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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, 2002

                                       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 January 14, 2003, was approximately
$8,019,563. There were 103,638,690 shares of Common Stock outstanding at January
14, 2003, and the closing sales price on the American Stock Exchange for our
Common Stock was $0.08 on such date.

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                                TABLE OF CONTENTS

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                                                          PART I

Item 1.  Business ..............................................................................................     3
          Overview and Recent Developments .....................................................................     3
          Strategy and Competitive Conditions ..................................................................     4
          Retail Distribution Network ..........................................................................     6
          Services and Products ................................................................................     7
               Carrier Services ................................................................................     7
               Network Services ................................................................................     8
               Retail Services .................................................................................     9
          Network ..............................................................................................     9
          Licenses/Regulatory ..................................................................................    10
          Employees ............................................................................................    12
          Additional Risk Factors ..............................................................................    12
Item 2.  Properties ............................................................................................    23
Item 3.  Legal Proceedings .....................................................................................    23
Item 4.  Submission of Matters to a Vote of Security Holders ...................................................    24

                                                         PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters .................................    24
Item 6.  Selected Financial and Operating Data .................................................................    26
Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations .................    26
          General ..............................................................................................    27
          Results of Operations ................................................................................    27
          Liquidity and Capital Resources ......................................................................    35
          Inflation/Foreign Currency ...........................................................................    37
          Seasonality ..........................................................................................    37
          Market Risk ..........................................................................................    37
Item 8.  Financial Statements and Supplementary Data ...........................................................    39
Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosures .................    78

                                                         PART III

Item 10. Directors and Officers of the Registrant ..............................................................    79
Item 11. Executive Compensation ................................................................................    82
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................................    85
Item 13. Certain Relationships and Related Transactions ........................................................    86

                                                         PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................................    87
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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. Historically, we have leased 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. During fiscal 2003, we anticipate beginning the installation of
a Voice over Internet Protocol (VoIP) network which will allow us to further
expand the outreaches of our current network, reduce fixed costs, speed up
provisioning of new customers and provide us with greater flexibility. The
installation of the VoIP network is contingent upon our ability to obtain equity
or debt financing to purchase the necessary equipment.

       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, 2002 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 continue to 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. In recent months we have made a number of decisions to allow us to
conserve our resources

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including the termination of a number of employees both at the corporate level
as well as in Mexico and reducing and then eventually idling our carrier network
capacity.

       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;

  .           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; at year-end this subsidiary owned 125
       communication centers in 63 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 network services traffic between the U.S. and Latin America

Recent Developments

       During our fiscal year ending July 31, 2002, we:

       .      Hired Stephen M. Wagner as President and Chief Operating Officer

       .      Signed strategic deals in Mexico with four other concessionaires
              (including Telefonos de Mexico, S.A. de C.V. (Telmex) and a CLEC
              (competitive local exchange carrier).

       .      Restructured our debt agreements with IBM and GE Capital

       .      Upgraded switching platform in Dallas through the installation of
              a Nortel Supernode

       .      Sold our majority ownership of GlobalSCAPE, Inc., an e-commerce
              entity which was not vital to our core business

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 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

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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:

       .      the rapid growth of the Latino segment of the United States
              population
       .      Mexico's status as the # 1 calling partner with the United States
       .      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 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 our 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. As regulatory and market
conditions permit, 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 license
holders are Mexican based affiliates of top tier U.S. carriers MCI/Worldcom and
AT&T. Although the Mexican government has also licensed 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

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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 and have entered the U.S. market for carrier termination services to
Mexico. 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 during fiscal year 2002, downward
pricing pressure in this market resulted in a less than proportional increase in
revenues. We expect that the market will continue to experience downward pricing
pressures. 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.

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 calling centers strategically located to serve travelers and the large
population of the country who typically do not have

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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 two years ago, we began offering additional enhanced
services such as prepaid and Internet services. We are the largest communication
center operator in Mexico with approximately 125 communication centers in 63
cities, at year-end, operating under the trade name "Computel(TM)". 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 370 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. Subsequent to year-end, we entered
into a management services agreement, with a former employee, to manage our
public pay telephone business.

Services and Products

       In the presentation of our historical financial results, we have divided
our revenues into three categories: Carrier services, network services and
retail 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 65% of our overall revenues in fiscal 2000,
approximately 74% in fiscal 2001 and 81% in fiscal 2002. The percentage of our
total volume of carrier services traffic sent by customers can fluctuate
dramatically, on a quarterly, and sometimes, daily basis. Historically, a
handful of customers have accounted for a majority of the total carrier services
volume, although not necessarily the same 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 are 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. During
fiscal 2001 we had two customers and during fiscal 2002 we had one customer,
respectively, whose traffic accounted for more than 10% of our consolidated
revenues. Through the high quality and reliability of our service and the
underlying infrastructure we were 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. Additionally, we believe we can create

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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.

     Over the last few quarters, as the telecommunications sector has continued
to suffer financially and operationally, we have seen a trend towards more and
more of our carriers requiring substantial deposits and or prepayments. As a
result, in December 2002, we were forced to idle our network until such time as
we can secure letters-of-credit or obtain sufficient cash to meet the
prepayments and deposit requirements of many of our carriers. Since that time we
have not been carrying any carrier traffic and have not generated any revenues
related to this product.

     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 other concessionaires 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. 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 may also be 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 and 2002, we did not devote significant resources
toward the development of this business in Mexico.

     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.

     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.

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     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 and 2002 was
integrated prepaid services, which are generated by calls processed by us
without live or automated operator assistance. A majority of these calls were
generated by our payphones 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 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.

     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 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 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.

Network

     We have established a technologically advanced network capable of using
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 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.

     Historically, our strategy has been to lease the fiber optic capacity to
access major metropolitan areas in Mexico and satellite 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

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to the other portion until the problem is resolved. During fiscal 2003, we plan
to enhance our existing network with the purchase of VOIP gear, which will allow
us to reduce our fixed costs as well as increase the flexibility of the network.
The installation of the VoIP network is contingent upon our ability to obtain
equity or debt financing to purchase the necessary equipment.

     Historically, we have leased fiber capacity from third parties, primarily
Bestel USA, Inc. and Iusacel, S.A. de C.V. and satellite capacity on the Mexican
satellites Solidaridad I and II, from COMSAT, S.A. de C.V. or "COMSAT. 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.
Subsequent to year-end, Bestel USA, Inc. terminated service on our fiber route
to Mexico City due to non-payment. While we have maintained our fiber capacity
with Iusacel, S.A. de C.V. into Monterrey, we are not currently using this
capacity. In November 2002, we began leasing satellite capacity directly from
SATMEX or Satelites Mexicanos, S.A. de C.V.

     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. During fiscal
2002, we purchased and installed a super node in our Dallas location -
increasing the capabilities of our existing switch.

     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.

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.

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     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.

     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

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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 had 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. In October 2002 we completed the sale of a
handful of network services customers reducing our operations in Costa Rica.

Employees

     At January 15, 2003, we (excluding ATSI-Mexico) had 6 employees, all of
whom performed operational, technical and administrative functions.

     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 December 15, 2002, ATSI-Mexico had 358 full-time employees of whom 310
were operators and 48 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.

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

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     Our auditors' opinion on our financial statements as of July 31, 2002 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 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, 2002, we had negative working capital of approximately $13.2
     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,
     2002, our negative cash flows from operations prior to debt service and
     capital expenditures were approximately $519,000. 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 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

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<PAGE>

     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. 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
     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 21 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

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<PAGE>

     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
     affect 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.

..    The telecommunications industry has been characterized by steady
     technological change. We may not be able to raise the money we need to
     acquire the new technology necessary to keep our services competitive.

     To complete successfully in the carrier and retail services markets, we
     must maintain the highest quality of service. Therefore we must continually
     upgrade our network to keep pace with technological change. This is
     expensive, and we do not have substantial resources that our large
     competitors have.

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

     From time to time some of our carrier services network customers generate
     large receivable balances. We incur substantial direct costs to provide
     this service since we must pay our carriers to terminate these calls. If a
     customer fails to pay a large balance on time, our cash flow may be

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<PAGE>

     substantially reduced and we would have difficulty paying our carriers on
     time. If our 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 SATMEX for satellite transmission
     capacity and 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 2002, the monthly average amount due to these suppliers as a group
     was approximately $2.9 million. 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 equipment with borrowed money. This equipment
     includes our DMS 250/350 International gateway switch from Nortel,
     additional DMS equipment from Nortel and certain equipment in Mexico from
     IBM. Under our restructured debt agreements we are required to pay these
     three lenders approximately $186,000 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 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 are in default of our Nortel switch loan agreement
     as of the end of our fiscal year, July 31, 2002, due to our failure to meet
     financial covenants related to revenues, gross margins and EBITDA. We have
     had ongoing conversations with our lender about re-setting the covenants
     but have not as of the date of this filing finalized new covenants.
     Subsequent to July 31, 2002 we have not made quarterly payments totaling
     approximately $282,000. Accordingly, we have accounted for this capital
     lease as a current liability in our accompanying consolidated financial
     statements. For more information on this default, you should see the
     Liquidity and Capital Resources section of this 10-K for the year ending
     July 31, 2002. As of January 31, 2003, we had not yet made payments
     totaling approximately $325,000 related to our capital lease with IBM. 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, 2002.

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

     At year-end, our revenues from carrier services comprised about 81% of our
     total revenues. The volume of business sent by each customer fluctuates,
     but this traffic is often heavily concentrated amongst a handful of
     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

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<PAGE>

     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. 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

     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

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<PAGE>

     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 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 742 shares currently outstanding were outstanding at the time of a
     change of control, this could result in a payment to the holder of
     approximately $1.2 million. 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.

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<PAGE>

     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.

     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 742 shares currently outstanding were outstanding at the time
     of redemption, this would result in a cash payment of approximately
     $942,000 plus accrued and unpaid dividends. If we were required to make a
     cash payment of this size, it would severely restrict our ability to fund
     our operations. On January 26, 2003 we received a demand letter from the
     Series D holder requesting that we redeem all of their outstanding shares.

     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.

     While we have not received a formal demand letter from the holder of the
     Series E Preferred Stock requesting redemption we have received conversion
     notices for which we have not issued common stock.

..    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

                                       19

<PAGE>

     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 at a price of $4.37 per
     share. 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

..    Trading in our common stock has been halted and may not be resumed

     The AMEX halted trading in our stock pending the filing of our Form 10-K
     and Form 10-Q. There has been no guarantee from the AMEX as to when the
     halting of trading in our stock will be lifted. If we do not resume trading
     on the AMEX, 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.

..    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;
        -     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
     January 15, 2003, we had 103,638,690 shares of common stock outstanding and
     13,750,662 shares issuable upon exercise of outstanding options and
     warrants. In addition, we have shares which could be issued upon conversion
     of our outstanding Series A, D and E, F and G Preferred Stock (subject to
     adjustment). Additionally, 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.

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<PAGE>

..    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.

..    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 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.

..    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

                                       21

<PAGE>

     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, 2002 is approximately $330,233 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.

..    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. Additionally, as a part of our annual
     review by the American Stock Exchange we were required to submit a plan as
     to how we would continue to be in compliance with the listing requirements
     as of April 30, 2003. If our common stock falls to this level or is not in
     compliance with the listing requirements as of April 30, 2003 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, 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

                                       22

<PAGE>

   affect the market price of, and the voting and other rights of, the holders
   of outstanding shares of common stock.

..  The impact of our lawsuit against two of our preferred stock holders is
   unknown

   As of the date of this filing, we do not know what the impact, positive or
   negative, of our filing a lawsuit against certain preferred stock holders
   will have on the trading of our stock as well as the price of our stock. If
   we were to lose the lawsuit, it is likely we would have to issue a
   substantial amount of shares to our Series D and Series E holders diluting
   your ownership of ATSI and putting substantial pressure on the 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 $282,705 under the lease and are responsible for taxes and
insurance. In August 2003, we obtained a six-month reduction in our monthly rent
of approximately $12,000 in exchange for an additional three months of rent at
the end of our current lease. Management believes our leased facilities are
suitable and adequate for their intended use. As of the date of this filing, we
are in arrears to our landlord at our executive offices for the months of
November, December and January.

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 have negotiated a cash resolution with
Comdisco for an amount deemed to be immaterial.

       In July 2002, 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. ATSI was unable to proceed in its
appeal of the appraisal due to its failure to pay the taxes under protest.
During fiscal 2002 we recorded approximately $260,000 of property tax expense
related to our Dallas office. As of the date of this filing, no payments have
been made.

       In December 2002, ATSI-Delaware and ATSI the Texas corporation, were both
sued in Mexico for an alleged breach of a promissory note. The U.S. companies
were guarantors on a promissory note to a Mexican telecommunications carrier.
ATSI is vigorously defending the suits in Mexico, which are claiming
approximately $200,000. ATSI believes it has a justifiable basis for its
position in the litigation and believes that we will be able to resolve the
dispute without suffering a material adverse effect on our financial position.

       ATSI has also filed a lawsuit in the Southern District of New York
against several financial parties for what ATSI believes is "stock fraud and
manipulation". The case is based on convertible

                                       23

<PAGE>

preferred stock financing transactions involving primarily two firms, Rose Glen
Capital and the Shaar Fund. In both of those transactions, ATSI believes it was
defrauded and its stock was manipulated.

       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". The table
below sets forth the high and low bid prices for the Common Stock from August 1,
2000 through January 14, 2003 as reported by AMEX. On January 15, 2003, trading
in our common stock was halted pending the filing of our Form 10-K and Form
10-Q. These price quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.

              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 -                                    $ 0.42     $0.30
              Second -                                   $ 0.37     $0.24
              Third -                                    $ 0.28     $0.21
              Fourth -                                   $ 0.25     $0.07

              Fiscal 2003                                  High     Low
              -------------------------------------------------------------
              First -                                    $ 0.12     $0.03
              Second - (through January 14, 2003)        $ 0.16     $0.07

       At January 14, 2003, the closing price of our Common Stock as reported by
AMEX was $0.08 per share. As of January 14, 2003, we had approximately 15,000
stockholders, including both beneficial 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.

                                       24

<PAGE>

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

       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 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 11 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. To date we 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).

                                       25

<PAGE>

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.

<TABLE>
<CAPTION>
                                                                       Years ended July 31,
                                                                       --------------------
                                                   1998         1999        2000         2001          2002
                                                   ----         ----        ----         ----          ----
                                                           (In thousands of $, except per share data)
<S>                                             <C>          <C>         <C>          <C>           <C>
Consolidated Statement of Operations
Data:
Operating revenues:
 Carrier services                               $  10,047    $  14,123   $  22,191    $  26,349     $  40,922
 Network services                                   3,315        5,127       2,538        2,714         2,223
 Retail services                                   19,632       12,626       9,572        6,836         7,556
                                                ---------    ---------   ---------    ---------     ---------
 Total operating revenues                          32,963       31,876      34,301       35,899        50,701
Operating expenses:
 Cost of services                                  21,898       21,141      26,654       28,297        42,862
 Selling, general and administrative               11,934       11,303      12,013       12,449        12,285
 Impairment loss                                        -            -           -            -         6,432
 Bad debt                                             997        2,276         755          150           388
 Depreciation and amortization                      1,796        3,070       4,296        3,920         4,115
                                                ---------    ---------   ---------    ---------     ---------
 Total operating expenses                          36,625       37,790      43,718       44,816        66,082
 Loss from operations                              (3,278)      (5,914)     (9,417)      (8,917)      (15,381)
                                                ---------    ---------   ---------    ---------     ---------
 Net loss                                       $  (5,292)   $  (8,445)  $ (17,138)   $ (12,785)    $ (14,989)
                                                =========    =========   =========    =========     =========
Per share information:
 Net loss - basic and diluted                   $   (0.13)   $   (0.18)  $   (0.30)   $   (0.18)    $   (0.17)
                                                ---------    ---------   ---------    ---------     ---------
 Weighted average common shares
 outstanding - basic and diluted                   41,093       47,467      56,851       71,180        86,275
                                                ---------    ---------   ---------    ---------     ---------

Consolidated Balance Sheet Data:
 Working capital (deficit)                      $  (5,687)   $  (6,910)  $  (5,251)   $  (9,236)    $ (13,169)
 Current assets                                     5,683        5,059       5,441        3,342         1,802
 Total assets                                      24,251       24,154      26,894       23,360        10,457
 Long-term obligations, including
 current portion                                    8,303       10,168       6,750        6,540         5,097
 Total stockholders' equity (deficit)               7,087        6,137      10,978        5,618        (7,112)
</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, 2000,
2001, and 2002. It should be read in conjunction with our Consolidated Financial
Statements, the Notes thereto and the other financial information

                                       26

<PAGE>

included elsewhere in this annual report on Form 10-K. For purposes of the
following discussion, fiscal 2000 or 2000 refers to the year ended July 31,
2000, fiscal 2001 or 2001 refers to the year ended July 31, 2001 and fiscal 2002
or 2002 refers to the year ended July 31, 2002.

General

       We are an international carrier serving the rapidly expanding
communications markets in and between Latin America and the United States. Our
mission is to connect the Americas with exceptional communications services
guided by our core values that drive everything we do. Our 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, we generate our traffic from retail points
of presence throughout Mexico, as well as from relationships with major carriers
based in the United States.

       ATSI's 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. We are
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, ATSI's strength lies in our framework of licenses,
interconnection agreements and business relationships in Mexico, as well as in
our customer relationships and industry knowledge in the United States. We have
over 300 employees based in Mexico, and operate Mexican subsidiaries with
licenses that allow them to sell local and long distance traffic, transport long
distance traffic, and operate a network utilizing packet-switching technology.
Utilizing these strengths, we have leveraged off of the networks of third
parties to build a reliable customer base, and have established our own
international satellite and fiber-based network to long haul consumer, corporate
and carrier-generated traffic between the U.S. and Mexico.

       As discussed in Note 16 to our consolidated financial statements we have
determined that we have two reportable operating segments: 1) U.S Telco and 2)
Mexico Telco.

       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 revenue is recorded in the U.S.
Telco 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, 2002. Additionally, we have had
recurring negative cash flows from operations over the past few fiscal years.
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 2003. However, we cannot assure you that
this will be the case.

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, 2000, 2001 and 2002.

                                       27

<PAGE>

<TABLE>
<CAPTION>
                                                               Year Ended July 31,
                                               ---------------------------------------------------
                                                     2000              2001               2002
                                               ---------------------------------------------------
                                                  $       %         $       %          $        %
                                                  -       -         -       -          -        -
<S>                                            <C>       <C>    <C>         <C>    <C>         <C>
Operating revenues
------------------
Telco services
   Carrier services                            $ 22,191   65%   $  26,349   74%    $  40,922   81%
   Network services                               2,538    7%       2,714    7%        2,223    4%
   Retail services                                9,572   28%       6,836   19%        7,556   15%
                                               --------         ---------          ---------
Total operating revenues                         34,301  100%      35,899  100%       50,701  100%

Cost of services                                 26,654   78%      28,297   79%       42,862   85%
                                               --------         ---------          ---------

Gross margin                                      7,647   22%       7,602   21%        7,839   15%

Selling, general and
  administrative expenses                        12,013   35%      12,449   35%       12,285   24%

Impairment loss                                       -    0%           -    0%        6,432   13%

Bad debt expenses                                   755    2%         150    0%          388    0%

Depreciation and amortization                     4,296   12%       3,920   11%        4,115    8%
                                               --------         ---------          ---------

Operating loss                                   (9,417) -27%      (8,917) -25%      (15,381) -30%

Other income (expense), net                      (2,169)  -8%        (887)  -2%         (492)  -1%
                                               --------         ---------          ---------

Net loss from continuing operations
before income tax and minority interests        (11,586) -34%      (9,804) -27%      (15,873) -31%

Minority interests                                    -    0%         245    0%          203    0%
Income tax expense (benefit)                          -    0%        (223)   0%         (110)   0%
                                               --------         ---------          ---------

Net loss from continuing operations             (11,586) -34%      (9,782) -27%      (15,780) -31%

Income (loss) from discontinuing
operations, net of tax                            1,533    4%        (771)  -2%          194    0%

Gain on disposition of discontinued
operations, net of tax                                -    0%           -    0%        1,069    2%

Less: preferred stock dividends                  (7,085) -20%      (2,232)  -6%         (472)  -1%
                                               --------         ---------          ---------

Net loss to common shareholders                $(17,138) -50%   $ (12,785) -35%    $ (14,989) -30%
                                               ========         =========          =========
</TABLE>

                                       28

<PAGE>

Year Ended July 31, 2002 Compared to Year ended July 31, 2001

     Operating Revenues. Consolidated operating revenues increased 41% between
periods from $35.9 million for the year ended July 31, 2001 to $50.7 million for
the year ended July 31, 2002. As demand for our services increased, we began
adding capacity to both the switch and the network backbone in October 2001. The
net effect of our efforts during the year was three of the four highest quarters
of revenues in our history.

     Carrier services revenues increased approximately $14.6 million, or 56%
from 2001 to 2002. As a result of our efforts to add capacity, the units
transported via our network increased from approximately 277 million units
during the year ended July 2001 to approximately 458 million units during the
period ended April 2002.

     Network services decreased by approximately $491,000 or 18% between years.
The decline is attributable to a decreased volume of units transported via our
network and the loss of customers in our private network services business
between years. In October 2002, we completed the sale of our Costa Rica private
network services, which will further reduce our networks services revenues in
fiscal 2003.

     Retail services revenues increased approximately $720,000 between periods.
The improved revenues between years resulted from our efforts to become more
competitive in the products we offered as we evaluated our core business to
strategically relocate communication centers to concentrated areas where growth
would be realized.

     Cost of Services. Cost of services increased as a percentage of revenue
from 79% to 85%, year to year. The increase in carrier services traffic as a
percentage of overall revenues from 74% to 81% contributed greatly to the
increased cost of services both as a percentage of revenues and in actual
dollars. Our carrier services traffic has a higher cost per revenue dollar than
either network or retail services. The Company continues to try to improve its
carrier services margins through reductions in variable costs and improvements
realized from the installation of Nortel Passport equipment in the latter half
of fiscal 2001. Due to the substandard performance of the Nortel passport gear
we decommissioned it subsequent to July 31, 2002.

     Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased approximately $164,000, or 1% between periods. The improvement, which
resulted from management's efforts to cut excess spending by each department,
would have been even larger if not for approximately $500,000 of severance costs
recognized during fiscal 2002. In the first quarter of fiscal 2003, we incurred
additional severance expense related to our operations in Mexico. As a
percentage of revenues, SG&A declined from 35% to 24% period to period.

     Impairment loss. During fiscal 2002 we recorded approximately $6.4 million
of impairment loss related to certain fixed assets, the concession license and
goodwill associated with Computel. No impairment expense was recorded in fiscal
2001.

     Bad Debt Expense. Bad Debt Expense increased by approximately $238,000
between periods due primarily to expense related to two of our carrier service
customers and the write-off of certain of our network services customers during
the year.

     Depreciation and Amortization. Depreciation and amortization increased by
approximately 5% or $195,000 between periods due to equipment purchases.

                                       29

<PAGE>

     Operating Loss. The Company's operating loss increased by approximately
$6.4 million due to the impairment loss recorded in fiscal 2002.

     Other Income(expense). Other expense decreased approximately $395,000
between years. The decrease was the net result of increased other income,
decreased interest expense and decreased interest income from 2001 to 2002.

     The increase in other income was primarily due to the restructuring of the
IBM capital lease in the fourth quarter of fiscal 2002. This restructuring
resulted in a gain of approximately $1,860,000.

     Income (loss) from discontinuing operations. The net income from our
e-commerce operations, net of taxes, during fiscal 2002 was $194,000 as compared
to a net loss of $771,000 for fiscal 2001.

     Gain on disposition of discontinued operations. The disposition in June
2002 of our e-commerce operations resulted in a gain of approximately $1.1
million, net of tax.

     Preferred Stock Dividends. During the year ended July 31, 2002, we recorded
approximately $472,000 of non-cash dividends related to our cumulative
convertible preferred stock. This compares favorably to the approximate $2.2
million of non-cash dividends and beneficial conversion feature expense
recognized during the year ended July 2001.

     Net loss to Common Stockholders. The net loss for the year increased by
approximately $2.2 million to $15.0 million from the $12.8 million net loss for
the year ended July 2001. The increase was due primarily to the impairment loss
of $6.4 million recorded in fiscal 2002 offset somewhat by a significant
increase in revenues, which improved our gross margin dollars. An additional
offset between years was the reduction in selling, general and administrative
expenses and preferred dividends.

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 $35.9 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 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.

                                       30

<PAGE>

     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.

     Cost of Services. Cost of services increased approximately $1.6 million, or
6%, between years and increased slightly as a percentage of revenues from 78% to
79%. 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. Due to the substandard performance of the Nortel passport
gear, we decommissioned it subsequent to July 31, 2002.

     Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
4%, or approximately $436,000, between periods. As a percentage of revenues,
these expenses remained flat at 35%. SG&A increased 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 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 $376,000, or 9%, 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 decreased approximately $500,000, or 5%
between periods and decreased as a percentage of revenues from 27% to 25%, due
primarily to increased bad debt and depreciation and amortization.

     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

                                       31

<PAGE>

finally, in fiscal 2001 we recorded a gain related to the extinguishment of a
liability of approximately $184,000.

     Income (loss) from discontinuing operations. The net loss from our
e-commerce operations, net of taxes, during fiscal 2001 was $771,000 as compared
to a net income of $1.5 million for fiscal 2000.

     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.

     Net loss to Common Stockholders. The net loss for 2001 improved by
approximately $4.4 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 as well as the
loss from our e-commerce operations in 2001 as compared to net income during
fiscal 2000.

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

     Operating Revenues. Consolidated revenues for fiscal 2000 totaled $34.3
million, an 8% increase over fiscal 1999's amount of $31.9 million. 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,

                                       32

<PAGE>

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 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 16 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.

         Cost of Services. Cost of services increased approximately $5.6 million
or 26% between years from $21.1 million in fiscal 1999 to $26.7 million in
fiscal 2000, and increased as a percentage of revenues from 66% to 78%. 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

                                       33

<PAGE>

carrier services business is exclusively accounted for in our U.S. Telco
segment. Carrier services revenues increased from 44% to 65% 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. 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 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 6%, or approximately $710,000 from fiscal 1999 to fiscal 2000. As a
percentage of revenue, these expenses remained flat at 35%. The increase in SG&A
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 $545,000 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 $1.5 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 $1.2 million, or 39%, and rose as a percentage of revenues from
10% to 13% 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 $3.5 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
$493,000 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

                                       34

<PAGE>

"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 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 $8.4 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.

     Liquidity and Capital Resources

     During the year ended July 31, 2002, we generated negative cash flows from
operations of approximately $509,000. The Company was able to minimize its
negative cash flow from operations primarily by working with customers to
shorten the cash conversion of receivables and working with vendors related to
payments.

     For the year, 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 $6.2 million. 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 positive cash flows of
approximately $5.7 million, resulting in the negative operating cash flows for
the period of approximately $509,000. This represents an approximate $5.5
million improvement over the negative operating cash flows of $6.0 million for
fiscal 2001.

     Although we were able to produce positive cash flows from operations during
three of the four quarters of fiscal 2002, we must produce positive cash flows
on a recurring basis, and reduce or eliminate our working capital deficit. Until
that time, 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.

     During the year ended July 31, 2002, the Company acquired approximately
$1.1 million in equipment which was not financed through capital lease or
financing arrangements. Additional material cash outflows included the payment
of approximately $1.2 million towards our capital lease obligations and an
additional $65,000 towards debt.

     During the year, we received cash proceeds of $2.25 million from the sale
of GlobalSCAPE, Inc., $275,000 in advance payables, approximately $220,000 from
the issuance of common stock as a result of an investment option exercise and
approximately $83,000 from the issuance of debt. These funds were used to pay
payables, to make payments on our debt and capital lease obligations, and to
purchase additional equipment used in our network operations.

                                       35

<PAGE>

     Overall, the Company's net operating, investing and financing activities
during the year resulted in negative cash flows of approximately $76,000. The
Company's working capital deficit at July 31, 2002 was approximately $13.2
million. This represents an increase of approximately $4.0 million from the
working capital deficit of $9.2 million at July 31, 2001.

     In May 2002, the Company announced that it had renegotiated its capital
lease agreement with IBM. The modification resulted in a reduction in our
capital lease obligations of approximately $663,000 and a reduction in current
liabilities of approximately $2.4 million from April 30, 2002. The agreement
calls for forty-two payments commencing July 31, 2002, consisting of six
payments of $50,000 and thirty-six payments of $75,000. As of the date of this
filing, we have made one payment totaling $50,000. As we are in default of the
agreement as of July 31, 2002, the entire principal balance of $2.3 million is
reflected in current liabilities.

     In May 2002, the Company entered into a Forbearance Agreement with NTFC
Capital Corporation related to its capital lease facility. In exchange for a
payment of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, NTFC agreed to waive the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Company
under the Forbearance Agreement, 3) any other default under the facility by the
Company or 4) the date an amended agreement is executed. Both parties agreed to
make their best efforts to negotiate the terms of an amended agreement, the
purpose being to restructure the current facility including the financial
covenants. Although we have not been successful to date in completing a
restructuring of the current facility we continue to work towards that
objective. At year-end we have classified the entire capital lease obligation,
of approximately $811,000, in current liabilities. A portion of the proceeds of
$2.25 million, resulting from the sale of GlobalSCAPE on June 12, 2002, were
used to make payment to NTFC in accordance with the forbearance agreement
thereby releasing GlobalSCAPE as a co-borrower on the facility.

     The Company's current liabilities include approximately $1.3 million of
equipment purchased from Northern Telecom, a subsidiary of Nortel Networks in
fiscal 2001. Approximately $386,000 of the amount due Northern Telecom is in the
form of a note payable, the remaining $850,000 is in accounts payable. In June
2002, the Company reached an agreement with Nortel related to this payable. In
return for a reduction of $314,000 in the price of the equipment and additional
technical support related to the equipment, ATSI agreed to make payments over a
ten-month period beginning July 15, 2002 totaling approximately $936,000. As of
the date of this filing, no payments have been made and we have removed
equipment with an original value of approximately $850,000 from our network with
the intent of returning the equipment to Northern Telecom.

     The Company's current obligations also include approximately $1,367,000
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. Of this amount, $357,000 is included in notes payable
and the additional $980,000 is included in accrued liabilities.

     In addition, to the notes payable due Northern Telecom and the former
owners of Grupo Intelcom, S.A. de C.V., we have additional current notes payable
outstanding of approximately $730,000 as detailed in Note 7.

     We continue to focus 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. A
direct result of our producing positive cash flows from operations relates to
the Company's focus on its core revenue stream and reducing the cash conversion
cycle of its primary customers. To allow these trends to continue, the Company
needs to expand its network and switch capacity in order to provide additional
capacity to existing and potential customers.

                                       36

<PAGE>

     The Company has limited availability to capital resources, 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. Subsequent to year-end we have made a number
of decisions to further conserve our limited resources and maintain certain
operations going forward. These decisions include the recent termination of a
number of employees in our corporate offices, strategic terminations in our
Mexico operations and the restriction and ultimately, idling of our carrier
services network capacity.

     As was recently announced, the Company is reviewing expressions of interest
received from various parties for a strategic combination. Should the Company be
successful in structuring a combination it is likely one component would include
a portion of working capital infusion to allow us to continue to operate our
operations both domestically and internationally.

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.

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.

                                       37

<PAGE>

     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.

                                       38

<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 Tanner + Co. ................................................................................     40

Report of Arthur Andersen LLP .........................................................................     41

Consolidated Balance Sheets as of July 31, 2001 and 2002 ..............................................     42

Consolidated Statements of Operations for the Years Ended July 31, 2000, 2001 and 2002 ................     43

Consolidated Statements of Comprehensive Loss for the Years Ended July 31, 2000, 2001 and 2002 ........     44

Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 2000, 2001 and 2002 ......     45

Consolidated Statements of Cash Flows for the Years Ended July 31, 2000, 2001 and 2002 ................     46

Notes to Consolidated Financial Statements ............................................................     47
</TABLE>

                                       39

<PAGE>

                                                    INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of ATSI Communications, Inc.

We have audited the consolidated balance sheet of ATSI Communications, Inc. and
subsidiaries as of July 31, 2002, and the related consolidated statements of
operations, comprehensive loss, stockholders' deficit and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The financial
statements of ATSI Communications, Inc. and subsidiaries as of July 31, 2001 and
for the years ended July 31, 2001 and 2000 were audited by other auditors who
have ceased operations and whose report dated October 18, 2001 on those
statements included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern. As
described in Note 18 the Company has restated its 2001 and 2000 financial
statements during the current year to report discontinued operations, in
conformity with accounting principles generally accepted in the United States of
America. The other auditors reported on the 2001 and 2000 financial statements
before the restatement.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

As discussed above, the consolidated financial statements of ATSI
Communications, Inc. and subsidiaries as of July 31, 2001 and for the years
ended July 31, 2001 and 2000 were audited by other auditors who have ceased
operations. As described in Note 18, these consolidated financial statements
have been restated. We audited the adjustments described in Note 18 that were
applied to restate the 2001 and 2000 consolidated financial statements. In our
opinion, such adjustments are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
2001 and 2000 consolidated financial statements of the Company other than with
respect to such adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 and 2000 consolidated financial
statements taken as a whole.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ATSI
Communications, Inc. and subsidiaries as of July 31, 2002, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.

The accompanying 2002 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
3 to the consolidated financial statements, the Company has a working capital
deficit, has suffered recurring losses, has negative cash flows from operations
and has a stockholders' deficit. These conditions 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 3. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

                                                  /s/ Tanner + Co.

                                                  Salt Lake City, Utah
                                                  January 24, 2003

                                       40

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheet 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 3 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 3. 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

NOTE:

     This report is a copy of the report previously issued by Arthur Andersen
LLP as of and for the periods indicated above. Arthur Andersen LLP has not
reissued this report.

                                       41

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    (In thousands, except share information)
<TABLE>
<CAPTION>
                                                                                         July 31,
                                                                                 --------------------------
                                                                                   2001            2002
                                                                                 ----------      ----------
<S>                                                                                    <C>             <C>
ASSETS
------
CURRENT ASSETS:
 Cash and cash equivalents                                                        $     42        $     27
 Accounts receivable, net of allowance of $22 and $276, respectively                 2,474           1,082
 Inventory                                                                              75              59
 Prepaid expenses and other                                                            751             634
                                                                                 ----------      ----------
     Total current assets                                                            3,342           1,802
                                                                                 ----------      ----------

PROPERTY AND EQUIPMENT:                                                             20,568          19,901
 Less - Accumulated depreciation                                                   (11,588)        (14,785)
                                                                                 ----------      ----------
     Net property and equipment                                                      8,980           5,116
                                                                                 ----------      ----------

OTHER ASSETS:
 Goodwill, net                                                                       4,846           1,393
 Concession license, net                                                             4,208           2,000
 Other assets                                                                          393             146
 Net discontinued assets                                                             1,591               -
                                                                                 ----------      ----------
     Total assets                                                                 $ 23,360        $ 10,457
                                                                                 ==========      ==========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
 Accounts payable                                                                 $  4,618        $  7,523
 Accrued liabilities                                                                 2,299           2,657
 Notes payable                                                                         677           1,473
 Current portion of obligations under capital leases                                 4,865           3,207
 Deferred revenue                                                                      119             111
                                                                                 ----------      ----------
     Total current liabilities                                                      12,578          14,971
                                                                                 ----------      ----------

LONG-TERM LIABILITIES:
 Obligations under capital leases, less current portion                                 18              67
 Advances payable                                                                        -             275
 Net discontinued liabilities                                                          852               -
 Other                                                                                 128              75
                                                                                 ----------      ----------
     Total long-term liabilities                                                       998             417
                                                                                 ----------      ----------

COMMITMENTS AND CONTINGENCIES:

REDEEMABLE PREFERRED STOCK:
 Series D Cumulative Preferred Stock, 3,000 shares authorized, 1,642
 shares issued and outstanding at July 31, 2001, 742 shares issued and
 outstanding at July 31, 2002                                                        1,302             765
 Series E Cumulative Preferred Stock, 10,000 shares authorized, 3,490
 shares issued and outstanding at July 31, 2001, 1,455 shares issued
 and outstanding at July 31, 2002                                                    2,864           1,415
 STOCKHOLDERS' EQUITY (DEFICIT):
  Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A
  Cumulative Convertible Preferred Stock, 50,000 shares authorized, 4,370 shares
  issued and outstanding at July 31, 2001 and July 31, 2002                              -               -
  Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized,
  9,210 shares issued and outstanding at July 31, 2001, 8,510 shares issued
  and outstanding at July 31, 2002                                                       -               -
  Series G Cumulative Convertible Preferred Stock, 42,000 shares
  authorized, 6,500 shares                                                               -               -
  issued and outstanding at July 31, 2001 and 2002
  Common stock, $0.001 par value, 200,000,000 shares authorized, 77,329,379
   issued and outstanding at July 31, 2001, 94,994,067 issued and
   outstanding at July 31, 2002                                                         77              95
 Additional paid in capital                                                         57,935          59,891
 Accumulated deficit                                                               (52,504)        (67,493)
 Warrants outstanding                                                                1,369           1,031
 Deferred compensation                                                                 (12)              -
 Other comprehensive loss                                                           (1,247)           (636)
                                                                                 ----------      ----------
     Total stockholders' equity (deficit)                                            5,618          (7,112)
                                                                                 ----------      ----------

     Total liabilities and stockholders' equity (deficit)                         $ 23,360        $ 10,457
                                                                                 ==========      ==========
</TABLE>

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

                                       42

<PAGE>

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

<TABLE>
<CAPTION>
                                                      For the Years Ended July 31,
                                                2000             2001              2002
                                            -------------   ----------------  ----------------
<S>                                              <C>                <C>               <C>
OPERATING REVENUES:
  Telco services
         Carrier services                    $    22,191     $       26,349    $       40,922
         Network services
                                                   2,538              2,714             2,223
         Retail services                           9,572              6,836             7,556
                                            -------------   ----------------  ----------------

     Total operating revenues                     34,301             35,899            50,701
                                            -------------   ----------------  ----------------

OPERATING EXPENSES:
  Cost of services                                26,654             28,297            42,862
  Selling, general and administrative             12,013             12,449            12,285
  Impairment loss                                      -                  -             6,432
  Bad debt expense                                   755                150               388
  Depreciation and amortization                    4,296              3,920             4,115
                                            -------------   ----------------  ----------------

     Total operating expenses                     43,718             44,816            66,082
                                            -------------   ----------------  ----------------

OPERATING LOSS                                    (9,417)            (8,917)          (15,381)

OTHER INCOME (EXPENSE):
  Other income (expense), net                         70                986              (501)
  Gain on restructuring of IBM debt                    -                  -             1,860
  Interest expense                                (2,239)            (1,873)           (1,851)
                                            -------------   ----------------  ----------------

     Total other income (expense)                 (2,169)              (887)             (492)
                                            -------------   ----------------  ----------------

LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX AND MINORITY
INTEREST                                         (11,586)            (9,804)          (15,873)

MINORITY INTEREST                                      -                245               203
CURRENT INCOME TAX (EXPENSE) BENEFIT                   -               (223)             (110)
                                            -------------   ----------------  ----------------


NET LOSS FROM CONTINUING OPERATIONS              (11,586)            (9,782)          (15,780)

INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF TAX                             1,533               (771)              194

GAIN ON DISPOSITION OF DISCONTINUED
OPERATIONS, NET OF TAX                                 -                  -             1,069
                                            -------------   ----------------  ----------------

NET LOSS                                         (10,053)           (10,553)          (14,517)

                                            -------------   ----------------  ----------------
LESS: PREFERRED STOCK DIVIDENDS                   (7,085)            (2,232)             (472)
                                            -------------   ----------------  ----------------

NET LOSS TO COMMON SHAREHOLDERS                 ($17,138)          ($12,785)         ($14,989)
                                            =============   ================  ================

BASIC AND DILUTED LOSS PER COMMON
   SHARE                                          ($0.30)            ($0.18)           ($0.17)
                                            =============   ================  ================

WEIGHTED AVERAGE
   COMMON SHARES OUTSTANDING                      56,851             71,180            86,275
                                            =============   ================  ================
</TABLE>


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

                                       43

<PAGE>

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

<TABLE>
<CAPTION>
                                                                 For the Years Ended July 31,
                                                               2000          2001           2002
                                                               ----          ----           ----
<S>                                                         <C>            <C>            <C>
Net loss to common shareholders                             ($17,138)      ($12,785)      ($14,989)

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

  Foreign currency translation adjustments                  $     79          ($467)      $    610
                                                            --------       --------       --------

Comprehensive loss to common shareholders                   ($17,059)      ($13,252)      ($14,379)
                                                            ========       ========       ========
</TABLE>







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

                                       44

<PAGE>

                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                          Additional
                                                       Preferred Stock   Common Stock      Paid In      Accumulated     Warrants
                                                       ---------------  ---------------
                                                       Shares  Amount   Shares   Amount    Capital       Deficit      Outstanding
                                                       ------  ------   -------  ------  -----------   ------------   -----------
<S>                                                    <C>     <C>      <C>      <C>     <C>           <C>            <C>
BALANCE, July 31, 1999                                     26       0    48,685  $   49  $    29,399       ($21,987)            0
   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                                                                            417
   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)          417
   Issuances of common shares for cash                                    1,942       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        2,485
   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                                                                            952
   Warrants issued with liquidating damages                                                       (5)
   Cumulative effect of translation adjustment
   Net loss                                                                                                 (10,553)
                                                       ------  ------   -------  ------  -----------   ------------   -----------
BALANCE, July 31, 2001                                     20       0    77,329      77       57,935        (52,504)        1,369
   Issuances of common shares for cash                                      773       1          219
   Issuances of common shares for services                                   48                   10
   Issuances of common shares for acquisition                             1,062       1         (981)
   Issuances of preferred stock                                                                  (26)
   Conversion of preferred stock                                         15,454      16        2,384
   Notes receivable from shareholders                                       328       0           12
   Dividends                                                                                                   (472)
   Compensation expense                                                                            0
   Expiration of warrants                                                                        338                         (338)
   Cumulative effect of translation adjustment
   Net loss                                                                                                 (14,517)
                                                       ------  ------   -------  ------   ----------   ------------   -----------
BALANCE, July 31, 2002                                     20       0    94,994  $   95  $    59,891       ($67,493)  $     1,031
                                                       ======  ======   =======  ======  ===========   ============   ===========

<CAPTION>
                                                          Notes
                                                        receivable     Cumulative                        Total
                                                          from         Translation      Deferred      Stockholders'

                                                         officers      Adjustment     Compensation       Equity
                                                       ------------   ------------    ------------   --------------
<S>                                                    <C>            <C>             <C>            <C>
BALANCE, July 31, 1999                                            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
   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                                       (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 damages                                                           250
   Issuances of common shares for acquisition                                                                  (457)
   Issuances of preferred stock                                                                               1,104
   Conversion of preferred stock                                                                              2,493
   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                                                              952
   Warrants issued with liquidating damages                                                                      (5)
   Cumulative effect of translation adjustment                                (468)                            (468)
   Net loss                                                                                                 (10,553)
                                                       ------------   ------------    ------------   --------------
BALANCE, July 31, 2001                                            0         (1,247)            (12)           5,618
   Issuances of common shares for cash                                                                          220
   Issuances of common shares for services                                                                       10
   Issuances of common shares for acquisition                                                                  (980)
   Issuances of preferred stock                                                                                 (26)
   Conversion of preferred stock                                                                              2,400
   Notes receivable from shareholders                                                                            12
   Dividends                                                                                                   (472)
   Compensation expense                                                                         12               12
   Expiration of warrants                                                                                         0
   Cumulative effect of translation adjustment                                 611                              611
   Net loss                                                                                                 (14,517)
                                                       ------------   ------------    ------------   --------------
BALANCE, July 31, 2002                                 $          0          ($636)   $          0          ($7,112)
                                                       ============   ============    ============   ==============
</TABLE>

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

                                       45

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                               For the Years Ended July 31,
                                                                                       2000               2001               2002
                                                                                    ----------         ----------         ----------
<S>                                                                                 <C>                <C>                <C>
NET LOSS (BEFORE ADJUSTMENT FROM DISCONTINUED OPERATIONS
 AND NON-OPERATING GAINS/(LOSSES)):                                                  ($10,053)          ($10,553)          ($14,517)

Gain on the sale of GlobalSCAPE                                                             -                  -             (1,082)
Gain on the restructuring of IBM debt                                                       -                  -             (1,860)

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                           ($10,053)          ($10,553)          ($17,459)
  Adjustments to reconcile net loss to net cash used in
   operating activities-
      Impairment loss                                                                       -                  -              6,432
     Depreciation and amortization                                                      4,681              4,434              4,599
     Amortization of debt discount                                                        442                372                  -
     Deferred compensation                                                                347                768                 12
     Issuance of common stock for services                                                  -                  -                 10
     Foreign currency gain                                                                  -               (326)                 -
     Minority Interest                                                                      -               (246)              (244)
     Provision for losses on accounts receivable                                          898                241                433
     Changes in current assets and liabilities-
      Decrease (increase) in accounts receivable                                         (678)               121                786
       (Increase) decrease in prepaid expenses and other                                   88               (482)               248
       (Increase) decrease in accounts payable                                           (776)              (267)             3,911
       Increase (decrease) in accrued liabilities                                         462                 (3)               780
       Decrease in deferred revenue                                                       (66)               (47)               (17)
                                                                                     --------           --------           --------
Net cash used in operating activities                                                  (4,655)            (5,988)              (509)
                                                                                     --------           --------           --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                                   (1,993)            (1,122)            (1,092)
  Sale of GlobalSCAPE                                                                       -                  -              2,250
  Acquisition of business, net of cash acquired                                        (1,334)              (102)               (54)
                                                                                     --------           --------           --------
Net cash provided by (used in) investing activities                                    (3,327)            (1,224)             1,104
                                                                                     --------           --------           --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of debt                                                         745                776                 83
   Net increase in short-term borrowings                                                   80                116                  0
   Payments on debt                                                                      (781)              (560)               (65)
   Capital lease payments                                                              (1,424)            (1,106)            (1,158)
   Proceeds from convertible debentures                                                     -                  -                275
   Proceeds from issuance of preferred stock,
     net of issuance costs                                                              5,646              5,639                (26)
   Proceeds from issuance of common stock,
     net of issuance costs                                                              4,887                900                220
                                                                                     --------           --------           --------
Net cash provided by (used in) financing activities                                     9,153              5,765               (671)
                                                                                     --------           --------           --------
NET INCREASE (DECREASE) IN CASH                                                         1,171             (1,447)               (75)
CASH AND CASH EQUIVALENTS, beginning of year                                              379              1,550                 42
CASH AND CASH EQUIVALENTS, allocated to discontinued operations                             -                (61)                61
                                                                                     --------           --------           --------
CASH AND CASH EQUIVALENTS, end of year                                               $  1,550           $     42           $     27
                                                                                     ========           ========           ========
</TABLE>

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

                                       46

<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 affecting 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, 2002, 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 15.

         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

                                       47

<PAGE>

using pesos 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 125 communication centers in 63 cities, as of
July 31, 2002. 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.

         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.       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 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.

                                       48

<PAGE>

     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.

     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, 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. For the year ended July 31, 2002, this netting of
IVA accounts resulted in the elimination of IVA payable, a corresponding
reduction in IVA receivable of approximately $1,533,000 and a net IVA receivable
of $265,000.

     Revenue Recognition Policies

     We recognize revenue from our retail services as such services are
performed, net of unbillable calls. Revenue from carrier services and network
services are recognized when service commences for service commencement fees and
monthly thereafter as services are provided.

     Concentration of Credit Risk

     Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of

                                       49

<PAGE>

its customers and maintains allowances for possible losses, which, when
realized, have been within the range of management's expectations.

     Cash and Cash Equivalents

     The Company considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.

     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.

     Impairment of Long-lived assets

     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recovered through undiscounted future cash flows. If it is determined that an
impairment has occurred based on expected cash flows, such loss is recognized in
the statement of operations.

     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.

     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, 2000, 2001 and 2002. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 12, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.

     New Accounting Pronouncements

     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
required to adopt SFAS 142 until August 1, 2002

                                       50

<PAGE>

we do not believe the adoption will have a material effect on the financial
condition or results of the Company unless we determine going forward that
further impairment of our intangible assets exist.

     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 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.

     In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity.
(Including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are effective for exit or disposal activities that are initiated after
December 31, 2002. The Company does not expect the adoption of SFAS 146 to have
a material impact on the Company's future results of operations or financial
position.

     In December 2002, the FASB issued SFAS No. 148 (SFAS 148), "Accounting for
Stock-Based Compensation--Transition and Disclosure", amending FASB Statement
No. 123 (SFAS 123), "Accounting for Stock-Based Compensation. SFAS 148 provides
two additional alternative transition methods for recognizing an entity's
voluntary decision to change its method of accounting for stock-based employee
compensation to the fair-value method. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 so that entities will have to (1) make
more-prominent disclosures regarding the pro forma effects of using the
fair-value method of accounting for stock-based compensation, (2) present those
disclosures in a more accessible format in the footnotes to the annual financial
statements, and (3) include those disclosures in interim financial statements.
SFAS 148's transition guidance and provisions for annual disclosures are
effective for fiscal years ending after December 15, 2002; earlier application
is permitted. Management is assessing the effects of SFAS 148 on the financial
statements 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.

                                       51

<PAGE>

     3.   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, 2002, we have incurred cumulative net losses
of $67.5 million. We had a working capital deficit of $9.2 million at July 31,
2001 and $13.2 million at July 31, 2002 and we had negative cash flows from
operations of $4.7 million, $6.0 million and $519,000 for the years ended July
31, 2000, 2001 and 2002, respectively. As of July 31, 2002, we are in default on
our leases with IBM de Mexico and NTFC Capital Corporation. See further
discussion regarding these leases in Note 9. 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 the latter half of fiscal 2001 and most of fiscal 2002 we focused
our energies on maximizing revenues through increased capacity and efficiencies
in our international network. The result was an increase in the volume of
carrier services traffic and three of the four highest revenue quarters in our
history. While overall demand for termination services remains high the
uncertainty in the telecom sector in the last quarter of 2002 and the first half
of 2003, our limited resources and the payment requirements of most of our
carriers have led to reduced terminating capacity and correspondingly, reduced
revenues. As a result, we have focused our efforts on maximizing our gross
margins by carrying the most profitable minutes possible and reducing our direct
costs. Additionally, we have worked where possible to reduce our SG&A costs.
Subsequent to year-end we have made a number of decisions to further conserve
our limited resources including terminating a number of employees in our
corporate office, strategic terminations in our Mexico operations and the
constriction and ultimately, idling of our carrier network capacity.

     On June 12, 2002 we discontinued our e-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. The sale, which was done to
strengthen our

                                       52

<PAGE>

balance sheet and facilitate future growth of our core telecommunications
business, resulted in a gain of approximately $1.1 million.

     Income statement presentation for the years ended July 2000, 2001 and 2002
reflects the e-commerce revenues and the expenses of GlobalSCAPE as discontinued
operations.

     Balance sheet presentation for the year ended July 31, 2001 reflects the
accumulation of the net assets of GlobalSCAPE consisting primarily of cash,
accounts receivable, intercompany receivables, prepaid and other current assets,
property, plant and equipment, goodwill, trademarks and development costs which
we have classified as net discontinued assets. We have also accumulated the net
liabilities of GlobalSCAPE, which consist primarily of trade payables, accrued
liabilities and capital lease obligations and classified them as net
discontinued liabilities.

     4.   IMPAIRMENT OF ASSETS

     During the fourth quarter of fiscal 2002, we evaluated the carrying value
of the goodwill and other intangible assets, as well as property and equipment.
Based on this evaluation and the anticipated undiscounted cash flows related to
such assets, we determined that the goodwill, the concession license, certain
telecom equipment, and certain other assets were impaired. Accordingly, we
recorded impairment of goodwill of approximately $3.3 million, impairment of the
concession license of approximately $2 million, impairment of telecom equipment
of approximately $977,000 and impairment of approximately $103,000 of other
assets.

     5.   PROPERTY AND EQUIPMENT, NET (at cost)

     Following is a summary of our property and equipment at July 31, 2001 and
2002:

<TABLE>
<CAPTION>
                                                       Depreciable lives        July 31, 2001         July 31, 2002
                                                       -----------------        -------------         -------------
<S>                                                       <C>                      <C>                  <C>
      Telecommunication equipment                         10-15 years              $9,886,154           $11,977,635
      Land and buildings                                   10 years                   560,088               575,333
      Furniture and fixtures                               3-5 years                1,353,741             1,370,424
      Equipment under capital leases                       5-7 years                6,193,945             3,391,024
      Leasehold improvements                               1-5 years                  765,762               765,628
      Computer equipment                                    3 years                 1,753,976             1,770,349
      Other                                                3-5 years                   54,784                51,444
                                                                            ------------------    ------------------
                                                                                   20,568,840            19,901,837
      Less: accumulated depreciation                                              (11,587,670)          (14,784,981)
                                                                            ------------------    ------------------
      Total - property and equipment, net                                          $8,980,780            $5,116,856
                                                                            ==================    ==================
</TABLE>

     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, 2000, 2001 and 2002, we recorded
approximately $3,483,719, $3,567,567 and $3,758,592, 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

                                       53

<PAGE>

U.S. and made a downward revision of the estimated lives of telecommunication
assets in Mexico to conform to lives in the U.S. This change did not have a
significant effect on the consolidated financial statements of the Company.
During fiscal 2002, we recorded approximately $977,000 of expense related to
equipment that had been decommissioned or deemed impaired.

         6.       GOODWILL AND CONCESSION LICENSE

         Following is a summary of our material intangible assets:

<TABLE>
<CAPTION>
                                                    July 31, 2001      July 31, 2002
                                                   ---------------    ---------------
              <S>                                  <C>                <C>
              Goodwill                               $ 5,363,735        $ 5,357,495
              Less: accumulated amortization           ($517,630)         ($651,477)
              Less: impairment                                 -        ($3,312,626)
                                                     -----------        -----------
                                                     $ 4,846,105        $ 1,393,392

              Concession License                     $ 4,428,931        $ 4,482,931
              Less: accumulated amortization           ($221,097)         ($443,842)
              Less: impairment                                 -        ($2,039,089)
                                                     -----------        -----------
                                                     $ 4,207,834        $ 2,000,000
</TABLE>

         Through July 31, 2002, goodwill has been amortized over a 40 year life.
As disclosed in Note 2, as of August 1, 2002 the Company will adopt SFAS 142
"Goodwill and Other Intangible Assets". SFAS 142 changes the accounting for
goodwill and other intangible assets with indefinite lives from an amortization
method to an impairment approach. Other intangible assets will continue to be
amortized over their estimated useful lives. Amortization of goodwill will cease
on August 1, 2002. The concession license costs are being amortized over 26
years, the remaining life of the concession license. As it relates to SFAS 121,
as of July 31, 2002, we determined that the estimated future cash flows
associated with our goodwill and concession license were less than the carrying
value of such assets and impairment losses of $3,312,626 and $2,039,089 were
recorded for the year. As of July 31, 2001 and 2002, other assets also included
approximately $392,956 and $146,398, not identified as goodwill or concession
license. For the years ended July 31, 2000, 2001 and 2002, we recorded
amortization expense of $812,217, $352,766 and $356,592, respectively related to
our other assets.

         7.       NOTES PAYABLE

Notes payable are comprised of the following:

<TABLE>
<CAPTION>
                                                           July 31, 2001       July 31, 2002
                                                           -------------       -------------
<S>                                                        <C>                 <C>
Notes payable to taxing entity, see terms below.              $361,089            $479,376

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

Note payable to a company, see terms below.                     65,734                   -
</TABLE>

                                       54

<PAGE>

Note payable to a company, see terms below                      -        386,362
Note payable to individuals, see terms below                    -        357,000
                                                       ----------     ----------
Total current notes payable                            $  676,823     $1,472,738
                                                       ==========     ==========

         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 $18,121. The notes were originally scheduled to mature
between July 1999 and July 2001 and are collaterized by the assets of Computel.
The Company continues to work with the taxing entities but as of year-end no
payments have been made and we are in default of the agreement.

         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 has been
extended throughout fiscal 2001 and 2002. Subsequent to year-end the director
resigned from our Board of Directors.

         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 was paid off in fiscal 2002.

         In May 2002, the Company entered into a note payable with a vendor for
equipment it had originally purchased commencing in June 2000 in the amount of
$386,362. The note which accrues interest beginning July 15, 2002 at the rate of
18% matured October 15, 2002. As of the date of this filing the Company has not
made any payments and is in default of the agreement.

         In November 2001, the Company entered into a note payable, in the
amount of $357,000 with the former owners of the concession license it purchased
in July 2002. The note called for principal payments of $51,000 per month plus
accrued interest. The note which accrues interest at the rate of prime plus 2%
matured July 19, 2002. On October 1, 2002, the note was amended in its entirety
with a revised maturity date of February 2006 and an amended interest rate of
7.75%. The revised note calls for equal monthly payments of principal and
interest in the amount of $8,925. As of the date of this filing, no monthly
payments have been made therefore the note is technical default and has been
classified as current.

         8.       ADVANCES PAYABLE

         During fiscal 2002 we received $275,000 of advances without specific
terms of repayment or interest. Subsequent to year-end in January 2003 we issued
275 9% Convertible Subordinated Debentures with a face value of $1,000, due
January 2005 and warrants to purchase 137,500 shares of common stock for the
$275,000 previously advanced. Each debenture accrues interest at the rate of 9%
per annum payable quarterly. The debentures convert into common stock at a
conversion price of $0.135 and the warrants are priced at $0.112.

                                       55

<PAGE>

         9.       LEASES

         Operating Leases

         We lease office space, furniture, equipment and network capacity under
noncancelable operating leases and certain month-to-month leases. During fiscal
2000, 2001 and 2002, we also leased certain equipment under capital leasing
arrangements. Rental expense under operating leases for the years ended July 31,
2000, 2001 and 2002, was $4,522,847, $4,308,501 and $3,689,597, respectively.
Future minimum lease payments under the noncancelable operating leases at July
31, 2002 are as follows:

                   2003                                        $  374,396
                   2004                                           367,161
                   2005                                           367,161
                   2006                                           282,705
                   2007                                           282,705
                   Thereafter                                     259,147
                                                               ----------
                   Total minimum lease payments                $1,933,275
                                                               ==========

         Capital Leases

         Future minimum lease payments under the capital leases together with
the present value of the net minimum lease payments at July 31, 2002 are as
follows:

                   2003                                       $ 3,896,560
                   2004                                            56,412
                   2005                                            17,013
                   2006                                                 -
                                                              -----------
                   Total minimum lease payments                 3,969,985
                   Less: Amount representing taxes                   (151)
                                                              -----------
                   Net minimum lease payments                   3,969,834
                   Less: Amount representing interest            (695,866)
                                                              -----------
                   Present value of minimum lease payments    $ 3,273,968
                                                              ===========

         In fiscal 1997 and in fiscal 1998, we through ATSI-Mexico, secured
capital lease facilities with IBM de Mexico. These facilities in total
approximated $4.625 million and were used to install U.S. standard intelligent
pay telephones in various Mexican markets and to increase network capacity. In
May 1999 and again in October 2000 we restructured our capital lease obligation
with IBM de Mexico by extending the payment of our total obligation. The latest
restructuring of October 2000 increased the monthly payments during calendar
year 2001 from approximately $108,000 to approximately $159,000 per month.
Interest continued to accrue at the rate of approximately 13% per year, with the
facility scheduled to be paid off in June 2003. In May 2002, the Company
announced that it had completed an additional restructuring of its capital lease
agreement with IBM. This restructuring resulted in a reduction in obligations
under capital leases of approximately $640,000, a reduction in accrued interest
and value added tax of approximately $1.7 million, a reduction in equipment of
$487,500 and a gain on restructuring of approximately $1,860,000. The agreement
called for forty-two payments

                                       56

<PAGE>

commencing August 1, 2002, consisting of six payments of $50,000 and thirty-six
payments of $75,000. The principal obligation outstanding under said facility at
July 31, 2001 and July 31, 2002 was approximately $3,009,840 and $2,346,126,
respectively. As of the date of this filing we had not made payments due
totaling approximately $325,000 and therefore were in default under the lease
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, 2002, we are not in compliance with the
financial covenants related to revenues, gross margins and EBITDA results,
although we are current with our payments. Subsequent to year-end we have not
made quarterly payments totaling $282,000 and are in default of our agreement.
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, 2001 and July 31, 2002 was approximately $
1,697,000 and $812,000, respectively.

         In May 2002, the Company entered into a Forbearance Agreement with NTFC
Capital Corporation related to its capital lease facility. In exchange for a
payment of approximately $500,000 NTFC agreed to release GlobalSCAPE, Inc. as a
co-borrower under the facility. Additionally, NTFC agreed to waive the default
of covenants until the earliest of 1) July 31, 2002, 2) a default by the Company
under the Forbearance Agreement, 3) any other default under the facility by the
Company or 4) the date an amended agreement is executed. Both parties have
agreed to make their best efforts to negotiate the terms of an amended
agreement, the purpose of which will be to restructure the current facility
including the financial covenants. On June 12, 2002, the Company completed the
sale of its majority ownership of GlobalSCAPE, our Internet e-commerce segment,
for $2.25 million resulting in a gain. A portion of the proceeds were used to
make payment to NTFC in accordance with the forbearance agreement to release
GlobalSCAPE as a co-borrower on the facility.

         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, 2001 and July 31, 2002 was
approximately $128,395 and $0, respectively.

         Our capital leases have interest rates ranging from 11% to 14%. Annual
interest expense under our capital leases was $736,252, $1,028,177 and
$1,028,177, respectively, for the years ending July 31, 2000, 2001 and 2002.

                                       57

<PAGE>

     10. 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, 2001 and July 31, 2002
we had approximately $119,000 and $111,000 of deferred revenues outstanding,
respectively.

     11. SHARE CAPITAL

         Common stock

     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, 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 15. 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.

     During the year ended July 31, 2002, we issued 17,664,688 common shares. Of
this total, 773,142 shares were issued for approximately $220,000 of net cash
through the investment option of our Series E Preferred Stock holder, 15,454,922
shares were issued as a result of the conversion of preferred shares, 1,062,791
were issued related to our acquisition in July 2000 of Grupo Intelcom, S.A. de
C.V., 328,333 shares were issued related to the settlement of officer notes and
47,500 shares were issued for services rendered to us. The shares issued for
services rendered and the shares issued related to our acquisition of Grupo
Telecom, S.A. de C.V. have not been registered by us, nor do we have any
obligation to register such shares.

                                       58

<PAGE>

     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.

     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,
2000, 2001 and 2002.

           Preferred Stock

     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,
2002.

     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.

     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 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.

          Series A Preferred Stock

     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. The Series A
Preferred Stock accrues cumulative dividends at the rate of 10% per annum
payable quarterly. During fiscal 2000, the holders of the aforementioned Series
A Preferred Stock elected to convert all of their outstanding preferred shares
and accumulated dividends resulting in the issuance of approximately 3,616,231
shares of common stock.

                                       59

<PAGE>

     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. The Series A Preferred Stock accrues cumulative dividends
at the rate of 10% per annum payable quarterly. In 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 resulting in the issuance of
576,633 shares of common stock. Additionally, in 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. As of July 31,
2002, 4,370 shares of Series A Preferred Stock remain outstanding for which we
have accrued approximately $110,000 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 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.

          Series B Preferred Stock

     In July 1999 we issued 2,000 shares of Series B Preferred Stock for cash
proceeds of approximately $2.0 million. The Series B Preferred Stock accrues
cumulative dividends at the rate of 6% per annum. During fiscal 2000, the holder
elected to convert all 2,000 shares of its Series B Preferred Stock and
accumulated dividends resulting in the issuance of approximately 2,625,214
shares of common stock.

     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.

                                       60

<PAGE>

          Series C Preferred 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 fiscal 2000, the holder
elected to convert all 500 shares of Series C Preferred Stock and accumulated
dividends resulting in the issuance of approximately 492,308 shares of common
stock.

     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.

          Series D Preferred Stock

     In February 2000, we 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 fiscal 2001, the holder elected to convert 1,358 shares and accumulated
dividends of approximately $73,000 resulting in the issuance of 3,946,464 shares
of common stock. During fiscal 2002, the holder elected to convert 900 shares
and accumulated dividends of approximately $103,000 resulting in the issuance of
4,384,990 shares of common stock. As of July 31, 2002, 742 shares of Series D
Preferred Stock remain outstanding, for which we have accrued approximately
$109,000 for dividends.

     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 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.

                                       61

<PAGE>

          Series E Preferred Stock

     In October 2000, March 2001 and June 2001 we issued a total of 4,500 shares
of Series E Preferred Stock and warrants to purchase 1,636,364 shares of common
stock for cash proceeds of approximately $4.5 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. During fiscal 2001, the holder converted 1,010 of the shares outstanding
and accumulated interest 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. During fiscal 2002, the holder converted 2,035 of the shares
outstanding and accumulated interest resulting in the issuance of 10,166,006
shares of common stock. In accordance with the terms of the Investment Option of
the Series E Preferred Stock, the holder also purchased an additional 773,142
shares of common stock for $220,000. As of July 31, 2002, 1,455 shares of Series
E Preferred Stock remain outstanding.

     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 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 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.

                                       62

<PAGE>

          Series F Preferred Stock

     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. During fiscal
2002, holders of 700 of the shares outstanding converted into 274,278 shares of
common stock. Additionally, we issued 320,994 shares of common stock for
accumulated dividends during the year. As of July 31, 2002 we have 8,510 shares
of Series F Preferred Stock outstanding for which we have accrued approximately
$74,000 for dividends.

     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 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.

          Series G Preferred Stock

     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. During fiscal 2002, we issued 301,606 shares of
common stock for accumulated dividends. As of July 31, 2002, the entire balance
of 6,500 shares of Series G Preferred Stock remains outstanding for which we
have accrued approximately $16,250 for dividends.

     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.

                                       63

<PAGE>

     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.

     12.  STOCK PURCHASE WARRANTS AND STOCK OPTIONS

     During the year ended July 31, 2002, we did not issue any warrants to
purchase shares of common stock. Following is a summary of warrant activity from
August 1, 1999 through July 31, 2002:

<TABLE>
<CAPTION>
                                                             Year Ending July 31,
                                              ----------------------------------------------------
                                                      2000               2001              2002
                                              ----------------------------------------------------
<S>                                            <C>                   <C>              <C>
Warrants outstanding, beginning                    4,203,925            681,045         5,013,826
Warrants issued                                      601,045          4,332,781                 -
Warrants expired                                     (80,000)                 -          (180,000)
Warrants exercised                                (4,043,925)                 -                 -
                                                  ----------         ----------        ----------
Warrants outstanding, ending                         681,045          5,013,826         4,833,826
                                                  ==========         ==========        ==========
</TABLE>

Warrants outstanding at July 31, 2002 expire as follows:

<TABLE>
<CAPTION>
   Number of Warrants                     Exercise Price                   Expiration Date
   ------------------                     --------------                   ---------------
<S>                                       <C>                             <C>
          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>

                                       64

<PAGE>

     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 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.
The Board further approved the granting of a total of 2,227,499 options to
directors, officers and employees in September 2001, December 2001, March 2002
and June 2002.

     A summary of the status of our 1997, 1998 and 2000 Stock Option Plans for
the years ended July 31, 2000, 2001 and 2002 and changes during the periods are
presented below:

<TABLE>
<CAPTION>
                                                                 Years Ended July 31,
                              --------------------------------------------------------------------------------------------
    1997 Stock
    Option Plan                          2000                            2001                           2002
                                                 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                        4,222,667      $0.75              312,003     $1.59              202,002     $1.87
    Granted                                -          -                    -         -                    -         -
    Exercised                     (3,907,331)     $0.66              (13,000)    $0.58                    -         -
</TABLE>

                                       65

<PAGE>

<TABLE>
<S>                                  <C>          <C>       <C>          <C>       <C>          <C>
    Forfeited                         (3,333)     $0.58      (97,002)    $2.15            -       -
                                     -------      -----      -------     -----            -       -
    Outstanding, end of year         312,003      $1.59      202,001     $1.87      202,002     $1.87
                                     =======      =====      =======     =====      =======     =====
    Options exercisable at
    end of year                      171,667      $1.55      202,001     $1.87      202,002     $1.87
                                     =======      =====      =======     =====      =======     =====
    Weighted average fair
    value of options
    granted during the year                         N/A                    N/A                    N/A
                                                    ===                    ===                    ===
</TABLE>

          See Note 21 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.

<TABLE>
<CAPTION>
                                                                 Years Ended July 31,
                              --------------------------------------------------------------------------------------------
    1998 Stock
    Option Plan                          2000                           2001                           2002
                              ------------------------------- ----------------------------- ------------------------------
                                                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         1,026,840        $0.91
    Granted                       155,000         $2.57            117,500       $0.90                 -            -
    Exercised                    (525,255)        $0.57           (231,999)      $0.55                 -            -
    Forfeited                    (132,334)        $0.69           (237,872)      $0.84           (11,668)       $0.78
                                ---------         -----          ---------       -----         ---------        -----

    Outstanding, end of year    1,379,211         $0.70          1,026,840       $0.91         1,015,572        $0.91
                                =========         =====          =========       =====         =========        =====
    Options exercisable at
    end of year                    85,499         $0.60            417,043       $0.83           891,840        $0.82
                                =========         =====          =========       =====         =========        =====
    Weighted average fair
    value of options
    granted during the year                       $1.92                          $0.87                           N/A
                                                  =====                          =====                          =====
</TABLE>

<TABLE>
<CAPTION>
                                                                      Year Ended July 31,
                                                 ---------------------------------------------------------------
    2000 Stock Option Plan                                  2001                            2002
                                                 ---------------------------- ----------------------------------
                                                                  Weighted                          Weighted
                                                                  Average                            Average
                                                                  Exercise                          Exercise
                                                    Shares         Price            Shares            Price
                                                 -------------- ------------- ------------------- --------------
<S>                                              <C>            <C>           <C>                 <C>
    Outstanding, beginning of year                           -     $   -                1,864,000      $0.56
    Granted                                          1,864,000     $0.56                5,277,499      $0.44
    Exercised                                                -     $   -                        -      $   -
    Forfeited                                                -     $   -                 (716,334)     $0.49
                                                     ---------     -----                ---------      -----
</TABLE>

                                       66

<PAGE>

<TABLE>
<S>                                                  <C>           <C>                 <C>            <C>
    Outstanding, end of year                         1,864,000     $0.56               6,425,165      $0.48
                                                     =========     =====               =========      =====
    Options exercisable at end of year                       -      N/A                1,876,998      $0.59
                                                                    ===                               =====
    Weighted average fair value of options
    granted during the year                                        $0.55                              $0.27
                                                                   =====                              =====
</TABLE>

     The weighted average remaining contractual life of the stock options
outstanding at July 31, 2002 is approximately 4.5 years for options granted
under the 1997 Stock Option Plan, approximately 6 years for options granted
under the 1998 Stock Option Plan and approximately 8 years for options granted
under the 2000 Incentive Stock Option Plan.

     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.

     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 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,
                                               -----------------------------------------------------------------------
                                                        2000                   2001                    2002
                                                        ----                   ----                    ----
<S>                                                  <C>                    <C>                      <C>
Net loss to common shareholders
-------------------------------
As reported                                          ($17,138)              ($12,785)                ($14,989)
Pro forma                                            ($17,657)              ($13,384)                ($15,931)
Basic and diluted loss per share
--------------------------------
As reported                                            ($0.30)                ($0.18)                  ($0.17)
Pro forma                                              ($0.31)                ($0.19)                  ($0.18)
</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 2000, 2001 and 2002: Dividend yield of 0.0%, expected volatility of between
104% - 141%, 136% - 156% and 123%,

                                       67

<PAGE>

(depending on the time of grant) respectively, risk-free interest rate of 6.25%,
5.45% and 4.92% 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.

     The following table summarizes information about stock options and warrants
outstanding for all plans at July 31, 2002:

<TABLE>
<CAPTION>
                                                           Options and Warrants
                Options and Warrants Outstanding                Exercisable
                ----------------------------------------------------------------
                                           Weighted
                                           Average
                              Weighted     Remaining                    Weighted
Range of                      Average     Contractual                   Average
Exercise        Number        Exercise       Life         Number        Exercise
Prices        Outstanding       Price       (Years)     Exercisable       Price
--------------------------------------------------------------------------------
<S>          <C>             <C>          <C>         <C>             <C>
$0.25-0.41      3,977,500       $0.38        7.64        1,000,000       $0.40
$0.53-0.64      4,802,804       $0.57        7.69        3,163,803       $0.57
$0.72-1.25      1,269,492       $0.81        2.37        1,247,626       $0.81
$1.72-7.17      2,426,368       $2.49        2.41        2,393,036       $2.47
--------------------------------------------------------------------------------

$0.25-7.17     12,476,164       $0.91        6.10        7,604,665       $1.17
================================================================================
</TABLE>



     13.  STATEMENT 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,
                                                                ----------------------------------------------------
                                                                     2000               2001               2002
                                                                     ----               ----               ----
<S>                                                             <C>                 <C>                <C>
Cash payments for interest                                      $   2,272,111       $    910,863       $     742,225
Cash payments for taxes                                         $           -       $     64,416       $     109,843
Non-cash:
Common shares issued for services                               $      24,968       $     33,000       $       9,502
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                            $   2,921,008       $          -       $    (981,063)
Note incurred in conjunction with acquisition                   $           -       $    120,000       $           -
Conversion of convertible debt to common shares                 $   3,333,664       $    803,271       $           -
Capital lease obligations incurred                              $     275,096       $          -       $     122,088
</TABLE>

     14.  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.

                                       68

<PAGE>

     Subsequent to December 31, 2000 and December 31, 2001, the Company made
matching contributions of approximately $17,600 and $10,400, respectively. No
discretionary contribution was made for the Plan Years 2000 and 2001.

     15.  ACQUISITIONS

     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. In October 2001, we renegotiated the
reset provisions of the original agreement resulting in: 1) a cash liability of
approximately $457,000 payable to Mr. Torres, 2) the issuance of 1,062,791
shares of ATSI common stock equivalent to $457,000, 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 the closing stock price was $0.10 resulting in an additional liability of
$980,000, which we have recorded as of July 31, 2002. We are currently
negotiating with Mr. Torres to satisfy a portion of the outstanding liability in
exchange for equity and a note payable over approximately 36-48 months. There
can be no assurances, however, that the negotiations will be successful.

     16.  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 two
reportable operating segments: (1) U.S. Telco and (2) Mexico Telco.
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, is 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-

                                       69

<PAGE>

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>
In Thousands                                       As of and for the years ending
                                     --------------------------------------------------------
                                        July 31, 2000       July 31, 2001       July 31, 2002
U.S. Telco
---------------------------------------------------------------------------------------------
<S>                                     <C>                 <C>                 <C>
External revenues                           $  27,359           $  28,919           $  42,590
Intercompany revenues                       $   2,618           $   1,422           $   1,468
                                            ---------           ---------           ---------
Total revenues                              $  29,977           $  30,341           $  44,055
                                            =========           =========           =========

EBITDA                                        ($4,374)            ($3,300)            ($3,538)

Operating loss                                ($6,607)            ($5,305)            ($6,568)

Net loss                                      ($6,526)            ($5,791)            ($5,039)

Total assets                                $  12,556           $  15,844           $  12,009

<CAPTION>
Mexico Telco
---------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>                 <C>
External revenues                           $   6,942           $   6,980           $   8,111
Intercompany revenues                       $   2,428           $   1,886           $   1,975
                                            ---------           ---------           ---------
Total revenues                              $   9,370           $   8,866           $  10,086
                                            =========           =========           =========

EBITDA                                          ($742)            ($1,685)            ($1,059)

Operating loss                                ($2,797)            ($3,332)            ($6,228)

Net loss                                      ($3,563)            ($4,065)            ($8,301)

Total assets                                $   9,808           $   8,097           $   2,781

<CAPTION>
Other
---------------------------------------------------------------------------------------------
<S>                                         <C>                 <C>                 <C>
External revenues                                   -                   -                   -
Intercompany revenues                         ($5,046)            ($3,308)            ($3,443)
                                            ---------           ---------           ---------
Total revenues                                ($5,046)            ($3,308)            ($3,471)
                                            =========           =========           =========

EBITDA                                            ($5)               ($12)              ($227)

Operating loss                                   ($13)              ($281)            ($2,585)

Net loss                                      ($7,048)            ($2,928)            ($1,649)

Total assets                                $   4,530               ($581)            ($4,333)
</TABLE>

                                       70

<PAGE>

<TABLE>
Total
----------------------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>                <C>
External revenues                                          $  34,301          $  35,899          $  50,701
Intercompany revenues                                              -                  -                  -
                                                           ---------          ---------          ---------
Total revenues                                             $3  4,301          $  35,899          $  50,701
                                                           =========          =========          =========

EBITDA                                                       ($5,121)           ($4,997)           ($4,834)

Depreciation and Amortization                                ($4,296)           ($3,920)           ($4,115)

Operating loss                                               ($9,417)           ($8,917)          ($15,381)

Net loss to common shareholders                             ($17,138)          ($12,785)          ($14,989)

Total assets                                               $  26,894          $  23,360          $  10,457
</TABLE>

     17.  INCOME TAXES

     Income tax expense from continuing operations differs from the amount
computed at federal statutory rates as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended July 31,
                                                            2000                     2001                  2002
<S>                                                       <C>               <C>                      <C>
Federal income tax benefit (expense) at
statutory rate                                           $ 3,418,000          $ 3,596,000              $ 4,967,000
Permanent tax differences in connection
with sale of GlobalSCAPE                                           -                    -                 (503,000)
Other                                                              -                    -                 (338,000)
Change in valuation allowance                            $(3,418,000)          (3,819,000)              (4,236,000)
Income tax benefit (expense)                             $         0          $  (223,000)             $  (110,000)
</TABLE>

     Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                                                      July 31,
                                                                         2001                       2002
<S>                                                                  <C>                         <C>
Net operating loss carryforward                                      $  6,596,000              $  7,223,000
Impairment of Mexican intangible assets                                                           1,779,000
Impairment of U.S. intangible assets and equipment                                                  408,000
Losses accrued in Mexican subsidiaries                                  4,966,000                 7,022,000
Other                                                                     728,000                    94,000
Valuation allowance                                                   (12,290,000)              (16,526,000)
Total deferred tax asset (liability)                                 $          -              $          -
</TABLE>

     The Company conducts a periodic examination of its valuation allowance.
Factors considered in the evaluation include recent and expected future earnings
and the Company's liquidity and equity positions. As of July 31, 2001 and 2002,
the Company has determined that a valuation allowance is necessary for the
entire amount of deferred tax assets.

                                       71

<PAGE>

     At July 31, 2001 and 2002, the Company had net operating loss carryforward
related to U.S. operations of approximately $19,401,000 and $21,246,000 with
expiration dates ranging from 2009 through 2022.

     The availability of the net operating loss 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 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.

     18.  DISCONTINUED OPERATIONS

     On June 12, 2002 we discontinued our e-commerce operations through the sale
of our majority-owned subsidiary, GlobalSCAPE, Inc. for approximately $2.25
million. The sale, which was done to strengthen our balance sheet and facilitate
future growth of our core telecommunications business, resulted in a gain of
approximately $1.1 million.

     Income statement presentation for the years ended July 2000, 2001 and 2002
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE.

     Balance sheet presentation for the year ended July 31, 2001 reflects the
elimination of the net assets of GlobalSCAPE as follows: (in thousands)

<TABLE>
<S>                                                                     <C>
     Assets:
     Current assets                                                  $    286
     PP&E, net                                                       $    810
     Goodwill, net                                                   $     10
     Trademarks, net                                                 $    390
     Development costs, net                                          $     73
     Other assets                                                    $     22
                                                                     --------
     Total assets                                                    $  1,591
                                                                     ========

     Liabilities:
     Current liabilities other than capital leases                   $    322
     Current capital lease obligations                               $     74
     Long-term capital lease obligations                             $    105
     Minority interest                                               $    351
                                                                     --------
     Total liabilities                                               $    852
                                                                     ========
</TABLE>

     Income statement presentation for the years ended July 2000, 2001 and 2002
reflects the elimination of e-commerce revenues and the expenses of GlobalSCAPE
as follows: (in thousands)

                                       72

<PAGE>

<TABLE>
<CAPTION>
                                                            Year ended July 31,
                                                            -------------------
                                            2000                      2001                    2002
                                            ----                      ----                    ----
<S>                                        <C>                       <C>                     <C>
E-commerce revenues                        $5,128                    $5,445                  $4,404
Costs and expenses                         $3,595                    $6,216                  $4,210
Net income (loss) before taxes             $1,533                     ($771)                 $  194
Net income (loss)                          $1,533                     ($771)                 $  194
</TABLE>

     The years ended July 31, 2000 and 2001 were audited by Arthur Andersen LLP.
Such periods have been restated to reflect the discontinued operations as
follows: (In thousands)

<TABLE>
<CAPTION>

Balance Sheet

                                                2001            Discontinued           2001
                      Assets                  Andersen          Restatement          Restated
                      ------                  --------          -----------          --------
<S>                                           <C>               <C>                  <C>
Current assets                                $  3,628          $      (286)         $  3,342
Net discontinued assets                              -                1,591             1,591
Long-term assets                                19,732               (1,305)           18,427
                                              --------                               --------
                                              $ 23,360                               $ 23,360

Liabilities and Stockholders Equity
-----------------------------------
Current liabilities                           $ 12,974          $      (396)         $ 12,578
Net discontinued liabilities                         -                  852               852
Long-term liabilities                              251                 (105)              146

Total liabilities                               13,225                    -            13,225

Minority interest                                  351                 (351)                -

Equity and Redeemable Preferred Stock            9,784                    -             9,784
                                              --------                               --------

                                              $ 23,360                    -          $ 23,360
</TABLE>

<TABLE>
<CAPTION>

Statement of Operations

                                                      2000             Discontinued           2000
                                                    Andersen           Restatement          Restated
<S>                                                 <C>                <C>                  <C>
Revenues                                            $  39,429          $    (5,128)         $  34,301
Costs and expenses                                     47,261               (3,543)            43,718
Operating loss                                         (7,832)              (1,585)            (9,417)
Other income (expense)                                 (2,221)                  52             (2,169)
Loss from continuing operations before
provision for income tax                              (10,053)              (1,533)           (11,586)
Net loss from continuing operations                   (10,053)              (1,533)           (11,586)
Gain from discontinued operations, net of tax               -                1,533              1,533
Net loss                                            $ (10,053)                              $ (10,053)
</TABLE>

                                       73

<PAGE>

<TABLE>
<CAPTION>
                                                                  2001             Discontinued           2001
                                                                Andersen           Restatement          Restated
<S>                                                             <C>                <C>                  <C>
Revenues                                                        $  41,344          $    (5,445)         $  35,899
Costs and expenses                                                 50,999               (6,183)            44,816
Operating loss                                                     (9,655)                 738             (8,917)
Other income (expense)                                               (920)                  33               (887)
Loss from continuing operations before
provision for income tax                                          (10,575)                 771             (9,804)
Income tax expense                                                   (223)                   -               (223)
Minority interest                                                     245                    -                245
Net loss from continuing operations                               (10,553)                                 (9,782)
Gain from discontinued operations, net of tax                           -                 (771)              (771)
Net loss                                                        $ (10,553)                              $ (10,553)
</TABLE>

     19.  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, 2002, one of the
officers was terminated upon completion of his employment agreement and the
other was notified that his employment agreement would not be renewed.

     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 $140,000 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, 2002, said officer's employment agreement was revised to
reflect the change in his responsibilities and a corresponding decrease in
compensation.

     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. In accordance with the terms of the agreement,
the officer gave notice of his desire to terminate the agreement.

                                       74

<PAGE>

     20.  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 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, 2000 and 2001 our carrier services business
had two customers whose aggregated revenues approximated 40% and 54%
respectively, of our total revenues. Individually, both customers generated
revenues greater than 10% during the year ended July 31, 2001. For the year
ended July 31, 2002, our carrier services business had a customer whose
aggregated revenues approximated 54% of our total revenues.

     21.  RELATED PARTY TRANSACTIONS

     In February 2000, our board of directors approved a plan, in which $1.1
million was loaned, at a market interest rate, in the aggregate to certain key
executive officers to allow them to exercise approximately 2,033,332 of their
vested options. During fiscal 2001, the board of directors modified the
agreements by extending them for an additional year and changing them to
non-recourse notes. As the accounting treatment for non-recourse notes is
consistent with the treatment for options outstanding, the Company excluded the
shares from its outstanding common stock as of the date of the modification.
Upon maturity in fiscal 2002, the Company elected not to renew the notes again
and called the notes due. The officers were unable to pay off the notes so the
Company retained the shares it had held as collateral upon the original issuance
of the note. In June 2002, the Company issued options in the amount of 933,333
and 866,666 to two of the executive officers at an exercise price of $0.58. The
options were to vest over a one-year period quarterly and were subject to being
accelerated in the event of early termination. In July 2002, upon the
termination of one of the officers 933,333 options vested immediately.

     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, 2002, we have a payable of approximately
$52,000 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 until
October 2002, 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, 2002, the payable due these

                                       75

<PAGE>

companies was approximately $78,276. Additionally, the Company has a note
payable due Mr. Revesz in the amount of $250,000 as detailed in Note 7.

     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, 2001
and July 31, 2002, we had a payable to Technology Impact Partners of
approximately $115,000 and approximately $71,207, respectively.

     As of July 31, 2002 we had an outstanding payable to Vianet Technologies,
Inc., a telecom company of which Stephen M. Wagner, Chief Executive Officer and
Director, served as a director from January 1, 2002 until his resignation
effective June 30, 2002, in the amount of approximately $1.3 million. Mr. Wagner
owns less than 5% of the outstanding stock of Vianet.

     22.  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 have negotiated a cash resolution with
Comdisco for an amount deemed to be immaterial.

     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. ATSI was unable to proceed in its
appeal of the appraisal due to its failure to pay the taxes under protest.
During fiscal 2002 we recorded approximately $260,000 of property tax expense
related to our Dallas office. As of the date of this filing, no payments have
been made.

     In December 2002, ATSI-Delaware and ATSI the Texas corporation were both
sued in Mexico for an alleged breach of a promissory note. The U.S. companies
were guarantors on a promissory note to a Mexican telecommunications carrier.
ATSI is vigorously defending the suits in Mexico, which are claiming
approximately $200,000. ATSI believes it has a justifiable basis for its
position in the litigation and believes that we will be able to resolve the
dispute without suffering a material adverse effect on our financial position.

     ATSI has also filed a lawsuit in the Southern District of New York against
several financial parties for what ATSI believes is "stock fraud and
manipulation". The case is based on

                                       76

<PAGE>

convertible preferred stock financing transactions involving primarily two
firms, Rose Glen Capital and the Shaar Fund. In both of those transactions, ATSI
believes it was defrauded and its stock was manipulated.

     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.

     23.  QUARTERLY FINANCIAL DATA (Net of GlobalSCAPE, Inc.)
            (unaudited) - inthousands -except per share information

<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                 $ 6,077              $ 6,796             $ 10,019             $ 13,007
Cost of services                     5,481                5,353                7,556                9,907
                                   -------              -------             --------             --------
Gross margin                           596                1,443                2,463                3,100
SG&A                                 3,853                2,867                2,785                2,944
Net loss                           ($4,683)             ($2,401)             ($1,829)             ($1,640)
Net loss to common shareholders    ($5,571)             ($2,634)             ($2,304)             ($2,276)
Net loss per share                  ($0.08)              ($0.04)              ($0.03)              ($0.03)

<CAPTION>
                                  Quarter ended       Quarter ended        Quarter ended        Quarter ended
     Fiscal 2002                     10/31/01            01/31/02             04/30/02             07/31/02
     -----------                     --------            --------             --------             --------
<S>                              <C>                 <C>                  <C>                  <C>
Operating revenues                 $11,364             $ 13,596             $ 13,251             $ 12,490
Cost of services                     9,097               11,191               11,314               11,260
Gross margin                         2,267                2,405                1,937                1,230
                                   -------              -------             --------             --------
SG&A                                 2,842                3,083                2,994                3,366
Net loss                           ($2,128)             ($2,363)             ($2,390)             ($7,636)
Net loss to common shareholders    ($2,273)             ($2,495)             ($2,486)             ($7,735)
Net loss per share                  ($0.03)              ($0.03)              ($0.03)              ($0.08)
</TABLE>

     24.   SUBSEQUENT EVENTS

     Subsequent to the end of the fiscal year, the holder of the Series E
Preferred Stock converted 285 of the 1,455 shares outstanding and accumulated
interest into common stock resulting in the issuance of 4,121,685 shares of
common stock.

     Additionally, we issued 335,495 shares as payment for dividends for the
quarters ended March 31, 2002 and June 30, 2002 for holders of our Series F
Preferred Stock.

                                       77

<PAGE>

     Subsequent to year-end we have made a number of decisions to further
conserve our limited resources and maintain certain operations going forward.
These decisions include the recent termination of a number of employees in our
corporate offices, strategic terminations in our Mexico operations and the
restriction and ultimately, idling of our carrier services network capacity.

     Additionally, the Company is reviewing expressions of interest received
from various parties for a strategic combination. Should the Company be
successful in structuring a combination it is likely one component would include
a portion of working capital infusion to allow us to continue to operate our
operations both domestically and internationally.

     On January 15, 2003 the American Stock Exchange halted trading in our stock
pending the filing of our Form 10-K for the year ended July 31, 2002 and our
Form 10-Q for the quarter ended October 31, 2002.

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

     On December 13, 2001, ATSI Communications, Inc.'s Board of Directors
approved the recommendation of its Audit Committee that the firm of Arthur
Andersen LLP be dismissed as its independent public accountants. A discussion
was also held by the Audit Committee with H. Douglas Saathoff, CFO and J.
Christopher Cuevas, V.P. - Corporate Controller and Treasurer.

     The Company was not aware of any disagreements regarding accounting or
financial disclosure with Arthur Andersen LLP. The auditor's opinion for fiscal
2000 and 2001 contained a qualification as to the uncertainty of the Company's
ability to continue as a going concern.

     On December 13, 2001, the Company also engaged Ernst & Young to audit the
financial statements for the year ended July 31, 2002. During the year ended
July 31, 2002 and through the date hereof, there were no disagreements with
Ernst & Young on any matters of accounting principle or practice, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the satisfaction of the former auditors, would have been referred to in the
auditors' report had such a report been issued.

     On November 14, 2002, ATSI Communications, Inc.'s Board of Directors
approved the recommendation of its Audit Committee that the firm of Ernst &
Young, LLP be dismissed as its independent public accountants. A discussion was
also held by the Audit Committee with J. Christopher Cuevas, Interim Chief
Financial Officer.

     On November 14, 2002, ATSI Communications, Inc.'s Board of Directors
approved the recommendation of its Audit Committee that the firm of Tanner + Co.
be hired as its independent public accountants for the fiscal year ending July
31, 2002. The recommendation of the Audit Committee was made after discussions
with J. Christopher Cuevas, Interim Chief Financial Officer.

                                       78

<PAGE>

     During the year ended July 31, 2000 and 2001, and through the date hereof,
the Company did not consult Tanner + Co. with respect to the application of
accounting principles to a specified transaction, proposed or completed, or the
type of audit opinion that might be rendered on the Company's financial
statements, or any other matters or reportable events pursuant to Item 304 (a).

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Name                        Age    Position Held

     Stephen M. Wagner            46    President, Chief Executive Officer and
                                        Director

     Arthur L. Smith              38    President, ATSI de Mexico

     J. Christopher Cuevas        37    Chief Financial Officer

     Raymond G. Romero            48    Vice President, General Counsel and
                                        Business Development and Corporate
                                        Secretary

     Richard C. Benkendorf        63    Director

     John R. Fleming              48    Interim Chairman of the Board

     Carlos K. Kauachi            62    Director

     Darrell O. Kirkland          61    Director

     Murray R. Nye                50    Director

     Stephen M. Wagner has served as Chief Executive Officer since October 2002,
as a director of the Company since October 2001, and as President since August
2001. He also served as Chief Operating Officer from August 2001 to October
2002. Prior to joining ATSI, Mr. Wagner served as President of Qwest
Communications International's Local Broadband, Southern Region from November
1999 to March 2001. From December 1997 until June 1998, Mr. Wagner served as
Vice President of Wholesale Markets for LCI International and from June 1998
until November 1999, he served in that same role for Qwest Communications upon
their acquisition of LCI International. Prior to December 1997, Mr. Wagner
served in various senior management positions with USLD Communications including
Vice President of Sales, Marketing and Business Development until their
acquisition by LCI International on December 31, 1997.

     Arthur L. Smith has served as President of ATSI-Mexico since October 2002,
as Chief Executive Officer and a director of the Company from June 1996 to
October 2002 and as President of the Company since its formation in June 1996 to
July 1998. Mr. Smith also served

                                       79

<PAGE>

as President, Chief Operating Officer and a director of ATSI-Canada since its
formation in May 1994. From December 1993 until May 1994, Mr. Smith served in
the same positions with Latcomm International Inc., which company amalgamated
with Willingdon Resources Ltd. to form ATSI-Canada in May 1994. Mr. Smith has
also served as President and Chief Executive Officer of American TeleSource
International, Inc., a Texas corporation ("ATSI-Texas"), one of the Company's
principal operating subsidiaries, since December 1993. From June 1989 to
December 1993, Mr. Smith was employed as director of international sales by
GeoComm Partners, a satellite-based telecommunications company located in San
Antonio, providing telecommunications services to Latin America. Mr. Smith has
over eleven years experience in the telecommunications industry.

     J. Christopher Cuevas has served as Interim Chief Financial Officer since
July 2002. From April 2000 through July 2002, Mr. Cuevas served as V.P. -
Corporate Controller and Treasurer. From December 1994 through April 2000, Mr.
Cuevas served in various roles within ATSI including Corporate Controller,
Director of Reporting and Manager of Financial Reporting. Prior to joining ATSI
in December 1994 he served in a variety of roles including; Manager of Financial
Reporting for Eastex Energy, Inc., an energy company, from 1991 through 1994,
Assistant Controller for King, Chapman, Broussard and Gallagher from 1989
through 1991 and as an auditor with Price Waterhouse LLP from 1987 through 1989.

     Raymond G. Romero has served as Vice President, General Counsel and
Corporate Secretary since July 2000. From October 1999 through April 2000, Mr.
Romero was employed as Vice President, Business Development for Open World
Communications, Inc. and from April 1999 through September 1999, he was employed
as President of Eurotech International, Inc., both Internet companies. Prior to
that time he served in a variety of roles including serving as a Partner with
Competitive Strategies Group, Ltd., a telecommunications consulting firm from
April 1997 through April 1999 and as Vice President and General Counsel for
Ameritech International, an international telecommunications company, from April
1991 through December 1995.

     Richard C. Benkendorf has served as a director of the Company since October
1996. From 1991 to present, Mr. Benkendorf has been a principal of Technology
Impact Partners, which provides advisory and investment services. From
1989-1991, Mr. Benkendorf served as Senior Vice President Investment, Planning,
Mergers & Acquisitions and Venture Capital for Ameritech, a communications
services company.

     John R. Fleming has served as Interim Chairman of the Board since October
2002 and as a Director of ATSI since January 2001. Mr. Fleming is the principal
and founder of Vision Corporation, an early-stage investment company that
focuses on communications technologies, service and hardware. Prior to forming
Vision Corporation, Mr. Fleming served as President, International of IXC
Communications, Inc. from April 1998 to December 1999. Immediately prior to that
he served as IXC's President of Emerging Markets from December 1997, as
Executive Vice President of IXC from March 1996 through November 1997 and as
Senior Vice President of IXC from October 1994 through March 1996. He served as
Vice President of Sales and Marketing of IXC from its formation in July 1992
until October 1994. Prior to that, Mr. Fleming served as Director of Business
Development and Director of Carrier Sales of CTI from 1986 to March 1990 and as
Vice President -- Marketing and Sales of CTI from March 1990 to

                                       80

<PAGE>

July 1992. Mr. Fleming was a Branch Manager for Satellite Business Systems from
1983 to 1986.

     Carlos K. Kauachi has served as a director of the Company since October
1996. From 1996 to present, Mr. Kauachi has been self-employed as a consultant.
From 1962 until 1996, Mr. Kauachi served in various positions with Telefonos de
Mexico, the then privately owned telecommunications monopoly in Mexico,
including Vice President-Telephone Business Development, Vice
President-Marketing and Sales and, most recently, Vice President-International
Business Development.

     Darrell O. Kirkland has served as a director of the Company since October
2002. Mr. Kirkland is the principal of Kirkland and Associates, a telecom
consulting firm. Prior to starting his own consulting firm, Mr. Kirkland was the
President of Superwire Communications, Inc., an Internet access provider. Mr.
Kirkland previously served as the President of Discovery Communications, Inc., a
regional designer of call processing and voice mail platforms. Mr. Kirkland was
also the Vice President and Regional Manager for MCI Air Signal (a subsidiary of
MCI Telecommunications.) Mr. Kirkland started his telecommunications career as
the Regional Manager of Sales at MCI Telecommunications, where he opened the
first MCI offices in Austin and San Antonio.

     Murray R. Nye has served as a director of the Company since its formation
in June 1996. Mr. Nye also served as Chief Executive Officer and a director of
ATSI-Canada from its formation in May 1994. From December 1993 until May 1994,
Mr. Nye served in the same positions with Latcomm International Inc., which
company amalgamated with Willingdon Resources Ltd. to form ATSI-Canada in May
1994. From 1992 to 1995, Mr. Nye served as President of Kirriemuir Oil & Gas
Ltd. From 1989 until 1992, Mr. Nye was self-employed as a consultant and Mr. Nye
is again currently self-employed as a consultant. Mr. Nye serves as a director
of D.M.I. Technologies, Inc., an Alberta Stock Exchange-traded company.

             SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than 10%
of a registered class of the Company's equity securities to file various reports
with the Securities and Exchange Commission concerning their holdings of, and
transactions in, securities of the Company. Copies of these filings must be
furnished to the Company.

     Based on a review of the copies of such forms furnished to the Company and
other information, the Company believes that, during the fiscal year ended July
31, 2002, all of its directors and executive officers were in compliance with
the applicable filing requirements.

ITEM 11.   EXECUTIVE COMPENSATION

Summary Compensation Table

     The following table sets forth information concerning the compensation
earned during the Company's last three fiscal years by the Company's Chief
Executive Officer and each of the Company's other four most highly compensated
executive officers whose total cash

                                       81

<PAGE>

compensation exceeded $100,000 for services rendered in all capacities for the
fiscal year ended July 31, 2002 (collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>
                                             Annual Compensation                      Long-Term Compensation
                                             -------------------                      ----------------------
                                     ----------------------------------------------------------------------------------
                                                                                 Awards            Payouts
                                                                                 ------            -------
                                                                           --------------------------------
                                                                 Other                Securities
Name And Principal          Fiscal                              Annual    Restricted  Underlying      LTIP     All Other
------------------                                           Compensation    Stock      Options/    Payout   Compensation
     Position                Year   Salary ($)     Bonus ($)    ($)(1)     Awards ($)   SARs (#)      ($)        ($)
     --------                ----   ----------     ---------    ------     ----------   --------      ---        ---
<S>                         <C>     <C>            <C>        <C>         <C>         <C>           <C>       <C>
Stephen M. Wagner (2)        2002    $174,327            -          -            -     500,000         -          -
Chief Executive Officer      2001           -            -          -            -           -         -          -
                             2000           -            -          -            -           -         -          -
Arthur L. Smith (3)          2002    $184,058      $25,004          -            -   1,166,666         -          -
President, ATSI-Mexico       2001     190,000            -          -            -           -         -          -
                             2000     124,915      $ 4,500          -            -           -         -          -
Raymond G. Romero (4)        2002    $137,008            -          -            -     150,000         -          -
Vice President, General      2001     140,000            -          -            -      50,000         -          -
Counsel and Business         2000      10,769            -          -            -      50,000         -          -
Development
Ruben Caraveo (4)            2002    $110,504            -          -            -           -         -          -
Vice President, Operations   2001      28,308            -          -            -     300,000         -          -
                             2000           -            -          -            -           -         -          -
</TABLE>
----------

(1)  Certain of the Company's executive officers receive personal benefits in
     addition to salary; however, the Company has concluded that the aggregate
     amount of such personal benefits does not exceed the lesser of $50,000 or
     10% of annual salary and bonus for any Named Executive Officer.

(2)  Also serves as Chief Executive Officer of American TeleSource
     International, Inc., a Texas corporation ("ATSI-Texas"), the Company's
     principal operating subsidiary. Mr. Wagner's compensation is paid by
     ATSI-Texas.

(3)  Served as Chief Executive Officer until October 2002. Mr. Smith's
     compensation is paid by ATSI-Texas.

(4)  Mr. Romero and Mr. Caraveo's compensation are all paid by ATSI-Texas.

                                       82

<PAGE>

Employment Agreements

     The Company has entered into employment agreements with certain of its
executive officers as follows:
                                                                   Minimum

      Name                          Term                         Annual Salary

Stephen M. Wagner       August 20, 2001 - August 19, 2002           $185,000

Arthur L. Smith (1)     August 1, 2001 - July 31, 2002              $140,000

Ruben Caraveo (2)       May 1, 2001 - April 30, 2002                $115,000
----------

(1)  agreement provides for an automatic renewal for an additional one-year term
     unless notice of termination is given 120 days prior to end of initial
     term.

(2)  agreement provides for an automatic renewal for an additional one-year term
     unless notice of termination is given 30 days prior to end of initial term.

          The Board may increase each officer's salary, and may pay a bonus to
     each of them from time to time. Each of the employment agreements provides
     for early termination under certain conditions, and restricts each
     executive from various competing and other potentially damaging activities
     during employment and for a specified time after termination of employment.

Stock Option Plans

     1997 Option Plan

     The American TeleSource International Inc. 1997 Stock Option Plan (the
"1997 Option Plan") was adopted in February 1997 by the Board of Directors of
the Company and approved in May 1997 by the Company's stockholders.

     The 1997 Option Plan terminated on February 10, 1998. No further options
will be granted under the 1997 Option Plan. All options outstanding under the
1997 Option Plan on the date of termination will remain outstanding under the
1997 Option Plan in accordance with their respective terms and conditions.

     As of July 31, 2002, options for 202,001 shares were outstanding under the
1997 Option Plan at a weighted average exercise price of $1.87, all of which
were exercisable. As of July 31, 2002, 4,463,331 options had been exercised.

1998 Option Plan

                                       83

<PAGE>

     The American TeleSource International, Inc. 1998 Stock Option Plan (the
"1998 Option Plan") was adopted in September 1998 by the Board of Directors of
the Company and approved December 1998 by the Company's stockholders. The 1998
Option Plan authorizes the grant of up to two million incentive stock options
and non-qualified stock options to employees, directors and certain other
persons. As of July 31, 2002, the Board had granted options to purchase
2,214,800 shares of common stock under the 1998 Option Plan at exercise prices
as follows: (i) 1,541,000 at $0.55 per share, (ii) 302,300 at $0.78 per share,
(iii) 371,500 at $0.63 - $4.63. As of July 31, 2002, options for 1,015,172
shares were outstanding under the 1998 Option Plan at a weighted average
exercise price of $0.91. As of July 31, 2002, 891,840 options were exercisable
at a weighted average exercise price of $0.82, 757,254 options had been
exercised and 442,374 options had been forfeited.

2000 Option Plan

     The ATSI Communications, Inc. 2000 Incentive Stock Option Plan (the "2000
Option Plan") was adopted in December 2000 by the Board of Directors of the
Company and approved February 2001 by the Company's stockholders.

     The 2000 Option Plan authorizes the grant of up to 9.8 million incentive
stock options and non-qualified stock options to employees, directors and
certain other persons. As of July 31, 2002, the Board had granted options to
purchase 7,141,499 shares of common stock under the 2000 Option Plan at an
exercise price of $0.47. As of July 31, 2002, 1,876,998 options were exercisable
at a weighted average exercise price of $0.48, no options had been exercised and
716,334 options had been forfeited.

Stock Option Grants in Fiscal 2002

     A total of 500,000, 1,166,666 and 150,000 options were granted to Mr.
Wagner, Mr. Smith and Mr. Romero, respectively, during the Company's fiscal year
ended July 31, 2002.

Aggregate Option Exercises in Fiscal 2002 and Fiscal Year-End Option Values

     The following table shows stock options exercised by the Named Executive
Officers during the fiscal year ended July 31, 2002, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and unexercisable stock options as
of July 31, 2002. Also reported are the values of "in-the-money" options, which
represent the positive spread between the exercise price of any such existing
stock options and the Common Stock price as of July 31, 2002.

<TABLE>
<CAPTION>
                Shares

              Acquired

                 On           Value           Number of Securities       Value of Unexercised In-the-
                                            Underlying Unexercised         Money Options at FYE ($)
              Exercise      Realized          Options at FYE(#)
              --------      --------

Name             (#)           ($)      Exercisable     Unexercisable   Exercisable      Unexercisable
----             ---           ---      -----------     -------------   -----------      -------------
<S>           <C>           <C>         <C>             <C>             <C>              <C>
</TABLE>

                                       84

<PAGE>

<TABLE>
<S>                      <C>        <C>     <C>             <C>           <C>     <C>
Stephen M. Wagner         -          -           -          500,000        -        -
Arthur L. Smith           -          -       350,000        950,000        -        -
Raymond G. Romero         -          -        50,000        200,000        -        -
Ruben Caraveo             -          -       100,000        200,000        -        -
</TABLE>

----------

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding ownership of
the Common Stock as of January 24, 2003 by (i) each person known by the Company
to be the beneficial owner of more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) the Chief Executive Officer and
each other executive officer of the Company named in the Summary Compensation
Table, and (iv) all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
                                                       Amount and Nature of
                                                     Beneficial Ownership of
          Name                                           Common Stock(1)           Percent of Class
          ----                                           ---------------           ----------------
<S>                                                  <C>                          <C>
Stephen M. Wagner (2) ..............................           341,667                         *
Arthur L. Smith (3) ................................         2,978,449                     2.86%
Raymond G. Romero (4) ..............................           106,000                         *
Ruben Caraveo (4) ..................................           100,000                         *
Richard C. Benkendorf (5) ..........................           316,666                         *
John R. Fleming (6) ................................           101,366                         *
Carlos K. Kauachi (7) ..............................           232,089                         *
Murray R. Nye (8) ..................................           647,166                         *
Darrell O. Kirkland ................................                 -                         *
All directors and executive officers as a group
 (14 persons) (9) ..................................         5,202,070                     4.94%
</TABLE>

----------
* Less than 1%

(1)  To the knowledge of the Company, each person named in the table has sole
     voting and investment power with respect to all shares of Common Stock
     shown as beneficially owned by him. Shares of Common Stock that are not
     outstanding but that may be acquired by a person upon exercise of options
     within 60 days of January 24, 2003 are deemed outstanding for the purpose
     of computing the percentage of outstanding shares beneficially owned by
     such person but are not deemed outstanding for the purpose of computing the
     percentage of outstanding shares beneficially owned by any other person.

(2)  Includes 166,667 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(3)  Includes 450,000 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

                                       85

<PAGE>

(4)  Includes 100,000 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(5)  Includes 136,666 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(6)  Includes 76,666 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(7)  Includes 96,666 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(8)  Includes 176,666 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

(9)  Includes 1,672,499 shares issuable upon exercise of presently exercisable
     options or options exercisable within 60 days of January 24, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In February 2000, our board of directors approved a plan, in which $1.1
million was loaned, at a market interest rate, in the aggregate to certain key
executive officers to allow them to exercise approximately 2,033,332 of their
vested options. During fiscal 2001, the board of directors modified the
agreements by extending them for an additional year and changing them to
non-recourse notes. As the accounting treatment for non-recourse notes is
consistent with the treatment for options outstanding, the Company excluded the
shares from its outstanding common stock as of the date of the modification.
Upon maturity in fiscal 2002, the Company elected not to renew the notes again
and called the notes due. The officers were unable to pay off the notes so the
Company retained the shares it had held as collateral upon the original issuance
of the note. In June 2002, the Company issued options in the amount of 933,333
and 866,666 to two of the executive officers at an exercise price of $0.58. The
options were to vest over a one-year period quarterly and were subject to being
accelerated in the event of early termination. In July 2002, upon the
termination of one of the officers 933,333 options vested immediately.

     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, 2002, we have a payable of approximately
$52,000 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 until
October 2002, 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, 2002, the payable due these companies was
approximately $78,276. Additionally, the Company has a note payable due Mr.
Revesz in the amount of $250,000 as detailed in Note 7.

                                       86

<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, 2001
and July 31, 2002, we had a payable to Technology Impact Partners of
approximately $115,000 and approximately $71,207, respectively.

         As of July 31, 2002 we had an outstanding payable to Vianet
Technologies, Inc., a telecom company of which Stephen M. Wagner, Chief
Executive Officer and Director, served as a director from January 1, 2002 until
his resignation effective June 30, 2002, in the amount of approximately $1.3
million. Mr. Wagner owns less than 5% of the outstanding stock of Vianet.

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

(a)      Financial Statements
         Index to Financial Statements appears on Page 39.

(b)      Reports on Form 8-K

         On December 18, 2001 we announced that our Board of Directors had
         approved the dismissal of Arthur Andersen LLP and the hiring of Ernst &
         Young LLP.

         On January 24, 2002 and January 31, 2002 we amended our filings to
         include an exhibit from Arthur Andersen.

         On October 29, 2002 we announced that a member of our Board of
         Directors had resigned.

         On November 15, 2002 we announced that our Board of Directors had
         approved the dismissal of Ernst & Young LLP and the hiring of Tanner +
         Co.

(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)

                                       87

<PAGE>

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)

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

                                       88

<PAGE>

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)

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)

                                       89

<PAGE>

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)

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)

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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)

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)

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<PAGE>

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 this
         Annual Report on Form 10-K for year ended July 31, 2002 filed February
         3, 2003)

22       Subsidiaries of ATSI (Exhibit 22 to this Annual Report on Form 10-K for
         year ended July 31, 2002 filed February 3, 2003)

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)

99.9     Certification of Chief Executive Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act (Exhibit 99.9 to this Form 10-K filed on February 3,
         2003.)

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<PAGE>

99.10    Certification of Chief Financial Officer pursuant to Section 906 of the
         Sarbanes-Oxley Act (Exhibit 99.10 to this Form 10-K filed on February
         3, 2003.)

                                   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
February 3, 2003.

                           AMERICAN TELESOURCE INTERNATIONAL, INC.

                                    By:  /s/ Stephen M. Wagner
                                         -----------------------------
                                         Stephen M. Wagner
                                         Chief Executive Officer

                                    By:  /s/ J. Christopher Cuevas
                                         -----------------------------
                                         J. Christopher Cuevas
                                         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 February 3, 2003.

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

         /s/ STEPHEN M. WAGNER                Chief Executive Officer, Director
         --------------------------           (Principal Executive Officer)

         /s/ J.CHRISTOPHER CUEVAS             Chief Financial Officer (Principal
         --------------------------           Accounting and Finance Officer)

         /s/ JOHN R. FLEMING                  Chairman of Board, Director
         --------------------------

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

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

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

         /s/ DARRELL KIRKLAND                 Director
         ---------------------------

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<PAGE>

             CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, Stephen M. Wagner, certify that:

     1.   I have reviewed this annual report on Form 10-K of ATSI
          Communications, Inc.;

     2.   Based on my knowledge, this annual report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this quarterly report;

     3.   Based on my knowledge, the financial statements and other financial
          information included in this quarterly report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this annual report;

     4.   The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

               a)   designed such disclosure controls and procedures to ensure
                    that material information relating to the registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others within those entities, particularly during the
                    period in which this annual report is being prepared;

               b)   evaluated the effectiveness of the registrant's disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing of this annual report (July 31, 2002); and

               c)   presented in this annual report our conclusions about the
                    effectiveness of the disclosure controls and procedures
                    based on our evaluation as of the Evaluation Date;

     5.   The registrant's certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrant's auditors and the audit
          committee of registrant's board of directors (or persons performing
          the equivalent function):

                    .    all significant deficiencies in the design or operation
                         of internal controls which would adversely affect the
                         registrant's ability to record, process, summarize and
                         report financial data and have identified for the
                         registrant's auditors any material weaknesses in
                         internal controls; and

                    .    any fraud, whether or not material, that management or
                         other employees who have a significant role in the
                         registrant's internal controls; and

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<PAGE>

     6.   The registrant's other certifying officers and I have indicated in
          this annual report whether or not there were any significant changes
          in internal controls or in other factors that could significantly
          affect internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.


By /s/ Stephen M. Wagner

Stephen M. Wagner
Chief Executive Officer
February 3, 2003

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<PAGE>

             CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002


I, J. Christopher Cuevas, certify that:

     7.   I have reviewed this annual report on Form 10-K of ATSI
          Communications, Inc.;

     8.   Based on my knowledge, this annual report does not contain any untrue
          statement of a material fact or omit to state a material fact
          necessary to make the statements made, in light of the circumstances
          under which such statements were made, not misleading with respect to
          the period covered by this quarterly report;

     9.   Based on my knowledge, the financial statements and other financial
          information included in this quarterly report, fairly present in all
          material respects the financial condition, results of operations and
          cash flows of the registrant as of, and for, the periods presented in
          this annual report;

     10.  The registrant's other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures (as
          defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
          and we have:

          a)   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b)   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing of this annual report (July 31, 2002); and

          c)   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

     11.  The registrant's certifying officers and I have disclosed, based on
          our most recent evaluation, to the registrant's auditors and the audit
          committee of registrant's board of directors (or persons performing
          the equivalent function):

               .    all significant deficiencies in the design or operation of
                    internal controls which would adversely affect the
                    registrant's ability to record, process, summarize and
                    report financial data and have identified for the
                    registrant's auditors any material weaknesses in internal
                    controls; and

                                       96

<PAGE>

               .    any fraud, whether or not material, that management or other
                    employees who have a significant role in the registrant's
                    internal controls; and

     12.  The registrant's other certifying officers and I have indicated in
          this annual report whether or not there were any significant changes
          in internal controls or in other factors that could significantly
          affect internal controls subsequent to the date of our most recent
          evaluation, including any corrective actions with regard to
          significant deficiencies and material weaknesses.


By /s/ J. Christopher Cuevas

J. Christopher Cuevas
Chief Financial Officer
February 3, 2003

                                       97