       The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to a going concern. For the period
from December 17, 1993 to July 31, 2001, we have incurred cumulative net losses
of $52.5 million. We had a working capital deficit of $5.3 million at July 31,
2000 and $9.3 million at July 31, 2001 and we had negative cash flows from
operations of $3.9 million, $4.7 million and $6.0 million for the years

                                       51

<PAGE>

ended July 31, 1999, 2000 and 2001, respectively. As of July 31, 2001, we are in
default on our leases with IBM de Mexico and NTFC Capital Corporation. See
further discussion regarding these leases in Note 6. We have limited capital
resources available to us, and these resources may not be available to support
our ongoing operations until such time as we are able to generate positive cash
flows from operations. There is no assurance we will be able to achieve future
revenue levels sufficient to support operations or recover our investment in
property and equipment, goodwill and other intangible assets. 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.

       We are likely to require additional financial resources in the near term
and could require additional financial resources in the long-term to support our
ongoing operations. We plan on securing funds through equity offerings and
entering into lease or long-term debt financing agreements to raise capital.
There can be no assurances, however, that such equity offerings or other
financing arrangements will actually be consummated or that such funds, if
received, will be sufficient to support existing operations until revenue levels
are achieved sufficient to generate positive cash flow from operations. If we
are not successful in completing additional equity offerings or entering into
other financial arrangements, or if the funds raised in such stock offerings or
other financial arrangements are not adequate to support us until a successful
level of operations is attained, we have limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.

       During fiscal 2001, we focused on enhancing the capacity and efficiency
of our international network backbone between the U.S. and Mexico, adding
alternate carriers to transport our traffic outside of that backbone in Mexico,
and changing the mix of our traffic to better utilize our network capabilities.
The result was an increase in the volume of carrier services traffic
transported. The Company plans to focus on this same revenue stream during at
least the first half of fiscal 2002. In order for these trends to continue, the
Company will need to expand its network and switch capacity to allow it to
process additional volumes of traffic, as it was operating at near-peak capacity
as of July 31, 2001. The Company intends to utilize most of the funds raised for
capital expenditures to add capacity to its network to enable it to generate
additional revenues and cut its direct costs as a percentage of revenues.

       3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       The consolidated financial statements have been prepared on the accrual
basis of accounting under accounting principles generally accepted in the United
States (GAAP). All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
for comparative purposes.

       Estimates in Financial Statements
       ---------------------------------

       The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and

                                       52

<PAGE>

liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results may differ
from those estimates.

       Revenue Recognition Policies
       ----------------------------

       We recognize revenue from our integrated prepaid and postpaid services as
such services are performed, net of unbillable calls. Revenue from carrier
services and private network contracts are recognized when service commences for
service commencement fees and monthly thereafter as services are provided.
Revenues related to our Internet products are recognized at the time of
delivery, as we bear no additional obligation beyond the provision of our
software products other than post-contract customer service. Post-contract
customer costs approximated $33,000, $58,000 and $96,000 at July 31, 1999, 2000
and 2001, respectively.

       Foreign Currency Translation
       ----------------------------

       Until January 1, 1999, Mexico's economy was designated as highly
inflationary. GAAP requires the functional currency of highly inflationary
economies to be the same as the reporting currency. Accordingly, the
consolidated financial statements of all of our Mexican subsidiaries, whose
functional currency is the peso, were remeasured from the peso into the U.S.
dollar for consolidation. Monetary and nonmonetary assets and liabilities were
remeasured into U.S. dollars using current and historical exchange rates,
respectively. The operating activities of these subsidiaries were remeasured
into U.S. dollars using a weighted-average exchange rate. The resulting
translation gains and losses were charged directly to operations. As of January
1, 1999, Mexico's economy was deemed to be no longer highly inflationary.
According to GAAP requirements the change from highly inflationary to non-highly
inflationary requires that the nonmonetary assets be remeasured using not the
historical exchange rates, but the exchange rate in place as of the date the
economy changes from highly inflationary to non-highly inflationary. As such,
our non-monetary assets in Mexico have been remeasured using the exchange rate
as of January 1, 1999. Subsequent to January 1, 1999, monetary assets and
non-monetary assets are translated using current exchange rates and the
operating activity of these Mexican subsidiaries remeasured into U.S. dollars
using a weighted average exchange rate. The effect of these translation
adjustments are reflected in the other comprehensive income account shown in
stockholders'equity.

       In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". This statement provides accounting
and reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with recourse. The adoption of
these statements has not had a material impact on the financial position or
results of operations of the Company.

       Impuesto al Valor Agregado (Value-Added Tax) ("IVA")
       ----------------------------------------------------

       Our Mexican subsidiaries are required to report a value-added tax related
to both purchases and sales of services and assets, for local tax reporting.
Accordingly, each subsidiary maintains both an IVA receivable and IVA payable
account on their subsidiary ledgers. For consolidated reporting purposes, we net
our Mexican subsidiaries IVA receivable and IVA payable accounts as allowed by
regulatory requirements in Mexico. For the year ended July 31,


                                       53

<PAGE>

2000, this netting of IVA accounts resulted in the elimination of IVA
receivable, a corresponding reduction in IVA payable of approximately $225,000
and a net IVA payable of $228,000. For the year ended July 31, 2001, this
netting of IVA accounts resulted in the elimination of IVA payable, a
corresponding reduction in IVA receivable of approximately $2,101,000 and a net
IVA receivable of $289,000.

       Basic and Diluted Loss Per Share
       --------------------------------

       Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1999, 2000 and 2001. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive. We
have also excluded the convertible preferred stock described in Note 8, from the
computation of the weighted average number of common shares outstanding, as its
effect will also be antidilutive.

       Property and Equipment
       ----------------------

       Property and equipment are stated at cost. Depreciation and amortization
are computed on a straight-line basis over the estimated useful lives of the
related assets, which range from one to fifteen years. Expenditures for
maintenance and repairs are charged to expense as incurred. Direct installation
costs and major improvements are capitalized.

       Effective for the fiscal years beginning after July 31, 1996, we follow
rules as prescribed under SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". SFAS 121 requires an
assessment of the recoverability of our investment in long-lived assets to be
held and used in operations whenever events or circumstances indicate that their
carrying amounts may not be recoverable. Such assessment requires that the
future cash flows associated with the long-lived assets are estimated over their
remaining useful lives and an impairment loss is recognized when the
undiscounted future cash flows are less than the carrying value of such assets.
As of July 31, 2001, we have determined that the estimated undiscounted future
cash flows associated with our long-lived assets are greater than the carrying
value of such assets and that no impairment loss needs to be recognized.

       Goodwill, Concession License, Contracts, Trademarks and Other Assets
       --------------------------------------------------------------------

       At July 31, 2000 and 2001, other assets consisted primarily of goodwill,
trademarks, acquisition costs and concession license costs. For the years ended
July 31, 2000 and 2001, goodwill, primarily related to the purchase of Computel,
was $5,310,490 and $5,412,859 respectively, net of accumulated amortization of
$408,908 and $557,137, respectively. Goodwill is amortized over 40 years. For
the years ended July 31, 2000 and 2001, concession license costs were
approximately $4,421,931 and $4,428,931, net of accumulated amortization of $0
and $221,097. The concession license costs are being amortized over 28 years,
the remaining life of the concession license. As of July 31, 2000 and 2001,
other assets included $898,943 related to the purchase of the rights to
CuteFTP(TM), net of accumulated amortization of $329,096 and $509,298,
respectively. This trademark is being amortized over an estimated five-year
life. As of July 31, 2000 and 2001, other assets also included approximately
$502,000 and $487,000, not

                                       54

<PAGE>

identified as goodwill, concession license, acquisition costs or trademarks. As
it relates to SFAS 121, as of July 31, 2001, we have determined that the
estimated future cash flows associated with our goodwill, concession license,
and other intangible assets are greater than the carrying value of such assets
and that no impairment loss needs to be recognized. For the years ended July 31,
1999, 2000 and 2001, we recorded amortization expense of $925,440, $1,075,566
and $602,289, respectively related to our other assets.

         Income Taxes
         ------------

         We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the provisions of SFAS 109, we recognize
deferred tax liabilities and assets based on enacted income tax rates that are
expected to be in effect in the period in which the deferred tax liability or
asset is expected to be settled or realized. A change in the tax laws or rates
results in adjustments in the period in which the tax laws or rates are changed.

         Research and Development
         ------------------------

         Our subsidiary, GlobalSCAPE, Inc. incurs research and development
expenses. These research and development expenses include all direct costs,
primarily salaries for GlobalSCAPE personnel and outside consultants, related to
the development of new products and significant enhancements to existing
products and are expensed as incurred until such time as technological
feasibility is achieved. For the years ended July 31, 1999, 2000 and 2001,
research and development expenses were $101,716, $ 414,541 and $1,229,393,
respectively.

         Statements of Cash Flows
         ------------------------

         Cash payments and non-cash investing and financing activities during
the periods indicated were as follows:

<TABLE>
<CAPTION>
                                                                             For the Years Ended July 31,
                                                                  ----------------------------------------------------
                                                                        1999              2000              2001
                                                                        ----              ----              ----
<S>                                                               <C>                  <C>                <C>
Cash payments for interest                                          $1,101,771         $2,272,111         $  910,863
Cash payments for taxes                                             $        -         $        -         $   64,416
Non-cash:
Common shares issued for services                                   $   40,000         $   24,968         $   33,000
Common shares issued for liquidating damages                        $        -         $        -         $  250,000
Notes receivable and accrued interest issued to
    exercise options for common shares                              $        -         $1,107,898         $  101,416
Common shares issued for acquisition                                $  178,750         $2,921,008         $        -
Note incurred in conjunction with acquisition                       $        -         $        -         $  120,000
Conversion of convertible debt to common shares                     $        -         $3,333,664         $  803,271
Common share subscriptions sold                                     $   42,500         $        -         $        -
Capital lease obligations incurred                                  $        -         $  275,096         $        -
</TABLE>

         For purposes of determining cash flows, we consider all temporary cash
investments with an original maturity of three months or less to be cash and
cash equivalents.

                                       55

<PAGE>

         New Accounting Pronouncements
         -----------------------------

         In September 2000, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", a replacement of FASB Statement No. 125.
SFAS No. 140, effective after March 31, 2001 for reporting and disclosure
proposes on fiscal years ending after December 15, 2000, provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. Those standards are based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The adoption of SFAS 140 has not had a
material effect on the financial condition or results of the Company.

         In June 2001, the FASB issued SFAS No. 141, "Business Combinations".
SFAS No. 141 which supercedes both APB Option No. 16, "Business Combinations"
and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises" provides financial accounting and reporting for business
combinations. The Statement requires that all business combinations initiated
after June 30, 2001 be accounted for using the purchase method. The adoption of
SFAS No. 141 will not have a material effect on the financial condition or
results of the Company as we have historically used the purchase method to
account for all of our business combinations.

         In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 which supercedes APB Option No. 17, "Intangible
Assets" provides financial accounting and reporting for acquired goodwill and
other intangible assets. While SFAS 142 is effective for fiscal years beginning
after December 15, 2001, early adoption is permitted for companies whose fiscal
years begin after March 15, 2001. SFAS 142 addresses how intangible assets that
are acquired individually or with a group of assets should be accounted for in
financial statements upon their acquisition as well as after they have been
initially recognized in the financial statements. While the Company is not yet
required to adopt SFAS 142, it believes the adoption will not have a material
effect on the financial condition or results of the Company unless at some
future time it is determined that an impairment of its intangible assets exists.

         In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies" is applicable to
all companies. SFAS 143, which is effective for fiscal years beginning after
June 15, 2002, addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. As used in this Statement, a legal obligation is
an obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance, or written or oral contract or by legal
construction of a contract under the doctrine of promissory estoppel. While the
Company is not yet required to

                                       56

<PAGE>

adopt SFAS 143, it believes the adoption will not have a material effect on the
financial condition or results of the Company.

         In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144, which supercedes
SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of" and amends ARB No. 51, "Consolidated
Financial Statements," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim financials within those
fiscal years, with early adoption encouraged. The provisions of this Statement
are generally to be applied prospectively. As of the date of this filing, the
Company is still assessing the requirements of SFAS 144 and has not determined
the impact the adoption will have on the financial condition or results of the
Company.

         Disclosures about Fair Value of Financial Instruments
         -----------------------------------------------------

         The following methods and assumptions were used to estimate the fair
value of each class of financial instrument held by us:

         Current assets and liabilities: The carrying value approximates fair
value due to the short maturity of these items.

         Convertible debt: Since our debt is not quoted, estimates are based on
each obligations' characteristics, including remaining maturity, interest rate,
credit rating, collateral, amortization schedule and liquidity (without
consideration for the convertibility of the notes). We believe that the carrying
amount does not differ materially from the fair value.

         4.    PROPERTY AND EQUIPMENT, NET (at cost)

         Following is a summary of our property and equipment at July 31, 2000
and 2001:

<TABLE>
<CAPTION>
                                                     Depreciable lives        July 31, 2000         July 31, 2001
                                                     -----------------        -------------         -------------
         <S>                                         <C>                      <C>                   <C>
         Telecommunication equipment                    10-15 years              $7,995,560            $9,886,154
         Land and buildings                              10 years                   516,915               560,088
         Furniture and fixtures                          3-5 years                1,560,067             1,459,796
         Equipment under capital leases                  5-7 years                6,185,979             6,469,815
         Leasehold improvements                          1-5 years                  834,035               915,519
         Computer equipment                               3 years                 1,844,707             1,943,325
         Other                                           3-5 years                  456,007               549,181
                                                                            ---------------       ---------------
                                                                                 19,393,270            21,783,878
         Less: accumulated depreciation                                          (8,335,909)          (11,992,477)
                                                                            ---------------       ---------------
         Total - property and equipment, net                                    $11,057,361            $9,791,401
                                                                            ===============       ===============
</TABLE>

                                       57

<PAGE>

         Depreciation and amortization expense as reported in our Consolidated
Statements of Operations includes depreciation expense related to our capital
leases. For the years ended July 31, 1999, 2000 and 2001, we recorded
approximately $2,323,000, $3,605,000 and $3,832,000, respectively of
depreciation expense related to our fixed assets. During fiscal 2000, the
Company reviewed its depreciable lives among its telecommunication assets in
Mexico and the U.S. and made a downward revision of the estimated lives of
telecommunication assets in Mexico to conform with lives in the U.S. This change
did not have a significant effect on the consolidated financial statements of
the Company.

         5.    NOTES PAYABLE AND CONVERTIBLE DEBT

Notes payable are comprised of the following:

<TABLE>
<CAPTION>
                                                            July 31, 2000     July 31, 2001
                                                            -------------     -------------
<S>                                                         <C>               <C>
Notes payable to taxing entity, see terms below.                 $379,466          $361,089

Note payable to a related party, see terms below.                       -           250,000

Note payable to a company, see terms below.                             -            65,734

Note payable to a bank, see terms below.                           70,000                 -

Note payable to a bank, see terms below.                           41,739                 -

Note payable to a bank, see terms below.                           33,000                 -

Notes payable to various banks, see terms below.                   20,730                 -
                                                                 --------          --------
Total current notes payable                                      $544,935          $676,823
                                                                 ========          ========
</TABLE>

         The Company, through its acquisition of Computel, assumed notes
payables to a taxing entity for various past due taxes. The notes have interest
rates ranging from 8% to 15%, with scheduled monthly principal and interest
payments of approximately $19,224. The notes were originally scheduled to mature
between July 1999 and July 2001 and are collaterized by the assets of Computel.
The Company is in negotiations with the taxing entity to exchange certain assets
for a partial reduction or total elimination of its indebtedness.

         In March 2001, the Company entered into a note payable with a related
party, a director of ATSI, in the amount of $250,000, for a period of 90 days,
renewable at the note holder's option. The note which accrues interest at a rate
of 9.75% per annum payable monthly until the note is paid in full was extended
in June 2001 and then again in September 2001.

         During December 2000, the Company, through one of its subsidiaries,
assumed a note payable, to a company, of approximately $120,000 related to the
acquisition of an Internet business. The note has an interest rate of
approximately 1.4%, with scheduled monthly principal and interest payments of
approximately $10,400. The note is scheduled to mature in November 2001.

                                       58

<PAGE>

          During January 1999, one of our subsidiaries entered into a note
payable with a bank in the amount of $180,000 related to our acquisition of a
computer software program known as "CuteFTP(TM)". (See Note 11). The note calls
for principal payments of $5,000 per month for twelve months and $10,000 per
month for the next twelve months. Interest accrues monthly at an interest rate
of the Lender's "Prime Rate" plus 1%. During the year ended July 31, 2001, the
note was paid off in full.

          During February 2000, one of our subsidiaries entered into a note
payable with a bank, for working capital purposes, in the amount of $70,000. The
note calls for principal plus interest payments of $6,142 per month for twelve
months. The principal plus interest payments are subject to changes based on the
Lender's "Prime Rate" plus 1%. During the year ended July 31, 2001, the note was
paid off in full.

          During October 1999, one of our subsidiaries entered into a note
payable with a bank, for working capital purposes, in the amount of $50,000. The
note calls for principal payments of $1,000 per month for six months and $3,667
per month for the next twelve months. Interest accrues monthly at an interest
rate of the Lender's "Prime Rate" plus 1%. During the year ended July 31, 2001,
the note was paid off in full.

          The Company, through its acquisition of Computel, assumed notes
payables to various banks in Mexico. The notes have interest rates ranging from
8% to 15%, with monthly principal and interest payments of approximately $3,000.
The notes were originally scheduled to mature between October 1999 and December
2015 and are collaterized by the assets of Computel. During the year ended July
31, 1999, we, through Computel, exchanged certain assets collaterized by the
notes for a reduction in our indebtedness. During the year ended July 31, 2001,
the notes were paid off in full.

Convertible Debt
----------------

          In July 2000, we entered into a convertible note in the amount of
$500,000, for working capital purposes. Interest accrues at a rate of 12% per
annum and is payable upon maturity or conversion. The note originally matured
October 31, 2000 but was extended throughout fiscal 2001 with the latest
maturity July 31, 2001. Additionally, the note holder received 50,000 warrants
to purchase shares of ATSI Communications, Inc. priced at 115% of market price
on the date of note issuance. The warrants are exercisable for 3 years from the
date of issuance. The fair value of the warrants was determined to be $4.22 per
share and the Company assigned $211,000 to the value of the warrants in
stockholder's equity. The Company recorded the $211,000 as debt discount and
amortized the discount over the original term of the debt based on the effective
interest rate. Effective July 31, 2001, the note holder elected to convert the
outstanding principal and interest into common shares resulting in the issuance
of approximately 1,600,000 shares. Additionally, the note holder was issued
800,000 warrants at an exercise price of $0.41 per share. The warrants are
exercisable for 3 years from the date of issuance. The value of the warrants was
determined to be approximately $243,000 which the Company recognized as
additional interest expense.

                                       59

<PAGE>

         6.    LEASES

         Operating Leases
         ----------------

          We lease office space, furniture, equipment and network capacity under
noncancelable operating leases and certain month-to-month leases. During fiscal
1999, 2000 and 2001, we also leased certain equipment under capital leasing
arrangements. Rental expense under operating leases for the years ended July 31,
1999, 2000 and 2001, was $2,952,710, $4,713,240 and $4,480,510, respectively.
Future minimum lease payments under the noncancelable operating leases at July
31, 2001 are as follows:

                     2002                                     $ 2,540,478
                     2003                                         553,839
                     2004                                         546,605
                     2005                                         546,605
                     2006                                         462,149
                     Thereafter                                   885,786
                                                               ----------
                     Total minimum lease payments              $5,535,462
                                                               ==========

         Capital Leases
         --------------

         Future minimum lease payments under the capital leases together with
the present value of the net minimum lease payments at July 31, 2001 are as
follows:

                   2002                                        $5,738,706
                   2003                                            80,565
                   2004                                            50,151
                                                               ----------
                   Total minimum lease payments                 5,869,422
                   Less: Amount representing taxes                 (1,959)
                                                               ----------
                   Net minimum lease payments                   5,867,463
                   Less: Amount representing interest            (805,747)
                                                               ----------
                   Present value of minimum lease payments     $5,061,716
                                                               ==========

     In April 1997, we, through ATSI-Mexico, secured a capital lease facility
with IBM de Mexico to purchase intelligent pay telephones for installation in
Mexico. The capital lease facility of approximately $1.725 million has allowed
us to install U.S. standard intelligent pay telephones in various Mexican
markets. In April 1998, we, through ATSI-Mexico, secured an additional capital
lease facility with IBM de Mexico for approximately $2.9 million to increase
network capacity and to fund the purchase and installation of public telephones
in Mexico. In May 1999, we restructured our capital lease obligation with IBM de
Mexico by extending the payment of our total obligation. The restructured lease
facility called for monthly payments of principal and interest of approximately
$108,000 beginning in July 1999 and extending through June 2003. In October
2000, we restructured our capital lease obligation to increase the monthly
payments during calendar year 2001 from approximately $108,000 to approximately
$159,000 per month. Interest continues to accrue at the rate of approximately
13% per year, with the facility scheduled to be paid off in June 2003. The
obligation outstanding under said facility at July 31, 2000 and July 31, 2001
was approximately $3,120,000 and $3,009,840, respectively.

                                       60

<PAGE>

As of October 29, 2001, we had not yet made payments totaling approximately
$743,305. Per the terms of our agreement with IBM de Mexico they have the right
to call all of the outstanding capital lease facility should we be in arrears
with our monthly payments. While IBM has not called the capital lease facility
as of October 29, 2001 the Company has reclassified the entire facility to
current liabilities as of July 31, 2001. An additional provision of the
agreement allows IBM to charge us interest calculated on the principal balance
outstanding should our payments be in arrears. While IBM has historically
calculated interest only on the payments that are late, the Company has accrued
additional interest expense of approximately $312,460 at July 31, 2001 in
accordance with the agreement.

         In December 1998, we ordered a DMS 250/300 International gateway switch
from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July
31, 1999, we entered into a capital lease transaction with NTFC Capital
Corporation, ("NTFC") to finance the switch and an additional approximate
$200,000 of equipment over a five and a half-year period with payments deferred
for six months. Quarterly payments approximate $141,000 and the capital lease
has an interest rate of approximately 12%. The lease facility requires that we
meet certain financial covenants on a quarterly basis beginning October 31,
1999, including minimum revenue levels, gross margin levels, EBITDA results and
debt to equity ratios. As of July 31, 2001, we are not in compliance with the
financial covenants related to revenues, gross margins and EBITDA results,
although we are current with our payments. As in previous quarters we have
requested a waiver for the non-compliance of the financial covenants and are
actively working to restructure the covenants. While we have received waivers
from NTFC in the past and do not anticipate that NTFC will call the lease
facility, the lease facility provides for that right. Accordingly, we have
classified the entire capital lease in our accompanying consolidated balance
sheet as a current liability. The obligation outstanding under said facility at
July 31, 2000 and July 31, 2001 was approximately $ 2,039,000 and $1,697,000,
respectively.

         We secured a capital lease for approximately $500,000 in December 1998
for the purchase of Asynchronous Transfer Mode ("ATM") equipment from Network
Equipment Technologies ("N.E.T"). The capital lease is for thirty-six months
with monthly payments of approximately $16,000 a month. The obligation
outstanding under said facility at July 31, 2000 and July 31, 2001 was
approximately $306,000 and $128,395, respectively.

         Our capital leases have interest rates ranging from 11% to 14%. Annual
interest expense under our capital leases was $451,478, $736,252 and $1,028,177,
respectively, for the years ending July 31, 1999, 2000 and 2001.

         7.    DEFERRED REVENUE

         We record deferred revenue related to the private network services
provided. Customers may be required to advance cash to us prior to service
commencement to partially cover the cost of equipment and related installation
costs. Any cash received prior to the actual commencement of services is
recorded as deferred revenue until services are provided by us, at which time we
recognize the service commencement revenue. At July 31, 2000 and July 31, 2001
we had approximately $167,000 and $119,000 of deferred revenues outstanding,
respectively.

                                       61

<PAGE>

         8.    SHARE CAPITAL

         As discussed in Note 1, in May 1998, we completed our Plan of
Arrangement whereby the shareholders of ATSI-Canada exchanged their shares on a
one-for-one basis for shares of ATSI-Delaware stock. The exchange of shares
resulted in the recording on our books of $0.001 par value stock and additional
paid-in capital.

         During the year ended July 31, 1999, we issued 3,081,721 common shares.
Of this total, 2,203,160 shares were issued for approximately $1.3 million of
net cash through the exercise of 2,203,160 warrants and options, 36,643 shares
were issued for consulting services rendered to us, 59,101 shares were issued to
a shareholder in exchange for a guarantee of up to $500,000 of Company debt,
503,387 shares and an equal number of warrants to purchase our common stock for
$0.70 per share were issued in exchange for approximately $300,000 in net cash
proceeds and 279,430 shares were issued related to our acquisition of certain
customer contracts in previous years. The shares issued for services rendered,
the guarantee of Company debt, and the shares issued for the $300,000 in cash
proceeds (including the shares underlying the warrants issued) have not been
registered by us, nor do we have any obligation to register such shares.

         During the year ended July 31, 2000, we issued 18,723,692 common
shares. Of this total, 8,469,825 shares were issued for approximately $6.3
million of net cash through the exercise of 8,469,825 warrants and options,
6,802,013 shares were issued as a result of the conversion of preferred shares,
2,632,929 were issued as a result of the conversion of convertible notes,
387,359 shares were issued for services rendered to us, 31,566 shares were
issued to a shareholder in exchange for a guarantee of up to $500,000 of Company
debt, and 400,000 shares were issued related to our acquisition of Grupo
Intelcom, S.A de C.V as noted in Note 11. The shares issued for services
rendered, the guarantee of Company debt, and the shares issued for our
acquisition of Grupo Intelcom, S.A. de C.V. have not been registered by us, nor
do we have any obligation to register such shares.

         During the year ended July 31, 2001, we issued 11,953,734 common
shares. Of this total, 244,999 shares were issued for approximately $102,000 of
net cash through the exercise of 244,999 warrants and options, 1,758,663 shares
were issued for approximately $832,000 of net cash through the investment option
of our Series E Preferred Stock holder, 8,180,379 shares were issued as a result
of the conversion of preferred shares, 1,600,000 shares were issued as a result
of the conversion of convertible debt and 169,693 shares were issued for
services rendered to us. The shares issued for services rendered have not been
registered by us, nor do we have any obligation to register such shares.

         As noted in the previous paragraphs we have on occasion granted shares
of our common stock in lieu of cash for services rendered by both employees and
non-employees. These services have included bonuses, employee commissions and
professional fees. The fair value of these services was determined using
invoiced amounts and, in lieu of cash, we distributed shares to these parties
based upon the market price of our common stock when the services were rendered.
These services were expensed in the period in which the services were performed
according to the terms of invoices and/or contracted agreements in compliance
with accounting principles generally accepted in the U.S.

                                       62

<PAGE>

         Additionally, we have from time to time issued shares in lieu of cash
for services rendered related to private equity placements. The contracts with
the various parties called for a designated number of shares to be issued based
upon the total shares distributed in the private placements.

         No dividends were paid on our common stock during the years ended July
31, 1999, 2000 and 2001.

         The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at our annual shareholders meeting on May 21, 1997. Effective
June 25, 1997, the class of preferred stock was authorized under the Ontario
Business Corporations Act. According to our amended Articles of Incorporation,
our board of directors may issue, in series, an unlimited number of preferred
shares, without par value. No preferred shares have been issued as of July 31,
2001.

         Pursuant to ATSI's Certificate of Incorporation, our board of directors
may issue, in series, an unlimited number of preferred shares, with a par value
of $0.001. In March and April 1999, we issued a total of 24,145 shares of Series
A Preferred Stock for cash proceeds of approximately $2.4 million and in July
1999 we issued 2,000 shares of Series B Preferred Stock for cash proceeds of
approximately $2.0 million. The Series A Preferred Stock accrues cumulative
dividends at the rate of 10% per annum payable quarterly, while the Series B
Preferred Stock accrues cumulative dividends at the rate of 6% per annum. During
the first and second quarter of fiscal 2000, the holder elected to convert all
2000 shares of its Series B Preferred Stock and accumulated dividends into
shares of common stock resulting in the issuance of approximately 2,625,214
shares of common stock. Additionally, the holders of the aforementioned Series A
Preferred Stock elected to convert all of their outstanding preferred shares and
accumulated dividends into shares of common stock resulting in the issuance of
approximately 3,616,231 shares of common stock.

         In September 1999, we issued 500 shares of Series C Preferred Stock for
cash proceeds of approximately $500,000. The Series C Preferred Stock accrues
cumulative dividends at the rate of 6% per annum. In the quarter ended April 30,
2000, the holder elected to convert all 500 shares of Series C Preferred Stock
and accumulated dividends into shares of common stock resulting in the issuance
of approximately 492,308 shares of common stock.

         In December 1999 and February 2000, we issued 14,370 shares (two
issuances of 10,000 shares and 4,370 shares) and 10,000 shares, respectively, of
Series A Preferred Stock for cash proceeds of approximately $1.4 million and
$1.0 million, respectively. In the first and second quarters of fiscal 2001, the
holder of the 10,000 shares issued in February 2000 elected to convert all their
shares and accumulated dividends of approximately $66,000 into shares of common
stock resulting in the issuance of 576,633 shares of common stock. In the third
quarter of fiscal 2001, the holder of the 10,000 shares issued in December 1999
elected to convert all their shares and accumulated dividends of approximately
$125,000 into shares of common stock resulting in the issuance of 1,458,955
shares of common stock. The Series A Preferred Stock accrues cumulative
dividends at the rate of 10% per annum payable quarterly. As of July 31, 2001,
4,370 shares of Series A Preferred Stock remain outstanding for which we have
accrued approximately $67,371 for dividends.

                                       63

<PAGE>

         In February 2000, we also issued 3,000 shares of Series D Preferred
Stock for cash proceeds of approximately $3.0 million. The Series D Preferred
Stock accrues cumulative dividends at the rate of 6% per annum payable
quarterly. During the second quarter of fiscal 2001, the holder elected to
convert 1,358 shares and accumulated dividends of approximately $73,000 into
shares of common stock resulting in the issuance of 3,946,464 shares of common
stock. As of July 31, 2001, 1,642 shares of Series D Preferred Stock remain
outstanding, for which we have accrued approximately $141,000 for dividends.

         In October 2000, we issued 2,500 shares of Series E Preferred Stock and
warrants to purchase 909,091 shares of common stock for cash proceeds of
approximately $2.5 million. Subject to the completion of certain conditions, we
may issue an additional 7,500 shares of Series E Preferred Stock and warrants to
purchase 2,727,273 shares of common stock for cash proceeds of approximately
$7.5 million. The Series E Preferred Stock does not accrue dividends. In
addition, we are obligated to issue 175,000 warrants as a finder's fee to an
entity that introduced us to the equity fund at an exercise price of $1.72 per
warrant. These warrants expire October 2004. The fair value of the warrants was
determined to be $1.27 per warrant and we assigned approximately $868,000 of the
proceeds to warrants outstanding in stockholders' equity. The warrants contain a
reset provision which call for the exercise price to be reset in October 2001,
should the closing bid price on AMEX for the ten days preceding the reset date
be lower than the original exercise price. In the third and fourth quarter of
fiscal 2001, the holder converted 1,010 of the shares outstanding and
accumulated interest into common stock resulting in the issuance of 2,198,329
shares of common stock. In accordance with the terms of the Investment Option of
the Series E Preferred Stock, the holder purchased an additional 1,758,663
shares of common stock for $832,415. Additionally, the holder of the Company's
Series E Preferred Stock purchased an additional 2,000 shares of its Series E
Preferred Stock for cash proceeds of $2,000,000. In accordance with the terms of
the agreement, we issued an additional 727,273 warrants. As of July 31, 2001,
3,490 shares of Series E Preferred Stock remain outstanding.

         In March 2001, we issued 8,175 shares of Series F Preferred Stock for
cash proceeds of $817,500 and 1,035 shares for services rendered, 535 of which
specifically related to the Series F private placement. The Series F Preferred
Stock accrues cumulative dividends at the rate of 15% per annum. As of July 31,
2001 we have accrued approximately $57,563 for dividends.

         In June 2001, we issued 6,500 shares of Series G Preferred Stock for
cash proceeds of $650,000. The Series G Preferred Stock accrues cumulative
dividends at the rate of 15% per annum. As of July 31, 2001 we have accrued
approximately $16,250 for dividends.

         The Series A Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year at the average closing price
of the Common Stock for twenty (20) trading days preceding the Date of Closing
(the "Initial Conversion Price"). On each Anniversary Date up to and including
the fifth Anniversary Date, the Conversion price on any unconverted Preferred
Stock, will be reset to be equal to 75% of the average closing price of the
stock for the then twenty (20) preceding days provided that the Conversion price
can not be reset any lower than 75% of the Initial Conversion Price. As these
conversion features are considered a "beneficial conversion feature" to the
holder, we allocated approximately $3.6 million of the approximate $5.0 million
in proceeds to additional paid-in capital as a discount to be amortized

                                       64

<PAGE>

over various periods ranging from ninety days to a twelve month period.
During fiscal year 2001 the remaining beneficial conversion feature was fully
amortized. The Series A Preferred Stock is callable and redeemable by us at 100%
of its face value, plus any accumulated, unpaid dividends at our option any time
after the Common Stock of ATSI has traded at 200% or more of the conversion
price in effect for at least twenty (20) consecutive trading days, so long as we
do not call the Preferred Stock prior to the first anniversary date of the Date
of Closing.

         The terms of our Series B Preferred Stock allowed for the conversion of
the preferred shares and any accumulated, unpaid dividends to be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. As this conversion feature is considered a "beneficial
conversion feature" to the holder, we allocated approximately $1.1 million, of
the $2.4 million in proceeds to additional paid-in capital as a discount to be
amortized over a three-month period. The entire beneficial conversion feature
was fully amortized during fiscal year 2000.

         The terms of our Series C Preferred Stock allowed for the conversion of
the preferred shares and any accumulated, unpaid dividends to be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. Consistent with the accounting for our Series A and Series
B Preferred Stock, this is considered a "beneficial conversion feature" to the
holder. We allocated approximately $139,000 of the proceeds to additional
paid-in capital as a discount to be amortized over a three-month period, all of
which was amortized during the year ended July 31, 2000.

         The Series D Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to two years at the lesser of a) the
market price on the day prior to closing or b) 83% of the five lowest closing
bid prices on the ten days preceding conversion. Consistent with the accounting
for our Series A, Series B and Series C Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. We allocated all of the
$3,000,000 in proceeds to additional paid-in capital as a discount to be
amortized over the lesser of the period most beneficial to the holder or upon
exercise of the conversion feature. The discount was amortized in its entirety
during the quarter ended April 30, 2000.

         The Series E Preferred Stock may be converted into Common Stock for up
to three years at the lesser of a) the market price - defined as the average of
the closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price. Consistent with the accounting for our Series A,
Series B, Series C and Series D Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. Of the approximate $1.5 million
of proceeds assigned to the first issuance of Series E Preferred Stock
approximately $802,000 was allocated to additional paid-in capital as a discount
to be amortized over the lesser of the period most beneficial to the holder or
upon exercise of the conversion feature. The discount was amortized in its
entirety during the quarter. In accordance with the agreement, the conversion
price was reset on February 11, 2001 to the then defined "market price". The
reset of the conversion price resulted in additional "beneficial conversion
feature" of approximately $188,000, which was allocated to additional paid-in
capital as a

                                       65

<PAGE>

discount and recognized during fiscal 2001. No beneficial conversion
expense was required to be recognized related to the second and third issuance
of Series E Preferred Stock.

         The Series F Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year (the "Anniversary Date") from
the Date of Closing at a conversion price of $0.54. On each Anniversary Date up
to and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to the average closing price of the stock for the five (5) preceding
trading days. The initial beneficial conversion feature, which represents the
difference between the Initial Conversion Price and the market price on the
Commitment Date, is $247,991, which the Company recognized in March 2001 as
preferred dividends. In addition, we issued 852,778 warrants at a price of 133%
of the original conversion price. The warrants are exercisable for a period of
three years from the Date of Closing.

         The Series G Preferred Stock and any accumulated, unpaid dividends may
be converted into Common Stock for up to one year (the "Anniversary Date") from
the Date of Closing at a conversion price of $0.44. On each Anniversary Date up
to and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to 85% of the Market Price on the first Anniversary Date and at all
times from and after the second Anniversary Date, the Conversion Price shall
equal 85% of the Market Price on the second Anniversary Date. The initial
beneficial conversion feature, which represents the difference between the
Initial Conversion Price and the market price on the Commitment Date, is
$479,576, which we amortized during the fourth quarter of fiscal 2001. In
addition, we issued 738,636 warrants at a price of 133% of the original
conversion price. The warrants are exercisable for a period of three years from
the Date of Closing.

         The terms of our Series A, Series B, Series C, Series D, Series E,
Series F and Series G preferred stock restrict us from declaring and paying
dividends on our common stock until such time as all outstanding dividends have
been fulfilled related to the preferred stock.

         The terms of our Series D Preferred Stock allow for mandatory
redemption by the holder upon certain conditions. The Series D Preferred Stock
allows the holder to elect redemption upon the change of control of ATSI at 120%
of the sum of $1,300 per share and accrued and unpaid dividends. Additionally,
the holder may elect redemption at $1,270 per share plus accrued and unpaid
dividends if we refuse to honor conversion notice or if a third party challenges
conversion.

         The terms of our Series E Preferred Stock allow for mandatory
redemption by the holder upon certain conditions. The Series E Preferred Stock
allows the holder to elect redemption at $1,250 per share plus 6% per annum if:
1) ATSI refuses conversion notice, 2) an effective registration statement was
not obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated
against the Company, 4) The Secretaria de Comunicaciones y Transportes of the
SCT limits or terminates the scope of the concession or, 5) if the Company fails
to maintain a listing on NASDAQ, NYSE or AMEX.

                                       66

<PAGE>

         The Series F Preferred Stock is callable and redeemable by us at 100%
of its face value, plus any accumulated, unpaid dividends at our option any time
after our Common Stock has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as we do not
call the Preferred Stock prior to the first anniversary date of the Date of
Closing.

         The Series G Preferred Stock is callable and redeemable by us at 100%
of its face value, plus any accumulated, unpaid dividends at our option any time
after our Common Stock has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as we do not
call the Preferred Stock prior to the first anniversary date of the Date of
Closing.

         The outstanding Series A, Series D, Series E, Series F and Series G
preferred stock have liquidation preference prior to common stock and ratably
with each other.

         In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE,
Inc. amended their certificate of incorporation to increase the number of
authorized shares of capital stock which they had the authority to issue to
50,000,000 shares consisting of 40,000,000 shares of common stock, par value
$0.001 per share and 10,000,000 shares of preferred stock, par value $0.001 per
share. The Board of Directors also declared a 7.6 for 1 stock split of the
outstanding shares of the issued and outstanding common stock. The effect of the
split was to increase the outstanding shares from 1,700,000 shares to
12,920,000. On September 12, 2000, we completed the distribution of a portion of
our ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders.
The distribution was part of a previously announced plan to distribute or
spin-off a portion of our ownership in GlobalSCAPE contemporaneously with a
public offering of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth
and ATSI's general corporate purposes. GlobalSCAPE and ATSI decided not to make
a public offering of GlobalSCAPE common stock contemporaneously with the
distribution in light of current market conditions. We distributed approximately
3,444,833 of our 12,920,000 shares to our shareholders. The distribution
represented approximately 27% of our ownership. The distribution did not
generate any proceeds to ATSI or GlobalSCAPE and resulted in approximately
$300,000 of expense to GlobalSCAPE for legal and accounting fees, printing and
distribution costs. Subsequent to September 2000, ATSI has accounted for the
approximate 27% owned by other shareholders through Minority Interest on both
its Consolidated Balance Sheet and Income Statement.

         9.    STOCK PURCHASE WARRANTS AND STOCK OPTIONS

         During the year ended July 31, 2001, certain shareholders and holders
of convertible debt were issued warrants to purchase shares of common stock at
exercise prices ranging from $0.41 to $1.72 per share. Following is a summary of
warrant activity from August 1, 1998 through July 31, 2001:

                                       67

<PAGE>

<TABLE>
<CAPTION>
                                                              Year Ending July 31,
                                              ---------------------------------------------------
                                                   1999              2000              2001
                                              ---------------- ----------------  ----------------
<S>                                           <C>              <C>               <C>
Warrants outstanding, beginning                     7,562,168         4,203,925           681,045
Warrants issued                                       933,387           601,045         4,332,781
Warrants expired                                   (2,386,470)          (80,000)                -
Warrants exercised                                 (1,905,160)       (4,043,925)                -
                                               --------------   ---------------  ----------------
Warrants outstanding, ending                        4,203,925           681,045         5,013,826
                                               --------------   ---------------  ----------------
</TABLE>

Warrants outstanding at July 31, 2001 expire as follows:

<TABLE>
<CAPTION>
         Number of Warrants      Exercise Price         Expiration Date
         ------------------      --------------         ---------------
         <S>                     <C>                    <C>
              150,000                $4.37                February 22, 2002
               30,000                $3.09                    March 9, 2002
              175,000                $7.17                   March 31, 2003
              100,000                $6.00                    July 21, 2003
               50,000                $5.46                    July 25, 2003
                5,000                $1.72                 November 1, 2003
               75,000                $1.06                November 16, 2003
              852,778                $0.72                   March 23, 2004
              738,636                $0.58                    June 11, 2004
               50,000                $1.25                     July 2, 2004
              800,000                $0.41                    July 31, 2004
               20,000                $1.19               September 24, 2004
              909,091                $1.72                 October 11, 2004
              181,819                $1.72                 October 11, 2004
              545,457                $1.72                 October 11, 2004
               50,000                $1.72                 October 11, 2004
              175,000                $1.72                 October 11, 2004
              106,045                $0.94                 December 8, 2004
</TABLE>

         On February 10, 1997, the board of directors granted a total of
4,488,000 options to purchase Common Shares to directors and employees of ATSI
under the 1997 Stock Option Plan. Certain grants were considered vested based on
past service as of February 10, 1997. The 1997 Stock Option Plan was approved by
a vote of the stockholders at our Annual Meeting of Shareholders on May 21,
1997.

          In September 1998, our board of directors adopted the 1998 Stock
Option Plan. Under the 1998 Stock Option Plan, options to purchase up to
2,000,000 shares of common stock may be granted to employees, directors and
certain other persons. The 1997 and 1998 Stock Option Plans are intended to
permit us to retain and attract qualified individuals who will contribute to our
overall success. The exercise price of all of the options is equal to the market
price of the

                                       68

<PAGE>

shares of common stock as of the date of grant. The options vest pursuant to the
individual stock option agreements, usually 33 percent per year beginning one
year from the grant date with unexercised options expiring ten years after the
date of the grant. During the years ending July 31, 1999, 2000 and 2001, the
board of directors granted a total of 1,942,300, 155,000 and 117,500 options,
respectively, to purchase common stock to directors and employees of ATSI under
the 1998 Stock Option Plan.

         In December 2000, our board of directors adopted the 2000 Incentive
Stock Option Plan. Under the 2000 Incentive Stock Option Plan, options to
purchase up to 9,800,000 shares of common stock may be granted to employees,
directors and certain other persons. Like the 1997 and 1998 Stock Option Plans,
the 2000 Incentive Stock Option Plan is intended to permit us to retain and
attract qualified individuals who will contribute to our overall success. The
exercise price of all of the options is equal to the market price of the shares
of common stock as of the date of grant. The options vest pursuant to the
individual stock option agreements, usually 33 percent per year beginning one
year from the grant date with unexercised options expiring ten years after the
date of the grant. The 2000 Incentive Stock Option Plan was approved by a vote
of the stockholders at our Annual Meeting of Shareholders on February 7, 2001.
On May 7, 2001, the board of directors granted a total of 1,864,000 options to
purchase common stock to employees of ATSI. In August 2001, the board approved
the granting of an additional 3,050,000 in options to directors, officers and
employees of ATSI.

         A summary of the status of our 1997, 1998 and 2000 Stock Option Plans
for the years ended July 31, 1999, 2000 and 2001 and changes during the periods
are presented below:

<TABLE>
<CAPTION>
                                                                 Years Ended July 31,
                                -------------------------------------------------------------------------------------
    1997 Stock
    Option Plan                            1999                            2000                        2001
                                                Weighted                        Weighted                     Weighted
                                                 Average                         Average                      Average
                                                Exercise                        Exercise                     Exercise
                                 Shares          Price            Shares         Price           Shares       Price
                                -------------------------------------------------------------------------------------
    <S>                         <C>          <C>                <C>             <C>             <C>          <C>
    Outstanding, beginning
    of year                       4,655,333       $0.74            4,222,667     $0.75            312,003     $1.59
    Granted                               -         -                      -        -                   -         -
    Exercised                     (298,000)       $0.58           (3,907,331)    $0.66            (13,000)    $0.58
    Forfeited                     (134,666)       $0.71               (3,333)    $0.58            (97,001)    $2.15
                                  ---------       -----           ----------     -----           --------     -----
    Outstanding, end of year
                                  4,222,667       $0.75              312,003     $1.59            202,002     $1.87
                                  =========       =====           ==========     =====           ========     =====
    Options exercisable at
    end of year

                                  3,271,333       $0.60              171,667     $1.55            202,002     $1.87
                                  =========       =====           ==========     =====           ========     =====
    Weighted average fair
    value of options
    granted during the year
                                                    N/A                            N/A                          N/A
                                                  =====                            ===                        =====
</TABLE>

     See Note 16 for a discussion of options exercised in the year ending July
31, 2000 in connection with a note arrangement with certain officers of the
Company.

                                       69

<PAGE>

<TABLE>
<CAPTION>
                                                                 Years Ended July 31,
                                --------------------------------------------------------------------------------------------
    1998 Stock
    Option Plan                            1999                           2000                          2001
                                --------------------------------------------------------------------------------------------
                                                Weighted                        Weighted                          Weighted
                                                 Average                        Average                            Average
                                                Exercise                        Exercise                          Exercise
                                 Shares          Price                  Shares   Price          Shares             Price
                                ---------------------------------------------------------------------------------------------
    <S>                         <C>             <C>                <C>           <C>            <C>                <C>
    Outstanding,
    beginning of year                     -           -            1,881,800     $0.63            1,379,211        $0.70
    Granted                       1,942,300       $0.65              155,000     $2.57              117,500        $0.90
    Exercised                             -           -             (525,255)    $0.57             (231,999)       $0.55
    Forfeited                       (60,500)      $0.78             (132,334)    $0.69             (237,872)       $0.84
                                  ---------       -----            ---------     -----            ---------        -----

    Outstanding, end of year      1,881,800       $0.63            1,379,211     $0.70            1,026,840        $0.91
                                  =========       =====            =========     =====            =========        =====
    Options exercisable at
    end of year                           -           -               85,499     $0.60              417,043        $0.83
                                                                   =========     =====            =========        =====
    Weighted average fair
    value of options
    granted during the year                       $0.65                          $1.92                             $0.87
                                                  =====                          =====                             =====
</TABLE>


<TABLE>
<CAPTION>
                                                    Year Ended July 31,
                                               ---------------------------
    2000 Stock Option Plan                                2001
                                               ---------------------------
                                                                  Weighted
                                                                   Average
                                                                  Exercise
                                                   Shares           Price
                                               --------------------------
    <S>                                        <C>                 <C>
    Outstanding, beginning of year                           -      $   -
    Granted                                          1,864,000      $0.56
    Exercised                                                -      $   -
    Forfeited                                                -      $   -
                                                     ---------      -----
    Outstanding, end of year                         1,864,000      $0.56
                                                     =========      =====

    Options exercisable at end of year                       -        N/A
                                                                    =====
    Weighted average fair value of options
    granted during the year                                         $0.55
                                                                    =====
</TABLE>

         The weighted average remaining contractual life of the stock options
outstanding at July 31, 2001 is approximately 5.5 years for options granted
under the 1997 Stock Option Plan, approximately 7 years for options granted
under the 1998 Stock Option Plan and approximately 9 years for options granted
under the 2000 Incentive Stock Option Plan.

         In January 1998, the Board of Directors of our subsidiary, GlobalSCAPE,
Inc. approved the 1998 Stock Option Plan (the Plan) for officers, other
employees, directors and consultants of GlobalSCAPE. Under the terms of the
Plan, up to 728,571 shares of GlobalSCAPE's common

                                       70

<PAGE>

stock may be granted in the form of incentive stock options or
non-qualified stock options, awarded, or sold to officers, other employees,
directors and consultants. GlobalSCAPE awarded approximately 384,499 options
under the Plan, all but 6,000 of which were subsequently cancelled and re-issued
in fiscal 2001. Of the 378,499 options re-issued, approximately 339,999 were
re-issued at terms equal to those of the original grant. The remaining 38,500
were re-issued in accordance with the terms of the 7.6 to 1 split in
GlobalSCAPE's outstanding shares resulting in the issuance of 292,600 options.
An additional 808,571 options were granted to settle a dispute with a
GlobalSCAPE employee as to whether their options were subject to the terms of
the 7.6 to 1 split. As of January 15, 2001, no additional grants could be issued
under the 1998 Plan.

         In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE
approved the 2000 stock option plan (the "Plan") for key employees, non-employee
directors, and advisors of GlobalSCAPE. Under the terms of the Plan, up to
3,660,000 shares of GlobalSCAPE's common stock may be granted in the form of
incentive stock options or non-qualified stock options. The maximum aggregate
number of shares of common stock which may be granted to any optionee during the
term of the Plan shall not exceed 2,000,000. The Plan provides that the purchase
price per share for incentive stock options and non-qualified stock options
shall not be less than the fair market value of the common stock on the date of
grant. The maximum term for an option granted is ten years from the date of
grant. During fiscal 2001, GlobalSCAPE issued approximately 2,076,000 options
under its 2000 Plan, of which 65,500 options were forfeited prior to July 31,
2001. As of July 31, 2001, GlobalSCAPE has 3,435,480 options outstanding under
its 1998 and 2000 Stock Option Plans.

         A summary of the status of GlobalSCAPE's 1998 and 2000 Stock Option
Plans for the years ended July 31, 2001 and changes during the period are
presented below:

                                                      Year Ended July 31,
                                               -------------------------------
    1998 Stock Option Plan                                2001
                                               -------------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares         Exercise
                                                                    Price
    Outstanding, beginning of year                           -      $   -
    Granted                                          1,441,170      $0.03
    Exercised                                           16,190      $0.10
    Forfeited                                                -      $   -
                                                     ---------      -----
    Outstanding, end of year                         1,424,980      $0.03
                                                     =========      =====
    Options exercisable at end of year
                                                             -        N/A
                                                     =========      =====
    Weighted average fair value of options
    granted during the year                                         $0.46
                                                                    =====

                                       71

<PAGE>


                                                     Year Ended July 31,
                                               -------------------------------
    2000 Stock Option Plan                                  2001
                                               -------------------------------
                                                                Weighted
                                                                Average
                                               Shares           Exercise

    Outstanding, beginning of year                           -      $   -
    Granted                                          2,076,000      $0.64
    Exercised                                                -      $   -
    Forfeited                                          (65,500)     $0.46
                                                     ---------
    Outstanding, end of year                         2,010,500      $0.65
                                                     =========      =====

    Options exercisable at end of year                       -        N/A
                                                     =========      =====
    Weighted average fair value of options
    granted during the year                                         $0.46
                                                                    =====

         In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" was issued. SFAS 123 defines a fair value based method of
accounting for employee stock options or similar equity instruments and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period of the award, which is usually the
vesting period. However, SFAS 123 also allows entities to continue to measure
compensation costs for employee stock compensation plans using the intrinsic
value method of accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). We adopted SFAS 123 effective August 1,
1996, and have elected to remain with the accounting prescribed by APB 25.

         In accordance with APB 25, we recorded deferred compensation expense
related to approximately 1.5 million of the options granted based on the
increase in our stock price from February 10, 1997, when the options were
granted, to May 21, 1997, when the underlying 1997 Stock Option Plan was
approved by our shareholders. We recorded additional deferred compensation
expense related to approximately 1.5 million of the options granted based on the
increase in our stock price from September 9, 1998 to December 17, 1998, when
the underlying 1998 Stock Option Plan was approved by our shareholders.

         As of July 31, 2000 we had $119,449 of deferred compensation expense
related to options granted, all of which were expensed as compensation expense
by July 31, 2001. Our subsidiary, GlobalSCAPE incurred both compensation expense
and deferred compensation expense related to the granting of options during
fiscal 2001 at less than the intrinsic value resulting in total compensation
costs of approximately $661,000 during the year, all but $12,416 of which was
expensed during the year. At July 31, 2001, we had $12,416 of deferred
compensation expense related to options granted by GlobalSCAPE.

         Because we have elected to remain with the accounting prescribed by APB
25, no compensation cost has been recognized for our fixed stock option plans
based on SFAS 123. Had compensation cost for our stock-based compensation plans
been determined on the fair value of the grant dates for awards under the fixed
stock option plans consistent with the method

                                       72

<PAGE>

of SFAS 123, our net loss (in thousands) and loss per share would have been
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                       Year Ended July 31,
                                    -----------------------------------------------------
                                          1999           2000            2001
                                          ----           ----            ----
<S>                                 <C>                  <C>             <C>
Net loss to common shareholders
-------------------------------
As reported                                 ($7,591)       ($17,138)       ($12,784)
Pro forma                                   ($8,046)       ($17,657)       ($13,393)
Basic and diluted loss per share
--------------------------------
As reported                                  ($0.16)         ($0.30)         ($0.18)
Pro forma                                    ($0.17)         ($0.31)         ($0.19)
</TABLE>

       The fair value of the option grant is estimated based on the date of
grant using an option pricing model with the following assumptions used for the
grants in 1999, 2000 and 2001: Dividend yield of 0.0%, expected volatility of
62%, between 104% - 141% and between 136% - 156%, (depending on the time of
grant) respectively, risk-free interest rate of 6.50%, 6.25% and 5.45%,
respectively, and an expected life of ten years. The fair value of these options
is being amortized over the three-year vesting period of the options.

       10.    EMPLOYEE BENEFIT PLAN

              In January 1, 1999, the Company established a Retirement Plan,
which is a qualified employee profit-sharing program. The purpose of the Plan is
to provide a program whereby contributions of participating employees and their
employers are systematically invested to provide the employees an interest in
the Company and to further their financial independence. Participation in the
Plan is voluntary and is open to employees of the Company who become eligible to
participate upon the completion of a half-year of continuous service. The term
of each Plan Year begins January 1 and ends December 31.

       Participating employees may contribute from 2% to 15% of their total
annual compensation, including bonuses, subject to certain limitations,
including a $7,000 annual limitation, subject to inflation. Participants may
elect to make these contributions on a before-tax or after-tax basis, or both,
with federal income taxes on before-tax contributions being deferred until a
distribution is made to the participant. Participants' contributions of up to 3%
of their elective deferrals are matched 25% by the Company. Participant's
contributions in excess of 3% of their annual compensation are not matched by
the Company. The Employer may also contribute an additional amount determined in
its sole judgement. Such additional contribution, if any, shall be allocated to
each Participant in proportion to his or her Compensation for the Plan Year
while a Participant.

       Subsequent to December 31, 1999 and December 31, 2000, the Company made
matching contributions of approximately $9,600 and $17,600, respectively. No
discretionary contribution was made for the Plan Years 1999 and 2000.

                                       73

<PAGE>

       11.    ACQUISITIONS

       In January 1999, GlobalSCAPE acquired the rights to the source code of a
computer software program known as "CuteFTP(TM)". Prior to January 1999, it had
been the distributor of this software under an exclusive distribution agreement
executed in June 1996 with the software's author. They acquired the rights to
CuteFTP(TM) in exchange for cash payments totaling approximately $190,000 in
January and February 1999 and an additional $756,000 to be paid in twelve
monthly installments.

       In July 2000, we acquired Grupo Intelcom, S.A. de C.V., a Mexican
company, which owned a long distance license issued by the Mexican government.
The terms of the agreement called for us to purchase 100% of the stock of Grupo
Intelcom from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A.
de C.V., (a 49% stockholder) for a total purchase price of approximately
$4,176,000 consisting of $755,000 in cash, $500,000 in the form of a note
payable, which was paid off prior to July 31, 2000, 400,000 shares of our common
stock valued at approximately $2.5 million and 100,000 warrants exercisable at
$6.00 for a period of three years and valued at approximately $440,000. The
agreement also provided for an additional payment should the value of ATSI's
stock be lower than $5.00 on the first anniversary date. Subsequent to year-end,
the Company renegotiated the reset provisions of the original agreement
resulting in: 1) a cash liability of approximately $457,000 payable to Mr.
Torres, 2) payment of ATSI common stock equivalent to $457,000 to be issued, 3)
100,000 warrants at an exercise price of $0.32 to be issued and 4) an extension
of the original reset provision to the second anniversary date in July 2002. On
the second anniversary date, ATSI will be required to pay cash equal to the
difference between $5.00 and the then current closing price times 200,000
shares. As of July 31, 2001, we have accrued in current liabilities a payable to
Mr. Torres for the cash payment of $457,000.

       In December 2000, one of our subsidiaries acquired an Internet business
for a total purchase price of approximately $170,000 consisting of approximately
$50,000 in cash and approximately $120,000 in the form of a note payable, which
is scheduled to be paid off in November 2001.

       12.    SEGMENT REPORTING

       In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 supersedes SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise." Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. In an attempt to identify our reportable operating
segments, we considered a number of factors or criteria. These criteria included
segmenting based upon geographic boundaries only, segmenting based on the
products and services provided, segmenting based on legal entity and segmenting
by business focus. Based on these criteria we have determined that we have three
reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3)
Internet e-commerce. Our

                                       74

<PAGE>

Internet e-commerce subsidiary, GlobalSCAPE, Inc. and its operations can be
differentiated from the telecommunication focus of the rest of ATSI.
Additionally, we believe that our U.S. and Mexican subsidiaries should be
separate segments even though many of the products are borderless. Both the U.S.
Telco and Mexican Telco segments include revenues generated from Integrated
Prepaid, Postpaid, and Network Services. Our Carrier Services revenues,
generated as a part of our U.S. Telco segment, are the only revenues not
currently generated by both the U.S. Telco and Mexico Telco segments. We have
included the operations of ATSI-Canada, ATSI-Delaware and all businesses falling
below the reporting threshold in the "Other" segment. The "Other" segment also
includes intercompany eliminations.

       We have used earnings before interest, taxes, depreciation and
amortization (EBITDA) in our segment reporting as it is the chief measure of
profit or loss used in assessing the performance of each of our segments.

<TABLE>
<CAPTION>
                                                                 As of and for the years ending
                                                   -----------------------------------------------------------
                                                      July 31, 1999       July 31, 2000       July 31, 2001
<S>                                                <C>                    <C>                 <C>
U.S. Telco
--------------------------------------------------------------------------------------------------------------
External revenues                                          $25,519,967         $27,359,003        $28,919,017
Intercompany revenues                                      $ 1,951,656         $ 2,617,760        $ 1,421,718
                                                           -----------         -----------        -----------
Total revenues                                             $27,471,623         $29,976,763        $30,340,735
                                                           ===========         ===========        ===========

EBITDA                                                     ($1,785,694)        ($4,680,052)       ($3,299,828)

Operating loss                                             ($3,782,919)        ($6,912,446)       ($5,305,353)

Net loss                                                   ($4,405,213)        ($7,353,641)       ($5,441,767)

Total assets                                               $11,229,863         $12,555,903        $15,843,600

Mexico Telco
--------------------------------------------------------------------------------------------------------------
External revenues                                          $ 6,355,936         $ 6,941,761        $ 6,980,474
Intercompany revenues                                      $ 3,901,246         $ 2,427,907        $ 1,886,150
                                                           -----------         -----------        -----------
Total revenues                                             $10,257,182         $ 9,369,668        $ 8,866,624
                                                           ===========         ===========        ===========

EBITDA                                                     ($1,050,963)          ($473,752)       ($1,685,101)

Operating loss                                             ($2,098,527)        ($2,528,919)       ($3,331,643)

Net loss                                                   ($2,437,230)        ($3,295,340)       ($4,065,094)

Total assets                                               $11,778,300          $9,808,068        $ 8,097,154

Internet e-commerce
--------------------------------------------------------------------------------------------------------------
External revenues                                          $ 2,642,376         $ 5,128,096        $ 5,444,887
Intercompany revenues                                                -                   -                  -
Total revenues                                             $ 2,642,376         $ 5,128,096        $ 5,444,887
                                                           ===========         ===========        ===========

EBITDA                                                     $ 1,052,015         $ 2,007,993          ($224,455)
</TABLE>

                                       75

<PAGE>

<TABLE>
<S>                                                       <C>                 <C>                <C>
Operating income (loss)                                      $873,832          $1,623,067          ($738,151)

Net income (loss)                                            $854,068          $1,570,857          ($835,700)

Total assets                                               $1,222,238          $2,245,590         $1,591,250

Other
------------------------------------------------------------------------------------------------------------
External revenues                                                   -                   -                  -
Intercompany revenues                                     ($5,852,902)        ($5,045,667)       ($3,307,868)
                                                          ------------        -----------        -----------
Total revenues                                            ($5,852,902)        ($5,045,667)       ($3,307,868)
                                                          ===========         ===========        ===========

EBITDA                                                        ($7,000)            ($5,000)          ($12,402)

Operating loss                                               ($31,900)           ($13,385)         ($280,667)

Net loss                                                  ($1,602,709)        ($8,059,143)       ($2,442,198)

Total assets                                                 ($76,108)         $2,284,389        ($2,168,940)

Total

------------------------------------------------------------------------------------------------------------
External revenues                                         $34,518,279         $39,428,860        $41,344,378
Intercompany revenues                                               -                   -                  -
                                                          -----------         -----------        -----------
Total revenues                                            $34,518,279         $39,428,860        $41,344,378
                                                          ===========         ===========        ===========

EBITDA                                                    ($1,791,642)        ($3,150,811)       ($5,221,786)

Depreciation and Amortization                             ($3,247,872)        ($4,680,872)       ($4,434,028)

Operating loss                                            ($5,039,514)        ($7,831,683)       ($9,655,814)

Net loss to common shareholders                           ($7,591,084)       ($17,137,267)      ($12,784,759)

Total assets                                              $24,154,293         $26,893,950        $23,363,064
</TABLE>

         13.      INCOME TAXES

         Income (loss) before income taxes was ($6,736,000), ($10,053,000) and
($10,575,000) for the years ended July 31, 1999, 2000 and 2001.

         The provision for income taxes for the years ended July 31, 1999, 2000
and 2001 was $0, $0 and $223,000, respectively. The $223,000 for the year ended
July 31, 2001 consists of approximately $64,000 of current state taxes and
approximately $159,000 of current foreign taxes.

         As of July 31, 2001, the Company had U.S. Federal net operating loss
(NOL) carryforwards of $19,401,000 with expiration dates ranging from 2009
through 2021.

         The availability of the NOL carryforwards to reduce U.S. federal
taxable income is subject to various limitations in the event of an ownership
change as defined in Section 382 of

                                       76

<PAGE>

the Internal Revenue Code of 1986 (the "Code"). We experienced a change in
ownership in excess of 50% as defined in the Code, during the year ended July
31, 1998. This change in ownership limits the annual utilization of NOL under
the code to $1,284,000 per year, but does not impact our ability to utilize our
NOL's because the annual limitation under the Code would allow full utilization
within the statutory carryforward period.

     The Company has established a valuation allowance of approximately
$5,741,000 and $7,324,000 as of July 31, 2000 and 2001, respectively, which
represent the total of net deferred taxes which may be deferred in future
periods. The realization of net deferred tax assets recorded as of July 31, 2001
is dependent upon the Company's ability to generate future taxable income.
Although realization is not assured, the Company believes it is more likely than
not that the net deferred tax assets will be realized.

     The Company's effective tax rate differs from the statutory rate as the tax
benefits have not been recorded on the losses incurred for the years ended July
31, 1999, 2000 and 2001.

     14. COMMITMENTS AND CONTINGENCIES

     During the year ended July 31, 2001, two of our officers entered into
employment agreements with ATSI-Delaware, for periods of one year unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements range from $100,000 to $115,000
per annum, and is subject to increase within the discretion of the Board. In
addition, each of these officers is eligible to receive a bonus in such amount
as may be determined by the Board of directors from time to time. Bonuses may
not exceed 50% of the executive's base salary in any fiscal year. No bonuses
were paid during fiscal 2001.

     During the year ended July 31, 2001, an additional officer entered into an
employment agreement for a period of one year (with an automatic one-year
extension) unless terminated earlier in accordance with the terms of agreement.
The annual base salary under such agreement may not be less than $190,000 and
subject to increase within the discretion of the Board. In addition, the officer
is eligible to receive a bonus in such amount as may be determined by the Board
of directors from time to time. Bonuses may not exceed 100% of the executive's
base salary in any fiscal year. No such bonuses were awarded for fiscal 2001.

     Subsequent to July 31, 2001, we entered into an employment agreement with
an additional officer for a period of one year (with an automatic one-year
extension) unless terminated earlier in accordance with the terms of agreement.
The annual base salary under such agreement may not be less than $185,000 and
subject to increase within the discretion of the Board. In addition, the officer
is eligible to receive a bonus in such amount as may be determined by the Board
of directors from time to time. Bonuses may not exceed 100% of the executive's
base salary in any fiscal year.

     15. RISKS AND UNCERTAINTIES AND CONCENTRATIONS

     Our business is dependent upon key pieces of equipment, switching and
transmission facilities, fiber capacity and the Solaridad satellites. Should we
experience service interruptions

                                       77

<PAGE>

from our underlying carriers, equipment failures or should there be damage or
destruction to the Solaridad satellites or leased fiber lines there would likely
be a temporary interruption of our services which could adversely or materially
affect our operations. We believe that suitable arrangements could be obtained
with other satellite or fiber optic network operators to provide transmission
capacity. Additionally, our network control center is protected by an
uninterruptible power supply system which, upon commercial power failure,
utilizes battery back up until an on-site generator is automatically triggered
to supply power.

     During the years ended July 31, 1999, 2000 and 2001, our carrier services
business had two customers whose aggregated revenues approximated 10%, 40% and
54%, respectively, of our total revenues. Individually, both customers generated
revenues greater than 10% during the year ended July 31, 2001.

     16. RELATED PARTY TRANSACTIONS

     In February 2000, our board of directors approved a plan to lend
approximately $1.5 million, at a market interest rate, in the aggregate to
certain key executive officers to allow them to exercise approximately 2,250,000
of their vested options. The executive officers who borrowed under the plan must
adhere to the following conditions: 1) they must contribute 10% in cash of the
amount borrowed; 2) the stock obtained with the exercises must be escrowed under
a twelve month standstill agreement or until such time as the note is paid; and
3) any derivative equity obtained from the stock's ownership must be escrowed
for a six-month period. As of April 30, 2000, we have loaned approximately $1.1
million to key executive officers allowing them to exercise vested options. We
recognized the transaction by recording a note receivable for each executive
officer. As of July 31, 2000, the note receivable balance was approximately $1.1
million. During fiscal 2001, the board of directors modified the agreements by
extending them for an additional year and changing them to non-recourse notes.
Accounting treatment for non-recourse notes is consistent with the treatment for
options outstanding so we have reversed the notes receivable recorded in fiscal
2000. The shares, underlying the notes, continue to be held by the Company, and
are not accessible to the officers until the associated principal and interest
is paid. Accordingly, the shares are not included in our shares outstanding for
fiscal 2001.

     In March 1999, we renewed an agreement with an international consulting
firm, of which ATSI-Delaware director Carlos K. Kauachi is president, for
international business development support. Under the terms of the agreement, we
paid the consulting firm $6,000 per month for a period of twelve months. Upon
expiration, the agreement was extended on a month-to-month basis until July 2000
when it was terminated. As of July 31, 2001, we have a payable of approximately
$35,500 outstanding.

     During fiscal 2000 and fiscal 2001, we contracted with two companies for
billing and administrative services related to carrier services we provide. The
companies, which are owned by Tomas Revesz, an ATSI-Delaware director, were paid
approximately $160,000 and $77,361 for their services during fiscal 2000 and
2001. The monthly fees are capped by the agreement at $18,500 per month. As of
July 31, 2001, the payable due these companies was $77,438. Additionally, the
Company has a note payable due Mr. Revesz in the amount of $250,000 as detailed
in Note 5.

                                       78

<PAGE>

     We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company director Richard C. Benkendorf is
principal and owner. Under the agreement, Technology Impact Partners provides us
with various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, we pay the
consulting firm $3,750 per month plus expenses. In November 2000 the agreement
was modified and the Company is now billed solely for expenses. At July 31, 2000
and July 31, 2001, we had a payable to Technology Impact Partners of
approximately $112,000 and approximately $115,000, respectively.

     On August 1, 2000 we entered into a consulting agreement with Charles R.
Poole, former President and Chief Operating Officer of ATSI-Delaware, to perform
certain consulting services for the period beginning August 1, 2000 and ending
December 31, 2000 in the amount of approximately $10,583 per month.

     17. LEGAL PROCEEDINGS

     In March 2001, ATSI-Texas was sued by Comdisco for breach of contract for
failing to pay lease amounts due under a lease agreement for telecommunications
equipment. Comdisco claims that the total amount loaned pursuant to the lease
was $926,185 and that the lease terms called for 36 months of lease payments.
Comdisco is claiming that ATSI only paid thirty months of lease payments. ATSI
disputes that the amount loaned was $926,185 since we only received $375,386 in
financing. We have paid over $473,000 in lease payments and, thus, believe that
we have satisfied our obligation under the lease terms. Although Comdisco has
since filed for bankruptcy protection, we are still in the midst of litigation.
We believe that we have a justifiable basis for our position in the litigation
and that we will be able to resolve the dispute without a material adverse
effect on our financial condition.

     In July 2001, we were notified by the Dallas Appraisal District that our
administrative appeal of the appraisal of our office in the Dallas InfoMart was
denied. The property was appraised at approximately $6 million. The property
involved includes our Nortel DMS 250/300 switch, which was purchased for
approximately $1.8 million, associated telecommunications equipment and office
furniture and computers. In September 2001, ATSI filed an appeal in Dallas
County Court. While this appeal will likely be settled, we believe the possible
impact will not have an adverse effect on our results of operations.

     In 1999 ATSI filed a Demand for Arbitration seeking damages for breach of
contract from Twister Communications. Twister had previously filed a Demand for
Arbitration against ATSI, but has since filed for bankruptcy and has not pursued
any discovery in this matter. We have filed a creditor's claim in the
bankruptcy proceeding but it is unlikely that we will be able to recover any
value from Twister. Additionally, there has been no activity in the arbitration
matter for over eighteen months and it is unlikely that Twister will be able to
pursue this matter.

     On June 16, 1999, our subsidiary, ATSI Texas initiated a lawsuit in
District Court, Bexar County, Texas against PrimeTEC International, Inc., Mike
Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of
conduct. Under an agreement signed in late 1998,


                                       79

<PAGE>

PrimeTEC was to provide quality fiber optic capacity in January 1999. Mike
Moehle is PrimeTEC's former president who negotiated the fiber lease and Vartec
is PrimeTEC's parent, which was to provide the fiber capacity. The delivery of
the route in early 1999 was a significant component of our operational and sales
goal for the year and the failure of our vendor to provide the capacity led to
our negotiating an alternative agreement with Bestel, S.A. de C.V. at a higher
cost. In November 2000, ATSI -Texas settled its lawsuit against PrimeTEC and
Vartec. The settlement called for a cash payment to ATSI of $500,000 and an
additional $500,000 in services purchased from ATSI by Vartec. The services were
provided during a period of approximately four months. Vartec has continued as a
customer of ATSI after finishing the settlement period.

     We are also a party to additional claims and legal proceedings arising in
the ordinary course of business. We believe it is unlikely that the final
outcome of any of the claims or proceedings to which we are a party would have a
material adverse effect on our financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if any, cannot
be estimated with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have an
adverse effect on our results of operations in the period in which it occurred.

     18. QUARTERLY FINANCIAL DATA
            (unaudited) - in thousands -except per share information

<TABLE>
<CAPTION>
                                Quarter ended      Quarter ended       Quarter ended        Quarter ended
     Fiscal 2000                  10/31/99            01/31/00             04/30/00             07/31/00
     -----------                  --------            --------             --------             --------
<S>                            <C>                 <C>                 <C>                  <C>
Operating revenues                 $ 9,463            $ 10,688              $ 9,524              $ 9,754
Cost of services                     6,526               7,104                6,723                6,445
Gross margin                         2,937               3,584                2,801                3,309
SG&A                                 3,374               3,252                3,755                4,503
EBITDA                                (557)                239           m   (1,126)              (1,707)
Net loss                           ($1,947)            ($1,812)             ($2,612)             ($3,682)
Net loss to common
shareholders                       ($3,207)            ($2,603)             ($7,295)             ($4,033)
Net loss per share                  ($0.05)             ($0.05)              ($0.12)              ($0.06)
</TABLE>

<TABLE>
<CAPTION>
                                Quarter ended      Quarter ended       Quarter ended        Quarter ended
     Fiscal 2001                  10/31/00            01/31/01             04/30/01             07/31/01
     -----------                  --------            --------             --------             --------
<S>                               <C>                 <C>                  <C>                  <C>
Operating revenues                 $ 7,499             $ 8,050             $ 11,468             $ 14,327
Cost of services                     5,528               5,417                7,619                9,975
Gross margin                         1,971               2,633                3,849                4,352
SG&A                                 5,221               4,057                4,498                4,010
EBITDA                              (3,301)             (1,503)                (688)                 270
Net loss                           ($4,684)            ($2,401)             ($1,829)             ($1,638)
Net loss to common
shareholders                       ($5,571)            ($2,634)             ($2,304)             ($2,275)
Net loss per share                  ($0.05)             ($0.04)              ($0.03)              ($0.03)
</TABLE>

                                       80

<PAGE>

         19.      SUBSEQUENT EVENTS

         In September 2001, the holder of the Series E Preferred Stock converted
350 of the 3,490 shares outstanding and accumulated interest into common stock
resulting in the issuance of 1,177,498 shares of common stock. In accordance
with the terms of the Investment Option of the Series E Preferred Stock, the
holder purchased an additional 493,422 shares of common stock for $150,000.

         On October 16, 2001 ATSI obtained bankruptcy court approval to purchase
Telscape's Houston-based Teleport assets for $50,000. The assets are being sold
as part of a court-supervised sale in the bankruptcy proceedings of Telscape.
Closing is expected to occur within the first half of November. The assets to be
purchased include Telscape's Houston-based satellite and telecommunications
equipment, its multinational customer base and accounts receivable. The purchase
does not include any of Telscape's assets owned by foreign subsidiaries or
affiliates. Telscape's Trustee and ATSI's management had previously entered into
an Interim Operating Agreement that allowed ATSI to manage the satellite
operations pending ATSI's purchase of the assets. The Interim Operating
Agreement also received the Bankruptcy Court's approval.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

                                    PART III
                                    --------

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement of the 2001 Annual
Meeting of Stockholders.

ITEM 11.   EXECUTIVE COMPENSATION

The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2001
Annual Meeting of Stockholders.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2001
Annual Meeting of Stockholders.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2001
Annual Meeting of Stockholders.

                                       81

<PAGE>

                                     PART IV
                                     -------

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Financial Statements
     Index to Financial Statements appears on Page 43.

(b)  Reports on Form 8-K
     None.

(c)  Exhibits

3.1  Amended and Restated Certificate of Incorporation of American TeleSource
     International, Inc., a Delaware corporation (Exhibit 3.3 to Amendment No. 2
     to Registration statement on Form 10 (No. 333-05557) of ATSI filed on
     September 11, 1997)

3.2  Amended and Restated Bylaws of American TeleSource International, Inc.
     (Exhibit to Amended Annual Report on Form 10-K for year ended July 31, 1999
     filed April 13, 2000)

4.1  Certificate of Designation, Preferences and Rights of 10% Series A
     Cumulative Convertible Preferred Stock (Exhibit 10.43 to Annual Report on
     Form 10-K for year ending July 31, 1999 filed on October 26, 1999)

4.2  Certificate of Designation, Preferences and Rights of 6% Series B
     Cumulative Convertible Preferred Stock (Exhibit 10.34 to Registration
     statement on Form S-3 (No. 333-84115) filed August 18, 1999)

4.3  Certificate of Designation, Preferences and Rights of 6% Series C
     Cumulative Convertible Preferred Stock (Exhibit 10.40 to Registration
     statement on Form S-3 (No. 333-84115) filed October 26, 1999)

4.4  Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI dated
     July 2, 1999 (Exhibit 10.33 to Registration statement on Form S-3 (No.
     333-84115) filed August 18, 1999)

4.5  Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI dated
     July 2, 1999 (Exhibit 10.35 to Registration statement on Form S-3 (No.
     333-84115) filed August 18, 1999)

4.6  Registration Rights Agreement between The Shaar Fund Ltd. and ATSI dated
     July 2, 1999 (Exhibit 10.36 to Registration statement on Form S-3 (No.
     333-84115) filed August 18, 1999)

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<PAGE>

4.7      Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI
         dated September 24, 1999 (Exhibit 10.39 to Registration statement on
         Form S-3 (No. 333-84115) filed October 26, 1999)

4.8      Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI
         dated September 24, 1999 (Exhibit 10.41 to Registration statement on
         Form S-3 (No. 333-84115) filed October 26, 1999)

4.9      Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
         dated September 24, 1999 (Exhibit 10.42 to Registration statement on
         Form S-3 (No. 333-84115) filed October 26, 1999)

4.10     Amended and Restated 1997 Option Plan (Exhibit 10.30 to Registration
         statement on Form S-4 (No. 333-47511) filed March 6, 1998)

4.11     Form of 1997 Option Plan Agreement (Exhibit 10.7 to Registration
         statement on Form 10 (No. 000-23007) filed August 22, 1997)

4.12     American TeleSource International, Inc. 1998 Stock Option Plan (Exhibit
         4.7 to Registration statement on Form S-8 filed January 11, 2000)

4.13     Form of letter dated December 30, 1999 from H. Douglas Saathoff, Chief
         Financial Officer of American TeleSource International, Inc. to holders
         of Convertible Notes (Exhibit 4.1 to Registration statement on Form S-3
         (No. 333-35846) filed April 28, 2000

4.14     Form of letter dated January 24, 2000 from H. Douglas Saathoff, Chief
         Financial Officer of American TeleSource International, Inc. to holders
         of Convertible Notes (Exhibit 4.2 to Registration statement on Form S-3
         (No. 333-35846) filed April 28, 2000)

4.15     Registration Rights Agreement between American TeleSource
         International, Inc. and Kings Peak, LLC dated February 4, 2000 (Exhibit
         4.4 to Registration statement on Form S-3 (No. 333-35846) filed April
         28, 2000)

4.16     Form of Convertible Note for $2.2 million principal issued March 17,
         1997 (Exhibit 4.5 to Registration statement on Form S-3(No. 333-35846)
         filed April 28, 2000)

4.17     Form of Modification of Convertible Note (Exhibit 4.6 to Registration
         statement on Form S-3(No. 333-35846) filed April 28, 2000)

4.18     Promissory Note issued to Four Holdings, Ltd. dated October 17, 1997
         (Exhibit 4.7 to Registration statement on Form S-3 (No. 333-35846)
         filed April 28, 2000)

4.19     Securities Purchase Agreement between The Shaar Fund Ltd. and ATSI
         dated February 22, 2000 (Exhibit 4.5 to Registration statement on Form
         S-3 (No. 333-89683) filed April 13, 2000)


                                       83

<PAGE>

4.20     Certificate of Designation, Preferences and Rights of 6% Series D
         Cumulative Convertible Preferred Stock (Exhibit 4.6 to Registration
         statement on Form S-3 (No. 333-89683) filed April 13, 2000)

4.21     Common Stock Purchase Warrant issued to The Shaar Fund Ltd. by ATSI
         dated February 22, 2000 (Exhibit 4.7 to Registration statement on Form
         S-3 (No. 333-89683) filed April 13, 2000)

4.22     Common Stock Purchase Warrant issued to Corporate Capital Management
         LLC by ATSI dated February 22, 2000 (Exhibit 4.8 to Registration
         statement on Form S-3 (No. 333-89683) filed April 13, 2000)

4.23     Registration Rights Agreement between The Shaar Fund Ltd. and ATSI
         dated February 22, 2000 (Exhibit 4.9 to Registration statement on Form
         S-3 (No. 333-89683) filed April 13, 2000)

4.24     Securities Purchase Agreement between ATSI and RGC International
         Investors, LDC dated October 11, 2000 (Exhibit 10.1 to Form 8-K filed
         October 18, 2000)

4.25     Certificate of Designation, Preferences and Rights of 6% Series E
         Cumulative Convertible Preferred Stock (Exhibit 10.2 to Form 8-K filed
         October 18, 2000)

4.26     Certificate of Correction of Certificate of Designation, Preferences
         and Rights of 6% Series E Cumulative Convertible Preferred Stock
         (Exhibit 10.3 to Form 8-K filed October 18, 2000)

4.27     2/nd/ Certificate of Correction of Certificate of Designation,
         Preferences and Rights of 6% Series E Cumulative Convertible Preferred
         Stock (Exhibit 10.4 to Form 8-K filed October 18, 2000)

4.28     Registration Rights Agreement between ATSI and RGC International
         Investors, LDC dated October 11, 2000 (Exhibit 10.5 to Form 8-K filed
         October 18, 2000)

4.29     Stock Purchase Warrant between ATSI and RGC International Investors,
         LDC dated October 11, 2000 (Exhibit 10.6 to Form 8-K filed October 18,
         2000)

4.30     Certificate of Designation, Preferences and Rights of 15% Series F
         Cumulative Convertible Preferred Stock (Exhibit 4.30 to Annual Report
         on Form 10-K for the year ended July 31, 2001 filed October 30, 2001)

4.31     Securities Purchase Agreement between ATSI and "Buyers" dated March 21,
         2001(Exhibit 4.31 to Annual Report on Form 10-K for the year ended July
         31, 2001 filed October 30, 2001)

4.32     Stock Purchase Warrant between ATSI and "Buyers" dated March 23, 2001
         (Exhibit 4.32 to Annual Report on Form 10-K for the year ended July 31,
         2001 filed October 30, 2001)

                                       84

<PAGE>

4.33     Certificate of Designation, Preferences and Rights of 15% Series G
         Cumulative Convertible Preferred Stock (Exhibit 4.33 to Annual Report
         on Form 10-K for the year ended July 31, 2001 filed October 30, 2001)

4.34     Securities Purchase Agreement between ATSI and "Buyers"dated March 21,
         2001(Exhibit 4.34 to Annual Report on Form 10-K for the year ended July
         31, 2001 filed October 30, 2001

4.35     Stock Purchase Warrant between ATSI and "Buyers" dated March 21, 2001
         (Exhibit 4.35 to Annual Report on Form 10-K for the year ended July 31,
         2001 filed October 30, 2001)

10.1     Agreement with SATMEX (Agreement #095-1) (Exhibit 10.31 to Annual
         Report on Form 10-K for year ended July 31, 1998 (No. 000-23007))

10.2     Agreement with SATMEX (Agreement #094-1) (Exhibit 10.32 to Annual
         Report on Form 10-K for year ended July 31, 1998 (No. 000-23007))

10.3     Amendment to Agreement #094-1 with SATMEX (Exhibit 10.3 to Amended
         Annual Report on Form 10-K for year ended July 31, 1999 filed August
         25, 2000)

10.4     Amendment to Agreement #095-1 with SATMEX (Exhibit10.4 to Amended
         Annual Report on Form 10-K for year ended July 31, 1999 filed August
         25, 2000)

10.5     Bestel Fiber Lease (Exhibit 10.5 to Amended Annual Report on Form 10-K
         for year ended July 31, 1999 filed April 14, 2000)

10.6     Addendum to Fiber Lease with Bestel, S.A. de C.V. (Exhibit 10.6 to
         Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
         August 25, 2000)

10.7     Lease Finance Agreements between IBM de Mexico and ATSI-Mexico (Exhibit
         10.21 to Amendment No. 1 to Registration statement on Form 10 (No.
         023007) filed September 11, 1997)

10.8     Agreement between IBM de Mexico and ATSI-Mexico (Exhibit 10.8 to Annual
         Report on Form 10-K for year ended July 31, 2001 filed November 14,
         2000)

10.9     Master Lease Agreement with NTFC (Exhibit 10.9 to Amended Annual Report
         on Form 10-K for year ended July 31, 1999 filed April 14, 2000)

10.10    BancBoston Master Lease Agreement (Exhibit 10.10 to Amended Annual
         Report on Form 10-K for year ended July31, 1999 filed August 25, 2000)

10.11    Employment Agreement with Arthur L. Smith dated - February 28, 1997
         (Exhibit 10.16 to Registration statement on Form 10 (No. 333-05557)
         filed August 22, 1997)

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<PAGE>

10.12    Employment Agreement with Arthur L. Smith dated September 24, 1998
         (Exhibit 10.12 to Amended Annual Report on Form 10-K filed April 14,
         2000)

10.13    Employment Agreement with Sandra Poole-Christal dated January 1, 1998
         (Exhibit 10.15 to Amended Annual Report on Form 10-K for year ended
         July 31, 1999 filed April 14, 2000)

10.14    Employment Agreement with H. Douglas Saathoff dated February 28, 1997
         (Exhibit 10.17 to Registration statement on Form 10 (No. 333-05557)
         filed August 22, 1997)

10.15    Employment Agreement with H. Douglas Saathoff dated January 1, 2000
         (Exhibit 10.19 to Amended Annual Report on Form 10-K for year ended
         July 31, 1999 filed April 14, 2000)

10.16    Office Space Lease Agreement (Exhibit 10.14 to Registration statement
         on Form S-4 (No. 333-05557) filed June 7, 1996)

10.17    Amendment to Office Space Lease Agreement (Exhibit 10.14 to
         Registration statement on Form S-4 (No. 333-05557) filed June 7, 1996)

10.18    Commercial Lease with ACLP University Park SA, L.P. (Exhibit 10.23 to
         Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
         April 14, 2000)

10.19    Amendment to Commercial Lease with ACLP University Park SA, L.P.
         (Exhibit 10.24 to Amended Annual Report on Form 10-K for year ended
         July 31, 1999 filed April 14, 2000)

10.20    Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park
         SA, L.P (Exhibit 10.25 to Amended Annual Report on Form 10-K for year
         ended July 31, 1999 filed April 14, 2000)

10.21    Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP
         University Park SA, L.P (Exhibit10.26 to Amended Annual Report on Form
         10-K for year ended July 31, 1999 filed April 14, 2000)

10.22    Compensation Agreement between ATSI-Texas and James McCourt relating to
         Guarantee of Equipment Line of Credit by James McCourt (Exhibit 10.3 to
         Registration statement on Form 10 (No. 000-23007) filed on August 22,
         1997)

10.23    Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit
         10.28 to Amended Annual Report on Form 10-K for year ended July 31,
         1999 filed April 14, 2000)

11       Statement of Computation of Per Share Earnings (Exhibit 11 to Annual
         Report on Form 10-K for year ended July 31, 2001 filed October 30,2001)


                                       86

<PAGE>

22       Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year
         ended July 31, 2000 filed October 30, 2001)

23       Consent of Arthur Andersen LLP) (Exhibit to this Annual Report on Form
         10-K for year ended July 31, 2001 filed October 30, 2001)

99.1     FCC Radio Station Authorization - C Band (Exhibit 10.10 to Registration
         statement on Form S-4 (No. 333-05557) filed June 7, 1996)

99.2     FCC Radio Station Authorization - Ku Band (Exhibit 10.11 to
         Registration statement on Form 10 (No. 333-05557) filed June 7, 1996)

99.3     Section 214 Certification from FCC (Exhibit 10.12 to Registration
         statement on Form 10 (No. 333-05557) filed June 7, 1996)

99.4     Comercializadora License (Payphone License) issued to ATSI-Mexico
         (Exhibit 10.24 to Registration statement on Form 10 (No. 000-23007)
         filed August 22, 1997)

99.5     Network Resale License issued to ATSI-Mexico (Exhibit 10.25 to
         Registration statement on Form 10 (No. 000-23007) filed August 22,
         1997)

99.6     Shared Teleport License issued to Sinfra (Exhibit 99.7 to Amended
         Annual Report on Form 10-K for year ended July 31, 1999 filed April 14,
         2000)

99.7     Packet Switching Network License issued to SINFRA (Exhibit 10.26 to
         Registration statement on Form 10 (No. 000-23007) filed August 22,
         1997)

99.8     Value-Added Service License issued to SINFRA(Exhibit 99.9 to Amended
         Annual Report on Form 10-K for year ended July 31, 1999 filed April 13,
         2000)

                                       87

<PAGE>

                                   SIGNATURES
                                   ----------

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
October 30, 2001.

                     AMERICAN TELESOURCE INTERNATIONAL, INC.

                            By:  /s/ Arthur L. Smith
                                 -------------------
                                 Arthur L. Smith
                                 Chief Executive Officer

                            By:  /s/ H. Douglas Saathoff
                                 -----------------------
                                 Douglas Saathoff
                                 Senior Executive Vice President and Chief
                                 Financial Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on October 30, 2001.

               Signature                                 Title
               ---------                                 -----

         /s/ ARTHUR L. SMITH                     Chairman of the Board,
         -------------------                     Chief Executive Officer,
                                                 Director
                                                 (Principal Executive Officer)


         /s/ H. DOUGLAS SAATHOFF                 Chief Financial Officer and
         -----------------------                 Senior Executive Vice President
                                                 (Principal Accounting and
                                                 Finance Officer)

         /s/ RICHARD C. BENKENDORF               Director
         -------------------------

         /s/ JOHN R. FLEMING                     Director
         -------------------

         /s/ CARLOS K. KAUACHI                   Director
         -----------------------

         /s/ MURRAY R. NYE                       Director
         -----------------

         /s/ TOMAS REVESZ                        Director
         ------------------

         /s/ STEPHEN M. WAGNER                   Director,  Chief Operating
         ---------------------                   Officer

                                       88