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                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                            _______________________

                                  FORM 10-KA
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended July 31, 1999

                                       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:

                              AMERICAN TELESOURCE
                              INTERNATIONAL, INC.
            (Exact Name of Registrant as Specified in its Charter)

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

     12500 Network Blvd. Suite 407,
         San Antonio, Texas
       (Address of Principal                                    78249
         Executive Office)                                   (Zip Code)

                                (210) 558-6090
             (Registrant's Telephone Number, Including Area Code)

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

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

                            _______________________

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.  Yes  X   No ___
                                               ---

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

     The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at October 25, 1999, was approximately
$41,558,696.  There were 48,685,287 shares of Common Stock outstanding at
October 25, 1999, and the closing sales price on the NASDAQ/OTCB for the
Company's Common Stock was $0.92 on such date.

                     DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held in December 1999, are incorporated by reference in Part
III hereof.

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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.....................................  5
          Retail Distribution Network...............................................  7
          Services and Products.....................................................  8
            Network Management Services.............................................  8
              Call Services.........................................................  9
              Direct Dial Services.................................................. 10
              Sales................................................................. 11
              Electronic Commerce Via Internet...................................... 11
          Network................................................................... 12
            Year 2000 Issue......................................................... 13
            Licenses/Regulatory..................................................... 13
            Employees............................................................... 15
            Additional Risk Factors................................................. 16
Item 2.   Properties................................................................ 25
Item 3.   Legal Proceedings......................................................... 26
Item 4.   Submission of Matters to a Vote of Security Holders....................... 26

                                       PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters..... 27
Item 6.   Selected Financial and Operating Data..................................... 28
Item 7.   Management's Discussion and Analysis of Financial Condition and
            Results of Operations................................................... 28
            General................................................................. 29
            Results of Operations................................................... 30
            Liquidity and Capital Resources......................................... 36
            Inflation/Foreign Currency.............................................. 38
            Seasonality............................................................. 38
            Year 2000 Compliance.................................................... 38
Item 8.   Financial Statements and Supplementary Data............................... 40
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures..................................................... 71

                                      PART III

Item 10.  Directors and Officers of the Registrant.................................. 71
Item 11.  Executive Compensation.................................................... 71
Item 12.  Security Ownership of Certain Beneficial Owners and Management............ 71
Item 13.  Certain Relationships and Related Transactions............................ 71

                                      PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 72
</TABLE>

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     This Annual Report on Form 10-K and the documents incorporated by reference
in this Annual Report contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities and Exchange Act of 1934, as amended. "Forward looking statements"
are those statements that describe management's beliefs and expectations about
the future. We have identified forward-looking statements by using words such as
"anticipate," "believe," "could," "estimate," "may," "expect," and "intend."
Although we believe these expectations are reasonable, our operations involve a
number of risks and uncertainties, including those described in the Additional
Risk Factors section of this Annual Report and other documents filed with the
Securities and Exchange Commission. Therefore, these types of statements may
prove to be incorrect.

                                    PART I.
                                    -------

ITEM I.   BUSINESS

Overview and Recent Developments

     The Company is a telecommunications provider, focusing on the market for
wholesale and retail services between the United States and Latin America, and
within Latin America. Most of the Company's current operations involve services
between the U.S. and Mexico or within Mexico. The Company owns various
transmission facilities and leases facilities of other providers as necessary to
complete its network. Specifically, the Company owns 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. The Company leases
fiber optic cable and satellite capacity to connect its teleports and switches
in the United States to its teleports and switches in Mexico, and relies on
other carriers to complete the long distance portion of its traffic within the
U.S. and Mexico.

     The Company's subsidiary GlobalSCAPE, Inc. distributes Internet
productivity software.

     The Company 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.

    The Company has had operating losses for almost every quarter since it began
operations in 1994. The auditor's opinion on the Company's financial statements
as of July 31, 1999 calls attention to substantial doubts about the Company's
ability to continue as a going concern. This means that they question whether
the Company can continue in business. The Company has experienced difficulty in
paying our vendors and lenders on time in the past, and may experience
difficulty in the future. If the Company is unable to pay its vendors and
lenders on time, they may stop providing critical services or repossess critical
equipment that the Company needs to stay in business.

    The Company's principal operating subsidiaries are:

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  .       American TeleSource International de Mexico, S.A. de C.V. or ATSI
     Mexico, which was formed in 1995 to support the Company's operations in
     Mexico, and performs regulatory, sales, marketing, planning, and technical
     maintenance services.

  .       Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom, which
     the Company acquired in August, 1997; this subsidiary owns 126 casetas in
     66 cities in Mexico;

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

  .       TeleSpan, Inc. which was formed in February1998 to carry the Company's
     wholesale and private network services traffic between the U.S. and Latin
     America; and

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

Recent Developments

     During its fiscal year ending July 31, 1999, the Company:

     .  executed a Marketing Agreement with AT&T providing for the Company's pay
        telephones in Mexico to be programmed with an AT&T "hot button." The
        Company receives a commission each time a pay telephone customer uses
        the hot button to access the AT&T network;

     .  signed a reciprocal services agreement with Bestel S.A. de C.V., further
        diversifying the Company's route choices in Mexico for intra-Mexico long
        distance;

     .  secured a three year lease of fiber optic cable from Bestel S.A. de C.V.
        and began transporting increased wholesale volume over this route;

     .  commissioned its new Nortel(TM) International Gateway DMS 300/250 switch
        located in Dallas;

     .  executed a reciprocal services agreement with Radiografica
        Costarricense, S.A. or RACSA), a division of Instituto Costarricense de
        Electricidad, the Costa Rican telephone company enabling the Company to
        connect to the RACSA network in Costa Rica, and provide high quality,
        low cost transmission services throughout Central America, Mexico and
        the United States

     .  applied for a long distance license from the Mexican government which,
        if granted, will permit the Company to carry its own intra-Mexico long
        distance traffic and interconnect directly with the local Mexican
        network, thereby substantially reducing costs

     In fiscal year 1999 GlobalSCAPE acquired the ownership of its flagship
software product, CuteFTP(R)/1/ from its original author, and subsequently
executed an agreement with Tech Data Corporation for distribution of CuteFTP in
209 CompUSA stores nationwide. GlobalSCAPE also released two new Internet
productivity software products, CuteHTML(R) and CuteMAP(R). Subsequent to

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July 31, 1999, GloblaSCAPE signed an agreement with Lycos, Inc. to distribute
CuteFTP over the Lycos network.

Strategy and Competitive Conditions

     The Company's strategy is to position itself to take advantage of the de-
monopolization of the Latin American telecommunications market, as well as the
increasing demand for services in this market. 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 countries are in various stages of migration toward a competitive,
multi-carrier market.

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

     .  rapid growth of the Latino segment of the United States population
     .  increase in trade and travel between Latin America and the United States

     .  the build out of local networks and corresponding increase in the number
        of telephones in homes and businesses in Latin countries
     .  proliferation of communications devices such as faxes, mobile phones,
        pagers, and personal computers
     .  declining rates for services as a result of increased competition.

     In addition, technological advances have provided emerging carriers with
the means to provide high quality transmission on a cost-effective basis. Most
notably, the Company and 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 with less capacity than traditional methods. The packets are
reassembled at the receiving end to re-create the message. The Company has also
incorporated asynchronous transfer mode or "ATM" technology into its 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.

     The Company has focused most of its efforts on Mexico, but has some
operations in Costa Rica, El Salvador, and Guatemala and intends to expand its
services as regulatory and market conditions permit.  Ultimately the Company
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 effective 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 15 new long distance providers.  Two l of these new
license holders are Mexican based affiliates of top tier U.S. carriers
MCI/Worldcom and AT&T.  Although the Mexican government has also licensed nine
new local competitors, the build out of additional local infrastructure is just
beginning, and the local

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network in Mexico is still dominated by Telmex. The Company 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 demonoplization of this market. In 1994, the Company
began providing private network services between the U.S. and Mexico via
satellite. Since then, the Company has established a retail distribution network
in Mexico through the acquisition of public payphones and casetas, has entered
the U.S. wholesale market for termination services to Mexico, and has begun
implementation of a U.S. retail strategy through the introduction of its
presubscribed and dial around services targeted to the Latino market in the U.S.
The Company has also invested in its own transmission facilities, beginning in
1994 with satellite teleport equipment, and most recently with the acquisition
of a new Nortel International Gateway Switch and the deployment of packet
switching technology in its network. As true competition has emerged, the
Company has 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 1999 the Company applied for its own long distance
license, which, if granted, will permit the Company to interconnect directly
with the local network and build out its own long distance network, thereby
reducing costs further. The Company believes that its establishment of a solid
framework of licenses, proprietary network and favorable reciprocal services
agreements has positioned it to take advantage of the benefits to be reaped as
the Mexican telecommunications industry enters a truly competitive phase. The
Company believes that it has a clear competitive advantage over pure resellers,
and that it has overcome significant hurdles that are a barrier to entry in this
market even for large carriers. The Company intends to use its 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, the
Company believes 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.  The
Company will devote most of its 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."  The Company will use its existing retail distribution network,
and may pursue acquisitions of established distribution channels from others.
The Company believes that its focus on a retail strategy, combined with the cost
reductions that will follow the grant of a Mexican long distance license, will
permit it to improve overall corporate profit margins and secure a stable
customer base.

     Wholesale. The U.S. wholesale 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 Company increased the
volume of wholesale minutes it transmitted to Mexico during fiscal year 1999,
downward pricing pressure in this market resulted in little additional revenue
for these minutes. The Company expects its wholesale volume of traffic
transported to increase during the upcoming year as a result of the inauguration
of its high quality ATM based fiber route to Mexico in July, 1999. In addition,
the Company plans to explore ways to exploit its wholesale operation without the
investment of significant new resources (see Network Management Services -
Carrier Services).

     Although the Company has succeeded in obtaining reciprocal services
agreements with various Mexican-based providers that permit the Company to
terminate northbound traffic in the U.S., it has not realized substantial
revenue from these arrangements.  The Company believes that the long distance
license, if obtained, will permit it to lower costs significantly, improving its
competitive position in the wholesale market for both north and southbound
services.

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Retail Distribution Network

     The Company's Mexican retail distribution network consists of communication
centers, formerly referred to as casetas, and public pay telephones.

     Casetas.  Casetas are indoor calling centers strategically located to serve
travelers and the large population of the country who do not have personal
telephones. Casetas are a widely recognized and utilized medium in Mexico, but
do not currently have a real equivalent in the U.S.  The Company's casetas offer
local, domestic Mexico and international long distance calling, as well as
facsimile service.  The Company is the largest caseta operator in Mexico with
approximately 126 casetas in 66 cities 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, casetas offer privacy and
comfort as well as the personalized attention needed by customers who are not
accustomed to using a telephone.  Key factors favoring the Company over
competing caseta 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 casetas as the cornerstone, the Company intends to further
increase its retail presence in Mexico and the U.S.  The next generation caseta
will be a "Communication Center" and will offer additional services, such as
Internet access and prepaid services. The Company intends to bring the
Communication Center concept to strategic markets in the U.S., targeting Mexican
nationals and U.S. citizens of Mexican origin who are familiar with the caseta
concept and the Computel(TM)name. The Communication Centers will be used to
distribute "borderless" products that function in the same manner regardless of
the users location north or south of the U.S./Mexico border.  ATSI will target
these products  to established Latino households, and on a prepaid basis to
recent immigrants and transient Latinos who may have acculturation issues, or
identity, credit or economic challenges.  ATSI believes it will capture customer
loyalty by serving these challenged consumers, and will keep their business as
they establish households in the U.S.

     The main source of competition for Communication Centers on both sides of
the border will be prepaid card services, payphone and prepaid cellular, which
are essentially designed for the same target market.  There is already a robust
market for prepaid calling cards in the U.S.  Regulations in Mexico have only
recently permitted the use of dial around products from payphones, and the
Company expects many more prepaid card vendors to enter that market.  The
Company is aware of only a limited number of caseta-style call centers in the
U.S. located on the East Coast, in Miami and Los Angeles.

     Pay Telephones.  The Company also owns and operates approximately 574 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.  The Company also has pay telephones in the
Mexico City airport and Mexico City's mass transit metro system transfer
stations.  All of the Company's pay telephones are "intelligent" phones, meaning
that certain features are fully automated, reducing operating costs.  The
Company's telephones accept pesos and U.S. quarters. Customers may also access a
Company operator for assistance in placing collect, third party, person-to
person calls or credit card calls.

     The Company markets its pay telephone services in Mexico through direct
sales efforts as well as some independent marketing representatives working on a
commission basis. The Company has targeted a significant portion of its pay
telephone marketing efforts toward various resort areas in Mexico, specifically
on locations with high tourist-traffic such as airports, ship ports and marinas,

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restaurants and bars. Approximately 16 million U.S. tourists visit Mexico each
year, and the country's vacation destinations are major hubs for northern
visitors via major U.S. airline carriers, and cruise ships. Although the Company
targets the tourist market for payphones and operator-assisted calling, these
services are available for Mexican nationals as well.

     As of October 1, 1999, there were 31 authorized payphone providers in
Mexico, of which Telmex is the largest.  The Company believes it is the second
largest provider after Telmex in the tourist markets, where it has focused its
efforts.  The Company's multi-pay payphones give it a significant advantage over
its largest competitor, Telmex, which accepts only pre-paid Telmex calling
cards.  Vendors of the cards are often difficult to locate and denominations
tend to be higher than needed by consumers.  Although other companies have plans
to install pay telephones, the Company believes that it will be one of the few
providers with its own network, allowing it to maintain flexibility with respect
to rates.

Services and Products

     In the presentation of its financial results, the Company divides its
revenues into four categories: Network Management Services, Call Services,
Direct Dial Services and Electronic Commerce.

Network Management Services

     The Company offers private network telecommunications services between the
United States and Latin America and within Latin America.

Carrier Services

     The Company offers wholesale termination services to U.S. and Latin
American carriers who lack transmission facilities or require additional
capacity.  Revenues from this service accounted for approximately 41% of overall
Company revenues in fiscal 1999.  This market experienced tremendous downward
pricing pressure during fiscal year 1999 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 wholesale rates.  Therefore, although the Company
experienced increased volumes in this line of business during the year, it
realized little additional revenue. The Company has seen a substantial increase
in volume since it activated its high-quality fiber route in July, 1999, and
believes this fiber network will continue to attract increased volumes from top
tier carriers.  In addition, the Company believes it will generate opportunities
to transport traffic for Mexican carriers.  The Company should be able to use
the increased volumes to negotiate more favorable termination costs in Mexico,
and if the Company receives a Mexican long distance  license, it will be able to
substantially cut its costs for carrying this traffic.

     The Company occupies a unique position in the market for wholesale
services.  Its unique licenses from the Mexican government allow it to transport
traffic from the United States to Mexico outside of the International Settlement
Policy, which is the international accounting and settlements policy governing
the methods that U.S. and foreign carriers use to settle the cost of carrying
traffic over each other's network.  The International Settlements Policy causes
MCI/Worldcom and AT&T to charge higher rates than they might otherwise charge.
However, the Company is at a disadvantage with respect to these large carriers
because it does not currently have a Mexican license to carry its own long
distance traffic within Mexico and must pay a licensed carrier, such as the
Mexican affiliate of MCI/Worldcom or AT&T, to carry its traffic from its Mexican
teleports to its final destination.  At the other end of the spectrum, the
Company competes with numerous small companies who illegally carry traffic into
and

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within Mexico. These companies do not pay the fees charged by Mexican-licensed
carriers and are therefore able to offer very competitive prices. However, these
companies do not typically own their own transmission facilities, and are not
able to control costs effectively as the Company. They are also subject to
regulatory action shutting down their operations in Mexico.

     The Company believes that it has less than 1% of the market for wholesale
termination services.  See our Risk Factor captioned "The Company may not
successfully compete with others in the industry" for additional description of
the competition in this market.

Private Networks

     The Company offers private communications links for multi-national and
Latin American 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 videoconferencing
and Internet.  During fiscal 1999, the Company did not devote significant
resources toward the development of this business in Mexico.  However, expansion
of this line of business is consistent with the Company's plans to build out its
network in Mexico, since many of the same facilities that would be used for
delivery of retail consumer products could be used for private network services
as well.

     The Company has 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.

The Company competes with MCI/Worldcom, Americatel, Pointe Communications
Corporation, and Telscape International Inc., as well as the former
telecommunication monopolies in the Latin American countries in providing
private network services.  Factors contributing to the Company's competitiveness
include reliability, network quality, speed of installation, and in some cases,
geography, network size, and hauling capacity.  The Company believes it has a
reputation as  a responsive service provider capable of processing all types of
network traffic.  The Company is at a competitive disadvantage with respect to
larger carriers who are able to provide networks for countries 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.

     The Company believes that it has less than 1% of the market for private
network services.

Call Services

     The Company's principal Call Service is operator-assistance for
international collect, person-to-person, third party, calling card and credit
card calls originating in Mexico.  The primary sources of demand for operator
assistance are the Company's pay telephones and casetas in Mexico.  The Company
also provides operator services for calls originating from payphones and casetas
owned by others, hotel and resort operators, and others who control the right to
direct operator-assisted calling from groups of telephones. The Company pays
these third parties a commission based on the revenue generated by the call
traffic they send.

     During the year ended July 31, 1999the Company offered a service by which
pin numbers are issued to Latin American travelers that enable them to use their
credit cards to place calls through the Company's Call Services Center. (Latin
Americans frequently do not have travel calling cards.)  The Company also
offered travel cards that enable Mexican travelers to use their cellular phones
to place

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international calls to Mexico while in the United States. The Company has ceased
providing these services in order to devote more resources to higher margin
products.

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

     As of July 16, 1998, the Company ceased providing operator services for
domestic U.S. calls and international calls originating in Jamaica and the
Dominican Republic in order to focus on the more profitable Mexican market.

     The Company's 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.  The Company is currently focusing more on improving
its profitability rather than simply generating additional revenues, and it has
therefore lost ground to competitors willing to accept lower profit margins by
paying higher commissions.  However, the Company believes it has a reputation as
a reliable provider, and it is also able to offer the value-added service of
intelligent pay telephones in hotel lobbies.

Direct Dial Services

     During fiscal 1999, the Company provided direct dial services (long
distance calls which do not require live or automated operator assistance) in
both Mexico and, to a lesser extent, the United States.  Direct dial calls were
generated in Mexico from the Company's own Communications Centers and pay
telephones.  Consumers visiting these locations can make calls on a "sent paid"
basis by making a cash payment at the time the call is placed.  In the U.S., the
Company provided 1+ and MEXICOnnect (SM) service to residential and business
customers in the San Antonio metropolitan area.  MEXICOnnect allows customer to
dial-around their presubscribed carrier by dialing 10-10-624 + the area code +
the telephone number.  Under the 1+ program, customers presubscribe to the
Company's network for all long distance calls made from their telephone number,
eliminating the need to dial any extra digits to reach the Company's network.

     In Mexico, the Company competes with other companies who have a
comercializadora license for sent paid traffic.  The comercializadora allows
companies to interconnect with the local telecommunications infrastructure in
order to resell local and long distance services from public telephones.  In the
U.S., the Company competes with large carriers such as AT&T, MCI/Worldcom, and
Sprint  as well as numerous smaller companies for presubscribed long distance.
Price remains a primary concern for many consumers since the technology is not
distinguishable from one provider to another.  The Company is focused on the
Latino market and offers an aggressive international rate to Mexico as well as
competitive domestic rates.  Unlike many other long distance providers, the
Company's charges are included on the customer's bill from the local phone
company.  The Company also offers the convenience of bilingual customer service.
The Company believes that it will be able to expand its presubscribed customer
base by using U.S. Communication Centers as magnets to attract underserved
Latino customers to the Company's products.

     There are numerous dial-around products on the market, offered by small and
large companies, and by long distance resellers as well as facilities-based
carriers.  MEXICOnnect's competitive advantage is its focus on the Latino
market, and the elimination of per call minimums, monthly access fees,
surcharges, and other types of restrictions and small print that make dial-
around discounts

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deceiving. In comparison to long distance resellers, the Company has greater
flexibility in adjusting rates, as it has greater control over its own network.

Sales

     Direct dial sales are supervised by the Senior Vice President, Sales and
Marketing based in San Antonio. U.S. domestic carrier sales are supervised by
the Senior Vice President, Sales and Marketing in San Antonio. Mexican carrier
sales are also supervised by the Senior Vice President, Sales and Marketing in
San Antonio, who is assisted by the Director General (President) of ATSI-Mexico.
The Director of Central American operations, based in San Jose, Costa Rica,
manages the Central American carrier and private network accounts under the
supervision of the Senior Vice President, Sales and Marketing in San Antonio.
Payphone, hospitality and aggregator sales are managed from ATSI-Mexico with
supervision from the Senior Vice President, Sales and Marketing in San Antonio.
Communication center's sales efforts are managed from Computel's offices in
Guadalajara with oversight from ATSI-Mexico in Mexico City. The Company is in
the process of consolidating the operations of Computel and ATSI-Mexico.

Electronic Commerce via Internet

     GlobalSCAPE was formed in April 1996 to implement Internet related
strategies that are not complementary to the Company's core business.
GlobalSCAPE's revenues are attributable to sales of Internet productivity
software, primarily its flagship product CuteFTP(TM)which it has historically
distributed via its web site. GlobalSCAPE operates autonomously, generating
substantially all funds for its development and expansion internally from its
own operations.  In January 1999 GlobalSCAPE acquired ownership of CuteFTP from
its original author, and subsequently released an enhanced new version.
GlobalSCAPE also released two new products, CuteHTML(TM) and CuteMAP(TM). Also
in fiscal 1999, GlobalSCAPE began distributing CuteFTP in CompUSA stores, and
began realizing revenue from advertisements placed in its software.  Subsequent
to July 31, 1999, GlobalSCAPE has executed an agreement with Lycos to distribute
a branded version of CuteFTP over the Lycos network.

     The Company announced in February, 1999 that it was considering a spin off
or public offering of GlobalSCAPE's stock, and the Company has retained an
investment banking firm to assist it in evaluating these options and other
options to finance GlobalSCAPE's continued growth.

     GlobalSCAPE's market includes all computer users on the Internet.
GlobalSCAPE's products are distributed as shareware, meaning that users may
download and use the products for free on a trial basis for a limited time.
After the expiration of the trial period, the user must register the product to
be in compliance with the license and to obtain product support.  GlobalSCAPE's
primary source of revenue is generated through product registration, with
additional revenues generated by advertising in the form of ad banners and
sponsorships in its "live" software products and on its web site. On a monthly
basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web
site and displays more than 15 million in-product and web site ad banners.  For
the year ended July 31, 1999, approximately 4,000,000 copies of software
products were downloaded from GlobalSCAPE's servers, of which approximately
92,000 copies were registered (including approximately 7,000 upgrades of
previously registered products).

     The Company's flagship product, CuteFTP(R), is a Windows(R)-based file
transfer protocol (FTP) utility allowing users the ability to transfer and
manage files via the Internet, including MP3's, web pages, software, videos and
graphics. The Company believes that CuteFTP(R) has 30% of the U.S. market share
for FTP programs. The Company's portfolio of products also includes CuteHTML(R),
an

                                       11
<PAGE>


advanced HTML editor for developing web sites, and CuteMAP(R), an image mapping
utility for graphic navigation through web sites, and others in various stages
of alpha and beta testing.

     GlobalSCAPE intends to leverage its strong brand recognition into a full
suite of "Cute" products, and to use its products in order to attract
advertising revenue and to market products of other on-line retailers and
service providers on a revenue sharing basis.

     GlobalSCAPE operates in a highly competitive environment with respect to
all its products. CuteFTP's primary competitors are WS_FTP, FTP Voyager and
Bulletproof FTP.  While many FTP products have mimicked CuteFTP's features, they
are not commercially successful due to their late arrival to the marketplace and
lack of support infrastructure. CuteHTML and CuteMAP, although relatively new to
the market, have the advantage of being able to piggyback on the success of
CuteFTP through product integration and cross-marketing efforts.

Network

     The Company has established a technologically advanced network which uses
both satellite and fiber optic cable to transmit telecommunications traffic
between the U.S. and Mexico.  The Company's network incorporates ATM technology,
which is compatible with other transmission technologies such as frame relay and
Internet protocols, permitting the Company to explore even more cost-effective
transmission methods in the future. See page 5, "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.   The Company's network
also employs compression technology to carry greater volumes on the same
facilities.

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

     The Company leases fiber capacity from third parties, primarily Bestel USA,
Inc. with whom it has a 3-year lease for fiber optic cable from San Antonio,
Texas to Laredo, Texas until March 2002.  The Company leases satellite capacity
on the Mexican satellites Solidaridad I and II, from Satelites Mexicanos, S.A.
de C.V. or "SATMEX, with whom it has an agreement for capacity through April
2001.  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.  During 1999, ATSI was unable to make payments to SATMEX on
time.  SATMEX agreed not to suspend service under the terms of a payment plan
calling for ATSI to bring its account current by December 15, 1999.  ATSI has
met the terms of the payment plan, and is now current in its payments to both of
these vendors.

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


                                       12
<PAGE>


     All aspects of the Company's owned network facilities are designed to allow
for modular expansion, permitting the Company to increase capacity as
needed.

     The Company must contract with others to complete the intra-Mexico and
domestic U.S. portions of its network.  The Company has reciprocal services
agreements in place with four Mexican long distance  license holders, Operadora
Protel, S.A. de C.V., Avantel, S.A. de C.V., Miditel, S.A. de C.V. and Bestel,
S.A. de C.V. The Company has applied for its own Mexican long distance  license,
which will allow it to build out its network in Mexico and to interconnect
directly with Telmex and other local carriers, thereby lowering its transmission
costs.  The Company has  reciprocal services agreements with Radiografica
Costarricense, S.A., FT&T, S.A., and Corporacion Solares, S.A. de C.V. for
transmission services in Costa Rica, Guatemala and El Salvador, respectively.
In the U.S., the Company purchases long distance capacity from various
companies.

     The Company purchases local line access in Mexico for its payphones and
casetas from Telmex, and various cellular companies including SOS
Telecomunicaciones, S.A. de C.V., Portatel del Sureste, S.A. de C.V., Movitel
del Noreste, S.A. de C.V, and Baja Celular Mexicana, S.A. de C.V.

Year 2000 Issue

     The Company initiated a program to identify and address issues associated
with the ability of its date-sensitive information, telephony and business
systems to properly recognize the year 2000 in order to avoid interruption of
the operation of these systems at the turn of the century.  This program is
being conducted by the Company's Management Information Systems group, which is
coordinating the efforts of internal resources as well as third party vendors in
making all of the necessary changes for all management systems and product
related infrastructure for the Company's divisions and subsidiaries. The Company
believes it is 96% complete in achieving Year 2000 readiness, and will be Year
2000 ready by November 30, 1999.  The only significant remaining item is an
outstanding issue related to the payroll systems of the Company's Mexican
subsidiaries. The Company expects to avoid disruption of its owned information,
telephony and business systems as a result of these efforts.  However, the
Company must rely on the representations and warranties of third parties,
including domestic U.S. and foreign carriers of its traffic, in testing for
readiness for year 2000 issues and cannot ensure compliance by these parties.
The Company has developed contingency plans in areas where it believes there is
any significant risk or where a third party has not adequately responded to the
Company's inquiries, which includes transitions to other providers.

     The Company believes that a worst case scenario resulting from a Year 2000
related failure would be a temporary disruption of normal business operations.
Based upon the work completed to date, the Company believes that such an
occurrence is unlikely.  However, as stated above, the Company is relying on
representations and warranties of third parties that are beyond the Company's
control.  A disruption of business operations could have a material adverse
effect on the Company's financial performance.

     The Company has expended approximately $100,000 in its Year 2000 program to
date, and does not expect to experience any material additional cost.

Licenses/Regulatory

     The Company's operations are subject to federal, state and foreign laws and
regulations.

                                       13
<PAGE>

Federal

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

     In October 1996, the FCC issued an order that non-dominant interexchange
carriers will no longer be required to file tariffs for interstate domestic long
distance services. Under the terms of the FCC order, detariffing would be
mandatory after a nine-month transition period.  Interexchange carriers would
still be required to retain and make available information as to the rates and
terms of the services they offer. The FCC's order was appealed by several
parties and, in February 1997, the D.C. Circuit issued a stay preventing the
rules from taking effect pending judicial review. The Company is currently
unable to predict what impact the FCC's order will have on the Company.

     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 the Company 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 the Company.
Southwestern Bell's application to offer in region long distance is expected to
be approved in April 2000.

     Although the Company does not know of any other specific new or proposed
regulations that will affect its 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 of the cost of terminating traffic over each
other's networks.  The FCC recently enacted certain changes in its 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 the Company's top tier competitors and are contributing to
the substantial downward pricing pressure facing the Company in the wholesale
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).  The Company believes it is in compliance
with all applicable State laws and regulations governing its services.

                                       14
<PAGE>

Mexico

     The Secretaria de Comunicaciones y Transportes or the SCT and COFETEL have
issued the Company's Mexican subsidiaries the following licenses:

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

     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 the Company 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 the Company's proprietary network or circuits leased from
other licensed carriers. The license supports any type of packet switching
technology, and can be utilized in conjunction with the Teleport and Satellite
Network License to build a hybrid nationwide network with international access
to the U.S.

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

     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 the
Company is not able to determine at this time.

Other Foreign Countries

     In addition to Mexico, the Company currently has operations in Costa Rica,
El Salvador, and Guatemala. The telecommunications markets in these countries
are in transition from monopolies to functioning, competitive markets. The
Company has established a presence in those countries by providing a limited
range of services, and intends to expand the services it offers as regulatory
conditions permit. The Company does not believe that any of its current
operations in those countries requires licensing, and it believes it is in
compliance with applicable laws and regulations governing its operations in
those countries.

Employees

     At September 1, 1999, the Company (excluding ATSI-Mexico) had 85 full-time
employees, of whom 10 were operators, 11 were sales and marketing personnel, and
64 performed operational, technical and administrative functions, and 9 part-
time employees, 5 of whom were operators. Of the foregoing, 22 were employed by
GlobalSCAPE, and 5 were employed by Sinfra. The Company believes its future
success will depend to a large extent on its continued ability to attract and
retain highly skilled and qualified employees. The Company considers its
employee relations to be good. None of these aforementioned employees belong to
labor unions.

                                       15
<PAGE>

     At September 1, 1999, ATSI-Mexico had 465 full-time employees of whom 375
were operators and 90 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 this entire prospectus. We have highlighted for you below all of
the material risks to our business that we are aware of.

                          RISKS RELATED TO OPERATIONS

 .  Our auditors have questioned our viability

   Our auditors' opinion on our financial statements as of July 31, 1999 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 do not expect to become profitable in the
   near future. We have invested and will continue to invest significant amounts
   of money in our network and personnel in order to maintain and develop the
   infrastructure we need to compete in the markets for our services and achieve
   profitability. 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.

   In the near term we expect to sell additional common stock or securities
   convertible into common stock, which will dilute our existing shareholders'
   percentage ownership of ATSI and depress the price of our common stock. See
   the risk factors below under the heading "Risks Related to Market for Common
   Stock."

   If we sell more common stock our existing shareholders will be diluted,
   meaning that their percentage of ownership of ATSI will be reduced, and the
   price of our common stock may go down.

 .  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

                                       16
<PAGE>


   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.

 .  The market for wholesale services is extremely price sensitive and there is
   downward pricing pressure in this market making it difficult for us to retain
   customers and generate adequate profit from this service

   Industry capacity along the routes serviced by ATSI is generally growing as
   fiber optic cable is activated. There have also been changes in the
   international regulatory scheme that have permitted large carriers such as
   AT&T and MCI/WorldCom to reduce the amount they may charge for international
   services. These factors, along with intense competition among carriers in
   this market, have created severe downward pricing pressure. For example, from
   October 1998 to October 1999, the prevailing price per minute to carry
   traffic from the U.S. to Mexico declined by approximately 45%. Although we
   carried almost twice as much wholesale traffic in fiscal year 1999 than in
   fiscal year 1998, we recognized about the same amount of revenue. If these
   pricing pressures continue, the Company must continue to lower its costs in
   order to maintain sufficient profits to continue in this market.

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

   Our wholesale network customers generate large receivable balances, often
   over $500,000 for a two week period. We incur substantial direct costs to
   provide this service since we must pay our carriers in Mexico to terminate
   these calls. If a customer fails to pay a large balance on time, we will have
   difficulty paying our carriers in Mexico 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 Bestel for fiber optic cable. We also rely on various Mexican
   and U.S. long distance companies to complete the intra-Mexico and intra-U.S.
   long distance portion of our calls. For the first two quarters of fiscal
   2000, the monthly average amount due to these suppliers as a group was
   approximately $1,722,000. We currently have overdue outstanding balances with
   long distance carriers for the first two quarters of fiscal 2000 of
   approximately $2,135,800 on which we are making payments. During the third
   quarter we began paying the current portion of our long distance needs on a
   weekly basis, so do not expect to accrue a large overdue balance as we did in
   the first and second quarters. Although these suppliers have given us payment
   extensions in the past, 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

                                       17
<PAGE>


   We purchased some of our significant equipment with borrowed money, including
   a substantial number of our payphones located in Mexico, our DMS 250/350
   International gateway switch from Nortel, and packet-switching equipment from
   Network Equipment Technologies. We pay these three lenders approximately
   $171,165 on a monthly basis. Our amended 10-K, which is incorporated by
   reference in this prospectus, includes more information about our equipment,
   equipment debt and capital lease obligations - see footnote 6 to financial
   statements. 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 are currently up to date in our payments to our lenders, but we have
   not always paid all of our equipment lenders on time due to temporary cash
   shortfalls. These lenders have given us payment extensions in the past, but
   they 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 not
   currently in compliance with the financial covenants in our Nortel switch
   loan agreement. Footnote 3 of our financial statements in our amended 10-Q
   for the period ended January 31, 2000 contains more detail on our non-
   compliance with those financial covenants, and footnotes 4 and 5 of our
   financial statements in our amended 10-K for the year ended July 31, 1999
   contains more information on our secured loans and capital leases.

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

   Our revenues from wholesale services currently comprise about 60% of our
   total revenues. The volume of business sent by each customer fluctuates, but
   this traffic is often heavily concentrated among three or four customers.
   During some periods in the past, two of these customers have been responsible
   for 50% of this traffic. Generally, our wholesale customers are able to re-
   route their traffic to other carriers very quickly in response to price
   changes. If we are not able to continue to offer competitive prices, these
   customers will find some other supplier and we will lose a substantial
   portion of our revenue very quickly. In addition, mergers and acquisitions in
   our industry may reduce the already limited number of customers for our
   wholesale services.

 .  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 compete successfully in the wholesale and retail 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 the substantial resources that our large competitors have.

 .  We may not be able to attract and retain qualified personnel

   We compete for technical and managerial personnel with other
   telecommunications companies. Many of these have greater resources than we do
   and are able to offer more attractive compensation packages, as well as the
   security of working for an established company.

 .  We may not be able to generate the sales volume we need to recover our
   substantial capital investment in our infrastructure.

                                       18
<PAGE>


   We have made a substantial investment in our network and personnel to
   position the company in our target markets and will continue to do so.
   Therefore, we must achieve a high volume of sales to make this investment
   worth while. We compete for wholesale and retail customers with larger, and
   better known companies making it relatively more difficult for us to attract
   new customers for our 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.

   In 1999 we experienced difficulty in obtaining fiber optic cable due to a
   supplier's default under the terms of a lease agreement. This difficulty was
   central to our failure to meet our revenue goals for 1999 since our goals
   were based on implementing a new fiber optic route in January of 1999. We
   were required to lease fiber optic lines from a different supplier at a
   higher price, with the alternative fiber becoming operational in June 1999 -
   delaying the new revenues by six months. This difficulty is described in more
   detail in Legal Proceedings.

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

 .  We may have service interruptions and problems with the quality of
   transmission, causing us to lose call volumes 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. To
   date, these problems have been temporary. 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. We have the ability to transmit calls via
   either the satellite or fiber optic portion of our network, and this
   redundancy should protect us if there is a problem with one portion of our
   network. However, 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.

   To stay competitive, we will attempt to integrate the latest technologies
   into our network. We are currently implementing "packet switching" transport
   capabilities such as Asynchronous Transfer Mode and we will continue to
   explore new technologies as they are developed. The risk of network

                                       19
<PAGE>


   problems increases during periods of expansion and transition to new
   technologies.

 .  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 retail 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

   We believe that we are in compliance with all domestic and foreign
   telecommunications laws that govern our current business. However, 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. To our knowledge, we
   are not currently subject to any regulatory inquiry or investigation.

 .  If we are not able to obtain a long distance license from the Mexican
   government, we may not be able to achieve profitability

   The ultimate fulfillment of our strategy for the future depends on obtaining
   a long distance license from the Mexican government so that we no longer have
   to pay other companies who have a Mexican long distance license to complete
   our calls in Mexico. If we do not obtain this license, we may not be able to
   reduce our costs sufficiently that we earn a profit. We have applied for a
   long distance license and we are also in negotiations to acquire a Mexican
   company, which holds a long distance license. We have obtained preliminary
   regulatory approval from the Mexican government to acquire this company, but
   we may not be able to acquire this company or obtain this license in some
   other manner.

 .  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.
   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

                                       20
<PAGE>


   suppliers. The next elections in Mexico are scheduled for August 2000. 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
   which 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, 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 earnings as stated Dollars

   Approximately 20% 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 earnings, 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

 .  If we do not raise additional capital we may go out of business

   In the past we have financed our operations almost exclusively through the
   private sales of securities. In the near term we expect to sell additional
   common stock or securities convertible into common stock, which will dilute
   our existing shareholders' percentage ownership of ATSI and depress the price
   of our common stock. See the risk factors in the section captioned "Risk
   Related to Market for Common Stock," below. Since we are not a profitable
   company, it is difficult for us to raise money on terms we find acceptable.
   The terms we are able to arrange may be more costly than the terms that
   profitable companies could obtain, and may place significant restrictions on
   our operations.

 .  We owe $160,000 to the holder of our series D preferred stock for taking too
   long to obtain an effective registration statement, and we will owe it even
   more money if the registration statement is not declared effective soon.

   Under the terms of registration rights agreements we signed with The Shaar
   Fund at the time we issued our series C preferred stock on September 24, 1999
   we are required to pay liquidated damages to The Shaar Fund of $25,000 for
   failing to file a registration statement for the underlying common stock by
   October 24, 2000 or failing to obtain effectiveness by December 23, 2000, and
   an additional $25,000 for each subsequent 30 day period that we fail to meet
   those targets. We initially filed our registration statement for the common
   stock underlying the series C preferred stock on October 26, 2000, 2 days
   late. The Shaar Fund has waived the penalty resulting from that late filing.
   As of April 1, 2000, we have not obtained effectiveness of the registration
   statement, resulting in liquidated damages owing to The Shaar Fund of
   $100,000, with another $25,000 to accrue if the registration statement is not
   effective by April 21, 2000.

   Under the terms of registration rights agreements we signed with The Shaar
   Fund at the time we issued our series D preferred stock on February 22, 2000
   we are required to pay liquidated damages to The Shaar Fund of $60,000 for
   failing to file a registration statement for the underlying common stock by
   April 1, 2000 or failing to obtain effectiveness by June 1, 2000 and an
   additional $60,000 for each subsequent 30 day period that we fail to meet
   those targets. We filed the registration statement late, and if we fail to
   obtain effectiveness, we may incur substantial additional liquidated
   damages.

                                       21
<PAGE>


 .  The terms of our preferred stock includes disincentives to a merger or other
   change of control of the company, 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 Shaar Fund to choose either to receive whatever
   cash or stock the common stockholders receive in the change of control as if
   the series D stock had been converted, or to require us to redeem the series
   D preferred stock at $1560 per share. If all 3,000 shares of the series D
   preferred stock were outstanding at the time of a change of control, this
   could result in a payment to The Shaar Fund of $4,680,000. The possibility
   that we might have to pay this large amount of cash would make it more
   difficult for us to agree to a merger or other opportunity that might arise
   even though it would otherwise be in the best interest of the shareholders.

 .  We may have to redeem the series D preferred stock for a substantial amount
   of cash, which would severely restrict the amount of cash available for our
   operations.

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

   First, the terms of the series D preferred stock prohibits The Shaar Fund
   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 Shaar Fund 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 stock
   increases as the price of our common stock decreases, so we do not know the
   actual number of shares of common stock that the series D preferred stock
   will be convertible into. On the second anniversary of the issuance of the
   series D preferred stock we are required to convert all remaining unconverted
   series D preferred stock. If this conversion would cause The Shaar Fund to
   exceed these limits, then we must redeem the excess shares of Series D
   preferred stock for cash equal to $1270 per share, plus accrued but unpaid
   dividends.

   Second, if we refuse to honor a conversion notice or a third party challenges
   our right to honor a conversion notice by filing a lawsuit, The Shaar fund
   may require us to redeem any shares it then holds for $1270 per share. If all
   3,000 shares were outstanding at the time of a redemption, this would result
   in a cash payment of $3,810,000 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.

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

   We may redeem the series A preferred stock only after the first anniversary
   of the issue date, and only if the market price for our common stock is 200%
   or more of 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

                                       22
<PAGE>


   price is $1270 per share, plus accrued but unpaid dividends, plus an
   additional warrant for the purchase of 150,000 shares of common stock. 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.

 .  The partial spin-off and public offering of shares of our subsidiary
   GlobalSCAPE will have a negative impact on our operating results and cash
   flows

   Because GlobalSCAPE currently contributes significantly to the Company's
   consolidated EBITDA results, the Company expects its consolidated operating
   and cash flow results to decline after the spin-off and offering.

                 RISKS RELATING TO MARKET FOR OUR COMMON STOCK

 .  We expect the holders of our preferred stock and warrants and our employees
   who have stock options to convert their stock and exercise their warrants and
   options, which will result in significant dilution to the common stock

   The Potential Dilution Chart included as Exhibit 99.10 in this registration
   statement shows all of the outstanding securities that are convertible into
   or exercisable for ATSI's common stock. The table included as Exhibit 99.11
   describes the features of the preferred stock in more detail. Given the
   current market price of our stock, the holders of each of most of these
   securities will realize a financial benefit by converting or exercising their
   securities, so we expect that almost all of the common stock that may be
   issued under the terms of each of these securities will be issued. Even if
   the holders of the preferred stock do not elect to convert, the terms of the
   preferred stock require conversion after a certain time. Since the conversion
   price of our preferred stock floats at a discount to market price, we do not
   know how many shares will ultimately be issued.

 .  The sale of the common stock issued upon conversion of preferred stock and
   exercise of the warrants will put downward pricing pressure on ATSI's common
   stock; any potential short sales by those converting will also put downward
   pressure on ATSI's common stock

   Most of the common stock that is included in the Potential Dilution Chart has
   been or will be registered with the SEC, meaning that the common stock will
   be freely tradeable in the near term. We expect many of the stockholders will
   sell their holdings in the near term, and in particular we expect The Shaar
   Fund to sell its shares of common stock resulting from the conversion of the
   series C stock very shortly after the effectiveness of the registration
   statement of which this prospectus is a part, and its shares of common stock
   resulting from the conversion of the series D preferred stock very shortly
   after it is issued to them. The addition of this substantial number of shares
   of common stock to the market will put downward pricing pressure on out
   stock.

 .  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 loss, 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

                                       23
<PAGE>


   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 and D 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 stock is reset each year on the
   anniversary of the issuance of the stock, and the conversion price for the
   series D 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
   preferred stock will increase if we sell additional common stock for less
   than the conversion price applicable to the series D preferred stock.

   The terms of the series D 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 provided for the series D 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 Shaar Fund 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.

   The series A stock requires quarterly dividends of 10% per annum, and the
   series D stock requires quarterly dividends of 6% 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 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.

 .  We have agreed to register additional unregistered shares of common stock,
   which will put further pressure on the price of the common stock.

   We have agreed to register 3,003,532 shares of common stock in addition to
   the shares covered by this prospectus, which includes 506,330 shares for the
   conversion of the 10,000 shares of series A preferred stock issued on
   February 4, 2000 as described in our potential dilution chart on page 3
   of

                                       24
<PAGE>


   this prospectus, and 2,632,929 shares of common stock that were issued to
   holders of convertible debt in exchange for their shares of convertible debt
   in January 2000 as described in footnote 4 to our financial statements
   appearing in our Quarterly Report on Form 10-Q for the quarter ended January
   31, 2000. We expect that much of this stock will be sold upon registration,
   which will put downward pressure on the price of our 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.

 .  Our common stock price is volatile.

   Our stock price has historically been volatile. Volatility makes it more
   difficult for you to sell shares when you choose, at prices you find
   attractive. The risk factors described above relating to the probable
   dilution of the common stock will tend to increase volatility in the price of
   our common stock.

 .  The partial spin-off and public offering of shares of our subsidiary
   GlobalSCAPE will tend to decrease the price of our stock.

   On February 17, 2000 we announced that the Board of Directors had approved a
   partial spin of GlobalSCAPE and a public offering of those shares to our
   shareholders and GlobalSCAPE's customers. Completion of these transactions
   separates the value of GlobalSCAPE that is currently inherent in our common
   stock and tend to reduce the price of our stock.


ITEM 2.   PROPERTIES

     The Company's executive offices, principal teleport facility and control
center are located at its leased facility in San Antonio, Texas, consisting of
11,819 square feet.  The lease expires August 2002, and has two five-year
renewal options.  The Company pays annual rent of $98,452 (increasing to
$107,789 per year for the last year) under the lease and is responsible for
taxes and insurance.  GlobalSCAPE, Inc.'s offices are located at its leased
facility in San Antonio, Texas, consisting of 5,401 square feet.  The lease
expires January 31, 2001.  GlobalSCAPE, Inc. pays annual rent of $87,496 per
year and is responsible for taxes and insurance.

     Subsequent to year-end, the Company and GlobalSCAPE entered into agreements
for new office space beginning in December of 1999.  Both agreements are for a
period of eight and a half-years with rent deferred for the first six months of
the agreement.  The Company's facility will consist of 26,250 square feet with
annual rent of $311,850 per year while GlobalSCAPE's facility will consist of
14,553 square feet with annual rent of $174,636 per year.  Management believes
its leased facilities are suitable and adequate for their intended use.

                                       25
<PAGE>


ITEM 3.   LEGAL PROCEEDINGS

     On January 29, 1999, one of the Company's customers, Twister
Communications, Inc. filed a Demand for Arbitration seeking damages for breach
of contract before the American Arbitration Association.  The customer claims
that the Company wrongfully terminated an International Carrier Services
Agreement executed by the parties in June 1998 under which the Company provided
wholesale carrier services from June 1998 to January 1999.  The customer's
claims for damages represent amounts that it claims it had to pay in order to
replace the service provided by the Company. The Company disputes that it
terminated the contract wrongfully and asserts that the customer breached the
agreement by failing to pay for services rendered and by intentionally making
false representation regarding its traffic patterns and on March 3, 1999 filed a
Demand for Arbitration seeking damages for breach of contract in an amount equal
to the amounts due to the Company for services rendered plus interest, plus
additional damages for fraud. An arbitration panel was selected and the parties
are now completing written discovery.

     While the Company believes that it has a justifiable basis for its
arbitration demand and that it will be able to resolve the dispute without a
material adverse effect on the Company's financial condition; until the
arbitration proceedings take place, the Company can not reasonably estimate the
possible loss, if any, and there can be no assurance that the resolution of this
dispute would not have an adverse effect on the Company's results of operations.

     On June 16, 1999, the Company's subsidiary, ATSI Texas initiated a lawsuit
in District Court, Bexar County, Texas against PrimeTEC International, Inc.,
Mike Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of
conduct.  Under an agreement the Company signed in late 1998, PrimeTEC was to
provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's
former president who negotiated the fiber lease and Vartec is PrimeTEC's parent.
The delivery of the route in early 1999 was a significant component of the
Company's operational and sales goal for the year and the failure of its vendor
to provide the capacity led to the Company negotiating an alternative agreement
with Bestel, S.A. de C.V. at a higher cost. While the total economic impact is
still being assessed, the Company believes lost revenues and incremental costs
are in excess of $15 million. While the Company's contract contains certain
limitations regarding the type and amounts of damages that can be pursued, the
Company has authorized its attorneys to pursue all relief to which it is
entitled under law. As such, the Company can not reasonably estimate the
ultimate outcome of neither this lawsuit nor the additional costs that may be
incurred in the pursuit of its case.

     The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business.  The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which the Company
is a party would have a material adverse effect on the Company's 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 the Company's 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 the Company's fiscal year.

                                       26
<PAGE>

                                   PART II.
                                   --------

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

     The Company's Common Stock is quoted on the AMEX under the symbol "AI".
From December 1997 to February 14, 2000 the Company's Common Stock was traded on
the NASD: OTCBB under the symbol "AMTI". Prior to December 1997, the Company's
Common Stock was traded on the Canadian Dealing Network under the symbol
ATIL.CDN.  The table below sets forth the high and low bid prices for the Common
Stock from August 1, 1997 through December 21, 1997 as reported by the Canadian
Dealing Network, from December 22, 1997 through February 14, 2000 as reported by
NASD: OTCBB and from February 15, 2000 through April 10, 2000.  These price
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.

          Fiscal 1998                        High         Low
          ---------------------------------------------------
          First - ......................... $ 3 1/4     $ 1 3/8
          Second - ........................ $ 3 7/16    $ 2
          Third - ......................... $ 3 1/2     $ 1 5/7
          Fourth - ........................ $ 2 1/4     $   3/4

          Fiscal 1999                        High         Low
          ---------------------------------------------------
          First - ......................... $ 1 1/8     $   15/32
          Second - ........................ $ 1 9/32    $   3/4
          Third - ......................... $ 1 13/64   $   5/8
          Fourth - ........................ $ 1 53/64   $ 1 1/32

          Fiscal 2000                          High       Low
          ---------------------------------------------------
          First - ......................... $ 1 11/32   $   45/64
          Second - ........................ $ 2 29/32   $   45/64
          Third - (through April 10, 2000). $ 9 7/16    $ 2 1/2


     At April 10, 2000 the closing price of the Company's Common Stock as
reported by AMEX was $6.0625 per share. As of April 10, 2000, the Company had
approximately 5,000 stockholders, including both beneficial and registered
owners. The terms of the Company's Series A, Series B, Series C and Series D
Preferred Stock restrict the Company from paying dividends on its Common Stock
until such time as all outstanding dividends have been fulfilled related to the
Preferred Stock. ATSI has not paid dividends on its common stock the past three
years and does not expect to do so in the foreseeable future.

                                       27
<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,
                                                                --------------------
                                                1995        1996        1997        1998        1999
                                                ----        ----        ----        ----        ----
                                                     (In thousands of $, except per share data)
<S>                                            <C>         <C>         <C>         <C>          <C>
Consolidated Statement of Operations
Data:
Operating revenues:
 Call services                                 $ 4,470     $10,807     $12,545     $13,547      $ 6,602
 Direct dial services                                -           -       1,421       6,085        6,024
 Network management services                       318       2,614       1,698      13,362       19,250
 Internet e-commerce                                 -          54         564       1,526        2,642
 Total operating revenues                        4,788      13,475      16,228      34,520       34,518
Operating expenses:
 Cost of services                                4,061      10,833      12,792      22,287       21,312
 Selling, general and administrative             2,196       3,876       6,312      12,853       12,652
 Bad debt                                          340         554         735       1,024        2,346
 Depreciation and amortization                     141         281         591       1,822        3,248
 Total operating expenses                        6,738      15,544      20,430      37,986       39,558
 Loss from operations                           (1,950)     (2,069)     (4,202)     (3,466)      (5,040)
 Net loss                                      $(2,004)    $(2,205)    $(4,695)    $(5,094)     $(7,591)
Per share information:
 Net loss                                      $ (0.14)    $ (0.11)    $ (0.18)    $ (0.12)     $ (0.16)
 Weighted average common shares                 13,922      19,928      26,807      41,093       47,467
  outstanding

Consolidated Balance Sheet Data:
 Working capital (deficit)                     $  (446)    $  (592)    $   195     $(5,687)     $(6,910)
 Current assets                                  1,088       1,789       5,989       5,683        5,059
 Total assets                                    2,766       4,348      15,821      24,251       24,154
 Long-term obligations, including                  133         604       3,912       8,303       10,168
  current portion
 Total stockholders' equity                      1,231       1,629       6,936       7,087        6,137
</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
2 for additional factors relating to such statements.

     The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three fiscal years ended July 31,
1997, 1998, and 1999.  It should be read in conjunction with the Consolidated
Financial Statements of the Company, the Notes thereto and the other financial
information included elsewhere in this annual report on Form 10-K.  For purposes
of the following discussion, references to year periods refer to the Company's
fiscal year ended July 31.


                                       28
<PAGE>

General

     The Company's mission is to employ leading-edge technologies for delivery
of exceptional telecommunication services to underserved Latino markets in the
U.S. and Latin America emphasizing convenience, accessibility, quality,
reliability, and affordability, while continually seeking to add value through
new and innovative products and services.   Utilizing a framework of licenses,
interconnection and service agreements, network facilities and retail
distribution channels (hereinafter collectively referred to as the "framework"),
the Company is primarily focused on capturing market share in the international
telecommunications corridor between the United States and Mexico.  Even with
poor phone-line penetration, the Company's research indicates that Mexico may
exchange more international traffic with the U.S. than any other country in the
world within the next two years.  As the regulatory environments allow, the
Company also plans to establish framework in other Latin American countries as
well.  In addition to the U.S. and Mexico, the Company currently owns or has
rights to use facilities in and has strategic relationships with carriers in
Costa Rica, El Salvador, and Guatemala.

     Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and casetas within Mexico, and provides similar services to some third party-
owned casetas, public telephones and hotels in Mexico. Consumers visiting a
Company-owned communication center or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator.  In July 1998, the
Company began providing domestic U.S. and international call services to Mexico
to residential customers on a limited basis in the U.S.  Callers may either pre-
subscribe to the Company's one-plus residential service, or dial around their
pre-subscribed carrier by dialing 10-10-624, plus the area code and desired
number.   Where possible, these retail calls are transported over the Company's
own network infrastructure.

     Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers.  These
customers typically lack transmission facilities into certain markets, or
require additional capacity into certain markets. The Company currently provides
these services to and from the United States, Mexico, Costa Rica, El Salvador
and Guatemala.

     The Company is also the sole owner of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies.  Utilizing CuteFTP as its
flagship product, GlobalSCAPE has a user base of approximately 7.5 million users
as of July 31, 1999.

     The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception and has a working capital deficit as of July 31, 1999.
Additionally, the Company has had recurring negative cash flows from operations
with the exception of a three month period ended January 31, 1998. For the
reasons stated in Liquidity and Capital Resources and subject to the risks
referred to in Liquidity and Capital Resources, the Company expects improved
results of operations and liquidity in fiscal 2000.   However, no assurance may
be given that this will be the case.


                                       29
<PAGE>

Results of Operations

     The following table sets forth certain items included in the Company's
results of operations in thousands of dollar amounts and as a percentage of
total revenues for the years ended July 31, 1997, 1998 and 1999.

<TABLE>
<CAPTION>
                                                                     Year Ended July 31,
                                              ----------------------------------------------------------------
                                                     1997                   1998                   1999
                                              -------------------    -----------------    --------------------
                                                  $         %            $         %           $           %
                                                  -         -            -         -           -           -
<S>                                           <C>         <C>        <C>         <C>      <C>            <C>
Operating revenues
------------------
Network management services                    $ 1,698     11%        $13,362     39%       $19,250       56%
Call services                                  $12,545     77%        $13,547     39%       $ 6,602       19%
Direct dial services                           $ 1,421      9%        $ 6,085     18%       $ 6,024       17%
Internet e-commerce                            $   564      3%        $ 1,526      4%       $ 2,642        8%
                                               -------                -------               -------
Total operating revenues                       $16,228    100%        $34,520    100%       $34,518      100%

Cost of services                               $12,792     79%        $22,287     65%       $21,312       62%
                                               -------                -------               -------

Gross margin                                   $ 3,436     21%        $12,233     35%       $13,206       38%

Selling, general and
  Administrative expenses                      $ 6,312     39%        $12,853     37%       $12,652       37%

Bad debt expenses                              $   735      4%        $ 1,024      3%       $ 2,346        6%

Depreciation and amortization                  $   591      4%        $ 1,822      5%       $ 3,248       10%
                                               -------                -------               -------

Operating loss                                 $(4,202)   -26%        $(3,466)   -10%       $(5,040)     -15%

Other, net                                     $  (493)    -3%        $(1,628)    -5%       $(1,696)      -5%
                                               -------                -------               -------

Net loss                                       $(4,695)   -29%        $(5,094)   -15%       $(6,736)     -20%

Less: preferred stock dividends                $     -      0%        $     -      0%       $  (855)      -2%
                                               -------                -------               -------

Net loss to common shareholders                $(4,695)   -29%        $(5,094)   -15%       $(7,591)     -22%
                                               =======                =======               =======
</TABLE>

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

     Operating Revenues. Operating revenues were flat between years, due
primarily to declines in the Company's call services revenues offset by the
growth in the Company's network management and Internet e-commerce services.

     Network management services, which includes both retail and wholesale
transport services increased 44%, or $5.9 million from 1998 to 1999. Revenues
from the wholesale transport of traffic for U.S.-based carriers increased as the
Company processed approximately 78.6 million minutes in 1999 as compared to 46.1
million minutes in 1998. The 70% increase in minutes did not result in a
corresponding increase in revenues as competitive and other market factors
caused the Company's revenue per minute to decline from period to period. The
Company's agreement with Satelites

                                       30
<PAGE>

Mexicanos, S.A. de C.V. ("SATMEX"), secured in the fourth quarter of fiscal 1998
allowed the Company to secure and resell additional bandwidth capacity. This
increased capacity and flexibility allowed the Company to increase billings to
existing corporate clients who previously dealt with SATMEX directly and to add
additional retail, corporate clients more quickly.

     Call services revenue decreased approximately $6.9 million, or 51%, between
years.  This decline is principally attributable to the Company's strategy to
focus on providing international call services from its own payphones and
communication centers (casetas). In July 1998, the Company ceased providing call
services for third-party owned payphones and hotels in the U.S., Jamaica and the
Dominican Republic and decreased the level of services provided to third-party
owned telephones and hotels in Mexico, as these services did not utilize the
Company's core business and the costs associated with further provision of
services did not justify keeping the business. For the year ended July 31, 1999,
the Company processed approximately 160,000 calls from Mexico as compared to
approximately 314,000 for the same period in 1998 and no calls for third-party
owned telephones and hotels in the U.S., Jamaica and the Dominican Republic as
compared to approximately 350,000 calls in 1998.

     Direct dial service revenues, which are generated by calls processed by the
Company without live or automated operator assistance, declined 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 the
Company's public telephones and casetas in Mexico in exchange for immediate cash
payment in pesos, the local Mexican currency. While the number of these calls
and consequently the pesos collected increased between years, those pesos
converted into fewer U.S. dollars as the average exchange rate between years
went from 8.33 pesos to the dollar for fiscal 1998 to 9.77 pesos to the dollar
for fiscal 1999.

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

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

     Selling, General and Administrative (SG&A) Expenses.  SG&A expenses
decreased 2%, or approximately $200,000 between year, as the Company did not
incur expenses incurred in the prior year associated with its Plan of
Arrangement. As a percentage of revenue, these expenses remained flat at 37%.
The Company had anticipated that these expenses would decline as a percentage of
revenues, but they did not do so in light of the circumstances surrounding the
delay of fiber capacity available to the Company. In the fourth quarter of 1999,
the Company began to further integrate its two primary

                                       31
<PAGE>

operating subsidiaries in Mexico, Computel and ATSI-Mexico as the Company
continues to seek ways to lower its SG&A expense levels. Net of non-cash
expenses, related to the Company's option plans, SG&A expenses decreased
approximately $300,000.

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

     Depreciation and Amortization.  Depreciation and amortization rose
approximately $1.4 million, or 78%, and rose as a percentage of revenues from 5%
to 10% between years.  The increased depreciation and amortization is
attributable to an approximate $2.4 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The majority of the assets purchased consisted of equipment which
added capacity to the Company's existing international network infrastructure
including the Network Technologies (N.E.T.) equipment purchased in December 1998
and the Company's new Nortel DMS 250/300 International Gateway switch purchased
in January 1999.

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

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

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

     Net income (loss.)  Net loss increased from approximately $5.1 million to
$7.6 million between years. The increase in net loss was due primarily to
increased bad debt expense, depreciation and amortization and preferred stock
dividends between the year ended July 31, 1998 and the year ended July 31,
1999.

Year ended July 31, 1998 Compared to Year Ended July 31, 1997

     Operating Revenues.  Operating revenues increased approximately $18.3
million, or 113%, as the Company experienced growth in each service category.

     Network management services increased 687% from $1.7 million in 1997 to
$13.4 million in 1998.  The majority of this growth was due to the amount of
wholesale network services provided to other carriers seeking transmission
facilities or additional capacity for their services.  The Company

                                       32
<PAGE>

began providing these services in October 1997, and produced approximately $10
million in revenues from this service during 1998.

     Call services revenue increased approximately $1.0 million, or 8%,
primarily due to growth in the Company's customer base in Mexico that produces
calls to the United States from hotels, public telephones and casetas.  As a
result of the installation of public telephones, the implementation of a direct
sales strategy, and the purchase of Computel in August 1997, the Company
processed approximately 314,000 international calls originating in Mexico during
fiscal 1998.  This compares to approximately 200,000 calls processed the year
before.  This increase in international calls from Mexico was offset to a large
extent by a decrease in domestic and international operator-assisted calls
originating in the United States and Jamaica.  During 1998, the Company de-
emphasized these services due to relatively lower profit margins on this
business.  On July 16, 1998, the Company ceased providing these services
altogether.  Revenues from these services decreased from approximately $3.9
million in 1997 to approximately $2.9 million in 1998.  The Company does not
anticipate producing significant revenues from such services, if any, during
fiscal 1999.

     Direct dial services, calls processed in exchange for cash without
utilizing the company's operator center in San Antonio, Texas, increased 328%
from approximately $1.4 million in fiscal 1997 to approximately $6.1 million in
fiscal 1998.  This increase was primarily due to the acquisition in May and
August 1997 of Computel, the largest private caseta operator in Mexico.  The
Company also began processing local and domestic long distance calls within
Mexico during the latter half of 1997 from its own intelligent payphones
installed in resort areas of Mexico.  These calls are made by depositing coins
(pesos or quarters) in the Company's phones to initiate service.

     Cost of Services.  Cost of services increased approximately $9.5 million,
or 74% between years, but decreased as a percentage of revenues from 79% to 65%.
The increase in cost of services is attributable to the increased volume of
business handled by the Company during 1998, as discussed above.  The
improvement in the Company's gross profit margin resulted from the change in the
mix of services it provided during 1998 as described above, and its continuing
efforts to decrease costs subsequent to the demonopolization of Telmex, which
took place January 1, 1997.  Subsequent to Telmex's demonopolization, the
Company was able to negotiate with newly concessioned carriers in Mexico to
transport its calls originating and terminating in Mexico, which has lowered the
associated per minute rate to carry those calls.  Additionally, the Company was
one of the first four companies to receive a public payphone comercializadora
license from the SCT in February 1997, which has allowed the Company to provide
local, domestic and international calls from public telephones in Mexico.  In
November 1997, the Company purchased the customer base of Comunicaciones del
Caribe, S.A. de C.V., an independent marketing representative in the
Cancun/Cozumel area of Mexico which did not have a comercializadora license, and
which had been utilizing the Company's operator center for processing
international calls.  By purchasing the customer base, the Company was able to
eliminate a layer of expense associated with the traffic and effectively lower
its overall commission rate paid to public telephone location owners in Mexico.
The Company has also improved its gross margin by utilizing its own existing
satellite network infrastructure and licenses to provide network services to
other carriers seeking transmission facilities or extra capacity for their own
services.

     Selling, General and Administrative (SG&A) Expenses.  SG&A expenses rose
104%, or approximately $6.5 million, from 1997 to 1998.  As a percentage of
revenue, these expenses decreased from 39% to 37% between years.  The growth in
dollars between years was caused by the acquisition of Computel, the continued
growth of the Company's ATSI-Mexico operations, the expensing of costs related
to the Company's planned acquisition of additional concessions from the Mexican
regulatory authorities, and the expensing of costs related to the Company's
reincorporation from Canada to

                                       33
<PAGE>

Delaware. Approximately $890,000 of the increase was due to the acquisition of
Computel, which operates approximately 134 retail-based casetas in approximately
sixty cities throughout Mexico, and employs in excess of 400 people. In August
1997, ATSI-Mexico expanded its operations and began procuring, installing,
operating and maintaining coin-operated, intelligent payphones. During 1998, the
Company expensed $631,000 in costs incurred relative to the Company's
reincorporation. Approximately $268,000 in expenses were incurred during 1997
relative to the reincorporation.

     Bad Debt Expense. Bad Debt expense increased approximately $300,000 between
years but decreased as a % of revenues from 4% to 3%.  The principal reason for
the improved bad debt expense as a percentage of revenues was the increase in
network management services revenues between years.

     Depreciation and Amortization.  Depreciation and amortization rose
approximately $1.2 million, or 208%, and rose as a percentage of revenues from
4% to 5% between years. From July 31, 1997 through July 31, 1998, the Company
acquired approximately $7.9 million in equipment. Approximately $4.6 million of
these assets were acquired through capital lease arrangements. The majority of
the assets consisted of equipment that added capacity to the Company's existing
international network infrastructure, and intelligent coin telephones that were
installed in Mexico. Approximately $1.4 million in fixed assets were acquired
subsequent to July 31, 1997 with the acquisition of Computel. The Company also
recorded $2.8 million of goodwill during 1998 associated with the purchase of
Computel, which is being amortized over a forty-year period.

     Operating Loss.  The Company's operating loss improved $736,000 to
approximately $3.5 million for 1998.  Increased revenue levels and improved
gross margins more than offset increases in selling, general and administrative
expenses and depreciation and amortization, allowing for the improvement.

     Other Income (expense).  Other income (expense) rose approximately 230%, or
$1.1 million, between years.  This increase was due almost exclusively to
increased interest expense levels.  During 1998, the Company incurred capital
lease obligations of approximately $4.6 million related to the purchase of
equipment mentioned above, and issued notes payable in the amount of
approximately $3.1 million.

     Net income (loss).  Net loss increased from approximately $4.7 million to
approximately $5.1 million due primarily to increased depreciation and
amortization and increased interest expenses, offset to some extent by increased
revenues, increased gross margin dollars and improved SG&A as a % of
revenues.

Year Ended July 31, 1997 Compared to Year Ended July 31, 1996

     Operating Revenues. Operating revenues increased approximately $2.8 million
or 20%, due mainly to increased revenues from call services. Approximately $1.4
million of revenues in fiscal 1996 were attributable to the sale and
installation of a large network in Mexico to one of Mexico's largest milk
producers. Subsequent to completing the sale and installation of the network,
the Company began recognizing monthly revenues from the management of the
network. The sale and installation of such a large network is not considered to
be of a recurring nature by the Company; however, management of this and other
networks is considered to be a recurring source of revenues for the Company.
GlobalSCAPE had revenue of $500,000 in fiscal 1997, representing less than 4% of
the Company's consolidated revenue.


                                       34
<PAGE>

     Operating revenues from call services increased 29%, or approximately $3.2
million, due almost entirely to increased call volumes from international call
services provided from hotels and resorts in Jamaica, increased call volumes
attributable to the Company's Brazilian calling card product, and the inclusion
of Computel's revenues attributable to call services provided by Computel during
the last quarter of fiscal 1997 (which represented approximately $1.4 million of
consolidated revenues in fiscal 1997). Revenues from international calls
originating in Mexico increased 5%, while call volumes and related revenues from
calls originating in Mexico and from calls originating and terminating
domestically within the U.S. remained relatively constant between periods.
Although the Company continued to install Charge-a-Call telephones in Mexico
throughout fiscal 1997, the number of calls per phone decreased slightly. The
Company believes this was due to increasing costs to the consumer. The Company
began to lower the price per call to the consumer from certain telephones in the
first quarter of fiscal 1998 based on the decrease in the Company's cost of
providing these calls through its agreement with Investcom. The increased volume
of calls relating to Jamaica and Brazil increased the number of international
calls processed by the Company as compared to domestic calls processed entirely
within the United States. Because international calls typically generate higher
revenues on a per call basis than domestic calls, the average revenue per
completed call processed by the Company increased from $14.93 for fiscal 1996 to
$17.88 for fiscal 1997.

     Excluding the $1.4 million of revenues recognized in fiscal 1996
attributable to the sale and installation of the network to the Mexican milk
producer, revenues from network management services increased approximately
$596,000, or 67%. This increase was largely due to recurring revenues from the
Mexican milk producer and Investcom commencing in the early and latter part,
respectively, of fiscal 1997.

     Cost of Services. Cost of services increased approximately $2.0 million, or
18%, resulting in an increase in the Company's overall gross margin from 20% in
fiscal 1996 to 21% in fiscal 1997. If the approximately $1.4 million in revenues
and the $960,000 in costs related to the sale and installation of the network to
the Mexican milk producer were excluded from the Company's results for fiscal
1996, the Company's gross profit percentage would have been 18% for fiscal 1996.
The increase in cost of services was primarily attributable to the increased
volume of calls handled by the Company from Jamaica to the U.S. and from the
U.S. to Brazil, the inclusion of Computel's cost of services for the last
quarter of fiscal 1997, and rising costs associated with transporting calls from
Mexico to the Company's Switching/Operator Facility in San Antonio, Texas.
Although Telmex officially lost its status as a monopoly on August 10, 1996,
Investcom was not allowed connectivity to Telmex's local network in Mexico until
January 1997 and did not have the switch capacity in Mexico to process the
Company's traffic until May 1997. As a result, the Company was unable to
commence processing any of its traffic at lower per-minute costs until May 1997.
Subsequent to May 1997, the public phones serviced by the Company in Mexico were
frequently only able to access the Company's operator center utilizing a
cellular connection, since local connectivity had not yet been provided by
Telmex. This added a per-minute air time charge to the Company's cost of
transmitting calls from Mexico, resulting in a decline in the gross profit
margin on international calls transmitted from the Company's public phones in
Mexico.

     Selling, General and Administrative Expenses.   SG&A expenses rose 63%, or
approximately $2.4 million between years.  If the revenues related to the sale
and installation of the network to the Mexican milk producer in fiscal 1996 were
excluded, SG&A expenses would have increased as a percentage of overall revenues
from 29% to 32%. The increase in SG&A expense is almost entirely due to expanded
operations within Mexico and the inclusion of Computel's SG&A expense for the
last quarter of fiscal 1997. ATSI-Mexico had less than five employees at the
beginning of fiscal 1996 as compared to 36 employees at the end of fiscal 1997.
Computel operates 134 casetas in approximately 72 cities throughout Mexico, and
has approximately 430 employees.


                                       35
<PAGE>

     Bad Debt Expense. Bad debt expense increased approximately $180,000 between
years and remained flat as a percentage of revenues at 4%. The Company incurred
greater bad debt expense due to the higher revenue levels between years.

     Depreciation and Amortization. Depreciation and amortization increased
approximately $310,000, or 110%, due primarily to approximately $2.1 million in
fixed asset additions principally for the development of the Company's teleport
facilities in San Antonio, Texas, Cancun and Mexico City, Mexico, and San Jose,
Costa Rica; the acquisition of intelligent payphones; and the inclusion of
Computel's depreciation attributable to the acquisition of Computel.

     Other income (expense). Other income (expense) increased to a net expense
of approximately $445,000 primarily as a result of interest expense incurred on
capital lease obligations and convertible notes issued in 1997.

     Net income (loss).   The net loss increased from approximately $2.2 million
for the year ended July 31, 1996 to approximately $4.7 million for the year
ended July 31, 1997 primarily as a result of increased SG&A expense and
increased interest expense between years.

Liquidity and Capital Resources

     Because the Company did not produce sufficient gross margin dollars to
cover its selling, general and administrative costs, the Company generated
negative cash flows from operations during the year ended July 31, 1999 of
approximately $3.6 million.  This shortfall includes the $1.5 million provision
for specific accounts receivable generated during the year for which the Company
may not receive any funds.

     The Company's payable and accrued liability position increased from July
31, 1998 to July 31, 1999 as the Company often utilized cash flows produced from
financing activities to pay down debt and capital lease obligations before
paying vendors or suppliers of services to the Company.

     When possible, the Company arranged capital lease obligations in order to
obtain equipment necessary to expand or maintain its operations.  During fiscal
1999, the Company was able to secure long-term capital lease arrangements of
$2.0 million from NTFC Capital Corporation to cover the acquisition of its
Nortel DMS 250/300 switch and $900,000 from Bank Boston Leasing to cover the
cost of ATM equipment needed to upgrade its network to a packet-switching
environment.  As of July 31, 1999 the Company has only utilized approximately
$500,000 of the Bank Boston Leasing facility.  During the year ended July 31,
1999 the Company acquired approximately $1.0 million in equipment which was not
financed.  The majority of this equipment was used to maintain or upgrade its
network between the U.S. and Mexico.

     In January 1999, GlobalSCAPE purchased the rights to the source code for
CuteFTP, its flagship product.  Terms of the purchase called for a cash payment
of approximately $171,000, which the Company financed through a bank note of
$180,000 at an interest rate of prime plus 1%, and twelve monthly payments of
principal and interest of $63,000 beginning February 1999. The terms of the note
called for principal and interest payments over a two-year period, comprised
initially of twelve monthly principal payments of $5,000 plus interest to be
followed by twelve monthly principal payments of $10,000 plus interest.
GlobalSCAPE paid the monthly amounts owed for these obligations out of recurring
cash flows produced from its operations during fiscal 1999, and management
anticipates that it will continue to be able to do so during the next fiscal
year.


                                       36
<PAGE>

     In addition to the financing by GlobalSCAPE, the Company borrowed $250,000
from officers and directors of the Company that was used for working capital
purposes.  As of July 31, 1999, a total of $100,000 remained outstanding to two
officers of the Company.

     During 1999, the Company stopped factoring a portion of its receivables.
At that point, the Company had accumulated an approximate $319,000 balance due
to the factoring company.  As of July 31, 1999 approximately $137,000 remains
outstanding on this balance, which is being paid monthly from cash generated by
the Company's call services business.

     The Company paid approximately $941,000 toward its capital lease
obligations during fiscal 1999.  In an effort to reduce its cash outflows, in
May 1999 the Company restructured its capital lease obligation with IBM de
Mexico, extending payment of the total obligation over a forty-eight (48) month
period.  Monthly payments due under the facility with NTFC Capital Corporation
are deferred until January 2000.

     In an effort to improve its working capital position, the Company raised
approximately $4.2 million from March 1999 through July 1999, net of issuance
costs, in private placements of preferred stock, and another $302,000 in a
private placement of common stock.  Exercises of warrants and options during
fiscal 1999 generated an additional approximate $1.3 million in cash proceeds
during the year.  The majority of the proceeds from these private placements and
warrant and option exercises were used to pay vendors and suppliers of services
to the Company.

     The net result of the Company's operating, investing and financing
activities during the year was a working capital deficit at July 31, 1999 of
approximately $6.9 million and cash on hand of approximately $379,000.  Included
in the Company's current obligations, net of the associated debt discount, are
notes payable of $2.2 million which will be due and payable, along with accrued
interest of approximately $760,000 in March 2000.

     Although the Company generated cash flows from financings in excess of $6.2
million during fiscal 1999, these proceeds were not sufficient to cover the net
cash used in operations, capital expenditures and debt service requirements of
approximately $6.9 million incurred during the year.  As planned, the Company
shifted its focus during the year away from traffic generated outside of its
core market of Mexico, and focused on generating and transporting traffic over
its own international network infrastructure in order to produce better cash
flow results.  The result was an increase in wholesale network transport traffic
flowing over the Company's network.   Overall, network services contributed
approximately 56% of overall corporate revenues during the year, as opposed to
approximately 39% in fiscal 1998.  However, market pressures caused the price at
which wholesale network transport services could be sold to decline
approximately 40% during fiscal 1999.   Although the Company was able to reduce
its costs associated with transporting the traffic, the Company produced less
dollars of gross margin on a per minute basis than it had in fiscal 1998.
GlobalSCAPE's gross margins increased during the year with the purchase of the
source code to CuteFTP, but on a consolidated basis the Company was unable to
generate the gross margin dollars necessary to cover SG&A costs and all of its
debt service requirements.

     As of October 1999, the Company is continuing to experience market
pressures on its wholesale network transport services business.  In order to
produce better cash flows, the Company must focus on keeping its international
network between Mexico and the U.S. optimally utilized with a blend of retail
and wholesale traffic.  Because the Company upgraded its network during fiscal
1999 to an ATM packet-switching environment, the Company feels that it can
transport traffic as efficiently as possible in

                                       37
<PAGE>

an effort to minimize costs. However, the Company anticipates that pricing
pressures will continue in its wholesale transport market, so it will focus its
efforts on implementing a retail strategy which targets the growing and
underserved Latino markets in both the U.S. and Mexico. Although management does
not expect improved results from this effort until the latter stages of fiscal
2000, it believes that its retail strategy combined with the deployment of
leading edge technology for communications transport will ultimately bring about
improved profitability and sustainable growth in the future.

     In the near term, the Company must continue to manage its costs of
providing services and overhead costs as it begins focusing on optimizing use of
its network.  The Company has applied for a long distance concession in Mexico
which, if obtained, the Company believes will eventually allow it to
significantly reduce its cost of transporting services.  In order for it to
significantly reduce costs with the concession, the Company would need to
purchase a significant amount of hardware and software, allowing it to expand
and operate its own network in Mexico.

     Until the Company is able to produce positive cash flows from operations in
an amount sufficient to meet its debt service and capital expenditure
requirements, it must be able to access debt and/or equity capital to assist it
in doing so, although no assurance may be given that it will be able to do so.
In September 1999, the Company issued approximately $500,000 of 6% Series C
Preferred Stock on terms substantially similar to those of the Series B
Preferred Stock.  In an effort to meet its financial needs going forward, the
Company has engaged the investment banking firm of Gerard, Klauer Mattison & Co.
("GKM").  GKM will assist the Company in finding and securing financial and
strategic relationships.  The Company has also engaged the investment banking
firm of SunTrust Equitable Securities to assist it in, among other things,
raising private or public funds for GlobalSCAPE.  However, there can be no
assurance that such funds will be raised.

Inflation/Foreign Currency

     Inflation has not had a significant impact on the Company's operations.
With the exception of direct dial services from the Company's casetas and coin
operated public telephones, almost all of the Company's revenues are generated
and collected in U.S. dollars. Direct dial services from the Company's casetas
and public telephones are generally provided on a "sent-paid" basis at the time
of the call in exchange for cash payment, so the Company does not maintain
receivables on its books that are denominated in pesos. In an effort to reduce
foreign currency risk, the Company attempts to convert pesos collected to U.S.
dollars quickly and attempts to maintain minimal cash balances denominated in
pesos. Some expenses related to certain services provided by the Company 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 the Company's financial condition or operating results.

Seasonality

     The Company's call service revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.

Year 2000 Compliance

     The Company initiated a program to identify and address issues associated
with the ability of its date-sensitive information, telephony and business
systems to properly recognize the year 2000 in order to avoid interruption of
the operation of these systems at the turn of the century.  This program is
being conducted by the Company's Management Information Systems group, which is
coordinating the efforts of internal resources as well as third party vendors in
making all of the necessary changes for all

                                       38
<PAGE>

management systems and product related infrastructure for the Company's
divisions and subsidiaries. The Company believes it is 96% complete in achieving
Year 2000 readiness, and will be Year 2000 ready by November 30, 1999. The only
significant remaining item is an outstanding issue related to the payroll
systems of the Company's Mexican subsidiaries. The Company expects to avoid
disruption of its owned information, telephony and business systems as a result
of these efforts. However, the Company must rely on the representations and
warranties of third parties, including domestic U.S. and foreign carriers of its
traffic, in testing for readiness for year 2000 issues and cannot ensure
compliance by these parties. The Company has developed contingency plans in
areas where it believes there is any significant risk or where a third party has
not adequately responded to the Company's inquiries, which includes transitions
to other providers.

     The Company believes that a worst case scenario resulting from a Year 2000
related failure would be a temporary disruption of normal business operations.
Based upon the work completed to date, the Company believes that such an
occurrence is unlikely.  However, as stated above, the Company is relying on
representations and warranties of third parties that are beyond the Company's
control.  A disruption of business operations could have a material adverse
effect on the Company's financial performance.

     The Company has expended approximately $100,000 in its Year 2000 program to
date, and does not expect to experience any material additional cost.

                                       39
<PAGE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                      Page
                                                                                                      ----
<S>                                                                                                   <C>
Consolidated Financial Statements of American TeleSource International, Inc. and Subsidiaries

Report of Independent Public Accountants.............................................................   41

Consolidated Balance Sheets as of July 31, 1998 and 1999.............................................   42

Consolidated Statements of Operations for the Years Ended July 31, 1997, 1998 and 1999...............   43

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended July 31, 1997,
1998 and 1999........................................................................................   44

Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1997, 1998 and 1999.....   45

Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1998 and 1999...............   46

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

                                       40
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of American TeleSource International, Inc.:


We have audited the accompanying consolidated balance sheets of American
TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the
Company) as of July 31, 1998 and 1999, and the related consolidated statements
of operations, comprehensive income (loss), stockholders' equity and cash flows
for the years ended July 31, 1997, 1998 and 1999. These financial statements are
the responsibility of the 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 generally accepted auditing
standards.  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 American TeleSource
International, Inc. and subsidiaries as of July 31, 1998 and 1999, and the
results of their operations and their cash flows for the years ended July 31,
1997, 1998 and 1999, in conformity with generally accepted accounting
principles.

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


                                         /s/ ARTHUR ANDERSEN LLP


San Antonio, Texas
October 5, 1999

                                       41
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                   (In thousands, except share information)

<TABLE>
<CAPTION>
                                                                                            July 31,
                                                                             -------------------------------------
                                                                                   1998                   1999
                                                                              -----------             ------------
<S>                                                                           <C>                     <C>
ASSETS
------
CURRENT ASSETS:
 Cash and cash equivalents                                                    $     1,091             $        379
 Accounts receivable, net of allowance of $209 and $1,600, respectively             3,748                    3,693
 Prepaid expenses and other                                                           844                      987
                                                                              -----------             ------------
     Total current assets                                                           5,683                    5,059
                                                                              -----------             ------------

PROPERTY AND EQUIPMENT (At cost):                                                  14,233                   16,669
 Less - Accumulated depreciation and amortization                                  (2,418)                  (4,713)
                                                                              -----------             ------------
     Net property and equipment                                                    11,815                   11,956
                                                                              -----------             ------------
OTHER ASSETS, net
 Goodwill, net                                                                      5,091                    5,032
 Contracts, net                                                                     1,173                      703
 Trademarks, net                                                                        -                      789
 Other assets                                                                         489                      615
                                                                              -----------             ------------
     Total assets                                                             $    24,251             $     24,154
                                                                              ===========             ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
 Accounts payable                                                             $     5,683             $      4,164
 Accrued liabilities                                                                2,113                    3,239
 Current portion of notes payable                                                     688                      961
 Current portion of convertible long-term debt                                          -                    1,942
 Current portion of obligations under capital leases                                2,351                    1,430
 Deferred revenue                                                                     535                      233
                                                                              -----------             ------------
     Total current liabilities                                                     11,370                   11,969
                                                                              -----------             ------------
LONG-TERM LIABILITIES:
 Notes payable, less current portion                                                  719                      312
 Convertible long-term debt, less current portion                                   1,604                        -
 Obligations under capital leases, less current portion                             2,941                    5,523
 Other                                                                                530                      213
                                                                              -----------             ------------
     Total long-term liabilities                                                    5,794                    6,048
                                                                              -----------             ------------
COMMITMENTS AND CONTINGENCIES: (See Note 13)

STOCKHOLDERS' EQUITY:
 Preferred stock, $0.001 par value, 10,000,000 shares
authorized,
    Series A Cumulative Convertible Preferred Stock, 50,000
    authorized, no shares issued and outstanding at July 31,
    24,145 shares issued and outstanding at July 31, 1999                               -                        -
    Series B Cumulative Convertible Preferred Stock, 2,000
    authorized, no shares issued and outstanding at July 31,
    2,000 shares issued and outstanding at July 31, 1999                                -                        -
 Common stock, $0.001 par value, 100,000,000 shares authorized,
      45,603,566 issued and outstanding at July 31, 1998
      48,685,287 issued and outstanding at July 31, 1999                               46                       49
 Additional paid in capital                                                        22,248                   29,399
 Accumulated deficit                                                              (14,396)                 (21,987)
 Deferred compensation                                                               (667)                    (466)
 Other comprehensive income                                                          (144)                    (858)
                                                                              -----------             ------------
     Total stockholders' equity                                                     7,087                    6,137
                                                                              -----------             ------------

     Total liabilities and stockholders' equity                               $    24,251             $     24,154
                                                                              ===========             ============
</TABLE>

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

                                       42
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                             For the Years Ended July 31,
                                            1997          1998          1999
                                        ------------  ------------  ------------
<S>                                     <C>           <C>           <C>
OPERATING REVENUES:
  Network management services               $  1,698      $ 13,362      $ 19,250
  Call services                               12,545        13,547         6,602
  Direct dial services                         1,421         6,085         6,024
  Internet e-commerce                            564         1,526         2,642
                                        ------------  ------------  ------------

    Total operating revenues                  16,228        34,520        34,518
                                        ------------  ------------  ------------

OPERATING EXPENSES:
  Cost of services                            12,792        22,287        21,312
  Selling, general and administrative          6,312        12,853        12,652
  Bad debt expense                               735         1,024         2,346
  Depreciation and amortization                  591         1,822         3,248
                                        ------------  ------------  ------------

    Total operating expenses                  20,430        37,986        39,558
                                        ------------  ------------  ------------

OPERATING LOSS                                (4,202)       (3,466)       (5,040)

OTHER INCOME (EXPENSE):
  Interest income                                 27            76            59
  Other income                                    68            32
  Other expense                                  (27)          (24)          (10)
  Interest expense                              (513)       (1,573)       (1,745)
                                        ------------  ------------  ------------

    Total other income (expense)                (445)       (1,489)       (1,696)
                                        ------------  ------------  ------------

LOSS BEFORE INCOME TAX EXPENSE
 AND MINORITY INTEREST                        (4,647)       (4,955)       (6,736)

FOREIGN INCOME TAX EXPENSE                         -          (139)            -
MINORITY INTEREST                                (48)            -             -
                                        ------------  ------------  ------------

NET LOSS                                     ($4,695)      ($5,094)      ($6,736)

LESS: PREFERRED STOCK DIVIDENDS                    -             -          (855)
                                        ------------  ------------  ------------

NET LOSS TO COMMON SHAREHOLDERS              ($4,695)      ($5,094)      ($7,591)
                                        ============  ============  ============

BASIC AND DILUTED LOSS PER SHARE              ($0.18)       ($0.12)       ($0.16)
                                        ============  ============  ============

WEIGHTED AVERAGE
 COMMON SHARES OUTSTANDING                    26,807        41,093        47,467
                                        ============  ============  ============
</TABLE>

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

                                       43
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                For the Years Ended July 31,
                                                                          ----------------------------------------
                                                                              1997         1998          1999
                                                                          -----------   ------------   -----------
<S>                                                                       <C>           <C>            <C>
Net loss                                                                      ($4,695)      ($5,094)      ($7,591)

     Other comprehensive income (loss), net of tax:

     Foreign currency translation adjustments                                  $   12       ($160)          ($714)
                                                                          -----------   -----------    -----------

Comprehensive loss to common stockholders                                     ($4,683)      ($5,254)      ($8,305)
                                                                          ===========   ===========    ===========
</TABLE>

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

                                       44
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (In thousands)

<TABLE>
<CAPTION>

                                  Preferred Shares        Common Stock                                     Cumulative
                                  ----------------    --------------------      Additional    Accumulated Translation   Deferred
                                   Shares   Amount    Shares       Amount    Paid In Capital    Deficit    Adjustment  Compensation
                                  -------   ------    ------      --------   ---------------  -----------  ----------  ------------
<S>                               <C>       <C>       <C>         <C>        <C>              <C>          <C>         <C>
BALANCE, July 31, 1996                                23,775      $  6,288          $            ($ 4,607)       $  4       ($   55)
  Issuances of common shares
   for cash                             -      -       5,760         4,736
  Conversion of convertible
   dept to common shares                -      -       3,612         1,967
  Issuance of common shares for
   acquisition                          -      -       2,716         1,847
  Issuances of common shares
   for services                         -      -         925           154
  Deferred compensation                 -      -           -         1,394                                                   (1,394)
  Compensation expense                  -      -           -                                                                    295
  Warrants issued with
   restoration long term debt           -      -           -           990
  Cumulative effect of
   translation adjustment               -      -           -                                                       12
  Net loss                              -      -           -                                       (4,695)
                                  ------- ------      ------      --------          --------     --------       -----       -------

BALANCE, July 31, 1997                  -      -      36,788      $ 17,376                       ($ 9,302)       $ 16       ($1,154)

  Issuances of common shares
   for cash                             -      -       5,500         3,496
  Issuances of common shares
   for reduction in indebtedness        -      -       2,871         1,076
  Conversion of convertible
   debt to common shares                -      -         200           100
  Issuances of common shares
   for services                         -      -         245           246
  Compensation expense                  -      -           -                                                                    487
  Cumulative effect of
   transition adjustments               -      -           -                                                     (160)
  Exchange of common shares for
   common stock                         -      -           -       (22,248)           22,248
  Net loss                              -      -           -                                       (5,094)
                                  ------- ------      ------      --------          --------     --------       -----       -------
BALANCE, July 31, 1998                  -      -      45,604      $     46          $ 22,248     ($14,396)      ($144)      ($  667)

  Issuances of common shares
   for cash                             -      -       2,706             3             1,037
  Issuances of common shares
   for services                         -      -          96                              40
  Issuances of common shares
   for acquisition                      -      -         279                             179
  Issuances of preferred stock         26      -           -                           1,176
  Deferred compensation                 -      -           -                             344                                   (344)
  Dividend expense                      -      -           -                                          (80)
  Amortization of equity amount         -      -           -                             775         (775)
  Compensation expense                  -      -           -                                                                    545
  Cumulative effect of
   transition adjustment                -      -           -                                                     (714)
  Net loss                              -      -           -                                       (6,736)                   (6,736)
                                  ------- ------      ------      --------          --------     --------       -----       -------
BALANCE, July 31, 1999                 26      -      48,685      $     49          $ 29,399     ($21,987)      ($858)      ($  466)
                                  ======= ======      ======      ========          ========     ========       =====       =======

<CAPTION>

                                         Total
                                     Stockholders'
                                         Equity
                                     -------------
<S>                                  <C>
BALANCE, July 31, 1996                      $1,630

  Issuances of common shares
   for cash                                  4,736
  Conversion of convertible
   dept to common shares                     1,967
  Issuance of common shares for
   acquisition                               1,847
  Issuances of common shares
   for services                                154
  Deferred compensation                          0
  Compensation expense                         295
  Warrants issued with
   restoration long term debt                  990
  Cumulative effect of
   translation adjustment                       12
  Net loss                                  (4,695)
                                            ------
BALANCE, July 31, 1997                      $6,936

  Issuances of common shares
   for cash                                  3,496
  Issuances of common shares
   for reduction in indebtedness             1,076
  Conversion of convertible
   debt to common shares                       100
  Issuances of common shares
   for services                                246
  Compensation expense                         487
  Cumulative effect of
   transition adjustments                     (160)
  Exchange of common shares for
   common stock                                  0
  Net loss                                  (5,094)
                                            ------
BALANCE, July 31, 1998                      $7,087

  Issuances of common shares
   for cash                                  1,640
  Issuances of common shares
   for services                                 40
  Issuances of common shares
   for acquisition                             179
  Issuances of preferred stock               4,176
  Deferred compensation                          0
  Dividend expense                             (80)
  Amortization of equity amount                  0
  Compensation expense                         545
  Cumulative effect of
   transition adjustment                      (714)
  Net loss                                  (6,736)
                                            ------
BALANCE, July 31, 1999                      $6,137
                                            ======
</TABLE>

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



                                       45
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)

<TABLE>
<CAPTION>
                                                                                      For the Years Ended July 31,
                                                                       1997                     1998                   1999
                                                                ---------------------     ------------------     -----------------
<S>                                                             <C>                       <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                    ($4,695)                ($5,094)             ($6,736)
  Adjustments to reconcile net loss to net cash used in
   operating activities-
     Depreciation and amortization                                                591                   1,822                3,248
     Amortization of debt discount                                                 87                     307                  346
     Deferred compensation                                                        295                     487                  545
     Provision for losses on accounts receivable                                  735                   1,024                2,346
     Minority interest                                                             48                       -                    -
     Changes in operating assets and liabilities-
       Increase in accounts receivable                                         (1,983)                 (2,723)              (2,207)
       (Increase) decrease in prepaid expenses and other                         (849)                    197               (1,632)
       Increase (decrease) in accounts payable                                 (1,025)                  3,479               (1,139)
       Increase (decrease) in accrued liabilities                                 884                    (192)               1,857
       Increase (decrease) in deferred revenue                                    378                      71                 (191)
       Other                                                                        4                       -                    -
                                                               ----------------------     -------------------    -----------------
Net cash used in operating activities                                          (5,530)                   (622)              (3,563)
                                                               ----------------------     --------------------   -----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment                                             (590)                  (3,297)               (956)
  Acquisition of business, net of cash acquired                                    73                   (2,112)               (171)
  Payments received on notes receivable                                           101                        -                   -
                                                               ----------------------     --------------------   -----------------
Net cash used in investing activities                                            (416)                  (5,409)             (1,127)
                                                               ----------------------     --------------------   -----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of debt                                               3,632                    2,547                 437
   Net increase (decrease) in short-term borrowings                               281                      353                (488)
   Payments on debt                                                                 -                   (1,141)               (679)
   Capital lease payments                                                        (401)                  (1,044)               (941)
   Payments on long-term liabilities                                                -                      (67)               (123)
   Proceeds from issuance of preferred stock,
     net of issuance costs                                                          -                        -               4,176
   Proceeds from issuance of common stock,
     net of issuance costs                                                      3,699                    4,553               1,596
                                                               ----------------------     --------------------   -----------------
Net cash provided by financing activities                                       7,211                    5,201               3,978
                                                               ----------------------     --------------------   -----------------

NET INCREASE (DECREASE) IN CASH                                                 1,265                     (830)               (712)

CASH AND CASH EQUIVALENTS, beginning of period                                    656                    1,921               1,091
                                                               ----------------------     --------------------   -----------------

CASH AND CASH EQUIVALENTS, end of period                                       $1,921                   $1,091             $   379
                                                               ======================     ====================   =================
</TABLE>

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

                                       46
<PAGE>

                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     1.   DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

     The accompanying consolidated financial statements are those of American
TeleSource International, Inc. and its subsidiaries ("ATSI" or the "Company").
The Company was formed on June 6, 1996 under the laws of the state of Delaware
for the express purpose of effecting a "Plan of Arrangement" with American
TeleSource International, Inc., which was incorporated under the laws of the
province of Ontario, Canada (hereinafter referred to as "ATSI-Canada").  The
Plan of Arrangement called for the stockholders of ATSI-Canada to exchange their
shares on a one-for-one basis for shares of the Company.  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 the Company.  The Company
is publicly traded on the OTC Bulletin Board under the symbol "AMTI".

     The accompanying consolidated balance sheet dated July 31, 1998 includes
the assets, liabilities and shareholders' equity of ATSI-Canada which were
transferred to the Company on May 11, 1998, and the accompanying statements of
operations for the years ended July 31, 1997 and 1998 include the consolidated
operations of ATSI-Canada through May 11, 1998.

     In May 1997, ATSI-Canada entered into an agreement to purchase up to 100%
of the outstanding shares of Sistema de Telefonia Computarizada, S.A. de C.V.
("Computel"), the largest privately owned operator of casetas (public calling
stations) in Mexico. Under the terms of the agreement, ATSI-Canada acquired 55%
of the shares of Computel effective May 1, 1997 and the remaining 45% effective
August 28, 1997. As ATSI-Canada acquired majority ownership effective May 1,
1997, the Company has recorded 100% of the net assets and liabilities of
Computel as of that date. The Company's consolidated financial statements for
the period May 1, 1997 to July 31, 1997 include the impact of the 45% minority
ownership interest. For the years ended July 31, 1998 and July 31, 1999, the
Company's consolidated financial statements include 100% of the activities of
Computel.

     In July 1997, American TeleSource International de Mexico, S.A. de C.V.
("ATSI-Mexico") acquired 100% of the outstanding stock of Servicios de
Infraestructura, S.A. de C.V. ("Sinfra"). In April 1998, TeleSpan, Inc.
("Telespan") purchased 100% of the outstanding stock of Sinfra from ATSI-Mexico.
In March 1998, ATSI-Delaware acquired 100% of the outstanding stock of
Soluciones Internactionales de Mercadeo, S.A. and subsequently changed the name
to ATSI de CentroAmerica, S.A.

     Through its subsidiaries, the Company provides retail and wholesale
communications services within and between the United States and select markets
within Latin America. Utilizing a framework of licenses, interconnection and
service agreements, network facilities and distribution channels, the Company
aims 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, 1999, the Company's operating subsidiaries are as
follows:

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

     ATSI-Texas owns and operates a switching facility and multilingual call
center in San Antonio, Texas.  This facility provides U.S. based call services
to public telephones owned by ATSI-Mexico and

                                       47
<PAGE>

casetas owned by Computel in Mexico, as well as to third party-owned public
telephones, casetas and hotels in Mexico. Although these calls originate in
Mexico, they are terminated and billed in the United States and Mexico by ATSI-
Texas. In July 1998, ATSI-Texas also began providing domestic U.S. and
international call services to residential customers in the U.S.

     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 its 20-year comercializadora license, ATSI purchases telephone lines
and resells local, long distance and international calls from public telephones
connected to the lines.  Direct dial calls may be made from the telephones 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.

     Computel (a Mexican corporation)
     --------------------------------

     Computel is the largest private operator of casetas in Mexico, operating
approximately 126 casetas in 66 cities.  Direct dial calls may be made from the
casetas 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.

     Sinfra (a Mexican corporation)
     -------------------------------

     Utilizing its 20-year Teleport and Satellite Network license, Sinfra owns
and operates the Company's teleport facilities in Cancun, Monterrey and Mexico
City, Mexico.  These facilities are used for the provision of international
private network services.  Sinfra also owns a 15-year Packet Switching Network
license.

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

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

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

     GlobalSCAPE markets CuteFTP and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD").

     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 corporate
development opportunities in Latin American countries through joint ventures and
interconnection agreements with existing telecommunication monopolies.

                                       48
<PAGE>

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

     The accompanying consolidated financial statements of the Company have been
prepared on the basis of accounting principles applicable to a going concern.
For the period from December 17, 1993 to July 31, 1999, the Company has incurred
cumulative net losses of $21.9 million.  Further, the Company had a working
capital deficit of $5.7 million at July 31, 1998 and $6.7 million at July 31,
1999.  Further, the Company had negative cash flows from operations of $5.5
million, $.6 million and $3.6 million for the years ended July 31, 1997, 1998
and 1999, respectively. The Company has limited capital resources available to
it, and these resources may not be available to support its ongoing operations
until such time as the Company is able to generate positive cash flow from
operations. There is no assurance the Company will be able to achieve future
revenue levels sufficient to support operations or recover its investment in
property and equipment, goodwill and other intangible assets. These matters
raise substantial doubt about the Company's ability to continue as a going
concern.  The ability of the Company to continue as a going concern is dependent
upon the ongoing support of its stockholders and customers, its ability to
obtain capital resources to support operations and its ability to successfully
market its services.

     The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations.  The Company has retained various financial
advisers to assist it in refining its strategic growth plan, defining its
capital needs and obtaining the funds required to meet those needs.  The plan
includes 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 the Company is 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 the Company until a successful level of
operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.


     3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The consolidated financial statements have been prepared on the accrual
basis of accounting under generally accepted accounting principles of the U.S.
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 generally
accepted accounting principles 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.

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

     The Company recognizes revenue from its call services and direct dial
services as such services are performed, net of unbillable calls.  Revenue from
network management service contracts is recognized when service commences for
service commencement fees and monthly thereafter as services

                                       49
<PAGE>

are provided. The Company recognizes revenue from equipment sales when the title
for the equipment transfers to the customer and from equipment installation
projects when they are completed. Revenues related to the Company's Internet
product are recognized at the point of delivery, as the Company bears no
additional obligation beyond the provision of its software product other than
post-contract customer service.

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

     Until January 1, 1999, Mexico's economy was designated as highly
inflationary.  Generally Accepted Accounting Principles, "GAAP" require the
functional currency of highly inflationary economies to be the same as the
reporting currency.  Accordingly, the consolidated financial statements of ATSI-
Mexico and Computel, 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 ATSI-Mexico
and Computel 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, the Company's non-monetary assets in ATSI-Mexico and
Computel 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 operating activity of ATSI-Mexico
and Computel are remeasured in to U.S. dollars using a weighted average exchange
rate.  The effect of these translation adjustments are reflected in the
cumulative translation account shown in equity.

     Accounts Receivable
     -------------------

     The Company utilizes the services of credit card processing companies for
the billing of commercial credit card calls.  The Company receives cash from
these calls, net of transaction and billing fees, generally within 20 days from
the dates the calls are delivered.  All other calls (calling card, collect,
person-to-person and third party billed) are billed under an agreement between
the Company and a billing clearinghouse.  This agreement allows ATSI to submit
call detail records to the clearinghouse, which in turn forwards these records
to the local telephone company to be billed.  The clearinghouse collects the
funds from the local telephone company and then remits the funds, net of
charges, to ATSI.  Because this collection process can take up to 90 days to
complete, ATSI participates in an advance funding program offered by the
clearinghouse whereby 100% of the call records are purchased for 75% of their
value within five days of presentment.  The remaining 25% value of the call
records are remitted to ATSI, net of interest and billing charges and an
estimate for uncollectible calls, as the clearinghouse collects the funds from
the local telephone companies.  Under the advanced funding agreement, the
collection clearinghouse has a security interest in the unfunded portion of the
receivables as well as future receivables generated by the Company's long
distance business.  The allowance for doubtful accounts reflects the Company's
estimate of uncollectible calls at July 31, 1998 and 1999 and includes $1.5
million of specific accounts identified by the Company as potentially
uncollectible.  ATSI currently pays a funding charge of prime plus 4% per annum
on the amounts that are advanced to ATSI.  Receivables sold with recourse during
fiscal years 1997, 1998, and 1999 were  $8,530,665, $11,127,221 and $6,138,549
respectively.  At July 31, 1997, 1998 and 1999, $577,256, $484,381 and $444,398
of such receivables were uncollected, respectively.  See Note 5 for additional
disclosure regarding advanced funding.

                                       50
<PAGE>

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

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

     The Company's 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, the Company nets its Mexican subsidiaries IVA receivable and IVA
payable accounts as allowed by regulatory requirements in Mexico. For the years
ended July 31, 1998 and 1999, this netting of IVA accounts resulted in the
elimination of IVA payable and a corresponding reduction in IVA receivable of
approximately $197,000 and $1.2 million, respectively.

     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, 1997, 1998 and 1999.  Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive.
Additionally, the Company has excluded the convertible preferred stock described
in Note 8, from the computation of the weighted average number of common shares
outstanding, as their effect will also be antidilutive.

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

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

     Effective for the fiscal years beginning after July 31, 1996, the Company
follows rules as prescribed under Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121").  SFAS 121 requires an assessment of the
recoverability of the Company's investment in long-lived assets to be held and
used in operations whenever events or circumstances indicate that their carrying
amounts may not be recoverable.  Such assessment requires that the future cash
flows associated with the long-lived assets be estimated over their remaining
useful lives and an impairment loss be recognized when the undiscounted future
cash flows are less than the carrying value of such assets.  As of July 31,
1999, the Company has determined that the estimated undiscounted future cash
flows associated with its long-lived assets are greater than the carrying value
of such assets and that no impairment loss needs to be recognized.

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

          As of the years ended July 31, 1998 and 1999, other assets include
goodwill, primarily related to the purchase of Computel, of $5,216,646 and
$5,296,646, respectively, net of accumulated amortization of $126,668 and
$265,089, respectively.  Goodwill is amortized over

                                       51
<PAGE>

40 years. As of July 31, 1998 and 1999 other assets include acquisition costs of
$1,417,870, and $1,596,620, respectively, related to the Company's acquisitions
of several of its independent marketing representatives, net of accumulated
amortization of $244,652, and $893,212, respectively. These acquisition costs
are being amortized over the life of the contracts, which approximates three
years. As of July 31, 1999, other assets include $898,943 related to the
purchase of the rights to CuteFTP, net of accumulated amortization of $110,352.
This trademark is being amortized over an estimated five-year life.
Additionally, as of July 31, 1998 and 1999, other assets include approximately
$489,000 and $615,000 of other assets, not specifically identified as goodwill,
acquisition costs or trademarks. As it relates to SFAS 121, as of July 31, 1999,
the Company has determined that the estimated future cash flows associated with
its goodwill and other intangible assets are greater than the carrying value of
such assets and that no impairment loss needs to be recognized. For the years
ended July 31, 1997, 1998 and 1999, the Company recorded amortization expense of
$55,491, $369,219 and $925,440, respectively related to its other assets.

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

     The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes".  Under the provisions of SFAS 109, the Company
recognizes 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.

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

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

<TABLE>
<CAPTION>
                                                                             For the Years Ended July 31,
                                                                     --------------------------------------------
                                                                          1997           1998           1999
                                                                          ----           ----           ----
<S>                                                                  <C>             <C>            <C>
Cash payments for interest                                             $  416,756     $1,349,679     $1,101,771

Cash payments for taxes                                                $        -     $  148,097     $        -

Common shares issued for services                                      $  153,885     $  246,591     $   40,000

Common shares issued for acquisition of Computel and other             $1,846,569     $        -     $  178,750

Assets acquired in acquisition of Computel                             $3,418,753     $        -     $        -

Liabilities assumed in acquisition of Computel                         $4,205,404     $        -     $        -

Conversion of convertible debt to common shares                        $1,966,531     $  100,000     $        -
</TABLE>

                                       52
<PAGE>

Capital lease obligations incurred      $1,521,875  $4,635,693   $        -

Common share subscriptions sold         $1,113,170  $        -   $   42,500


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

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

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and disclosure of comprehensive income and its components in a full
set of financial statements.  SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997, and requires reclassification of comparative
financial statements for earlier periods.  The adoption of SFAS No. 130 has
resulted in the presentation of comprehensive income (loss) that differs from
net income (loss) as presented in the accompanying financial statements to the
extent of foreign currency translation adjustments as shown in the accompanying
consolidated statements of comprehensive income (loss).  The Company
presentation of its comprehensive income component, foreign currency translation
adjustments, is presented net of tax, which is $0 for all periods presented, in
light of the Company's current net operating loss carryforward position.

     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 the Company:

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

     Long-term debt and convertible debt: Since the Company's 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).  The Company believes that the carrying amount does not differ
materially from the fair value.


     4.   PROPERTY AND EQUIPMENT, NET (at cost)

     Following is a summary of the Company's property and equipment at July 31,
1998 and 1999:



                                            July 31,          July 31,
                                            -------           -------
                                              1998              1999
                                              ----              ----

Telecommunications equipment               $ 6,084,771      $ 6,476,395
Land and buildings                             892,507          447,748
Furniture and fixtures                         882,449          902,873


                                       53
<PAGE>

Equipment under capital leases                   5,585,291        7,758,739
Leasehold improvements                             281,014          474,748
Other                                              517,192          608,914
                                               -----------      -----------
                                                14,233,224       16,669,417

Less: accumulated depreciation and
 amortization                                   (2,418,514)      (4,712,671)
                                               -----------      -----------

Total - property and equipment, net            $11,814,710      $11,956,746
                                               ===========      ===========

     Depreciation expense as reported in the Company's Consolidated Statements
of Operations includes depreciation expense related to the Company's capital
leases.  For the years ended July 31, 1997, 1998 and 1999, the Company recorded
approximately $536,000, $1,453,000 and $2,323,0000, respectively of depreciation
expense related to its fixed assets.


     5.   NOTES PAYABLE AND CONVERTIBLE DEBT

Notes Payable
-------------
<TABLE>
<CAPTION>

Notes payable are comprised of the following:                July 31,
                                               -------------------------------

                                                    1998             1999
                                               ---------------  --------------
<S>                                            <C>              <C>

Note payable to a company, see terms below.         $   25,320      $  137,071

Note payable to an individual, see terms below.              -         150,000

Note payable to a bank, see terms below.                     -         150,000

Notes payable to related parties, see terms                  -         100,000
 below.

Note payable to an individual, see terms below.              -         368,768

Notes payable to various banks, see terms below        416,846          56,878

Notes payable to a company, net of discount, see
 terms below.                                          364,803         309,588
                                                    ----------      ----------

                                                    $1,406,969      $1,272,305



Less: current portion                               $  688,005      $  960,523
                                                    ----------      ----------
Total non-current notes payable
                                                    $  718,964      $  311,782
                                                    ==========      ==========
</TABLE>

     During November 1996, the Company entered into an agreement with a
financing company under which the Company is advanced an additional 13.75% of
its receivables sold to a billing clearinghouse, as discussed in Note 3. These
advances are typically outstanding for periods of less than 90 days, and are
repaid, including accrued interest, by the clearinghouse on behalf of the
Company as its receivables from long distance call services are collected. The
Company was charged 4% per month for these fundings. When the agreement with the

                                       54
<PAGE>

financing company expired in November 1998, it was renewed on a month-to-month
basis, and the Company ceased using the factoring arrangement altogether in
April 1999 as part of its ongoing effort to minimize costs. The approximate
$137,000 outstanding represents advances to be repaid by the clearinghouse to
the financing company upon its subsequent collection of its receivables from
long distance call services.

     During February 1999, the Company entered into a note payable with an
individual, for working capital purposes, in the amount of $150,000. Interest
accrues at an interest rate of 12% per year, principal and interest due at
maturity.  The note originally matured in May 1999, but the Company has extended
the note with the individual for an additional six months.

     During January 1999, one of the Company's subsidiaries entered into a note
payable with a bank in the amount of $180,000 related to its acquisition of a
computer software program known as "CuteFTP".  (See Note 10).  The note calls
for principal payments of $5,000 per month for twelve months and $10,000 per
month for twelve months. Interest accrues monthly at an interest rate of the
Lender's "Prime Rate" plus 1%.  At July 31, 1999, the Lender's "Prime Rate" was
8.00%.

     In February 1999, the Company entered into notes payable with related
parties, all of whom were officers or directors of the Company in the amount of
$250,000. The notes accrue interest at a rate of 12% per year until paid in
full. As of July 31, 1999, $100,000 of the notes remain outstanding.

     In January 1999, one of the Company's subsidiaries entered into an
agreement with an individual related to its acquisition of a computer software
program known as "CuteFTP". (See Note 10).  The agreement calls for twelve
principal and interest payments of $63,000 per month beginning February 28,
1999.  The Company has imputed interest using an interest rate of 12% per annum.

     As of July 31, 1998 and July 31, 1999, the Company through its acquisition
of Computel had approximately $416,846 and $56,878, respectively, of bank notes
payable to various banks in Mexico.  The notes have interest rates ranging from
8% to 15%, with monthly principal and interest payments of approximately $7,500.
The notes mature between October 1999 and December 2015 and are collaterized by
the assets of Computel.  In the year ended July 31, 1999, the Company through
Computel exchanged certain assets collaterized by the notes for a reduction in
its indebtedness. The notes remaining mature during the year ended July 2000.

     During October 1997, the Company entered into a note payable with a company
in the amount of $1,000,000. The note calls for quarterly payments of principal
and interest beginning in January 1998 and continuing until October 2004.
Interest accrues on the unpaid principal at the rate of 13% per year.  The
Company also issued 250,000 warrants to the note holder which carry an exercise
price of $3.56 per warrant.  These warrants expire in October 2000.  The amount
of debt discount recorded by the Company related to the issuance of these
warrants was $103,333. The fair value of the warrants was calculated on the date
of issuance using an option pricing model with the following assumptions:
Dividend yield of 0.0%, expected volatility of 30%, risk-free interest rate of
6.00%, and an expected life of three years.  The warrants expire three years
from their date of issuance, and are not exercisable for a period of one year
after their initial issuance.  In January 1998, the noteholder exercised 700,000
warrants at an exercise price

                                       55
<PAGE>

of $0.70, unrelated to the warrants noted above, in consideration of a $490,000
reduction of the principal balance outstanding on the note.

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

          In March and May 1997, the Company issued $2.2 million in convertible
notes, interest at 10%.  The principal and interest, which accrues quarterly, is
due and payable three years from the date of issuance.  The convertible notes
convert into fully redeemable preferred stock at the Company's option.  In
addition, for each $50,000 unit of convertible debt, each holder was issued
108,549 warrants to purchase an equal number of shares of common stock at $0.27
per share.  The fair value of the warrants was determined to be $0.37 per share
and the Company assigned $990,000 to the value of the warrants in stockholders'
equity. The fair value of the warrants was calculated on the date of issuance
using an option pricing model with the following assumptions: Dividend yield of
0.0%, expected volatility of 62%, risk-free interest rate of 6.35%, and an
expected life of three years.  The warrants expire three years from their date
of issuance, and were not exercisable for a period of one year after their
initial issuance.  The Company has recorded the $990,000 as debt discount and is
amortizing the discount over the term of the debt based on the effective
interest method.  Principal outstanding as of July 31, 1998 and July 31, 1999,
net of debt discount, was $1,603,802 and $1,942,614, respectively.  All of the
outstanding principal at July 31, 1999 is reflected in the current portion of
convertible long-term debt.

Maturities of notes payable and convertible debt as of July 31, 1999 were as
follows:


Year Ending July 31, 2000               $2,903,137

2001                                       107,983

2002                                        56,949

2003                                        67,138

2004                                        78,718

Thereafter                                     994
                                        ----------

Total                                   $3,214,919
                                        ==========


     6.   LEASES

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

     The Company leases office space, furniture, equipment and network capacity
under noncancelable operating leases and certain month-to-month leases. During
fiscal 1997, 1998 and 1999, the Company also leased certain equipment under
capital leasing arrangements.  Rental expense under operating leases for the
years ended July 31, 1997, 1998 and 1999, was $176,700, $942,750 and $2,952,710,
respectively.  Future minimum lease payments under the noncancelable operating
leases at July 31, 1999 are as follows:

                                       56
<PAGE>

           2000                            $ 2,929,328
           2001                              3,284,740
           2002                              2,598,753
           2003                                583,524
           2004                                574,542
           Thereafter                        1,864,863
                                           -----------
           Total minimum lease payments    $11,835,750
                                           ===========


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

     Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payment at July 31, 1999 are as follows:



          2000                                          $ 2,295,036
          2001                                            2,246,127
          2002                                            2,022,825
          2003                                            1,758,391
          2004                                              562,335
          Thereafter                                        277,435
                                                        -----------
          Total minimum lease payments                    9,162,149
          Less: Amount representing taxes                   (45,302)
                                                        -----------
          Net minimum lease payments                      9,116,847
          Less: Amount representing interest             (2,164,572)
                                                        -----------
          Present value of minimum lease payments       $ 6,952,275
                                                        ===========

     In April 1997, the Company, through ATSI-Mexico secured a capital lease
facility with IBM de Mexico to purchase intelligent pay telephones for
installation in Mexico.  The capital lease facility of approximately $1.725
million has allowed the Company to install U.S. standard intelligent pay
telephones in various Mexican markets.  In April 1998, the Company through ATSI-
Mexico secured an additional capital lease facility with IBM de Mexico for
approximately $2.9 million to increase network capacity and to fund the purchase
and installation of public telephones in Mexico.  In May 1999, the Company
restructured its capital lease obligation with IBM de Mexico by extending the
payment of its total obligation.  The restructured lease facility calls for
monthly payments of principal and interest of approximately $108,000 beginning
in July 1999 and extending through June 2003.  Interest accrues on the facility
at an interest rate of approximately 13% per year. The obligation outstanding
under said facility at July 31, 1998 and July 31, 1999 was approximately
$4,272,000 and $3,826,000, respectively.

     In December 1998, the Company 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, the Company 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 delayed for six months. Quarterly payments approximate $139,000 and the
capital lease has an interest rate of approximately 11%. The lease facility
requires that the Company 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.  Due primarily to pricing
pressures in the Company's network transport services business,

                                       57
<PAGE>

the Company may not be able to meet some of the financial covenants in the
facility, which, if not cured, would allow NTFC to demand payment in full of the
amount outstanding. However, because management does not believe that non-
compliance is a certainty, the majority of the amount outstanding under the
facility has been classified as non-current in the accompanying balance sheet.
The Company also has certain affirmative covenants under the facility, including
a covenant on Year 2000 compliance, under which the Company gives assurance that
the Company's systems will be able to process transactions effectively before,
on and after January 1, 2000.


     The Company secured a capital lease for approximately $500,000 in December
1998 for the purchase of 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 Company's capital leases have interest rates
ranging from 11% to 14%.


     7.   DEFERRED REVENUE

     The Company records deferred revenue related to the private network
services it provides.  Customers may be required to advance cash to the Company
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 the
Company, at which time the Company recognizes service commencement revenue.


     8.   SHARE CAPITAL

     As discussed in Note 1, in May 1998, the Company completed its 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 the Company's books of $0.001 par value stock and
additional paid-in capital.

     During the year ended July 31, 1997, the Company issued 13,012,448 common
shares.  Of this total, 5,760,355 shares were issued for approximately
$4,737,000 of net cash proceeds, 924,761 shares were issued for services
rendered to the Company, 3,611,786 shares were issued for the conversion of
convertible debt to common shares, and 2,715,546 shares were issued related to
the Company's acquisition of Computel. (See Note 10).

     During the year ended July 31, 1998, the Company issued 8,816,461
common shares.  Of this total, 7,765,174 shares were issued for approximately
$3.2 million of net cash proceeds and reductions in indebtedness of
approximately $1.1 million through the exercise of 7,765,174 warrants and
options, 245,016 shares were issued for services rendered to the Company,
200,000 were issued resulting from the conversion of a $100,000 convertible note
and 606,271 shares were issued for approximately $333,000 in net cash proceeds.

     During the year ended July 31, 1999, the Company issued 3,081,721
common shares.  Of this total, 2,203,160 shares were issued for approximately
$1.3 million of net cash through the

                                       58
<PAGE>

exercise of 2,203,160 warrants and options, 36,643 shares were issued for
consulting services rendered to the Company, 59,101 shares were issued to a
shareholder in exchange for a guarantee of up to $500,000 of Company debt,
503,387 shares and an equal number of warrants to purchase the Company's common
stock for $0.70 per share were issued in exchange for approximately $300,000 in
net cash proceeds and 279,430 shares were issued related to the Company's
acquisition of certain customer contracts in previous years. The shares issued
for services rendered, the guarantee of Company debt, and the shares issued for
the $300,000 in cash proceeds (including the shares underlying the warrants
issued) have not been registered by the Company, nor does the Company have any
obligation to register such shares.

          At July 31, 1999, stock subscription receivables of  $42,500, were
outstanding related to sales of common stock.  Such amounts were collected by
the Company subsequent to said date.  No dividends were paid on the Company's
stock during the years ended July 31, 1997, 1998 and 1999.

          The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at the Company's 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 the Company's amended Articles
of Incorporation, the Company's 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, 1999.

          Pursuant to ATSI-Delaware's Certificate of Incorporation, the
Company's Board of Directors may issue, in series, an unlimited number of
preferred shares, with a par value of $0.001. In March and April 1999, the
Company issued a total of 24,146 shares of Series A Preferred Stock for cash
proceeds of approximately $2.4 million and in July 1999 the Company issued 2,000
shares of Series B Preferred Stock for cash proceeds of approximately $2.0
million.  The Series A Preferred Stock accrues cumulative dividends at the rate
of 10% per annum payable quarterly, while the Series B Preferred Stock accrues
cumulative dividends at the rate of 6% per annum.

          In September 1999, the Company 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.

          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. The Series
B 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) 78% of the five lowest closing bid prices on the ten days
preceding conversion.  As these conversion features are considered a "beneficial
conversion feature" to the holder, the Company allocated approximately $1.6
million and $1.1 million, respectively of the approximate $2.4 million and $2.0
million, respectively, in proceeds to additional paid-in capital as a discount
to be amortized over a twelve month and

                                       59
<PAGE>

three month period, respectively. The Series A Preferred Stock is callable and
redeemable by the Company at 100% of its face value, plus any accumulated,
unpaid dividends at the Company's option any time after the Common Stock of the
Company has traded at 200% or more of the conversion price in effect for at
least twenty (20) consecutive trading days, so long as the Company does not call
the Preferred Stock prior to the first anniversary date of the Date of Closing.
The Series B Preferred Stock is callable and redeemable by the Company at 127%
of its face value, plus any accumulated, unpaid dividends at the Company's
option any time prior to the second anniversary date of the Date of Closing.

          The Series C 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) 78% of the five lowest closing
bid prices on the ten days preceding conversion.  Consistent with the accounting
for the Company's Series A and Series B Preferred Stock, this is considered a
"beneficial conversion feature" to the holder. The Company will allocate
approximately $139,000 of the proceeds to additional paid-in capital as a
discount to be amortized over a three-month period.

          The terms of the Company's Series A, Series B and Series C Preferred
Stock restrict the Company from declaring and paying on its common stock until
such time as all outstanding dividends have been fulfilled related to the
Preferred Stock.


          9.   STOCK PURCHASE WARRANTS AND STOCK OPTIONS

          During the year ended July 31, 1999, certain shareholders and holders
of convertible debt of the Company were issued warrants to purchase shares of
common stock at exercise prices ranging from $0.70 to $1.06 per share.
Following is a summary of warrant activity from August 1, 1996 through July 31,
1999:


<TABLE>
<CAPTION>
                                                 Year Ending July 31,
                                     -------------------------------------------
                                      1997             1998              1999
                                     -------------------------------------------
<S>                                 <C>            <C>             <C>
Warrants outstanding, beginning       8,097,463     14,489,942        7,562,168

Warrants issued                       9,931,854        667,400          933,387

Warrants expired                       (777,200)             -       (2,386,470)
Warrants exercised                   (2,762,175)    (7,595,174)      (1,905,160)
                                     ----------     ----------       ----------
                                     14,489,942      7,562,168        4,203,925
Warrants outstanding, ending         ==========     ==========       ==========
</TABLE>

                                       60
<PAGE>

Warrants outstanding at July 31, 1999 expire as follows:

<TABLE>
<CAPTION>
     Number of Warrants              Exercise Price                 Expiration Date
     -----------------------         --------------                 ---------------
    <S>                              <C>                            <C>
                     80,000              $1.06                       November 6, 1999
                     30,000              $0.50                      December 31, 1999
                    367,400              $0.85                        January 1, 2000
                    550,824              $0.85                       February 7, 2000
                  1,030,060              $0.27                      February 17, 2000
                  1,000,000              $0.70                      February 28, 2000
                    192,254              $0.75                          April 7, 2000
                    503,387              $0.70                         April 13, 2000
                     50,000              $2.00                          June 20, 2000
                    250,000              $3.56                       October 14, 2000
                     50,000              $3.09                          March 9, 2002
                    100,000              $1.25                           July 2, 2004
</TABLE>

     The Company had two fixed stock plans during 1997.  The Company had a stock
option plan that was in existence since May 1994 (the Canadian Plan).  No
options were ever issued as part of the Canadian Plan, even though the Company
had the ability to issue options to acquire approximately 2,800,000 shares of
the Company's common stock.  In February 1997, the Company's Board of Directors
adopted the 1997 Stock Option Plan, which replaced the Canadian Plan.  Under the
1997 Stock Option Plan, options to purchase up to 5,000,000 shares of common
stock may be granted to employees, directors, consultants and advisers.  The
1997 Stock Option Plan is intended to permit the Company to retain and attract
qualified individuals who will contribute to the Company's 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.  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 the
Company.  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 the Company's Annual Meeting of Shareholders on May 21, 1997.

     In September 1998, the Company's 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 the Company to retain and attract qualified individuals who will
contribute to the Company's 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.  On
September 9, 1998, the Board of Directors granted a total of 1,541,000 options
to purchase

                                       61
<PAGE>

common stock to directors and employees of the Company. On December 16, 1998,
the Board approved the granting of an additional 302,300 in options to employees
of the Company. The 1998 Stock Option Plan was approved by a vote of the
stockholders at the Company's Annual Meeting of Shareholders on December 17,
1998.

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

<TABLE>
<CAPTION>
                                                             Years Ended July 31,

                                           ----------------------------------------------------------
     1997 Stock Option Plan                         1997                            1998
                                           ----------------------------------------------------------
                                                          Weighted                       Weighed
                                                           Average                       Average
                                           Shares         Exercise        Shares        Exercise
                                                            Price                         Price
     <S>                                <C>            <C>            <C>             <C>
     Outstanding, beginning of year                -             -      4,483,000         $0.58
     Granted                               4,488,000         $0.58        429,000         $2.33
     Exercised                                     -             -       (245,000)        $0.58
     Forfeited                                (5,000)        $0.58        (11,667)        $1.28
     Outstanding, end of year              4,483,000         $0.58      4,655,333         $0.74
                                           =========         =====      =========         =====
     Options exercisable at end of
      year                                 1,786,332         $0.58      2,571,332         $0.58
                                           =========         =====      =========         =====
     Weighted average fair value of
      options granted during the year                        $0.45                        $1.50
                                                             =====                        =====
</TABLE>


<TABLE>
<CAPTION>
                                             Year Ended July 31,
                                      -------------------------------
   1997 Stock Option Plan                            1999
                                      -------------------------------
                                                          Weighted
                                                           Average
                                                          Exercise
                                            Shares          Price
   <S>                                <C>             <C>
   Outstanding, beginning of year         4,655,333          $0.74
   Granted                                        -              -
   Exercised                               (298,000)         $0.58
   Forfeited                               (134,666)         $0.71
   Outstanding, end of year               4,222,667          $0.75
                                          =========          =====
   Options exercisable at end of
    year                                  3,271,333          $0.60
                                          =========          =====
   Weighted average fair value of
    options granted during the year                          $0.00
                                                             =====
</TABLE>


                                       62
<PAGE>

<TABLE>
<CAPTION>
                                            Year Ended July 31,
                                      ------------------------------
                                                   1999
                                      ------------------------------
   1998 Stock Option Plan
                                                         Weighted
                                                          Average
                                                         Exercise
                                          Shares          Price
   <S>                                <C>             <C>
   Outstanding, beginning of year                 -             -
   Granted                                1,843,300         $0.60
   Exercised                                      -             -
   Forfeited                                (57,500)        $0.78
   Outstanding, end of year               1,785,800         $0.60
                                          =========         =====
   Options exercisable at end of
    year                                          -             -
   Weighted average fair value of
    options granted during the year                         $0.64
                                                            =====
</TABLE>

     The weighted average remaining contractual life of the stock options
outstanding at July 31, 1999 is approximately 7.5 years for options granted
under the 1997 Stock Option Plan and approximately 9 years for options granted
under the 1998 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").  The Company has adopted SFAS 123 effective August 1, 1996, and has
elected to remain with the accounting prescribed by APB 25.  The Company has
made the required disclosures prescribed by SFAS 123.

     In accordance with APB 25, the Company recorded approximately $1.4 million
in deferred compensation related to approximately 1.5 million of the options
granted based on the increase in the Company's 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 the Company's shareholders. Additionally, the
Company recorded approximately $340,000 in deferred compensation related to
approximately 1.5 million of the options granted based on the increase in the
Company's stock price from September 9, 1998 to December 17, 1998, when the
underlying 1998 Stock Option Plan was approved by the Company's shareholders.

     As of July 31, 1998 and July 31, 1999, the Company had $666,899 and
$465,487, respectively, of deferred compensation related to options granted.

     Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its fixed stock option plan
based on SFAS 123.  Had compensation cost for the Company's stock-based
compensation plans been determined on

                                       63
<PAGE>

the fair value of the grant dates for awards under the fixed stock option plans
consistent with the method of SFAS 123, the Company's net loss (in thousands)
and loss per share would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                          Year Ended         Year Ended          Year Ended
                                                         July 31, 1997      July 31, 1998      July 31, 1999
                                                       -----------------  -----------------  ------------------
          <S>                                          <C>                <C>                <C>
          Net Loss to common stockholders
          -------------------------------

             As reported                                    $(4,695)           $(5,094)            $(7,591)

             Pro forma                                      $(5,235)           $(5,936)            $(7,312)

          Basic and Diluted Loss per share
          --------------------------------

             As reported                                    $ (0.18)           $ (0.12)            $ (0.16)

             Pro forma                                      $ (0.20)           $ (0.14)            $ (0.15)
</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 1997, 1998 and 1999: Dividend yield of 0.0%, expected volatility of 60%, 46%
and 62%, respectively, risk-free interest rate of 6.41%, 5.10% and 6.50%,
respectively, and an expected life of ten years.


     10.  ACQUISITIONS

     As discussed in Note 1, the Company acquired 55% of Computel in May 1997
and acquired the remaining shares in August 1997.  The total purchase price for
the acquisition of Computel was approximately $3.6 million, of which $1.1
million was paid in cash, $700,000 in a note receivable forgiven by the Company
and approximately $1.8 million in common stock, representing 2,715,546 shares.
The Company recorded the assets and liabilities of Computel as of May 1, 1997.
As Computel had net liabilities at May 1, 1997, the Company recorded goodwill of
$2,279,231 related to the acquisition.  The remaining 45% ownership interest is
reflected as minority interest at July 31, 1997.  Per the terms of the
agreement, the remaining shares of Computel were acquired in August 1997 for the
previously mentioned cash payment of approximately $1.1 million and forgiveness
of the aforementioned note receivable.  The Company recorded additional goodwill
of approximately $2,857,000.

     The following unaudited pro forma results of operations for the year ended
July 31, 1997, assumes the acquisition of Computel occurred as of the beginning
of the period.  Such pro forma information is not necessarily indicative of the
results of future operations.


                                       64
<PAGE>

<TABLE>
<CAPTION>
                                                         Year Ended July 31,
                                                         -------------------
                                                                 1997
                                                                 ----
                                                             (Unaudited)
          <S>                                            <C>
          Operating revenues                                $ 20,312,000
          Net loss                                           ($5,408,000)
          Basic and Diluted net loss per share
                                                                  ($0.19)
</TABLE>

     These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as additional amortization of
goodwill as a result of the acquisition, and the elimination of intercompany
transactions.  The unaudited pro forma information is not necessarily indicative
of the results that would have occurred had such transactions actually taken
place at the beginning of the period specified nor does such information purport
to project the results of operations for any future date or period.

     Pro forma results of operations for the year ended July 31, 1998 have been
omitted, as pro forma results would not materially differ from actual results of
operations for the period.

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


     11.  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.  SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997.  SFAS No. 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. In an attempt to identify its reportable
operating segments, the Company 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 or
factors the Company has determined that it has three reportable operating
segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce.
Clearly, the Company's Internet e-commerce subsidiary, GlobalSCAPE, Inc. and its
operations can be differentiated from the telecommunication focus of the rest of
the Company. Additionally, the Company believes that its U.S. and Mexican
subsidiaries should be

                                       65
<PAGE>


separate segments in spite of the fact that many of the products are borderless.
Both, the U.S. Telco and Mexican Telco segments include revenues generated from
Integrated Prepaid, Postpaid, and Private Network Services. The Company's
Carrier Services revenues, generated as a part of its U.S. Telco segment, are
the only revenues not currently generated by both the U.S. Telco and Mexico
Telco segments. The Company has included the operations of ATSI-Canada, ATSI-
Delaware and all businesses falling below the reporting threshold in the "Other"
segment. The "Other" segment also includes intercompany eliminations.

<TABLE>
<CAPTION>
                                                    As of and for the years ending
                                      ------------------------------------------------------
                                             July 31,           July 31,          July 31,
                                                1997              1998              1999
U.S. Telco
--------------------------------------------------------------------------------------------
<S>                                      <C>               <C>               <C>
External revenues                           $ 13,714,251      $ 26,695,690      $ 25,516,665
Intercompany revenues                       $    330,362      $  1,300,000      $    800,012
                                            ------------      ------------      ------------
Total revenues                              $ 14,044,613      $ 27,995,690      $ 26,316,677
                                            ============      ============      ============

Earnings before interest, taxes,
 depreciation and amortization (EBITDA)
                                             ($3,131,841)         ($16,807)      ($1,485,045)

Operating loss                               ($3,603,447)      ($1,294,037)      ($3,342,035)

Net loss                                     ($3,806,889)      ($1,819,986)      ($3,866,051)

Total assets                                $  6,450,033      $ 10,049,021      $  9,606,263

Mexico Telco
--------------------------------------------------------------------------------------------
External revenues                           $  1,949,755      $  6,298,620      $  6,359,238
Intercompany revenues                       $  1,359,891      $  5,136,541      $  5,052,890
                                            ------------      ------------      ------------
Total revenues                              $  3,309,646      $ 11,435,161      $ 11,412,128
                                            ============      ============      ============

EBITDA                                         ($183,002)      ($1,434,261)      ($1,071,502)

Operating loss                                 ($273,740)      ($1,927,928)      ($2,253,037)

Net loss                                       ($364,402)      ($2,564,103)      ($2,691,450)

Total assets                                $  9,097,780      $ 17,228,025      $ 13,236,868

Internet  e-commerce
--------------------------------------------------------------------------------------------
External revenues                           $    564,381      $  1,525,517      $  2,642,376
Intercompany revenues                                  -            25,000                 -
                                            ------------      ------------      ------------
Total revenues                              $    564,381      $  1,550,517      $  2,642,376
                                            ============      ============      ============

EBITDA                                      $     39,197      $    215,051      $  1,052,015

Operating income                            $     36,483      $    188,658      $    873,832
</TABLE>

                                       66
<PAGE>

<TABLE>
<S>                                         <C>               <C>               <C>
Net income                                  $     38,282      $    197,698      $    854,068

Total assets                                $    266,955      $    537,289      $  1,222,238

Other
---------------------------------------------------------------------------------------------
External revenues                                      -                 -                 -
Intercompany revenues                        ($1,690,253)      ($6,461,541)      ($5,852,902)
                                            ------------      ------------      ------------
Total revenues                               ($1,690,253)      ($6,461,541)      ($5,852,902)
                                            ============      ============      ============

EBITDA                                        ($ 335,325)        ($408,783)        ($287,110)

Operating loss                                 ($361,013)        ($433,683)        ($318,274)

Net loss                                       ($562,119)        ($907,570)      ($1,887,651)

Total assets                                $      5,940       ($3,563,743)     $     88,924

Total
---------------------------------------------------------------------------------------------
External revenues                           $ 16,228,387      $ 34,519,827      $ 34,518,279
Intercompany revenues                                  -                 -                 -
                                            ------------      ------------      ------------
Total revenues                              $ 16,228,387      $ 34,519,827      $ 34,518,279
                                            ============      ============      ============

EBITDA                                      ($3,610,971)      ($1,644,800)       ($1,791,642)

Depreciation, Depletion and                  ($590,746)       ($1,822,190)       ($3,247,872)
 Amortization

Operating loss                              ($4,201,717)      ($3,466,990)       ($5,039,514)

Net loss                                    ($4,695,128)      ($5,093,961)       ($7,591,084)

Total assets                                $15,820,708       $24,250,592        $24,154,293
</TABLE>


     12.    INCOME TAXES

     As of July 31,1999, the Company had net operating loss carryforwards of
approximately $9,335,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $534,000 will expire in 2009,
$2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will
expire in 2012 and $1,439,000 will expire in 2019.  The availability of the net
operating loss (NOL) carryforwards to reduce U.S. federal taxable income is
subject to various limitations in the event of an ownership change as defined in
Section 382 of the Internal Revenue Code of 1986 (the "Code").  The Company
experienced a change in ownership in excess of 50 percent, 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 its ability to utilize its NOL's because the annual limitation under the
Code would allow full utilization within the statutory carryforward period.

                                       67
<PAGE>

     The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1998 and 1999:


                                            July 31, 1998   July 31,1999

        Net operating loss carryforward       $ 2,919,000    $ 3,174,000

        Other tax differences, net                628,000        839,000

        Valuation allowance                    (3,547,000)    (4,013,000)
                                              -----------    -----------

        Total deferred income tax assets      $         -    $         -
                                              ===========    ===========

     A valuation reserve of $3,547,000 and $4,013,000, as of July 31, 1998 and
1999, respectively, representing the total of net deferred tax assets has been
recognized by the Company as it cannot determine that it is more likely than not
that all of the deferred tax assets will be realized.

     Additionally, the Company's effective tax rate differs from the statutory
rate as the tax benefits have not been recorded on the losses incurred for the
years ended July 31, 1997, 1998 and 1999.


     13.  COMMITMENTS AND CONTINGENCIES

     During the years ended July 31, 1998 and 1999, nine officers of the Company
entered into employment agreements with ATSI-Texas or ATSI-Delaware, generally
for periods of up to three years (with automatic one-year extensions) unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements for each of these nine officers
range from $75,000 to $100,000 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 1999.

     Effective August 1998, two of the aforementioned officers entered into
employment agreements with ATSI-Delaware, which superceded their previous
agreements, each for a period of three years (with automatic one-year
extensions) unless terminated earlier in accordance with the terms of the
respective agreements.  The annual base salary under such agreements for each of
these two officers may not be less than $127,000 and $130,000, respectively, 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 such
bonuses were awarded for fiscal 1999.

     Subsequent to July 31, 1999, three officers whose employment agreements
were to expire January 1, 2000 were informed that their agreements would not be
renewed under the current terms and conditions.  Two of the three officers have
since entered into new employment agreements with ATSI-Delaware, each for a
period of one year unless earlier terminated in

                                       68
<PAGE>

accordance with the terms of the respective agreements. The annual base salaries
under such agreements may not be less than approximately $101,000 and $105,000,
respectively, 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.


     14.  RISKS AND UNCERTAINTIES AND CONCENTRATIONS

     The Company's business is dependent upon key pieces of equipment, switching
and transmission facilities, fiber capacity and the Solaridad satellites.
Should the Company experience service interruptions from its 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 the Company's services which could adversely or materially
affect the Company's operations. The Company believes that suitable arrangements
could be obtained with other satellite or fiber optic network operators to
provide transmission capacity. Additionally, the Company's 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 year ended July 31, 1999, the Company's wholesale transport
business had two customers, whose aggregated revenues approximated 10% of the
Company's total revenues for the year.  No other customer generated revenues
individually greater than 5% during the year.


     15.  RELATED PARTY TRANSACTIONS

     In January 1997, ATSI-Canada entered into 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, the Company paid the consulting firm $8,000 per month for a
period of twelve months.  In January 1998, the agreement was renewed at $10,000
per month for a period of twelve months.  In March 1999, the agreement was
renewed at $6,000 per month for a period of twelve months.

     In April 1998, the Company engaged two companies for billing and
administrative services related to network management services it provides.  The
companies, which are owned by Tomas Revesz, an ATSI-Delaware director, were paid
approximately $140,000 for their services during fiscal 1998.  Subsequent to
year-end, the Company entered into an agreement with the two companies capping
their combined monthly fees at $18,500 per month.  For fiscal 1999, the
companies were paid approximately  $180,000 for their services.  Additionally,
the Company has a payable to Mr. Revesz of $90,000.

     In February 1999, the Company entered into notes payable with related
parties, all of whom were officers or directors of the Company in the amount of
$250,000. The notes accrue interest at a rate of 12% per year until paid in
full. As of July 31, 1999, $100,000 of the notes remain outstanding.

                                       69
<PAGE>

     The Company has 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 the Company with various services that include strategic
planning, business development and financial advisory services.  Under the terms
of the agreement, the Company pays the consulting firm $3,750 per month plus
expenses. At July 31, 1999, the Company has a payable to Technology Impact
Partners of approximately $74,000.


     16.  LEGAL PROCEEDINGS

     On January 29, 1999, one of the Company's customers, Twister
Communications, Inc. filed a Demand for Arbitration seeking damages for breach
of contract before the American Arbitration Association.  The customer claims
that the Company wrongfully terminated an International Carrier Services
Agreement executed by the parties in June 1998 under which the Company provided
wholesale carrier services from June 1998 to January 1999.  The customer's
claims for damages represent amounts that it claims it had to pay in order to
replace the service provided by the Company. The Company disputes that it
terminated the contract wrongfully and asserts that the customer breached the
agreement by failing to pay for services rendered and by intentionally making
false representation regarding its traffic patterns and on March 3, 1999 filed a
Demand for Arbitration seeking damages for breach of contract in an amount equal
to the amounts due to the Company for services rendered plus interest, plus
additional damages for fraud. An arbitration panel was selected and the parties
are now completing written discovery.

     While the Company believes that it has a justifiable basis for its
arbitration demand and that it will be able to resolve the dispute without a
material adverse effect on the Company's financial condition; until the
arbitration proceedings take place, the Company can not reasonably estimate the
possible loss, if any, and there can be no assurance that the resolution of this
dispute would not have an adverse effect on the Company's results of operations.

     On June 16, 1999, the Company's subsidiary, ATSI Texas initiated a lawsuit
in District Court, Bexar County, Texas against PrimeTEC International, Inc.,
Mike Moehle and Vartec Telecom, Inc. claiming misrepresentation and breach of
conduct.  Under an agreement the Company signed in late 1998, PrimeTEC was to
provide quality fiber optic capacity in January 1999. Mike Moehle is PrimeTEC's
former president who negotiated the fiber lease and Vartec is PrimeTEC's parent.
The delivery of the route in early 1999 was a significant component of the
Company's operational and sales goal for the year and the failure of its vendor
to provide the capacity led to the Company negotiating an alternative agreement
with Bestel, S.A. de C.V. at a higher cost. While the total economic impact is
still being assessed, the Company believes lost revenues and incremental costs
are in excess of $15 million. While the Company's contract contains certain
limitations regarding the type and amounts of damages that can be pursued, the
Company has authorized its attorneys to pursue all relief to which it is
entitled under law. As such, the Company can not reasonably estimate the
ultimate outcome of neither this lawsuit nor the additional costs that may be
incurred in the pursuit of its case.

     The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business.  The Company believes it is unlikely
that the final outcome of any

                                       70
<PAGE>

of the claims or proceedings to which the Company is a party would have a
material adverse effect on the Company's 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 the Company's results of operations in the period in
which it occurred.

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

None.

                                   PART III
                                   --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in the Company' Proxy Statement of the
1999 Annual Meeting of Stockholders.

ITEM 11.  EXECUTIVE COMPENSATION

The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in the Company's Proxy Statement for the
1999 Annual Meeting of Stockholders.

                                       71
<PAGE>

                                    PART IV
                                    -------

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

(a)  Financial Statements
     Index to Financial Statements appears on Page 40.

(b)  Reports on Form 8-K
     None.

(c)  Exhibits

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

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

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

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

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

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

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

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

                                       72
<PAGE>


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

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

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

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

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

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

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 to this Amended Annual
     Report on Form 10-K for year ended July31, 1999 filed April 13, 2000)
     Confidential treatment requested for portions of this document

10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit to this Amended Annual
     Report on Form 10-K for year ended July31, 1999 filed April 13, 2000)
     Confidential treatment requested for portions of this document

10.5 Bestel Fiber Lease (Exhibit to this Amended Annual Report on Form 10-K for
     year ended July31, 1999 filed April 13, 2000)

10.6 Amendment to Private Line Agreement with Bestel, S.A. de C.V. (Exhibit to
     this Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
     April 13, 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)

                                       73
<PAGE>


10.8   Telecommunications Services Agreement with Best Marketing and Natta
       Marketing (Exhibit to this Amended Annual Report on Form 10-K for year
       ended July 31, 1999 filed April 13, 2000)

10.9   Master Lease Agreement with NTFC (Exhibit to this Amended Annual Report
       on Form 10-K for year ended July 31, 1999 filed April 13, 2000)

10.10  BancBoston Master Lease Agreement (Exhibit to this Amended Annual Report
       on Form 10-K for year ended July31, 1999 filed April 13, 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 to this Amended Annual Report on Form 10-K filed April 13, 2000)

10.13  Employment Agreement with Craig K. Clement dated February 28, 1997
       (Exhibit 10.18 to Registration Statement on Form 10 (No. 333-05557) filed
       August 22, 1997)

10.14  Employment Agreement with Craig K. Clement dated January 1, 2000 (Exhibit
       to this Amended Annual Report on Form 10-K for year ended July 31, 1999
       filed April 13, 2000)

10.15  Employment Agreement with Sandra Poole-Christal dated January 1, 1998
       (Exhibit to this Amended Annual Report on Form 10-K for year ended July
       31, 1999 filed April 13, 2000)

10.16  Employment Agreement with Charles R. Poole dated February 28, 1997
       (Exhibit 10.20 to Registration Statement on Form 10 (No. 333-05557) filed
       August 22, 1997)

10.17  Employment Agreement with Charles R. Poole dated September 24, 1998
       (Exhibit to this Amended Annual Report on Form 10-K filed April 13, 2000)

10.18  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)

10.19  Employment Agreement with H. Douglas Saathoff dated January 1, 2000
       (Exhibit to this Amended Annual Report on Form 10-K for year ended July
       31, 1999 filed April 13, 2000)

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

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

10.22  Office Space Lease Agreement for GlobalSCAPE (Exhibit 10.29 to
       Registration Statement on Form S-4 (No. 333-47511) filed on March 6,
       1998)

                                       74
<PAGE>


10.23  Commercial Lease with ACLP University Park SA, L.P. (Exhibit to this
       Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
       April 13, 2000)

10.24  Amendment to Commercial Lease with ACLP University Park SA, L.P. (Exhibit
       to this Amended Annual Report on Form 10-K for year ended July 31, 1999
       filed April 13, 2000)

10.25  Commercial Lease between GlobalSCAPE, Inc. and ACLP University Park SA,
       L.P (Exhibit to this Amended Annual Report on Form 10-K for year ended
       July 31, 1999 filed April 13, 2000)

10.26  Amendment to Commercial Lease between GlobalSCAPE, Inc. and ACLP
       University Park SA, L.P (Exhibit to this Amended Annual Report on Form
       10-K for year ended July 31, 1999 filed April 13, 2000)

10.27  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)

10.28  Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit to this
       Amended Annual Report on Form 10-K for year ended July 31, 1999 filed
       April 13, 2000)

11     Statement of Computation of Per Share Earnings (Exhibit 11 to Annual
       Report on Form 10-K for year ended July 31, 1999 filed October 26, 1999)

22     Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year
       ended July 31, 1999 filed October 26, 1999)

23     Consent of Arthur Andersen LLP) (Exhibit to this Amended Annual Report on
       Form 10-K for year ended July 31, 1999 filed April 13, 2000)

27     Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for
       year ended July 31, 1999 filed October 26, 1999)

99.1   ATSI Shareholder Newsletter (Exhibit 99.1 to Annual Report on Form 10-K
       for year ended July 31, 1999(File No. 000-23007) filed October 26, 1999)

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

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

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

                                       75
<PAGE>


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

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

99.7   Shared Teleport License issued to Sinfra (Exhibit to this Amended Annual
       Report on Form 10-K for year ended July 31, 1999 filed April 13, 2000)

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

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

99.10  Potential Dilution Chart (Exhibit to this Amended Annual Report on Form
       10-K for year ended July 31, 1999 filed April 13, 2000)

99.11  Preferred Stock Features (Exhibit to this Amended Annual Report on Form
       10-K for year ended July 31, 1999 filed April 13, 2000)

                                       76
<PAGE>

                                  SIGNATURES
                                  ----------


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
April 13, 2000.

                    AMERICAN TELESOURCE INTERNATIONAL, INC.


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


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


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 April 13, 2000.

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

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

     /s/ H. DOUGLAS SAATHOFF           Chief Financial Officer, Senior Vice
     -----------------------
                                       President, and Corporate Secretary

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

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

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

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

     /s/ ROBERT B. WERNER                          Director
     --------------------

                                       77
<PAGE>

                             Exhibit List for 10-K

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 11, 2000)

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

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

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

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

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

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

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)
<PAGE>

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)

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 to this Amended
        Annual Report on Form 10-K for year ended July 31, 1999 filed April 11,
        2000)

10.4    Amendment to Agreement #095-1 with SATMEX (Exhibit to this Amended
        Annual Report on Form 10-K for year ended July 31, 1999 filed April 11,
        2000)

10.5    Bestel Fiber Lease (Exhibit to this Amended Annual Report on Form 10-K
        for year ended July 31, 1999 filed April 11, 2000)

10.6    Amendment to Private Line Agreement with Bestel, S.A. de C.V. (Exhibit
        to this Amended Annual Report on Form 10-K for year ended July 31, 1999
        filed April 11, 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)

10.10   BancBoston Master Lease Agreement (Exhibit to this Amended Annual Report
        on Form 10-K for year ended July 31, 1999 filed April 11, 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 to this Amended Annual Report on Form 10-K filed April 11,
        2000)

10.13   Employment Agreement with Craig K. Clement dated February 28, 1997
        (Exhibit 10.18 to Registration Statement on Form 10 (No. 333-05557)
        filed August 22, 1997)


<PAGE>

     10.14     Employment Agreement with Craig K. Clement dated January 1, 2000
               (Exhibit to this Amended Annual Report on Form 10-K for year
               ended July 31, 1999 filed April 11, 2000)


     10.15     Employment Agreement with Sandra Poole-Christal dated January 1,
               1998 (Exhibit to this Amended Annual Report on Form 10-K for year
               ended July 31, 1999 filed April 11, 2000)

     10.16     Employment Agreement with Charles R. Poole dated February 28,
               1997 (Exhibit 10.20 Registration Statement on Form 10 (No. 333-
               05557) filed August 22, 1997)

     10.17     Employment Agreement with Charles R. Poole dated September 24,
               1998 (Exhibit to this Amended Annual Report on Form 10-K filed
               April 11, 2000)

     10.18     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)

     10.19     Employment Agreement with H. Douglas Saathoff dated January 1,
               2000 (Exhibit to this Amended Annual Report on Form 10-K for year
               ended July 31, 1999 filed April 11, 2000)

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

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

     10.22     Office Space Lease Agreement for GlobalSCAPE (Exhibit 10.29 to
               Registration Statement on Form S-4 (No. 333-47511) filed on March
               6, 1998)

     10.23     New Office Space Lease Agreement for American TeleSource
               International, Inc. (Exhibit to this Amended Annual Report on
               Form 10-K for year ended July 31, 1999 filed April 11, 2000)


     10.24     Amendment to New Office Space Lease Agreement for American
               TeleSource International, Inc. (Exhibit to this Amended Annual
               Report on Form 10-K for year ended July 31, 1999 filed
               April 11, 2000)

     10.25     New Office Space Lease Agreement for GlobalSCAPE, Inc. (Exhibit
               to this Amended Annual Report on Form 10-K for year ended July
               31, 1999 filed April 11, 2000)
<PAGE>

     10.26     Amendment to New Office Space Lease Agreement for GlobalSCAPE,
               Inc. (Exhibit to this Amended Annual Report on Form 10-K for year
               ended July 31, 1999 filed April 11, 2000)

     10.26     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)

     10.28     Consulting Agreement with KAWA Consultores, S.A. de C.V. (Exhibit
               to this Amended Annual Report on Form 10-K for year ended July
               31, 1999 filed April 11, 2000)

     11        Statement of Computation of Per Share Earnings (Exhibit 11 to
               Annual Report on Form 10-K for year ended July 31, 1999 filed
               October 26, 1999)

     22        Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K
               for year ended July 31, 1999 filed October 26, 1999)

     23        Consent of Arthur Andersen LLP (Exhibit to this Amended Annual
               Report on Form 10-K for year ended July 31, 1999 filed April 11,
               2000)

     27        Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K
               for year ended July 31, 1999 filed October 26, 1999)

     99.1      ATSI Shareholder Newsletter (Exhibit 99.1 to Annual Report on
               Form 10-K for year ended July 31, 1999 (File No. 000-23007) filed
               October 26, 1999)

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

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

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

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

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

     99.7      Shared Teleport License issued to Sinfra (Exhibit to this Amended
               Annual Report on Form 10-K for year ended July 31, 1999 filed
               April 11, 2000

<PAGE>

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

99.9    Value-Added Service License issued to SINFRA (Exhibit to this Amended
        Annual Report on Form 10-K for year ended July 31, 1999 filed April 11,
        2000)