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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(mark  one)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 2004

[_]  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: 1-15687

                            ATSI COMMUNICATIONS, INC.
           (Name of Small Business Issuer as Specified in its Charter)

                 NEVADA                                         74-2849995
    (State or Other Jurisdiction                               (IRS Employer
    of Incorporation or Organization)                        Identification No.)

                 8600 WURZBACH, SUITE 700W
                      SAN ANTONIO, TEXAS                          78240
          (Address of Principal Executive Offices)             (Zip Code)

                                 (210) 614-7240
                (Issuer's Telephone Number, Including Area Code)

     Securities registered under Section 12(b) of the Exchange Act: NONE

     Securities registered under Section 12(g) of the Exchange Act:

                    COMMON STOCK, PAR VALUE $0.001 PER SHARE
        SERIES H CONVERTIBLE PREFERRED 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.   X   Yes  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.  [_]

     Indicate  by  check mark whether the registrant is an accelerated filer (as
defined  in  Rule  12b-2  of  the  Exchange  Act)  Yes     No  X
                                                       ---    ---

     As  of  October  25,  2004, the aggregate market value of the voting common
equity  held  by  non-affiliates  of  the Registrant was $3,128,727 based on the
closing  price  of  $0.68  per  share  on  October  25,  2004 as reported on the
over-the-counter  bulletin  board.

     There  were 4,601,069 shares of Registrant's Common Stock outstanding as of
October  25,  2004.

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<PAGE>
<TABLE>
<CAPTION>
                                     TABLE OF CONTENTS


                                                                                     PAGE
                                          PART I
<S>                                                                                  <C>
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3
    History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4
    Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4
    Services and Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4
      Carrier Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     4
      Network Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5
  Voice over Internet Protocol Network. . . . . . . . . . . . . . . . . . . . . . .     5
  Strategy and Competitive Conditions . . . . . . . . . . . . . . . . . . . . . . .     7
  Government Regulations/ Concession License. . . . . . . . . . . . . . . . . . . .     9
  Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    11
  Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
Item 2.   Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
Item 3.   Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . .    12
Item 4.   Submission of Matters to a Vote of Security Holders . . . . . . . . . . .    13

                                          PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters . .    14
Item 6.   Selected Financial and Operating Information. . . . . . . . . . . . . . .    15
Item 7.   Management's Discussion and Analysis or Plan of Operations. . . . . . . .    16
Item 7A.  Quanitative and Qualitative Disclosures about Market Risk . . . . . . . .    25
Item 8.   Financial Statements and Supplementary Data . . . . . . . . . . . . . . .    26
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . .    54
Item 9A.  Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . .    55

                                          PART III

Item 10   Directors, Executive Officers, Promoters and Control Persons, Compliance
          with Section 16(A) of the Exchange Act. . . . . . . . . . . . . . . . . .    55
Item 11.  Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . .    57
Item 12.  Security Ownership of Certain Beneficial Owners and Management. . . . . .    58
Item 13.  Certain Relationships and Related Transactions. . . . . . . . . . . . . .    60
Item 14.  Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . .    60

                                          PART IV

Item 15.  Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . .    60
</TABLE>


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<PAGE>
                                     PART I
                                     ------

ITEM I.  BUSINESS.

OVERVIEW

     We  are  an  international  telecommunications  carrier  that  utilizes the
Internet  to  provide  economical international telecommunications services. Our
current  operations  consist of providing digital voice communications over data
networks  and  the  Internet  using  Voice-over-Internet-Protocol  ("VoIP").  We
provide  high quality voice and enhanced telecommunication services to carriers,
telephony  resellers  and  others  through various agreements with local service
providers  in the United States, Mexico, Asia, the Middle East and Latin America
utilizing  VoIP  telephony  services.

     We  have  had  operating  losses  for  almost  every quarter since we began
operations  in  1994.  Our  operating  losses  from  continuing  operations were
approximately  $8,529,000 and $5,780,000, for the years ending July 31, 2004 and
2003,  respectively.  Additionally,  we  had  a  working  capital  deficit  of
approximately  $18,948,000  at July 31, 2004.  We have experienced difficulty in
paying  our vendors and lenders on time in the past, and we expect this trend to
continue  over  the  next  12  months  as we continue to rebuild our operations.
Moreover,  we  are  currently  pursuing  various  alternatives  including equity
offerings,  exchanging  some  portion  or  all  of  our  debt  for  equity,  and
restructuring our debt to extend the maturity.  However, in the event we fail to
execute  on  our  current  plan  or  that  circumstances  currently  unknown  or
unforeseen  by us arise, we may not succeed in re-capitalizing the Company or be
able  to  obtain  additional  funding  to  allow  us  to  meet  our obligations.

     Two  of  our  subsidiaries, ATSI (Texas), Inc. ("ATSI Texas") and TeleSpan,
Inc.  ("TeleSpan"), filed for protection under Chapter 11 of the U.S. Bankruptcy
Code  on February 4, 2003 and February 18, 2003 respectively.  The court ordered
joint  administration  of  these  cases  on  April  9,  2003 and on May 14, 2003
converted  the  cases  to a Chapter 7 proceeding.  The two bankrupt subsidiaries
were our two primary operating companies and they have ceased operations.  These
bankruptcies did not include the reporting entity ATSI Communications, Inc. (the
"Company").

     Due  to the bankruptcies of our principal operating subsidiaries, recurring
losses,  negative  cash  flows generated from our operations and our substantial
working capital deficit, our auditor's opinion on our financial statements as of
July  31,  2004  calls  attention  to  substantial  doubts  about our ability to
continue as a going concern.  This means that there is substantial doubt that we
will  be  able  to continue in business through the end of our next fiscal year,
July  31,  2005.  In  order  to remain a going concern, we intend to attract new
customers  to  generate  additional  revenues  and/or generate cash from debt or
equity  offerings.  There  is  no  assurance  that  we  will  be  able to obtain
sufficient  additional  customers  or  funding  to  continue as a going concern.

     Our  strength  is based on our interconnection agreement with carriers such
as Telefonos de Mexico S.A de C.V. ("Telmex") and Bestel S.A de C.V. ("Bestel").
Our  interconnection agreements with these Mexican long-distance concessionaires
provide  us  with  nationwide  network coverage at a competitive cost structure.
Currently,  Telmex  owns and operates the only nationwide network in Mexico with
more  than  14.1  million  phone  lines  in  over 105,000 communities throughout
Mexico.  Bestel  operates  a  fiber  optic  network  that  extends  over  6,356
kilometers  with  points  of  presence  in 19 Mexican metropolitan areas.  Under
these interconnection agreements our cost to provide service over these networks
is  based  on  a  per  minute rate and the volume of minutes transported through
their  respective  networks.  We  also  own  49%  of  a  Mexican  company,  ATSI
Comunicaciones,  S.A.  de  C.V.  ("ATSICOM"),  that  holds  a 30 year concession
license,  allowing  for  the  sale  of  voice  and  data services, long distance
transport,  and the operation of a telecommunications network throughout Mexico.

     Additionally,  during the fourth quarter of Fiscal year 2004, we acquired a
NexTone  Communications  Session  Controller  (soft-switch)  to enhance our VoIP
network.  This enhancement has allowed us to route our traffic more efficiently,
improve  our  call processing, monitor quality of service and enable us to share
port  resources  with


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<PAGE>
our  customers.  We  expect that the NexTone technology will allow us to be more
competitive and allow us to obtain higher margins in our wholesale international
telecommunication  services.  As  a  result  of  these  enhancements to our VoIP
Network  our customer base has grown to approximately 26 customers and generated
revenues  of  approximately  $125,000 during the last month of fiscal year 2004.

HISTORY

     ATSI  Communications, Inc., a Nevada corporation, was formed in 2004 as the
successor  to  the  business  originally incorporated 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.  Our
stockholders  voted  to  change our name from American TeleSource International,
Inc.  to  ATSI  Communications, Inc in 2003 and to reincorporate in the State of
Nevada  by  merger into our wholly owned subsidiary in 2004.  We own 49% of ATSI
Comunicaciones  S.A  de  C.V.,  a  Mexican  corporation,  that  holds  a 30-year
concession,  allowing  for  the  sale  of voice and data services, long distance
transport,  and  the  operation  of  a  telecommunications  network.

RECENT DEVELOPMENTS

     During our fiscal year ending July 31, 2004:

     -    We  acquired a NexTone Communications Session Controller (soft-switch)
          to  enhance  our  Voice  over  Internet  Protocol  (VoIP) network. The
          acquisition  of  the  NexTone(TM)  Communication  Session  Controller
          (soft-switch)  will  allow  us  to  expand our network, allow for more
          efficient  routing  of  traffic  and  improve  our call processing and
          quality.

     -    Our  stockholders  approved  the reincorporation of the Company in the
          State  of  Nevada  by  merger with and into a wholly owned subsidiary,
          ATSI  Merger  Corporation.  Stockholders  of record as of May 24, 2004
          were  entitled  to  receive one (1) share of New ATSI Common Stock and
          ten  (10)  shares of New ATSI Series H Convertible Preferred Stock for
          each  100  shares  of  Old  ATSI  Common  Stock  surrendered.

SERVICES AND PRODUCTS

     We provide two types of services: Carrier Services and Network Services.

Carrier Services

     We  provide  transmission  and  termination  services  to  U.S. and Foreign
telecommunications  companies  who  lack  transmission  facilities,  require
additional  capacity or do not have the regulatory licenses to terminate traffic
in  Mexico,  Asia,  the  Middle  East  and  Latin  America.  Typically  these
telecommunications  companies  offer  their services to the public for local and
international  long distance services.  Revenues from this service accounted for
approximately  94% of our total revenue in the year ended July 31, 2003 ("fiscal
2003")  and  81%  of  our total revenue in the year ended July 31, 2004 ("fiscal
2004").  The  percentage of our total volume of carrier services traffic sent by
customers  can  fluctuate  dramatically,  on  a  quarterly, and sometimes, daily
basis.  Historically,  a  handful  of customers have accounted for a majority of
the  total  carrier services volume, although not necessarily the same customers
from  period  to period.  During fiscal 2004, our agreements with customers were
not for a specific period of time or volume of minutes. The customer was given a
set  rate  for  services  and the customer would decide the volume of minutes it
would  send  to  us to terminate.  Therefore on a month-to-month basis there was
not  a  required  volume commitment from any customer and customers were free to
re-route  their  traffic  away  from  us  to  a  lower  priced  carrier.


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<PAGE>
     Due  to  our  limited  resources  and  lack  of  a  line of credit with our
carriers,  we  were required to prepay or maintain substantial deposits with our
carriers  to minimize their risk as they provide us with their services.  During
fiscal  2004  our  carriers  required  deposits  and prepayments equal to 25% or
$30,000  of  our  weekly  estimated  traffic.  These  deposit  requirements were
calculated by our carriers using historical weekly traffic volumes and estimated
future  weekly  traffic.  We  have  attempted to minimize the amount of deposits
that are required by our carriers by entering into various reciprocal agreements
with  our customers that permit them to transport and terminate traffic over our
network and allow us to transmit and terminate traffic over their networks, thus
reducing  the  prepayment requirements.  However, there can be no assurance that
we  will  able  to  enter into reciprocal agreements in the future and we may be
required  to  prepay  for  services  in  the  future.

     During  the  fourth  quarter  of  2004  we  were  able  to  utilize  our
interconnection agreement with Bestel S.A de C.V. ("Bestel"), to reduce our cost
per  minute  to  access the local carriers networks in Mexico. Bestel operates a
fiber  optic  network that extends over 6,356 kilometers with points of presence
in  19  Mexican metropolitan areas. We believe that this broad range of coverage
through  our interconnection agreement with Bestel provides us with the tools to
be  competitive  and  attract  additional  customers.

Network Services

     A  private  satellite  network is a secure communication connection or link
between  various  remote  locations for the transmission of voice or data.  This
connection  is  accomplished  by having all of the various remote locations from
one  customer  connected to a common satellite destination, where information is
allowed  to  be exchanged, transported and shared.  We provide these services to
multi-national  and  Latin  American  corporations  or  enterprise customers who
require  a  high  volume  of  communications  services  to their U.S. offices or
businesses  and  need  greater  dependability  than  is available through public
networks.  These  services  include  the  transportation  of data, voice and fax
transmission  and Internet services between the customers multiple international
offices  and  branches.  We currently provide network services to Bell Canada, a
Canadian  corporation  on  a  month-to-month  basis  and  generate approximately
$23,000  per  month  in revenue.  There is no assurance that we will continue to
generate  this  level  of revenue in the future or that we will be able to enter
into  a  long-term  contract  with  Bell  Canada  or  any  other  customer.

     We compete with MCI and Americatel, as well as the former telecommunication
monopolies  in  the  Latin  American  countries,  in providing network services.
Factors  contributing  to  our  competitiveness  include  reliability,  network
quality,  speed of installation, and in some cases, geography, network size, and
hauling  capacity.  We  are at a competitive disadvantage with respect to larger
carriers  who  are able to provide networks for corporations that encompass more
countries  in  Latin  America,  as  well  as Europe, Asia and other parts of the
globe.  As  a  result  of  these  disadvantages  we  do not expect a significant
increase  in  revenue  from  this  source  in  the  near  future.

     We lease our satellite capacity and space segment on a month-to-month basis
directly from Satellites Mexicanos, S.A. de C.V. ("Satmex") for the connectivity
for our network services customer.  We also have a monthly Termination Agreement
with  Telecomunicaciones  de  M  xico  S.A  de  C.V.  ("Telecomm").  Under  the
month-to-month  agreements  with  these  two  vendors  we incur fixed charges of
approximately  $5,600  and  $2,200,  respectively,  for  the  space  segment and
termination  services.  Under the monthly agreements with Satmex and Telecomm we
can  increase or decrease capacity as the customer usage changes with demand and
can  terminate  these  agreements  at  any  time  without  any  penalties.

VOICE OVER INTERNET PROTOCOL NETWORKS

     The basic technology of traditional telecommunications systems was designed
for  slow  mechanical  switches.  Communications  over the traditional telephone
network  are  routed  through circuits that must dedicate resources to each call
from its inception until the call ends, regardless of whether anyone is actually
talking  on the circuit.  This circuit-switching technology incurs a significant
cost  per  call  and  does  not  efficiently  support  the  integration of voice


                                        5
<PAGE>
with  data  services.  Data  networks,  however,  were  designed  for electronic
switching.  They  break  the  data  stream  into  small,  individually addressed
packages  of  data  ("packets") that are routed independently of each other from
the origin to the destination.  Therefore, they do not require a fixed amount of
bandwidth  to  be  reserved  between the origin and destination of each call and
they do not waste bandwidth when it is not being used for actual transmission of
information.  This  allows  multiple voice or voice and data calls to be pooled,
resulting  in these networks being able to carry more calls with an equal amount
of  bandwidth.  Moreover, they do not require the same complex switching methods
required  by  traditional voice telephone networks, instead using a multiplicity
of  routers  to  direct each packet in the direction of its destination and they
automatically  route  packets  around  blockages,  congestion  or  outages.

     Packet  switching  is  a  method  of transmitting messages that can be used
within  a  data  network or across networks, including the public Internet.  The
Internet  itself  is  not  a single data network owned by any single entity, but
rather  a  loose  interconnection  of  networks  belonging  to  many owners that
communicate  using the Internet Protocol ("IP").  By converting voice signals to
digital  data  and  handling  the  voice  signals as data, it can be transmitted
through  the  more  efficient switching networks designed for data transmissions
and  through  the  Internet  using the IP.  The transmission of voice signals as
digitalized  data  streams  over  the  Internet  is known as Voice over Internet
Protocol  or  "VoIP".  A  VoIP  network  has  the  following  advantages  over
traditional  networks:

     -    INTEGRATION  OF  VOICE  AND  DATA:  VoIP  networks  allows  for  the
          integration  of  voice, data traffic and images into the same network.

     -    SIMPLIFICATION:  An  integrated infrastructure that supports all forms
          of  communication  allows  more  standardization  and  less  equipment
          management.  The  result  is  a  fault  tolerant  design.

     -    NETWORK  EFFICIENCY:  The  integration  of voice and data fills up the
          data  communication  channels  efficiently,  thus  providing bandwidth
          consolidation  and  reduction  of  the  costs  associated  with  idle
          bandwidth.  The  sharing of equipment and operations costs across both
          data  and voice users can also improve network efficiency since excess
          bandwidth  on  one  network can be used by the other, thereby creating
          economies  of  scale  for  voice (especially given the rapid growth in
          data traffic). An integrated infrastructure that supports all forms of
          communication  allows  more  standardization  and  reduces  the  total
          equipment complement. This combined infrastructure can support dynamic
          bandwidth  optimization  and  a fault tolerant design. The differences
          between  the  traffic  patterns  of  voice  and  data  offer  further
          opportunities  for  significant  efficiency  improvements.

     -    CO-EXISTENCE  WITH TRADITIONAL COMMUNICATION MEDIUMS: IP telephony can
          be used in conjunction with existing PSTN switches, leased and dial-up
          lines,  PBXs  and  other  customer premise equipment (CPE), enterprise
          LANs,  and  Internet  connections.  IP  telephony  applications can be
          implemented  through dedicated gateways, which in turn can be based on
          open  standards  platforms  for  reliability  and  scalability.

     -    COST  REDUCTION: Under the VoIP network, the connection is directly to
          the Internet backbone and as a result the telephony access charges and
          settlement  fees  are  avoided.

     The  growth  of  voice  on the Internet was limited in the past due to poor
sound  quality  caused by technical issues such as delays in packet transmission
and  by  bandwidth  limitations  related  to Internet network capacity and local
access  constraints.  However,  the  continuing  addition  of  data  network
infrastructure,  recent  improvements  in  packet  switching  and  compression
technology,  new  software  algorithms  and improved hardware have substantially
reduced  delays  in  packet  transmissions  and  the  effect  of  these  delays.
Nevertheless,  certain  VoIP routes into countries with limited or poor Internet
infrastructure  continue  to  lack  the  consistent  quality  required for voice
transport  and  termination.


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<PAGE>
     A  number of large long distance carriers have announced Internet telephony
service offerings.  Smaller Internet telephony service providers have also begun
to  offer  low-cost  Internet  telephony  services  from  personal  computers to
telephones  and  from  telephones  to  telephones.  Traditional  carriers  have
substantial  investments  in  traditional  telephone  network  technology,  and
therefore  have  been  slow  to  embrace  Internet  technology.

     We  believe  that  the  infrastructure required for a global network is too
expensive  for  most  companies  to deploy on their own.  This mandates that the
network  be  a  combination  of  gateways  owned  by different operators.  For a
network to achieve optimal functionality and quality, however, the gateways need
to  be interoperable, or able to communicate with one another.  Interoperability
continues  to  be  a  challenge  for  VoIP providers and recently, technological
solutions have emerged that support interoperability between different protocols
and/or  gateways.  Cisco  appears to have emerged as a dominant supplier of VoIP
gateways  and  other  manufacturers  often  seek  to  make  their  equipment
interoperable  with  Cisco.

     Long  distance  telephone  calls  transported  over  the  Internet are less
expensive  than  similar  calls  carried  over the traditional telephone network
primarily  because  the  cost  of  using  the  Internet is not determined by the
distance  those  calls need to travel.  Also, routing calls over the Internet is
more  cost-effective  than  routing calls over the traditional telephone network
because  the  technology  that enables Internet telephony is more efficient than
traditional  telephone  network  technology.  The  greater  efficiency  of  the
Internet  creates cost savings that can be passed on to the consumer in the form
of  lower  long  distance  rates  or  retained by the carrier as higher margins.

     By  using  the  public Internet, VoIP providers like ATSI are able to avoid
direct payment for transport of communications, instead paying for large "pipes"
into the public Internet, billed by bandwidth rather than usage, which transmits
calls  to  a  distant  gateway.  The Internet, which has its origins in programs
devised  by  the  Department of Defense to provide multiple routes and therefore
redundancy  which  was  largely  immune  from  the  failure  of a single network
element,  provides great redundancy and can be "self healing" in the event of an
outage  in  a particular network element or transmission path.  Moreover, adding
an  additional  entry  or  exit  point  (a  Point of Presence or "PoP") does not
require  any  expensive  or  time  consuming reconfiguration or reprogramming of
existing  network elements.  The new element is simply installed with a specific
IP  address  and it can send or receive information from any other IP address on
the  Internet.

STRATEGY AND COMPETITIVE CONDITIONS

     The  long  distance  telephony market and the Internet telephony market are
highly competitive.  There are several large and numerous small competitors, and
we  expect  to  face continuing competition based on price and service offerings
from  existing competitors and new market entrants in the future.  The principal
competitive  factors  in our market include price, quality of service, coverage,
customer  service,  reliability,  and  network  size/capacity.  Our  competitors
include  major  and emerging telecommunications carriers in the U.S. and foreign
telecommunications  carriers.  The  financial  difficulties  of  many
telecommunications  providers  are  rapidly  altering  the  number, identity and
competitiveness  of  the  marketplace,  and  we  are  unable  to  determine with
certainty  the  eventual  result of the consolidation occurring in our industry.

     During  the  past  several  years,  a  number  of companies have introduced
services  that  make  Internet  telephony  or  voice  services over the Internet
available  to  other  carriers.  All  major  telecommunications companies either
presently  or  could  potentially  route  traffic  to destinations worldwide and
compete  or  can  compete  directly  with  us.  Other Internet telephony service
providers  focus on a retail customer base and may in the future compete with us
in  the  carrier services business.  In addition, companies currently in related
markets  have  begun  to provide voice over the Internet services or adapt their
products  to  enable  voice over the Internet services.  These related companies
may  potentially  migrate  into  the  Internet  telephony  market  as  direct
competitors.

     Carriers  buying  wholesale  termination into Mexico, while cost conscious,
are  increasingly  demanding  high  reliability and quality in service delivery.
Sustainability  and  growth  in  this  segment  depends  on specific competitive
advantages  that  companies  may  possess  in  specific  markets.  Competitive
advantages  like  proper  licenses,  network


                                        7
<PAGE>
redundancy,  favorable  termination  agreements,  or  the presence of a business
infrastructure and relationships in the specific terminating market. The Company
competes  with  the dominant providers, such as Qwest and MCI, as well as other,
smaller  providers  for  international  long  distance  services  to Mexico. The
Company  believes that in contrast to the dominant providers, it has a much more
focused  and  cost  competitive  strategy  that  targets  select  higher  margin
telecommunication  niches  utilizing  VoIP  technology. Certain carriers provide
termination  services  in Mexico at lower prices (e.g., $0.015 to $0.06) because
they  contract  with  other  carriers  that  "leak" into the local network using
unlicensed  IP  points  of  presence.  These  carriers,  however,  have  several
disadvantages  including: (i) generally poor quality, (ii) limited capacity, and
(iii)  poor  reliability, since Mexican authorities periodically shut down their
operations.  Additionally,  there  are  a  few  market  trends  that  affect our
wholesale  product's  competitiveness  in  the  market.  First,  unauthorized,
non-conventional  operators  continue  to have a major impact by offering prices
below  real  costs.  Second,  the  elimination  of  settlement  rates  in Mexico
continues  to  drive  down  costs.  The  result  of  this trend is a significant
reduction in revenue per minute. The combination of non-conventional termination
and  the new settlement rates have reduced U.S to Mexico termination prices from
an  average  price  of  $0.27 per minute in 1998 to a current $0.045 per minute.

     Many of our competitors have substantially greater financial, technical and
marketing  resources, larger customer bases, longer operating histories, greater
name  recognition  and  more  established  relationships in the industry than we
have.  As  a  result,  certain  of  these  competitors may be able to adopt more
aggressive  pricing  policies  that  could  hinder  our  ability  to  market our
services.  We  believe  that  our  key competitive advantages are our ability to
deliver  reliable,  high  quality  voice  service  over  the  Internet  in  a
cost-effective  manner.  We  cannot  provide  assurances,  however,  that  these
advantages  will  enable us to succeed against comparable service offerings from
our competitors. A large number of telecommunications companies, including AT&T,
WorldCom,  Qwest and Sprint currently provide wholesale voice telecommunications
service  which  competes  with  our  business. These companies, which tend to be
large  entities  with  substantial  resources,  generally  have  large  budgets
available  for  research  and development, and therefore may further enhance the
quality  and  acceptance  of  the  transmission  of  voice  over  the  Internet.

     Our  strategy  is  to  position  ourselves  to  take  advantage  of  the
demonopolization  of  the  Latin American telecommunications markets, as well as
the  increasing  demand  for international communications services between these
markets  and  the  United  States.  Historically, telecommunications services in
Latin America have been provided by state-run companies, operating as a legal or
de  facto  monopoly.  Although  these companies failed to satisfy the demand for
services  in  their  countries,  the  regulatory  scheme  effectively  precluded
competition  by  foreign  carriers.  Currently,  there  is  a  trend  toward
demonopolization  of  the telecommunications industry in Latin America, and many
of  these  countries  are  in  various stages of migration toward a competitive,
multi-carrier market. Many Latin American countries produce a significant number
of  immigrants  to  the  United  States,  or  are  becoming  homes to U.S. based
corporations  seeking  lower  labor  costs. At the same time that Latin American
markets have been opening up, the demand for telecommunications services between
the  United States and Latin America (particularly Mexico) has been strengthened
by:

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

     Our  strengths  include  our  knowledge  of,  and relationships within, the
telecommunications  industry  in  the United States and certain countries within
Latin  America, particularly Mexico.  Our management and employees have in-depth
knowledge  of  the  Mexican culture, business environment and telecommunications
industry.  As  a  result,  we  have  been  able  to  obtain  a key long distance
concession  through our 49% ownership in ATSICOM that allows us to both generate
and  carry  traffic  within  Mexico  and  between  Mexico and the United States.


                                        8
<PAGE>
GOVERNMENT REGULATION / CONCESSION LICENSE

REGULATION OF INTERNET TELEPHONY

     Our  operations  are  subject  to  federal,  state  and  foreign  laws  and
regulations.  The  use  of the Internet to provide telephone service is a fairly
recent  market  development.  At present, ATSI is not aware of any domestic, and
is  only  aware  of  a  few  foreign,  laws  or  regulations that prohibit voice
communications  over  the  Internet.

United States.

     ATSI believes that, under U.S. law, the Internet-related services that ATSI
provides  constitute  information  services  as  opposed  to  regulated
telecommunications  services, and, as such, are not currently actively regulated
by  the  FCC  or  any  state agencies charged with regulating telecommunications
carriers.  Nevertheless, aspects of ATSI's operations may be subject to state or
federal  regulation,  including  regulation governing universal service funding,
disclosure  of  confidential  communications and excise tax issues.  ATSI cannot
provide assurances that Internet-related services will not be actively regulated
in  the  future.  Several  efforts  have  been made in the U.S. to enact federal
legislation  that  would  either  regulate  or  exempt  from regulation services
provided  over  the Internet.  Increased regulation of the Internet may slow its
growth,  particularly  if  other  countries  also  impose  regulations.  Such
regulation  may  negatively  impact the cost of doing business over the Internet
and  materially  adversely  affect ATSI's business, operating results, financial
condition  and  future  prospects.

     The FCC has considered whether to impose surcharges or other common carrier
regulations upon certain providers of Internet telephony, primarily those which,
unlike  ATSI,  provide Internet telephony services directly to end users.  While
the  FCC  has  presently  refrained  from  such  regulation,  the  regulatory
classification  of Internet telephony remains unresolved.  Additionally, the FCC
has  expressed  an  intention to further examine the question of whether certain
forms  of  phone-to-phone  VoIP  services  are  information  services  or
telecommunications  services.  The  two  are  treated  differently  in  several
respects,  with certain information services being regulated to a lesser degree.
The  FCC  has noted that certain forms of phone-to-phone VoIP services bear many
of  the  same  characteristics  as  more  traditional  voice  telecommunications
services  and  lack  the  characteristics  that  would  render  them information
services.  The  FCC  has  indicated  that the mechanisms for contributing to the
Universal  Service  Fund, issues as to applicability of access charges and other
matters  will  be  considered  in  that  context.

     If  the  FCC  were  to  determine  that  certain  Internet-related services
including  Internet  telephony  services  are  subject  to  FCC  regulations  as
telecommunications services, the FCC could subject providers of such services to
traditional  common carrier regulation, including requirements to make universal
service  contributions,  and pay access charges to local telephone companies.  A
decision  to impose such charges could also have retroactive effect, which could
materially  adversely  affect the Company.  It is also possible that the FCC may
adopt  a  regulatory  framework other than traditional common carrier regulation
that would apply to Internet telephony providers.  Any such determinations could
materially  adversely  affect  ATSI's  business,  financial condition, operating
results  and  future  prospects  to  the  extent  that  any  such determinations
negatively affect the cost of doing business over the Internet or otherwise slow
the  growth of the Internet.  Congressional dissatisfaction with FCC conclusions
could  result  in requirements that the FCC impose greater or lesser regulation,
which  in  turn  could  materially  adversely  affect ATSI's business, financial
condition,  operating  results  and  future  prospects.

     State  regulatory  authorities  may  also  retain  jurisdiction to regulate
certain  aspects  of  the  provision  of intrastate Internet telephony services.
Several  state  regulatory authorities have initiated proceedings to examine the
regulation  of  such  services.  Others  could  initiate  proceedings  to do so.


                                        9
<PAGE>
Other regulations affecting the Internet in the United States.

     Congress has recently adopted legislation that regulates certain aspects of
the Internet, including online content, user privacy and taxation.  In addition,
Congress  and  other  federal  entities  are  considering  other legislative and
regulatory  proposals  that  would further regulate the Internet.  Congress has;
for example, considered legislation on a wide range of issues including Internet
spamming, database privacy, gambling, pornography and child protection, Internet
fraud,  privacy  and  digital  signatures.  Various  states have adopted and are
considering  Internet-related  legislation.  Increased  U.S.  regulation  of the
Internet  may  slow  its  growth, particularly if other governments follow suit,
which  may  negatively  impact  the cost of doing business over the Internet and
materially  adversely  affect  our  business,  financial  condition,  results of
operations  and future prospects.  Legislation has also been proposed that would
clarify  the  regulatory  status  of  VoIP  service.  The  Company has no way of
knowing  whether  legislation  will  pass  or  what  form  it  might  take.

International.

     The  regulatory  treatment of Internet telephony outside of the U.S. varies
widely  from  country  to country. A number of countries that currently prohibit
competition  in  the  provision  of  voice  telephony  also  prohibit  Internet
telephony.  Other  countries  permit  but  regulate  Internet  telephony.  Some
countries  will  evaluate  proposed Internet telephony service on a case-by-case
basis  and  determine  whether  it  should be regulated as a voice service or as
another  telecommunications  service.  Finally,  in  many  countries,  Internet
telephony  has  not  yet been addressed by legislation or regulation.  Increased
regulation  of  the  Internet  and/or  Internet  telephony  providers  or  the
prohibition  of  Internet  telephony  in  one or more countries could materially
adversely affect our business, financial condition, operating results and future
prospects.

Other General regulations

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

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

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


                                       10
<PAGE>
in  order to be competitive, retain and attract new customers.  Additionally, as
a  result of the reduction in our termination rates to our customers our margins
have  declined  slightly.

Mexico

     The  Secretaria  de  Comunicaciones  y  Transportes  or the SCT and COFETEL
(Comision  Federal  de  Telecomunicaciones  or  Federal  Telecommunications
Commission)  have  issued  ATSICOM  a  30-year  license  granted in June 1998 to
install  and  operate  a public network. Under this license, ATSI Comunicaciones
S.A  de  C.V.  is  required  to  meet  the  following:

     General requirements
     --------------------

     -    Maintain approximately 10 million dollars in registered and subscribed
          capital.
     -    Install  and  operate a network in Mexico, the Mexican government will
          need to approve the operating plan before is implemented, additionally
          the  Mexican government will need to approve any future changes to the
          operating  plan  before  it  can  be  implemented.
     -    Continuously  develop  and  conduct  training  programs for its staff.
     -    The  Concessionaire, at all times needs to have an assigned individual
          responsible  for  the  technical  functions to operate the concession.

          Concession  services  requirements
     ---------------------------------------

     -    The  Concessionaire  is  required  to provide continuous and efficient
          services  at  all  times  to  its  customers.
     -    The  Concessionaire  must  establish a complaint center and correction
          facilities center. We are required to report to the Mexican Government
          on  a  monthly  basis the complaints received and the actions taken to
          resolve  the  problems.

     Tariff Requirements
     -------------------

     -    The  Concessionaire  will only be authorized to invoice its customer's
          tariffs  rates  that  have  been  approved  by the Mexican government.

     Verification and Information requirements
     -----------------------------------------

     -    The Concessionaire is required to provide audited financial statements
          on  a  yearly  basis that includes a detailed description of the fixed
          assets  utilized in the network and accounting reporting by region and
          location  of  where  the  services  are  being  provided.
     -    The  Concessionaire  is  required  to  provide  quarterly  reports and
          updates on the expansion of the network in Mexico and a description of
          the  training  programs  and  research  and  development  programs.
     -    The  Concessionaire  is  required  to  provide  statistic  reports  of
          traffic,  switching  capacity  and  other  parameters  in the network.

     Guarantee requirements
     ----------------------

          The  Concessionaire  is  required to have a bond/ insurance policy for
          approximately  $500,000  dollars,  where  the Mexican Federal Treasury
          Department will be the beneficiary in the event the Mexican government
          revokes  the  concession  license.

SUPPLIERS

     We  rely  on  various  suppliers to provide services in connection with our
communication  services.  Satmex  and  Telecomm  provide  us  with  the  network
required  for  our  network  services.  We  also  depend  on  various  Global


                                       11
<PAGE>
VoIP  companies  to  complete our voice over Internet (VoIP) traffic between US,
Mexico,  Asia,  the  Middle  East  and  Latin  America.  Our  critical suppliers
include,  Bestel,  DialMex  and  Advance  Global  Communications.

EMPLOYEES

     As of July 31, 2004, we had 6 employees, all of whom performed operational,
technical  and  administrative  functions.  We  believe  our future success will
depend  to  a large extent on our continued ability to attract and retain highly
skilled and qualified employees.  We consider our employee relations to be good.
None  of  these  aforementioned  employees  belong  to  labor  unions.

ITEM 2. PROPERTIES.

     Our  executive  office  is located at our leased facilities in San Antonio,
Texas, consisting of 3,042 square feet.  The lease expired September 2004 and we
continue  to  occupy the facility on a month-to-month basis.  We pay annual rent
of  $41,040.  Management  believes  that  our leased facilities are suitable and
adequate  for  their  intended  use.

ITEM 3. LEGAL PROCEEDINGS.

     In  March  2001,  Comdisco  sued  our subsidiary, ATSI-Texas, for breach of
contract  for  failing  to  pay  lease  amounts  due under a lease agreement for
telecommunications  equipment.  Comdisco  claims  that  the  total  amount  owed
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments.  Comdisco is claiming that ATSI-Texas only paid thirty months
of  lease payments.  ATSI-Texas disputes that the amount owed was $926,185 since
it  received  only  $375,386  in  financing  and has paid over $473,000 in lease
payments and, thus, believe that it has satisfied its obligation under the lease
terms.  Comdisco  has  filed  a claim with the United States Bankruptcy Court of
the  Western District of Texas in which the bankruptcy of ATSI-Texas is pending.
The  Company  does  not  have a liability for the lease payments and expects the
obligation  of  ATSI-Texas  will  be  discharged  in the pending Chapter 7 case.

     In  July  2002,  we were notified by the Dallas Appraisal District that the
administrative  appeal from the appraisal of the ATSI-Texas office in the Dallas
InfoMart  was  denied.  The  property  was appraised at over $6 million dollars.
The  property  involved  included  a  Nortel  DMS  250/300  switch,  associated
telecommunications equipment and office furniture and computers.  ATSI-Texas was
unable  to  proceed in its appeal of the appraisal due to its failure to pay the
taxes  under  protest.  During fiscal 2002 we recorded approximately $260,000 of
property  tax  expense  related  to the ATSI-Texas Dallas office.  Currently the
Dallas County taxing authority has filed claim with the United States Bankruptcy
Court  of the Western District of Texas for approximately $783,843.  This amount
also  included  a  property  tax estimate of approximately $230,572 for calendar
year  2003.  We  believe  this  amount  is  incorrect.  All  of the property was
removed  and  impaired from the Dallas site as a result of ATSI-Texas filing for
protection  under  Chapter  11  of  the  Bankruptcy  code.  We believe that this
liability  ATSI-Texas  will  be  discharged  upon  the completion of the pending
Chapter  7  case.

     In  October  2002,  we filed a lawsuit in the Southern District of New York
against several financial parties for stock fraud and manipulation.  The case is
based  on convertible preferred stock financing transactions involving primarily
two firms: Rose Glen Capital and the Shaar Fund.  We believe that Rose Glenn and
the Shaar Fund engaged in a scheme to defraud us into selling multiple series of
convertible preferred stock and to manipulate the price of our stock downward in
order to take advantage of increased conversion rates resulting from the decline
in stock price.  If we receive an adverse decision in this suit, it is likely we
would  be  required  to  issue  a substantial amount of our common shares to our
Series  D and Series E holders and the current owners of our common shares would
be  substantially  diluted.

     In  June  2003,  we  filed  a lawsuit in the 150th Judicial District Court,
Bexar  County,  Texas  against  NIFTI  Communications Systems, LLC for breach of
contract,  fraudulent  misrepresentation,  and  negligent  misrepresentation


                                       12
<PAGE>
relating  to  a  letter of intent for NIFTI to acquire the concession license in
Mexico owned by ATSICOM.  NIFTI failed to provide proof of funding to consummate
this  transaction,  lacked  interest  in  the transaction and failed commit to a
definite  date  for  the  completion  of  this  transaction.  As  a  result this
transaction  was  never  consummated  and  in May 2003 we sold 51% of ATSICOM to
Telemarketing.  In  July  21,  2003,  NIFTI counterclaimed for damages allegedly
arising  from  our failed to provide all the proper documentation related to the
concession  license  liabilities,  accounting  and  requirements  by the Mexican
Government.  During  fiscal 2004, the parties reached a settlement and agreed to
dismiss  both  lawsuits  without  compensation.

     In December 2003, we filed a cause of action in the 407th Judicial District
of  Bexar  County,  Texas  against  James  C.  Cuevas,  Raymond G. Romero, Texas
Workforce  Commission,  ATSI-Texas and Martin W. Seidler seeking judicial review
on  the  decision  issued by the Texas Workforce Commission awarding a claim for
unpaid  wages  against  us.  We  are  vigorously pursuing this action but cannot
predict  the  outcome  of this litigation or the financial impact on our ongoing
operations.

     In  January  2004,  we  filed  a petition in the 150th Judicial District of
Bexar  County, Texas against Inter-tel.net, Inc. and Vianet Communications, Inc.
d/b/a Inter-tel.net seeking declaratory relief that ATSI Communications, Inc. is
not  bound by the Carrier Services Agreement between Vianet Communications, Inc.
and  ATSI-Texas.  On  February  27,  2004 the Bankruptcy Court in the ATSI-Texas
Bankruptcy  case  allowed Vianet Communications, Inc. to amend its claim against
ATSI-Texas that was pending in the Bankruptcy of ATSI-Texas and assert its claim
for  breach  of  contract  against  ATSI.  The Bankruptcy Court then ordered the
lawsuit  to  be  remanded back to state court for hearing. We are a plaintiff in
this  case  and  are  seeking  declaratory  relief  from the Bexar County court.
Currently  we  cannot  predict  the  outcome of this litigation or the financial
impact  on  our  ongoing  operations.

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

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

     On  May  6,  2004,  during  the  2004  Annual  Stockholders  meeting  our
     stockholders  approved  the  following:

     The  election of Murray R. Nye and Richard C. Benkendorf as Class B members
     of  our Board of Directors, with their terms expiring at the Annual Meeting
     of  Stockholders  to  be  held in 2007. Arthur L. Smith and John R. Fleming
     continued  to serve as directors after the meeting. The results of the vote
     on  this  item  follow:

                                          FOR      WITHHELD
                                          ---      --------
          Murray R. Nye               130,283,400  6,886,458
          Richard C. Benkendorf       130,642,345  6,527,513

     The  selection  of  Malone & Bailey, PLLC as independent public accountants
     for  the  fiscal year ending July 31, 2004. The results of the vote on this
     item  follow:

                  FOR            AGAINST       ABSTAIN
                  ---            -------       -------
               136,075,890       864,847       229,121

The  reincorporation of the Company in Nevada by merger with and into its wholly
owned  subsidiary.  The  results  of  the  vote  on  this  item  follow:


                                       13
<PAGE>
                  FOR            AGAINST       ABSTAIN
                  ---            -------       -------
               78,125,374       1,454,326       226,406

                                    PART II.
                                    --------

ITEM  5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER  PURCHASES  OF  EQUITY  SECURITIES.

     Our  common  stock  is  quoted  on  the OTC Bulletin Board under the symbol
"ATSX".  From  May  9, 2003 through July 31, 2004 our common stock traded in the
pink  sheets  under  the  symbol  "ATSC".  Prior to January 15, 2003, our common
stock  was  quoted  on  the  AMEX under the symbol "AI".  Our Series H Preferred
Stock  is not traded on any market.  The following table sets forth the high and
low bid prices for our common stock from August 1, 2002 through January 15, 2003
as  reported  by  AMEX and the high and low bid prices for our common stock from
May  9,  2003  through  July  31, 2004 as reported by OTC bulletin board.  Price
quotations on the OTC bulletin board reflect inter-dealer prices, without retail
mark-up,  markdown  or  commission,  and  may  not  necessarily represent actual
transactions.  All  prices  have  been  adjusted  for  the  1:100  reverse split
effective  as  of  May  24,  2004.

<TABLE>
<CAPTION>
          FISCAL 2003                                   HIGH       LOW
          ==============================================================
<S>                                                   <C>       <C>
          FIRST QUARTER. . . . . . . . . . . . . . .  $  12.00  $   3.00
          SECOND QUARTER (THROUGH JANUARY 14, 2003).  $  16.00  $   7.00
          THIRD QUARTER (TRADING HALTED) . . . . . .   -------   -------
          FOURTH QUARTER . . . . . . . . . . . . . .  $   7.00  $   1.00

          FISCAL 2004. . . . . . . . . . . . . . . .  HIGH         LOW
          ==============================================================
          FIRST QUARTER. . . . . . . . . . . . . . .  $   2.00  $   2.00
          SECOND QUARTER . . . . . . . . . . . . . .  $   1.00  $   1.00
          THIRD QUARTER. . . . . . . . . . . . . . .  $   1.00  $   1.00
          FOURTH QUARTER . . . . . . . . . . . . . .  $   6.00  $   1.25
</TABLE>

     The  following  table  provides information relating to the grant of stock,
options, and warrants pursuant to equity based compensation plans as of July 31,
2004.  A  description of each equity compensation plan adopted by the Company is
included in the Notes to the Consolidated Financial Statements contained in this
report.

<TABLE>
<CAPTION>
                                                                           NUMBER OF SECURITIES
                                                                         REMAINING AVAILABLE FOR
                                                                          FUTURE ISSUANCE UNDER
                       NUMBER OF SECURITIES TO      WEIGHTED-AVERAGE       EQUITY COMPENSATION
                       BE ISSUED UPON EXERCISE     EXERCISE PRICE OF         PLANS (EXCLUDING
                       OF OUTSTANDING OPTIONS,    OUTSTANDING OPTIONS,   SECURITIES REFLECTED IN
   PLAN CATEGORY         WARRANTS AND RIGHTS      WARRANTS AND RIGHTS          COLUMN (a))
                                 (a)                     (b)                       (c)
<S>                    <C>                       <C>                     <C>

 EQUITY COMPENSATION
 PLANS APPROVED BY
  SECURITY HOLDERS                       42,341  $               103.47                    20,285

 EQUITY COMPENSATION
PLANS NOT APPROVED BY
  SECURITY HOLDERS                    3,333,426  $                 0.25                 3,570,715

      TOTAL                           3,375,767  $                 1.54                 3,591,000
</TABLE>


                                       14
<PAGE>
     As  of  July  31,  2004, we had approximately 11,067 common shareholders of
record.  This  amount  does  not  include  shares  held  in  street  name.

     We  have  never  paid any cash dividends on our common stock. Additionally,
the  terms  of our Series A, Series D, Series E, Series F and Series G Preferred
Stock  restrict  us from paying dividends on our common stock until such time as
all  outstanding  dividends  have  been  fulfilled  related  to  each  series of
preferred  stock.  There  are  presently a total of $587,467 in unpaid dividends
payable  on  outstanding  series  of  preferred  stock.  Consequently, we do not
anticipate  paying  any  cash  dividends  in  the  foreseeable  future.

     During  the  year  ended July 31, 2004, prior to the reincorporation to the
state  of  Nevada,  ATSI  issued  400,965  common shares. Of this total, 101,786
shares  were  issued as a result of the conversions of ATSI's Series F Preferred
Stock  and  accumulated dividends, 297,974 shares were issued as a result of the
conversion  of  ATSI's  Series  G Preferred Stock and accumulated dividends, and
1,205  shares  were  issued  as  a  result  of the conversion of ATSI's Series A
Preferred  Stock.  All  shares were exempt from registration pursuant to Section
3(a)(9) of the Securities Act of 1933 as an exchange for other securities issued
by  the  Company  in  which  no  person  was  paid  any  consideration.

     Also  during  the  year  ended  July  31,  2004, 165 shares were issued for
services  rendered  to ATSI. These shares were exempt from registration pursuant
to  Section  4(2)  of  the  Securities  Act  of 1933 since they were issued in a
transaction  not  involving  a  public  offering.

     On  May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI in
Nevada  through  the  merger of the Company into a wholly owned subsidiary, ATSI
Merger  Corporation. As a result of the merger, ATSI's stockholders of record as
of  May  24,  2004  received one (1) share of New ATSI Common Stock and ten (10)
shares  of  New ATSI Series H Convertible Preferred Stock for each 100 shares of
Old  ATSI  Common  Stock  surrendered.  As a result of the merger ATSI exchanged
143,751,710  common  shares of the Old ATSI for 1,437,517 shares of the New ATSI
Common  stock  and  14,385,000  shares  of  the  New  ATSI  Series H Convertible
Preferred Stock. These shares were exempt from registration pursuant to Rule 145
and  Rule 414 under the Securities Act of 1933 as an exchange for the purpose of
changing  the  domiciling  the  Company.

ITEM 6. SELECTED FINANCIAL DATA.

     The  following  selected  financial 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,
                                                                              --------------------
                                                             2004         2003          2002         2001        2000
                                                         ------------  -----------  ------------  ----------  ----------
                                                                   (In thousands of $, except per share data)
<S>                                                      <C>           <C>          <C>           <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Operating revenues
  Carrier services                                       $     1,020   $    6,532   $    41,190   $  26,349   $  22,192
  Network services                                               234          417         1,956       2,714       2,539
                                                         ------------  -----------  ------------  ----------  ----------
  Total operating revenues                                     1,254        6,949        43,146      29,063      24,731

Cost of services (exclusive of depreciation and
amortization)                                                  1,071        6,244        39,077      24,802      20,463
                                                         ------------  -----------  ------------  ----------  ----------
  Gross Margin                                                   183          705         4,069       4,261       4,268
  Selling, general and administrative expense                  7,942        4,803         6,866       6,924       6,724
  Impairment loss                                                702          418         3,119           -           -
  Bad debt expense                                                 4           35           388         142         756


                                       15
<PAGE>
                                                                              Years ended July 31,
                                                                              --------------------
                                                             2004         2003          2002         2001        2000
                                                         ------------  -----------  ------------  ----------  ----------
                                                                   (In thousands of $, except per share data)

  Depreciation and amortization                                   20        1,229         1,955       2,045       2,020
                                                         ------------  -----------  ------------  ----------  ----------
Operating loss                                                (8,485)      (5,780)       (8,259)     (4,850)     (5,232)

  Debt forgiveness income                                        257            -             -           -           -
  Other income (expense), net                                   (241)      (2,922)        1,475        (300)     (1,388)
                                                         ------------  -----------  ------------  ----------  ----------
Net loss from continuing operations before income
tax expense
                                                              (8,469)      (8,702)       (6,784)     (5,150)     (6,620)
  Income tax expense                                               -            -             -           -           -
                                                         ------------  -----------  ------------  ----------  ----------
Net loss from continuing operations                           (8,469)      (8,702)       (6,784)     (5,150)     (6,620)
Net loss from discontinued operations                              -       (2,919)       (8,815)     (5,403)     (3,432)
Net (loss)/income from sale of discontinued operations             -         (962)        1,082           -           -
Net loss                                                      (8,469)     (12,583)      (14,517)    (10,553)    (10,052)
  Less: preferred stock dividends                               (306)        (653)         (472)     (2,232)     (7,085)
                                                         ------------  -----------  ------------  ----------  ----------
Net loss applicable to common shareholders                   ($8,775)    ($13,236)     ($14,989)   ($12,785)   ($17,137)
                                                         ============  ===========  ============  ==========  ==========

PER SHARE INFORMATION:
  Net loss-basic and diluted                                  ($7.31)     ($13.01)      ($17.37)    ($17.96)    ($30.14)
                                                         ------------  -----------  ------------  ----------  ----------
  Weighted average common shares
  outstanding-basic and diluted                            1,199,892    1,017,670       862,750     711,800     568,520
                                                         ------------  -----------  ------------  ----------  ----------

CONSOLIDATED BALANCE SHEET DATA:
  Working capital (deficit)                                 ($18,948)    ($19,099)     ($10,094)  $   1,936   $   5,076
  Current assets                                                 149          340         1,184       2,447       3,274
  Total Assets                                                   270        1,103         6,763      12,070      13,396

  Pre-petition liabilities of bankrupt
  subsidiaries, net of assets                                 12,354       12,350             -           -           -
  Current liabilities (Net of pre-petition liabilities)        3,177        3,635        12,528       5,757       6,630
  Current liabilities from discontinued operations             1,152        1,152         2,444       5,796       5,066
  Redeemable preferred shares                                  2,413        2,302         2,180       3,529           -
  Total Liabilities                                           19,116       19,448        15,389      13,329      13,544
  Total Stockholders' equity (deficit)                       (18,846)     (18,345)       (7,112)      6,254      13,350
</TABLE>


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

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


                                       16
<PAGE>
     The  following  is a discussion of the consolidated financial condition and
results  of  operations of ATSI Communications, Inc., for the fiscal years ended
July  31,  2004,  2003  and  2002.  It  should  be  read in conjunction with our
Consolidated  Financial  Statements,  the  Notes thereto and the other financial
information included elsewhere in this annual report on Form 10-K.  For purposes
of  the  following discussion, fiscal 2004 or 2004 refers to the year ended July
31,  2004, fiscal 2003 or 2003 refers to the year ended July 31, 2003 and fiscal
2002  or  2002  refers  to  the  year  ended  July  31,  2002

SOURCES OF REVENUE AND DIRECT COST

Sources of revenue:

     Carrier  Services:  We  currently  provide  transmission  and  termination
     -----------------
services  to U.S. and Foreign telecommunications companies who lack transmission
facilities,  require  additional capacity or do not have the regulatory licenses
to  terminate  traffic  in  Mexico,  Asia,  the  Middle  East and Latin America.
Typically  these telecommunications companies offer their services to the public
for  local  and  international  long  distance  services.

     Network  Services:  We offer private communication links for multi-national
     -----------------
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability  than is available through public networks. These services include
data,  voice  and  fax  transmission  as  well  as Internet services between the
customers  multiple  international  offices  and  branches.

Direct Cost:

     Carrier  Services:  We  incur transmission and termination charges from our
     -----------------
suppliers  and  the  providers  of  the infrastructure and network.  The cost is
based  on  a  per  minute  rate and volume of minutes transported and terminated
through  the  network.  Additionally, we incur installation charges from certain
carriers; this cost is passed on to our customers for the connection to our VoIP
network.

     Network Services:  Under the network services, we incur satellite and fiber
     ----------------
optic charges. The satellite and fiber optic charges are incurred as part of the
connection  links between the customer's different remote locations and sites to
transmit  data,  voice  and  Internet  services.

RESULTS OF OPERATIONS

     The  following  table  sets  forth certain items included in our results of
operations  in thousands of dollar amounts and as a percentage of total revenues
for  the  years  ended  July  31,  2004,  2003  and  2002.

<TABLE>
<CAPTION>
                                                                                 Year ended July 31,
                                                                ---------------------------------------------------------
                                                                        2004                2003               2002
                                                                --------------------  -----------------  ----------------
                                                                    $          %          $         %        $        %
<S>                                                             <C>        <C>        <C>         <C>    <C>         <C>
Operating revenues
------------------
Services
  Carrier services                                              $  1,020         81%  $   6,532     94%  $  41,190    95%
  Network services                                                               19%        417      6%      1,956     5%
                                                                     234

                                                                ---------  ----------  ---------  ------  ---------  ----
Total operating revenues                                           1,254        100%      6,949    100%     43,146   100%

Cost of services (exclusive of depreciation and
amortization, shown below)                                         1,071         85%      6,244     90%     39,077    91%
                                                                ---------  ----------  ---------  ------  ---------  ----


                                       17
<PAGE>
Gross Margin                                                         183         15%        705     10%      4,069     9%

Selling, general and
administrative expense                                             7,942        633%      4,803     69%      6,866    16%


Impairment expense                                                               56%        418      6%      3,119     7%
                                                                     702

Bad debt expense                                                                  0%         35      1%        388     1%
                                                                       4

Depreciation and amortization                                                     2%      1,229     18%      1,955     5%
                                                                      20
                                                                ---------  ----------  ---------  ------  ---------  ----

Operating loss                                                    (8,485)      -677%     (5,780)   -83%     (8,259)  -19%

Debt forgiveness income                                              257         20%          -      0%          -     0%
Other income (expense), net                                         (241)       -19%     (2,922)   -42%      1,475     3%
                                                                ---------  ----------  ---------  ------  ---------  ----

Net loss from continuing operations before income tax expense
                                                                  (8,469)      -675%     (8,702)  -125%     (6,784)  -16%

Income tax expense                                                     -          0%          -      0%          -     0%
                                                                ---------  ----------  ---------  ------  ---------  ----

Net loss from continuing operations                               (8,469)      -675%     (8,702)  -125%     (6,784)  -16%

Net loss from discontinued operations                                  -          0%     (2,919)   -42%     (8,815)  -20%
Net loss from sale of discontinued operations                          -          0%       (962)   -14%      1,082     3%

Net loss                                                          (8,469)      -675%    (12,583)  -181%    (14,517)  -34%

Less: preferred stock dividends                                                 -24%       (653)    -9%       (472)   -1%
                                                                    (306)
                                                                ---------  ----------  ---------  ------  ---------  ----

Net loss applicable to common shareholders                       ($8,775)      -700%   ($13,236)  -190%   ($14,989)  -35%
                                                                =========  ==========  =========  ======  =========  ====
<FN>
                 See accompanying summary of accounting policies and notes to financial statements
</TABLE>

YEAR ENDED JULY 31, 2004 COMPARED TO YEAR ENDED JULY 31, 2003

     Operating  revenues.  Consolidated operating revenues decreased 82% between
periods from $6.9 million for the year ended July 31, 2003 to $1,254,000 for the
year  ended  July  31,  2004.

     Carrier services revenues decreased approximately $5.5 million, or 84% from
the  year  ended  July  31,  2003  to  the year ended July 31, 2004. Our carrier
traffic  declined  from  approximately  95 million minutes during the year ended
July  31,  2003 to approximately 25.8 million minutes during the year ended July
31,  2004.  The decrease in carrier services revenue can mainly be attributed to
the  idling of our network during December 2002. During fiscal 2004 we were able
to  restart  our  carrier  services  network  and  we  generated  approximately
$1,020,000  in  carrier  services  revenue.


                                       18
<PAGE>
     Network  services revenues decreased approximately 44% or $183,000 from the
year ended July 31, 2003 to the year ended July 31, 2004.  During the year ended
July  31,  2004  we  provided  network  services  to  one customer and generated
approximately $14,820 in revenues from this customer.  Additionally, in February
2004,  we  purchased  a  network  services  contract  from  American  TeleSource
International  de  Mexico  S.A  de  C.V.  (ATSIMEX).  Under  the  assignment and
purchase  agreement  with  ATSIMEX,  we acquired the remaining term of a network
services  contract,  from February 2004 through June 2004.  Under the assignment
of  this  contract  we  generated  approximately  $23,000  per  month in network
services  revenue  for  the  remaining  term  of the contract.  Currently we are
providing service to this customer on a month-to-month basis.  As of the date of
this  filing  we  have  not been able to negotiate a long-term contract with the
customer.

     Cost  of  services.  (exclusive  of  depreciation  and  amortization)  The
consolidated  cost  of  services decreased by approximately $5.2 million, or 83%
from the year ended July 31, 2003 to the year ended July 31, 2004.  The decrease
in  cost  of  services is a direct result of the decrease in carrier revenue and
network  services revenue.  As mentioned above, we idled our network in December
2002  and  our  carrier  traffic  declined from approximately 95 million minutes
during the year ended July 31, 2003 to approximately 25.8 million minutes during
the  year  ended  July  31,  2004,  thus  reducing  our cost of services between
periods.

     Selling,  general  and  administrative  (SG&A)  expenses.  SG&A  expenses
increased by approximately $3.1 million from the year ended July 31, 2003 to the
year  ended  July  31,  2004.  This  increase is primarily due to recognition of
approximately  $7.1  million in non-cash compensation expense as a result of the
issuance  of  warrants  for  legal  and  consulting  services  rendered by Recap
Marketing  &  Consulting,  LLP.  However,  as  a  result of various cost-cutting
measures,  we  reduced  operating  expenses from the prior year by the following
amounts:

                       Salaries & Wages               $1,871,141
                       Rent                              212,923
                       Professional fees               1,255,025
                       Insurance                         154,257
                       Repairs & Maintenance              45,621
                       Telephone                          52,665
                       Travel                             55,961

                                                      ----------
                                              TOTAL:  $3,647,593
                                                      ----------

     Impairment  losses.  Impairment  expense  increased by 68% or $284,000 from
the  year  ended  July 31, 2003 to the year ended July 31, 2004. During the year
ended  July  31,  2004,  in  accordance  with  U.S.  GAAP we determined that the
estimated cash flows expected from the concession license would be less than the
recorded  value.  As  a  result  we recorded an impairment loss of approximately
$702,000  to  reduce  the  recorded value of the concession license.  During the
year  ended July 31, 2003, we recorded an impairment loss totaling approximately
$418,000.  The  impairment  losses during the fiscal year 2003 can be attributed
to  the  impairment of leasehold improvements and other equipment as a result of
idling  our  network  during  the  second  half  of  fiscal  year  2003.

     Bad  debt  expense.  Bad  debt expense decreased by 89% or $31,000 from the
year  ended July 31, 2003 to the year ended July 31, 2004. During the year ended
July  31,  2003  we  recognized  $35,000 in bad debt expense associated with the
write-off  of  network  services customer receivables in Central America. During
the year ended July 31, 2004 we recognized $4,000 in bad debt expense associated
with the write-off of network services revenue related to a customer that ceased
operations.

     Depreciation  and  amortization. Depreciation and amortization decreased by
98% or $1.2 million from the year ended July 31, 2003 to the year ended July 31,
2004.  The  decrease  is attributed to the disposal of substantially all capital
equipment  during  Fiscal  2003.


                                       19
<PAGE>
     Operating  loss. Our operating loss increased approximately $2.7 million or
47%  from  the  year  ended  July  31, 2003 to the year ended July 31, 2004. The
increase  in  operating  loss  is  attributed  to  the  increase  in  SG&A  by
approximately  $3.2  million.  The  increase  in SG&A was slightly offset by the
decreases  in  bad  debt  expense  of  approximately $31,000 and the decrease in
depreciation  and  amortization  expense  of  approximately  $1.2  million.

     Debt  forgiveness  income.  Our  debt  forgiveness  income  increased
approximately  $257,000 from the year ended July 31, 2003 to the year ended July
31,  2004.  During  fiscal  2004,  we  negotiated  various  liabilities with our
creditors by issuing ATSI's equity to the creditors. The settlement of debt with
the creditors was for legal services previously provide to us during fiscal 2003
and  2004.  The  debt forgiveness income was based on the difference between the
market  price  of  ATSI  equity  at  the time of issuance and the exercise price
calculated  at  the  time  of  the  settlement  of  debt.

     Other  expense,  net. Other expense decreased approximately $2.7 million or
92%  from  the  year  ended  July  31, 2003 to the year ended July 31, 2004. The
decrease  in  other expense is attributed to the decrease in interest expense of
approximately  $1.3  million  recognized  during  the  year  ended July 31, 2003
associated  with various capital leases. During the year ended July 31, 2004 the
Company  did  not  have  any  capital leases, thus we did not incur any interest
expense  associated  with  capital  leases.

     Loss  from  discontinued  operations.  Loss  from  discontinued  operations
decreased  by $2.9 million between periods; from $2.9 million for the year ended
July  31, 2003 to $0 during the year ended July 31, 2004.  During the year ended
July  31, 2003, we recognized loss from discontinued operations of approximately
$2.9  million  associated  with  Mexico Telco operations.  The Mexico Telco loss
from  discontinued  operations during the year ended July 31, 2003 can mainly be
attributed  to the recognition of approximately $3.2 million in selling, general
and  administrative expenses and the recognition of $660,000 of foreign currency
loss on exchange rate related to the Mexico Telco operations.  Additionally, the
Mexico  Telco  operations  also  recognized  $510,000  of  depreciation  and
amortization  and  approximately  $228,000  of  interest  expense and income tax
expense  during  the  year  ended  April  30,  2003.  These expenses were offset
slightly by the recognition of approximately $1.9 million of gross profit margin
from  the  Mexico  Telco  Operations.

     Preferred  stock dividends.  Preferred Stock Dividends expense decreased by
approximately  $347,000  between  periods, from $653,000 for the year ended July
31,  2003  to  $306,000 during the year ended July 31, 2004.  During the quarter
ended April 30, 2004 we converted all Redeemable preferred Series F and Series G
shares  to common.  As a result of these conversions, no dividends were incurred
during  the  forth  quarter  of  fiscal  2004,  thus  resulting in a decrease in
Preferred  Stock  dividends  expense  during  the  period.

     Net  loss to common stockholders.  The net loss for the year ended July 31,
2004  decreased  to  $8.8 million from $13.2 million for the year ended July 31,
2003.  The  decrease in net loss to common stockholders was due primarily to the
idling  of  our  network  and  not incurring any fixed costs associated with the
leasing  of  satellite  sites,  connectivity  fees  and operating a network site
during the year ended July 31, 2004. Additionally, as mentioned above, loss from
discontinued  operations decreased from the year ended July 31, 2003 to the year
ended July 31, 2004 by approximately $2.9 million. Also, there was a decrease in
depreciation  and  amortization  expense  of approximately $1.2 million from the
year  ended  July  31,  2003  to the year ended July 31, 2004. These decrease in
various  expenses  were somewhat offset by the increase in SG&A by approximately
$3.1  million.

YEAR ENDED JULY 31, 2003 COMPARED TO YEAR ENDED JULY 31, 2002

     Operating  Revenues.  Consolidated operating revenues decreased 84% between
periods  from $43 million for the year ended July 31, 2002 to $7 million for the
year  ended  July  31,  2003.

     Carrier  services  revenues  decreased  approximately $34.7 million, or 84%
from  the year ended July 31, 2002 to the year ended July 31, 2003. The decrease
in  carrier  services revenue during fiscal 2003 can mainly be attributed to the
idling  of  our network during December 2002.  As result we did not generate any
revenue  from  this  source


                                       20
<PAGE>
during  the  last  six  months  of  fiscal year 2003.  During the same six-month
period  in  fiscal  year  2002,  we  generated  approximately  $21  million  or
approximately  50%  of  the  total  yearly  carrier  services  revenue.

     Network  services revenues decreased approximately 79% or $1.5 million from
the  year  ended  July  31,  2002  to the year ended July 31, 2003.  The primary
reason  for  the  decrease  in  revenue is attributed to the decrease in network
services  customers  from  25  customers during fiscal 2002 to 1 customer during
fiscal  2003. The decrease in customers is attributed to the sale of our network
services  customer  base  during  the  second  quarter  of  fiscal  2003.

     Cost  of  Services.  The  consolidated  cost of services decreased by $32.8
million,  or  84%  from  the year ended July 31, 2002 to the year ended July 31,
2003.  The  decrease  in  cost of services is a direct result of the decrease in
carrier  services  revenues  and private network revenue. As mentioned above, we
idled  our network in December 2002 and as a result did not generate any revenue
or cost of services related to carrier services during the second half of fiscal
year  2003.  During  the  same six-month period in fiscal year 2002, we incurred
approximately  $19.9  million  in  carrier  services  cost  of  services.

     Selling,  General  and  Administrative  (SG&A)  Expenses.  SG&A  expenses
decreased  approximately  $2.1 million, or 30% between periods. The decrease can
mainly be attributed to the termination of approximately 27 employees associated
with  carrier  services  business unit and network services in January 2003. The
termination  of  these employees resulted in a decrease in salaries and wages of
approximately  $195,000 per month or $1.2 million over the second half of fiscal
year  2003.  Additionally,  as  a  result of the termination of these employees,
during the second half of fiscal year 2003, the company recognized a significant
decrease  in  health and business insurance expense of approximately $96,000 per
month  or  $576,000  during  the  period.

     Impairment  losses.  During  the  year  ended July 31, 2003, we recorded an
impairment  loss  totaling  approximately $418,000. The impairment losses during
the  fiscal  year  2003  can  be  attributed  to  the  impairment  of  leasehold
improvements  and  other  equipment as a result of idling our network during the
second half of fiscal year 2003. In addition during the year ended July 31, 2002
we  determined that the estimated future cash flows expected from the concession
license and certain equipment and other assets was less than its carrying value.
Therefore,  we  recorded an impairment of approximately $2,039,000 to reduce the
recorded  value of the concession license and approximately $1,080,000 to reduce
the  recorded  value  of  equipment  and  other  assets.

     Depreciation  and  Amortization. Depreciation and amortization decreased by
approximately  37% or $726,000 between periods. The decrease in depreciation and
amortization  can  be  attributed to the complete depreciation and impairment of
our  equipment  during  fiscal  2003.

     Operating  Loss.  The Company's operating loss decreased approximately $2.5
million  or  30%  from  the  year ended July 31, 2002 to the year ended July 31,
2003. The decrease is attributed to the decrease between periods in SG&A of $2.1
million  and  a  decrease between periods of impairment expense of approximately
$2.7  million.  These  decreases  were  offset somewhat by the decrease in gross
margin  dollars  of  approximately  $3.3  million  between  periods.

     Other  Income  (expense). Other income decreased approximately $4.4 million
between  periods  from  $1.5  million  in  other income to $2.9 million on other
expense  during  the  fiscal  year  ended  July  31,  2003.  This  change can be
attributed  to  various  factors,  during  the  fiscal  year  2003,  we incurred
approximately  $1,009,000  in  loss  from the sale of various telecommunications
assets  from  continuing operations; this loss is attributed to the sale of ATSI
Texas  and  TeleSpan  telecommunication  equipment  by  the Chapter 7 Bankruptcy
trustee.  Additionally,  during  the  fiscal  year  2003 we recognized a loss of
approximately $511,000 related to the sale of 51% of our ownership in one of our
subsidiaries,  ATSICOM.  We  also  recognized during fiscal year 2003 additional
interest  expense  of approximately $401,000 associated with the default of ATSI
Texas  in its capital lease with IBM. We also recognized during fiscal year 2003
approximately  $924,000 in interest expense associated with other capital leases
and  we  recognized  approximately  $52,000  in interest expense associated with
various  notes  payables.


                                       21
<PAGE>
     Loss  from  discontinued  operations.  Loss  from  discontinued  operations
decreased  by  $5.9  million  between periods, from $8.8 million to $2.9 million
during  the  fiscal  year  ended  July  31,  2003.  During  fiscal year 2003, we
recognized  loss  from  discontinued operations of approximately $2.9 associated
with  Mexico Telco operations. During fiscal year 2002 we recognized a gain from
discontinued  operations  of  approximately $399,000 related to the discontinued
operations  of the E-commerce operations. Additionally, during fiscal year 2002,
we also recognized approximately $9,215,000 of loss from discontinued operations
related  to the Mexico Telco operations. The Mexico Telco loss from discontinued
operations  during  fiscal year 2002 can mainly be attributed to the recognition
of  the  impairment  loss  of Computel's goodwill of approximately $3.3 million.
Additionally,  during  fiscal  year  2002  we  incurred $1.5 million in interest
expense  associated  with  the  IBM  capital  lease

     Net  gain  or loss from sale of discontinued operations. During fiscal year
2003, we recognized a loss from sale of discontinued operations of approximately
$962,000  attributable  to  the  loss  on  the  sale  of ATSI Mexico and Sinfra.
Additionally,  during  fiscal  year  2002, we recognized a gain from the sale of
discontinued operations of approximately $1,082,000 associated with gain on sale
of  GlobalScape.

     Preferred Stock Dividends. During the year ended July 31, 2003, we recorded
approximately  $653,000  of  non-cash  dividends  related  to  our  cumulative
convertible preferred stock. This compares unfavorably to approximately $472,000
of  non-cash  dividends  recognized  during  the  year  ended July 31, 2002. The
increase  is  mainly  attributed  to  the  accrual  of approximately $284,000 of
preferred stock dividends in relation to the redemption letter received from the
Series  D  Preferred  Shareholder  during  fiscal  year  ended  July  31,  2003.

     Net  loss  to Common Stockholders. The net loss for the year ended July 31,
2003  decreased  to  $13,236,000  million  from $14,990,000 million for the year
ended July 31, 2002. The decrease in net loss was due primarily to the idling of
our  network,  not  incurring  any  fixed and variable costs associated with the
leasing  of  satellite  sites,  connectivity  fees  and operating a network site
during  the second half of fiscal year 2003. During the same six-month period in
fiscal  year  2002,  we  incurred approximately $20 million or 53 % of the total
yearly  carrier services variable and fixed costs. Additionally, during the same
period  we  terminated  approximately  27  employees associated with the carrier
services  and network services business unit. The termination of these employees
resulted in a decrease in salaries and wages of approximately $195,000 per month
or  $1.2  million  over  the  second  half  of  fiscal  year  2003.

LIQUIDITY AND CAPITAL RESOURCES

     Cash  (used  in)/  provided by operating activities:  During the year ended
July  31,  2004,  operations consumed approximately $457,000 in cash.  This cash
consumed  by  operations  is  primarily  due  to  net  losses  of  approximately
$8,469,000  incurred during fiscal 2004.  The net losses were somewhat offset by
the  increase in accounts payable of approximately $272,000, increase in accrued
liabilities  of  approximately  $162,000  and  the  recognition of approximately
$107,000  of  losses  on  an  unconsolidated affiliate.  The increase in accrued
liabilities  and  accounts  payable  is primarily due to the company recognizing
approximately $122,000 in interest expense associated with various notes and the
accrual  of  professional  fees  and  board  fees  of  approximately  $125,000.
Additionally,  we  recognized  approximately $7,053,000 in non-cash compensation
expense  associated  with  the  issuance of warrants for services related to the
consulting agreements entered into with two individuals. In addition, during the
year  ended  July  31,  2004, we determined that the estimated future cash flows
expected from the concession license would be less than its carrying value. As a
result  we  recorded  an impairment loss of approximately $702,000 to reduce the
record  value  of  the  concession  license.  Currently  we  are  not generating
sufficient  revenues from operations to cover our monthly operating salaries and
general  and  administrative  expense.

     Cash provided by investing activities: During the year ended July 31, 2004,
the Company acquired the NexTone Communications Session Controller (soft-switch)
for  $130,000. The NexTone soft-switch includes a network analysis and reporting
system  that  provides  a  comprehensive set of management tools to engineer and
translate  VoIP  traffic  routing  tables  and  is  also  capable  of processing
approximately  30  million  minutes  per  month  of  VoIP  traffic.


                                       22
<PAGE>
     Additionally,  during  fiscal  2004  we  received $187,000 in payments from
Telemarketing de Mexico S.A de C.V. associated with the agreed amounts under the
"Share purchase Agreement" dated May 22, 2003 where we agreed to sell 51% of our
ownership  in  ATSI  Comunicaciones S.A de C.V., which owns a 30 year concession
license.  The  concession license allows for the installation and operation of a
public  telecommunications  network  throughout  Mexico.

     Furthermore,  during the year ended July 31, 2004 we invested approximately
$47,000  in  ATSI  Comunicaciones  S.A.  de  C.V.  The proceeds were utilized by
ATSICOM  to  pay  payroll taxes and professional services, which were previously
agreed  to  in  the  sale  of  ATSICOM  to  Telemarketing.

     Cash  provided  by / (used in) financing activities: During the fiscal year
ended  July 31, 2004 we received approximately $410,000 for the issuance of debt
and warrant options. Additionally, during the fiscal year ended July 31, 2004 we
made  debt payments of approximately $9,000 to our creditors, for an outstanding
note.

     Overall,  our  net operating, investing and financing activities during the
year  ended  July  31, 2004 provided a decrease of approximately $46,000 in cash
balances.  We  intend to cover our monthly operating expenses with our remaining
available  cash.  Additionally,  we  will  continue  to pursue additional equity
offerings  to  cover  our  deficiencies  in  cash reserves. However, there is no
assurance  that  we  will  be  able  to  secure the equity offerings required to
supplement  our  deficiencies  in  cash  reserves.

Working Capital and liabilities

     Our working capital deficit at July 31, 2004 was approximately $18,948,000.
This  represents  a  decrease of approximately $151,000 from our working capital
deficit  at  July  31,  2003.  The  decrease  can primarily be attributed to the
settlement  of  various  liabilities through the issuance of common stock, these
liabilities  were  mainly  associated with professional services incurred during
fiscal 2003. Our working capital deficit at July 31, 2004 included approximately
$12,354,000  related to the pre-petition liabilities (net of assets), associated
with  ATSI-Texas  and TeleSpan, the two subsidiaries under Chapter 7 Bankruptcy.
The  pre-petition  liability  balance  is  composed  primarily of the following:

     -    $3  million  in  debt  owed to IBM Corporation associated to a capital
          lease;
     -    $1.3  million  in  debt  to  Northern  Telecom, a subsidiary of Nortel
          Networks,  associated  with some telecommunications equipment acquired
          during  fiscal  year  2001;
     -    $5.1  million  in  debt  to  various  international  and  domestic
          telecommunications  carriers  for services provided during fiscal year
          2002  and  2003;
     -    $250,000  in  property  taxes  to  various  taxing  entities,
     -    $550,000  to  Universal  Service  Fund  for  telecommunication  taxes;
     -    $250,000  in  a  note  payable;  and
     -    $2.4  million  associated  with  rent  expense, salaries and wages and
          professional  services  to  various  entities.

Our  working  capital deficit after exclusion of the pre-petition liabilities is
approximately  $6,594,000.

     Our  current  obligations also include approximately $1,403,000 owed to the
former  owners  of  Grupo  Intelcom,  S.A.  de C.V., the entity purchased by the
Company  in  July  2000  and through which the Company obtained its Mexican long
distance  concession.  Of this amount, $357,000 is included in notes payable and
the  additional  $1,046,000  is  included  in  accrued  liabilities.

     Our  current  liabilities  also include approximately $1,138,000 associated
with  the  Series  D  Cumulative  preferred stock.  Of this balance, $942,000 is
associated  with the full redemption of this security and $196,000 is related to
the  accrued  dividends  as  of  July  31,  2004.


                                       23
<PAGE>
     Our  current  liabilities  include approximately $1,275,000 associated with
the  Series  E  Cumulative  preferred  stock.  Of  this  balance,  $1,058,000 is
associated  with the full redemption of this security and $217,000 is related to
the  accrued  dividends  as of July 31, 2004.  During the fiscal year ended July
31,  2003, the Company was de-listed from AMEX and according to the terms of the
Series  E  Cumulative preferred stock Certificate of Designation, if the Company
fails  to  maintain  a  listing  on  NASDAQ, NYSE or AMEX the Series E preferred
stockholder  could  request  a  mandatory  redemption  of  the total outstanding
preferred  stock.  As  of  the  date  of  this  filing we have not received such
redemption  notice.

     On  October  31,  2002 we filed a lawsuit in the Southern District Court of
New  York  against two financial institutions, Rose Glen Capital and Shaar Fund,
the  holders  of  Series D and E Redeemable Preferred Stock, for stock fraud and
manipulation.  These  liabilities  combined  for  a  total  of  approximately
$2,413,000.  Accounting rules dictate that these liabilities remain in our books
under  Current  Liabilities until the lawsuit is resolved in the judicial system
or  otherwise.  At this time we cannot predict the outcome or the time frame for
this  to  occur.

     We  also  have  approximately  $1,152,000  of  current  liabilities (net of
assets)  associated  to the discontinued operations of the retail services unit.
This  balance  is  mainly composed of approximately $453,000 owed to the Mexican
taxing authorities related to a note assumed through the acquisition of Computel
and  approximately  $699,000  related  to income taxes owed as of July 31, 2004.

Ongoing  operations

     We believe that, based on our limited availability to capital resources and
our  current cash balances, that these resources may not be available to support
our  ongoing  operations  for  the  next  twelve  months or until we are able to
generate  income  from  operations.  These matters raise substantial doubt about
our  ability to continue as a going concern.  Our ability to continue as a going
concern is dependent upon the ongoing support of our stockholders and customers,
our ability to obtain capital resources to support operations and our ability to
successfully  market  our  services.

     As outlined in Note 6 to the financial statements, we have incurred amounts
of  debt  to  finance  our  working capital requirements. During fiscal 2004, we
borrowed a total of $410,500 from Recap Marketing & Consulting, LLP, to fund our
operating  expenses,  reincorporation  related  expenses  and  other  corporate
expenses.  This  debt will be applied to the payment of warrants issued to Recap
Marketing  &  Consulting,  LLP.

     Furthermore,  during  fiscal 2004, we also relied on cash payments received
of $187,000 from Telemarketing de Mexico S.A de C.V. (Telemarketing) to fund our
operating  expenses.  These  funds  were  received in accordance with the "Share
Purchase  Agreement"  entered  with  Telemarketing  on  May  22, 2004. Under the
agreement  we  sold  to  Telemarketing  51%  of  our  Mexican  subsidiary,  ATSI
Comunicaciones,  S.A. de C.V. (ATSICOM), which owns a 30-year concession license
to  install  and  operate a public telecommunications network throughout Mexico.
Under  the  agreement  we received an initial payment of $194,000. The agreement
also  required, a $200,000 payment associated with ATSICOM'S liabilities and the
remaining  purchase  price  of  $747,000  to  be  paid  as  follows:

     -    From May 2003 Telemarketing paid ATSI $20,750 per month for 12 months;
          and
     -    In  May 2004, ATSI was scheduled to receive from Telemarketing $20,750
          per  month  for  24  months,  contingent on ATSI generating 20,750,000
          minutes of monthly traffic through ATSICOM's network. In the event the
          Company  did  not reach the above-mentioned volume of monthly minutes,
          the monthly payment were to be adjusted based on the percentage of the
          shortfall  in  minutes,  until  Telemarketing  pays the total purchase
          price.

     In  addition  to  the  signing of the "Share Purchase Agreement" on May 22,
2003  with  Telemarketing  we  also  entered  into  a three-year Carrier Service
Agreement  with  DialMex,  LLC  ("DialMex"),  a  U.S.-based  telecommunications
carrier, and Telemarketing. Under the Carrier Service Agreement we had access to
DialMex's  VoIP  network to transport and terminate voice and fax communications
over  the  Internet.  This  agreement  was


                                       24
<PAGE>
intended  to  allow  us  to  meet the requirement of generating and transporting
20,750,000  minutes  of monthly traffic through ATSICOM's network, as stipulated
under  the  Share  Purchase  Agreement  with  Telemarketing.

     During  fiscal 2004 we experienced difficulties with DialMex's network, due
primarily  to  deficiencies  in  their  network capacity, call interruptions and
limited traffic routing selections. Additionally ATSI Comunicaciones S.A de C.V.
has  not  been able to complete the required interconnections with other Mexican
carriers,  to  process  domestic and international VoIP traffic. As a result, we
have  not  been  able  to  generate  the  monthly  minutes  required  under  the
Telemarketing  agreement.  Consequently,  we have not received any payments from
Telemarketing  since  May  2004.  Currently  we  are  in  negotiations  with
Telemarketing  to  amend  the Share Purchase Agreement for the remaining balance
owed  to  us  of  approximately  $498,000.  Additionally,  we  are  currently in
discussions  with  DialMex  and  the  principal  owners of Telemarketing to join
resources  and network expertise for the purpose of correcting the problems with
DialMex's  network  and  build  a  more  robust  and  efficient  network.

     During  the  fourth  quarter  of  fiscal  2004, we initiated our efforts to
correct the various problems experienced with the DialMex network by acquiring a
VoIP  soft-switch  from  NexTone  Communications,  Inc.  The  acquisition of the
NexTone  soft-switch  has  allowed us to interconnect directly to foreign and US
carriers  and  diversify  our  traffic.  During  fiscal  2005  we  initiated the
interconnection  of  our soft-switch to DialMex's network for routes into Mexico
that meet our standards for cost and quality. The NexTone soft-switch is capable
of  processing  approximately  30  million minutes per month, it also includes a
network  analysis  and  reporting  system  that  provides a comprehensive set of
management  tools  to  engineer, translate VoIP traffic routing tables and route
our traffic efficiently. We believe that the acquisition of the VoIP soft-switch
will  allow  us  to  correct  the  various network problems experienced with the
DialMex  network.

     The  following summarizes the Company's contractual obligations at July 31,
2004,  and the effect such obligations are expected to have on its liquidity and
cash  flow  in  future  periods.

<TABLE>
<CAPTION>
                                 LESS THAN                           MORE THAN
CONTRACTUAL OBLIGATIONS  TOTAL     1 YEAR    1-3 YEARS   3-5 YEARS    5 YEARS
-----------------------  ------  ----------  ----------  ----------  ----------
<S>                      <C>     <C>         <C>         <C>         <C>
Operating Lease
Obligations               6,840       6,840           -           -           -
                         ------  ----------  ----------  ----------  ----------
Total                    $6,840  $    6,840  $        -  $        -  $        -
                         ======  ==========  ==========  ==========  ==========
</TABLE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Commodity  Price  Risk:  The  carrier services market is an extremely price
     ----------------------
sensitive  environment.  The  carrier  services  business  over  the past twelve
months  has  seen  significant  reductions  in  the price per minute charged for
transporting  minutes  of  traffic.  We  might  not  be  able to withstand these
pricing  pressures  as  certain  of  our  competitors are much larger and better
positioned  to  withstand  these  price reductions.  Our ability to absorb these
price  reductions may be dependent on our ability to further reduce our costs of
transporting  these  minutes.

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


                                       25
<PAGE>
<TABLE>
<CAPTION>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                                        Page
                                                                                        ----

CONSOLIDATED FINANCIAL STATEMENTS OF ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
<S>                                                                                     <C>

     Report of Malone and Bailey, PLLC. . . . . . . . . . . . . . . . . . . . . . . . . . .    27
     Report of Tanner + Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    28
     Consolidated Balance Sheet as of July 31, 2004 and 2003. . . . . . . . . . . . . . . .    29
     Consolidated Statements of Operations for the Years Ended July 31, 2004, 2003 and 2002    30
     Consolidated Statements of Comprehensive Loss for
       the Years Ended July 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . .    31
     Consolidated Statements of Stockholders' Deficit for
       the Years Ended July 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . .    32
     Consolidated Statements of Cash Flows for the Years Ended July 31, 2004, 2003 and 2002    33
     Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . .    34
</TABLE>


                                       26
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ATSI COMMUNICATIONS, INC.

We  have audited the consolidated balance sheet of ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES  as  of  July  31,  2004 and the related consolidated statements of
operations,  comprehensive  loss,  stockholders'  deficit and cash flows for the
year  ended  July  31,  2004.  These  consolidated  financial statements are the
responsibility of ATSI's management. Our responsibility is to express an opinion
on  these  consolidated  financial  statements  based  on  our  audit.

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

In  our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material respects, the consolidated financial position of ATSI
COMMUNICATIONS,  INC.  AND SUBSIDIARIES as of July 31, 2004 and the consolidated
results  of  their  operations  and their cash flows for the year ended July 31,
2004  in  conformity with accounting principles generally accepted in the United
States  of  America.

The  accompanying  consolidated financial statements have been prepared assuming
that  ATSI  will  continue  as  a  going  concern. As discussed in Note 2 to the
consolidated  financial  statements,  ATSI  has  a  working capital deficit, has
suffered  recurring  losses  and  has  a stockholders' deficit. These conditions
raise  substantial  doubt  about  ATSI'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 that might
result  from  the  outcome  of  this  uncertainty.


MALONE & BAILEY, PLLC
www.malone-bailey.com
Houston,  Texas

October 25, 2004


                                       27
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ATSI COMMUNICATIONS, INC.

We  have audited the consolidated balance sheet of ATSI COMMUNICATIONS, INC. AND
SUBSIDIARIES  as  of  July  31, 2003, and the related consolidated statements of
operations,  comprehensive  loss,  stockholders'  deficit and cash flows for the
years ended July 31, 2003 and 2002.  These consolidated financial statements are
the  responsibility  of  the  Company's  management.  Our  responsibility  is to
express  an  opinion  on  these  consolidated  financial statements based on our
audits.

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

In  our opinion, the consolidated financial statements referred to above present
fairly,  in  all  material respects, the consolidated financial position of ATSI
COMMUNICATIONS,  INC. AND SUBSIDIARIES as of July 31, 2003, and the consolidated
results  of  their  operations and their cash flows for the years ended July 31,
2003 and 2002 in conformity with accounting principles generally accepted in the
United  States  of  America.

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 and has a stockholders' deficit.  These
conditions  raise substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also described
in Note 2.  The consolidated financial statements do not include any adjustments
that  might  result  from  the  outcome  of  this  uncertainty.

                                               /S/ TANNER+  CO.

                                               SALT  LAKECITY,  UTAH
                                               OCTOBER 3, 2003


                                       28
<PAGE>
<TABLE>
<CAPTION>
                                          ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
                                                CONSOLIDATED BALANCE SHEETS
            (in thousands, except share information, which have been adjusted to reflect the reverse split)
                                                                                                         July 31,    July 31,
                                                                                                           2004        2003
                                                                                                        ----------  ----------
<S>                                                                                                     <C>         <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents                                                                               $      94   $     140
Accounts receivable                                                                                            29           7
Note receivable-current portion                                                                                 -         187
Prepaid & other current assets                                                                                 26           6
                                                                                                        ----------  ----------
  Total current assets                                                                                        149         340
                                                                                                        ----------  ----------

PROPERTY AND EQUIPMENT                                                                                        130           -
Less - Accumulated depreciation and amortization                                                               (9)          -
                                                                                                        ----------  ----------
  Net property and equipment                                                                                  121           -
                                                                                                        ----------  ----------

OTHER ASSETS, net
Note receivable                                                                                                 -         100
Investment in joint venture                                                                                     -         663
                                                                                                        ----------  ----------
  Total assets                                                                                          $     270   $   1,103
                                                                                                        ==========  ==========

LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Pre-petition liabilities of bankrupt subsidiaries, net of assets                                        $  12,354   $  12,453
Accounts payable                                                                                              503         356
Accrued liabilities                                                                                         1,622       2,559
Notes payable                                                                                                 778         445
Convertible debentures                                                                                        275         275
Series D Cumulative Preferred Stock, 3,000 shares authorized, 742 shares issued and outstanding             1,138       1,093
Series E Cumulative Preferred Stock, 10,000 shares authorized and 1,170 shares issued and outstanding       1,275       1,209
Liabilities from discontinued operations, net of assets                                                     1,152       1,152
                                                                                                        ----------  ----------
  Total current liabilities                                                                                19,097      19,542
                                                                                                        ----------  ----------

  Total long-term liabilities                                                                                  20           9

STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized, 3,750 and 4,370 shares
issued and outstanding, respectively                                                                            -           -
Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized, 0 and 7,260 shares
issued and outstanding, respectively                                                                            -           -
Series G Cumulative Convertible Preferred Stock, 42,000 shares authorized, 0 and 6,500 shares
issued and outstanding, respectively                                                                            -           -
Series H Convertible Preferred Stock, 16,000,000 shares authorized, 14,385,661 and 0 shares
issued and outstanding, respectively                                                                           14           -
Common stock, $0.001, 150,000,000 shares authorized, 2,918,532 and 1,036,386 (Adjusted to reflect
reverse-split) issued and outstanding, respectively                                                             3           1
Additional paid in capital                                                                                 69,178      61,124
Accumulated deficit                                                                                       (88,544)    (80,075)
Other comprehensive Income                                                                                    502         502
                                                                                                        ----------  ----------
  Total stockholders' deficit                                                                             (18,847)    (18,448)
                                                                                                        ----------  ----------
  Total liabilities and stockholders' deficit                                                           $     270   $   1,103
                                                                                                        ==========  ==========
<FN>
                     See accompanying summary of accounting policies and notes to financial statements
</TABLE>


                                       29
<PAGE>
<TABLE>
<CAPTION>
                                ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF OPERATIONS

                                                            Twelve months ended July 31,
                                                       2004            2003               2002
                                                  --------------  --------------  ----------------
<S>                                               <C>             <C>             <C>
OPERATING REVENUES:
  Services
    Carrier services                              $       1,020   $       6,532   $        41,190
    Network services                                        234             417             1,956
                                                  --------------  --------------  ----------------

    Total operating revenues                              1,254           6,949            43,146

OPERATING EXPENSES:
    Cost of services (exclusive of depreciation
    and amortization, shown below)                        1,071           6,244            39,077
    Selling, general and administrative                   7,942           4,803             6,866
    Impairment expense                                      702             418             3,119
    Bad debt expense                                          4              35               388
    Depreciation and amortization                            20           1,229             1,955
                                                  --------------  --------------  ----------------

    Total operating expenses                              9,739          12,729            51,405
                                                  --------------  --------------  ----------------


OPERATING LOSS                                           (8,485)         (5,780)           (8,259)

OTHER INCOME (EXPENSE):
  Other income (expense), net                                 7             (25)            1,868
  Debt forgiveness income                                   257               -                 -
  Loss on an unconsolidated affiliate                      (107)              -                 -
  Interest expense                                         (166)         (1,377)             (393)
  Gain/(loss) from sale of assets                            25          (1,520)                -
                                                  --------------  --------------  ----------------

    Total other income (expense)                             16          (2,922)            1,475

LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX                             (8,469)         (8,702)           (6,784)

NET LOSS FROM DISCONTINUED
OPERATIONS                                                    -          (2,919)           (8,815)
NET LOSS FROM THE SALE OF DISCONTINUED
OPERATIONS                                                    -            (962)            1,082
                                                  --------------  --------------  ----------------

NET LOSS                                                 (8,469)        (12,583)          (14,517)

LESS: PREFERRED DIVIDENDS                                  (306)           (653)             (472)
                                                  --------------  --------------  ----------------

NET LOSS TO COMMON STOCKHOLDERS                         ($8,775)       ($13,236)         ($14,989)
                                                  ==============  ==============  ================

BASIC AND DILUTED LOSS PER SHARE                         ($7.31)        ($13.01)          ($17.37)
                                                  ==============  ==============  ================

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                                 1,199,892       1,017,670           862,750
                                                  ==============  ==============  ================
<FN>
          See accompanying summary of accounting policies and notes to financial statements
</TABLE>


                                       30
<PAGE>
<TABLE>
<CAPTION>
                                ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                             (In thousands)

                                                            For the twelve months ended July 31,
                                                         2004              2003              2002
                                                   -----------------  ---------------  ----------------
<S>                                                <C>                <C>              <C>
Net loss to common stockholders

  Other comprehensive income (loss), net of tax:            ($8,775)        ($13,236)         ($14,989)

  Foreign currency translation adjustment                         -            1,139               611
                                                   -----------------  ---------------  ----------------

Comprehensive loss to common stockholders                   ($8,775)        ($12,097)         ($14,378)
                                                   =================  ===============  ================
</TABLE>

                              See accompanying summary of accounting policies
                                     and notes to financial statements


                                       31
<PAGE>
<TABLE>
<CAPTION>
                                           ATSI COMMUNICATIONS, INC.

                                                AND SUBSIDIARIES

                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT


                                                    Preferred Stock      Common Stock      Additional      Accumulated
                                                    ------------------  ---------------
                                                      Shares    Amount  Shares  Amount    Paid In Capital     Deficit
                                                    --------------------------------------------------------------------
<S>                                                 <C>         <C>     <C>     <C>      <C>                <C>
BALANCE, JULY 31, 2001                                     18        -     773  $     1  $         58,011      ($52,503)
Issuances of common shares for cash                                          8                        220
Issuances of common shares for services                                      0                         10
Issuances of common shares for acquisition                                  11                       (980)
Issuances of preferred stock                                                                          (26)
Conversion of preferred stock                                              155                      2,400
Notes receivable from shareholders                                           3                         12
Dividends                                                                                                          (472)
Compensation expense                                                                                    0
Expiration of warrants                                                                                338
Cumulative effect of translation adjustment
Net loss                                                                                                        (14,517)
                                                    --------------------------------------------------------------------
BALANCE, JULY 31, 2002                                     18        -     950  $     1  $         59,985      ($67,492)
                                                    --------------------------------------------------------------------
Issuances of common shares for services                                     33                        174
Conversion of redeemable preferred stock                                    53                        691
Dividends                                                                                            (653)
Cumulative effect of translation adjustment
Net loss                                                                                                        (12,583)
                                                    --------------------------------------------------------------------
BALANCE, JULY 31, 2003                                     18        -   1,036  $     1  $         60,197      ($80,075)
                                                    --------------------------------------------------------------------
Issuances of common shares for preferred shares                            913        1               859
Issuance of common shares for services                                                                  2
Issuances of common shares for cash                                        567        1                 5
Conversion of redeemable preferred stock                  (14)             401                        353
Preferred stock dividend in conjunction with split     14,385       14                                (14)
Dividends                                                                                            (306)
Warrant expense                                                                                     7,053
Net loss                                                                                                         (8,469)
                                                    --------------------------------------------------------------------
BALANCE, JULY 31, 2004                                 14,389       14   2,917  $     2  $         68,148      ($88,544)
                                                    ====================================================================


                                                                    Cumulative
                                                      Warrants     Translation       Deferred          Total
                                                     Outstanding    Adjustment     Compensation    Stockholders'
                                                    -------------------------------------------------------------
<S>                                                 <C>            <C>            <C>             <C>
BALANCE, JULY 31, 2001                              $      1,369        ($1,247)           ($12)  $        5,619
Issuances of common shares for cash                                                                          220
Issuances of common shares for services                                                                       10
Issuances of common shares for acquisition                                                                  (980)
Issuances of preferred stock                                                                                 (26)
Conversion of preferred stock                                                                              2,400
Notes receivable from shareholders                                                                            12
Dividends                                                                                                   (472)
Compensation expense                                                                         12               12
Expiration of warrants                                      (338)                                              -
Cumulative effect of translation adjustment                                 611                              611
Net loss                                                                                                 (14,517)
                                                    -------------------------------------------------------------
BALANCE, JULY 31, 2002                              $      1,031          ($636)  $           0          ($7,111)
                                                    -------------------------------------------------------------
Issuances of common shares for services                                                                      174
Conversion of redeemable preferred stock                                                                     691
Dividends                                                                                                   (653)
Cumulative effect of translation adjustment                               1,139                            1,139
Net loss                                                                                                 (12,583)
                                                    -------------------------------------------------------------
BALANCE, JULY 31, 2003                              $      1,031   $        503   $           0         ($18,344)
                                                    -------------------------------------------------------------
Issuances of common shares for preferred shares                                                              860
Issuance of common shares for services                                                                         2
Issuances of common shares for cash                                                                            6
Conversion of redeemable preferred stock                                                                     353
Preferred stock dividend in conjunction with split                                                             -
Dividends                                                                                                   (306)
Warrant expense                                                                                            7,053
Net loss                                                                                                  (8,469)
                                                    -------------------------------------------------------------
BALANCE, JULY 31, 2004                              $      1,031   $        503   $           0         ($18,846)
                                                    =============================================================
<FN>
                  See accompanying summary of accounting policies and notes to the financial statements
</TABLE>


                                       32
<PAGE>
<TABLE>
<CAPTION>
                                ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
                                   CONSOLIDATED STATEMENT OF CASH FLOWS
                                              (In thousands)


                                                                      Twelve months ended July 31,
                                                                    2004        2003           2002
                                                                  ---------  ----------  ----------------
<S>                                                               <C>        <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS                                                           ($8,469)   ($12,583)         ($14,517)
Adjustments to net loss
    Issuance of warrants for services                                7,053           -                 -
    Impairment loss                                                    702         418             6,432
    Loss on an unconsolidated affiliate                                107           -                 -
    Depreciation and amortization                                       19       1,739             4,599
    Provision for losses on accounts receivable                          4         106               433
    Issuance of common stock for services                                2           -                10
  Debt forgiveness income                                             (257)          -                 -
  Loss on the disposal of property & equipment                           -       1,009                 -
  Loss on the sale of ATSIMEX & SINFRA                                   -         962                 -
    Foreign currency loss                                                -         661                 -
  Loss on the sale of 51% of ATSICOM                                     -         511                 -
    Loss on investment in ATSICOM                                        -          14                 -
    Deferred compensation                                                -           -                12
    Minority interest                                                    -           -              (244)
  Gain on the sale of GlobalScape                                        -           -            (1,082)
  Gain on the restructuring of the IBM debt                                                       (1,860)
   Changes in operating assets and liabilities:
    (Increase)  Decrease in accounts receivable                        (21)        719               786
    (Increase) Decrease in prepaid expenses and other                  (31)        583               248
    Increase in accounts payable                                       272       3,179             3,911
    Increase in accrued liabilities                                    162       2,919               780
    (Decrease) in deferred revenue                                       -        (108)              (17)
                                                                  ---------  ----------  ----------------
Net cash (used in) / provided by operating activities                 (457)        129              (509)
                                                                  ---------  ----------  ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash proceeds from sale of ATSICOM                                   187         440                 -
  Investment in joint venture  in ATSICOM                              (47)          -                 -
  Purchases of property & equipment                                   (130)       (281)           (1,092)
  Cash proceeds from sale of ATSIMEX & SINFRA                            -          18                 -
  Acquisition of business, net of assets                                 -           -               (54)
  Cash proceeds from sale of GlobalScape                                 -           -             2,250
                                                                  ---------  ----------  ----------------
Net cash provided by investing activities                               10         177             1,104
                                                                  ---------  ----------  ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of debt                                       410          25               358
  Debt payments                                                         (9)          -               (65)
  Capital lease payments                                                 -         (87)           (1,158)
  Payment of expenses related to the issuance of preferred stock         -         (12)              (26)
  Proceeds from issuance of common stock                                 -           -               220
  Payment of expenses related to the issuance of common stock            -         (95)                -
                                                                  ---------  ----------  ----------------
Net cash provided by / (used in) financing activities                  401        (169)             (671)
                                                                  ---------  ----------  ----------------
NET (DECREASE) INCREASE IN CASH                                        (46)        137               (76)
CASH AND CASH EQUIVALENTS, beginning of period                         140           3                12
CASH AND CASH EQUIVALENTS, Allocated to discontinued operations          -           -                67
                                                                  ---------  ----------  ----------------
CASH AND CASH EQUIVALENTS, end of period                          $     94   $     140   $             3
                                                                  =========  ==========  ================
<FN>
            See accompanying summary of accounting policies and notes to financial statements
</TABLE>


                                       33
<PAGE>
                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS: ATSI Communications, Inc. ("ATSI") was incorporated in
Nevada on May 24, 2004. ATSI is an international telecommunications carrier that
utilizes the Internet to provide economical international telecommunications
services to carriers and telephony resellers around the world. ATSI's continuing
operations consist of VoIP wholesale business and network services. ATSI
provides transmission and termination services to U.S. and Foreign
telecommunications companies who lack transmission facilities, require
additional capacity or do not have the regulatory licenses to terminate traffic
in Mexico, Asia, the Middle East and Latin America.

RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
with the current year presentation.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements have been
prepared on the accrual basis of accounting under accounting principles
generally accepted in the United States (GAAP). All significant intercompany
balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES. In preparing financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheet and revenue and expenses in the statement of expenses. Actual
results could differ from those estimates.

CASH AND CASH EQUIVALENTS. For purposes of the statement of cash flows, ATSI
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.

REVENUE RECOGNITION. ATSI derives revenue from both Carrier Services and Network
Services. Revenue is recognized when persuasive evidence of an arrangement
exists, service or network capacity has been provided, the price is fixed or
determinable, collectibility is reasonably assured and there are no significant
obligations remaining.

     Carrier Service: ATSI provides transmission and termination services to
U.S. and Foreign telecommunications companies who lack transmission facilities,
require additional capacity or do not have the regulatory licenses to terminate
traffic in Mexico, Asia, the Middle East and Latin America. Typically these
telecommunications companies offer their services to the public for local and
international long distance services. Carrier service revenue is derived through
transporting and terminating minutes of telecommunications traffic over ATSI's
owned or leased VoIP network (Voice over Internet Protocol). ATSI recognizes
revenue in the period the service is provided, net of revenue reserves for
potential billing credits. Such disputes can result from disagreements with
customers regarding the duration, destination or rates charged for each call.

     Network Service: ATSI offers private communication links for multi-national
and Latin American corporations or enterprise customers who use a high volume of
telecommunications services to their U.S. offices or businesses and need greater
dependability than is available through public networks. These services include
data, voice and fax transmission as well as Internet services between the
customers multiple international offices and branches. Network service revenue
is derived from the network capacity provided to customers to connect their
multiple sites or locations throughout Latin America to transport data, voice
and fax transmissions.

ALLOWANCE FOR DOUBTFUL ACCOUNTS. Bad debt expense is recognized based on
management's estimate of likely losses per year, based on past experience and an
estimate of current year uncollectible amounts. There was no allowance for
doubtful accounts as of July 31, 2004.

NOTE RECEIVABLE. ATSI has an unrecorded note receivable from Telemarketing de
Mexico S.A de C.V. for the sale of 51% of ATSI Comunicaciones S.A de C.V. Under
the terms of the "Share Purchase Agreement" dated May 24, 2003, ATSI is
scheduled to receive from Telemarketing $20,750 per month for 24 months
beginning in May 2004, contingent on ATSI generating 20,750,000 minutes of
monthly traffic through ATSICOM's network. In the event


                                       34
<PAGE>
the  ATSI  does  not  reach  the  above-mentioned volume of monthly minutes, the
monthly payments were to be adjusted based on the percentage of the shortfall in
minutes, until Telemarketing pays the total remaining purchase price of
$498,000. Currently, ATSI has as a collateral on this note 10% of ATSICOM's
stock, which was part of the "Share Purchase Agreement" with Telemarketing.

During fiscal 2004 ATSI experienced difficulties with DialMex's network, due
primarily to deficiencies in DialMex's network capacity, call interruptions and
limited traffic routing selections. Additionally ATSI Comunicaciones S.A de C.V.
has not been able to complete the required interconnections with other Mexican
carriers, to process domestic and international VoIP traffic. As result, ATSI
has not been able to generate the monthly minutes required under the
Telemarketing agreement. Consequently, ATSI has not received any payments from
Telemarketing since May 2004. Currently ATSI is in negotiations with
Telemarketing to amend the "Share Purchase Agreement" for the remaining balance
owed to us of approximately $498,000. Currently ATSI is in discussions with
DialMex and the principal owners of Telemarketing to join resources and network
expertise to correct the problems experienced with the DialMex Network and
build a more robust and efficient network.

DIRECT COST OF REVENUE:

     Carrier Services: Under carrier services ATSI incurs termination charges.
These charges are related to the fees that ATSI is charged by carriers / vendors
for the termination of phone calls into their infrastructure and network to
terminate traffic in Mexico, Asia, the Middle East and Latin America. The cost
is based on a per minute rate and volume. ATSI also incurs installation charges
from various carriers; this cost is passed on to customers for the connection to
the VoIP network from ATSI's carriers.

     Network Services: Under network services, ATSI incurs satellite and fiber
optic charges. The satellite and fiber optic charges are incurred as part of the
connection links between the customer's different remote locations and sites to
transmit data, voice and Internet services.

PROPERTY AND EQUIPMENT is valued at cost. Additions are capitalized and
maintenance and repairs are charged to expense as incurred. Gains and losses on
dispositions of equipment are reflected in operations. Depreciation is provided
using the straight-line method over the estimated useful lives of the assets,
which are one to five years.

IMPAIRMENT OF LONG-LIVED ASSETS. ATSI reviews the carrying value of its
long-lived assets annually or whenever events or changes in circumstances
indicate that the historical cost-carrying value of an asset may no longer be
appropriate. ATSI assesses recoverability of the carrying value of the asset by
estimating the future net cash flows expected to result from the asset,
including eventual disposition. If the future net cash flows are less than the
carrying value of the asset, an impairment loss is recorded equal to the
difference between the asset's carrying value and fair value.

     -    During the year ended July 31, 2004, in accordance with U.S. GAAP we
          determined that the estimated cash flows expected from the concession
          license would be less than the recorded value. As a result we recorded
          an impairment loss of approximately $702,000 to reduce the recorded
          value of the concession license.

INVESTMENT IN UNCONSOLIDATED SUBSIDIARY. On May 22, 2003 ATSI sold 51% of its
interest in ATSI Comunicaciones S.A de C.V., (ATSI COM) As of July 31, 2003,
ATSI has a 49% interest in the profits and equity of ATSICOM, a Mexican
Corporation, engaged in providing telecommunications services. During fiscal
2003 ATSI recorded the investment in the unconsolidated subsidiary in conformity
with the equity method of accounting. During the year ended July 31, 2004, we
have taken a conservative approach and determined that the estimated future cash
flows expected from the concession license will be less than its carrying value.
As a result ATSI recorded an impairment loss of approximately $702,000 to reduce
the record value of the concession license. Although there is no assurance of
future value appreciation, the company will conduct a valuation of its
investment in the concession license annually and record the determined value,
if any, in its financial statements.


                                       35
<PAGE>
INCOME TAXES. ATSI recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. ATSI provides a
valuation allowance for deferred tax assets for which it does not consider
realization of such assets to be more likely than not.

BASIC AND DILUTED NET LOSS PER SHARE. The basic net loss per common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by dividing
the net loss adjusted on an "as if converted" basis, by the weighted average
number of common shares outstanding plus potential dilutive securities. For the
years ended July 31, 2004, 2003 and 2002, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.

STOCK BASED COMPENSATION. ATSI adopted the disclosure requirements of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No.
123) and FAS No. 148 with respect to pro forma disclosure of compensation
expense for options issued. For purposes of the pro forma disclosures, the fair
value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model.

ATSI applies APB No. 25 in accounting for its stock option plans and,
accordingly, no compensation cost has been recognized in ATSI financial
statements for stock options under any of the stock plans which on the date of
grant the exercise price per share was equal to or exceeded the fair value per
share. However, compensation cost has been recognized for warrants and options
granted to non-employees for services provided. The following table illustrates
the effect on net loss and net loss per share if ATSI had applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.

<TABLE>
<CAPTION>
                                                    For the Years Ended July 31,
                                       -----------------------------------------------------
                                            2004                 2003               2002
                                       ---------------  ----------------------  ------------
                                             (In thousands, except per share amounts)
<S>                                    <C>              <C>                     <C>
Net loss applicable to common
Stockholders                           $       (8,775)  $             (13,236)  $   (14,989)

Deduct: Total stock based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects                  -                    (313)         (794)
                                       ---------------  ----------------------  ------------

Pro forma net loss                             (8,775)                (13,549)      (15,783)
                                       ===============  ======================  ============

Earnings per share
  Basis - as reported                  $        (7.31)  $              (13.01)  $    (17.00)
                                       ===============  ======================  ============
  Basis - pro forma                    $        (7.31)  $              (13.01)  $    (18.00)
                                       ===============  ======================  ============
</TABLE>

The  fair  value  of each option and warrant granted is estimated on the date of
grant  using  the  Black-Scholes  option  pricing  model  with  the  following
assumptions:

<TABLE>
<CAPTION>
                                     For the Years Ended July 31,
                                 -------------------------------------
                                    2004         2003         2002
                                 ----------  ------------  -----------
<S>                              <C>         <C>           <C>
Expected dividends yield              0.00%         0.00%        0.00%

Expected stock price volatility        248%          256%         123%

Risk-free interest rate                  2%         2.70%        4.92%

Expected life of options         1-2 years    3-10 years   3-10 years
                                 ----------  ------------  -----------
</TABLE>

                                       36
<PAGE>
There were no options granted to employees during fiscal 2004.The weighted
average fair value of options granted during 2003 and 2002 were $8.00 and $5.00,
respectively.

CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject ATSI
to concentration of credit risk consist primarily of trade receivables. In the
normal course of business, ATSI provides credit terms to its customers.
Accordingly, ATSI performs ongoing credit evaluations of its customers and
maintains allowances for possible losses, which, when realized, have been within
the range of management's expectations. ATSI maintains cash in bank deposits
accounts, which, at times, may exceed federally insured limits. ATSI has not
experienced any losses in such accounts and ATSI does not believe ATSI is
exposed to any significant credit risk on cash and cash equivalents.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS. ATSI does not expect the adoption of
recently issued accounting pronouncements to have a significant impact on ATSI's
results of operations, financial position or cash flow.

NOTE 2 - GOING CONCERN

As shown in the accompanying financial statements, ATSI incurred recurring net
losses from operations of $8,469,000, $8,702,000 and $6,784,000 in fiscal 2004,
2003 and 2002, respectively, has an accumulated deficit of $89 million and a
working capital deficit of $18.9 million as of July 31, 2004. These conditions
create substantial doubt as to ATSI's ability to continue as a going concern.
Management will continue to pursue financings that may include raising
additional capital through sale of common stock, preferred stock, or warrants.
The financial statements do not include any adjustments that might be necessary
if ATSI is unable to continue as a going concern.

NOTE 3 - PRE-PETITION LIABILITIES (NET OF ASSETS) OF THE BANKRUPT SUBSIDIARIES

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


                                       37
<PAGE>
<TABLE>
<CAPTION>
The following represents the pre-petition liabilities of bankrupt subsidiaries, net of assets:

                              ATSI Texas and TeleSpan
                                  (in thousands)

                                     July 31, 2004      July 31, 2003
                                 -----------------  -----------------
<S>                              <C>                <C>
CURRENT LIABILITIES:
Accounts payable                 $           7,496  $           7,492
Accrued liabilities                          2,015              2,015
Notes payable                                  636                636
Capital leases                               2,207              2,207
                                 -----------------  -----------------
  Total current liabilities      $          12,354  $          12,350
                                 -----------------  -----------------
</TABLE>

NOTE 4 - PROPERTY AND EQUIPMENT

     Following  is  a  summary of ATSI's property and equipment at July 31, 2004
and  2003  (in  thousands):

<TABLE>
<CAPTION>
                                     Depreciable lives   July 31, 2004   July 31, 2003
                                     -----------------  ---------------  -------------
<S>                                  <C>                <C>              <C>
     Telecom equipment & Software            1-5 years  $          130               -
     Total                                                         130               -
     Less: accumulated depreciation                                 (9)              -
                                                        ---------------  -------------
     Net-property and equipment                         $          121               -
                                                        ===============  =============
</TABLE>

For  the  years  ended  July  31,  2004  and 2003, depreciation and amortization
totaled  approximately  $20,000  and  $1,229,000,  respectively.

NOTE 5 - ACCRUED LIABILITIES

     Following  is  a  summary  of  ATSI's  accrued  liabilities (in thousands):

<TABLE>
<CAPTION>
                                                     July 31, 2004   July 31, 2003
                                                     --------------  --------------
<S>                                                  <C>             <C>

Alfonso Torres (Mexican concession license)          $        1,047  $        1,003
Christian, Wukoson, Smith & Jewell                                -             869
Dividends series "A", "F" and "G"                               239             396
Audit fees, penalties, rent, wages & payroll taxes              266             260
Convertible debenture interest                                   55              31
Recap Marketing interest                                         15               -
                                                     ------------------------------
TOTAL:                                               $        1,622  $        2,559
                                                     ===============  =============
</TABLE>

NOTE 6 - NOTES PAYABLE


                                       38
<PAGE>
During  fiscal  2004,  ATSI  borrowed a total of $410,500 from Recap Marketing &
Consulting,  LLP  and  entered into a series of unsecured convertible promissory
notes bearing interest at the rate of 12% per annum, with the following maturity
dates:

<TABLE>
<CAPTION>
          ORIGINATION DATE    AMOUNT     MATURITY DATE
          ------------------  --------  -----------------
<S>                           <C>       <C>

          October 14, 2003    $ 50,000  December 15, 2004
          November 25, 2003     25,000  December 15, 2004
          December 15, 2003     25,000  December 15, 2004
          January 15, 2004      25,000  December 15, 2004
          February 19, 2004     25,000  July 31, 2005
          March 17, 2004        25,000  July 31, 2005
          April 22, 2004        40,000  July 31, 2005
          May 10, 2004          47,500  July 31, 2005
          June 1, 2004          25,000  July 31, 2005
          June 21, 2004         47,500  January 21, 2005
          July 7, 2004          25,000  January 7, 2005
          July 30, 2004         50,000  January 30, 2005
                              --------
                      TOTAL:  $410,000
                              --------
</TABLE>

In November 2001, ATSI entered into a note payable, in the amount of $357,000
with the former owners of the concession license that was purchased in July
2000. The note called for principal payments of approximately $51,000 per month
plus accrued interest. The note, which accrues interest at the rate of prime
plus 2%, matured July 19, 2002. On October 1, 2002, the note was amended in its
entirety with a revised maturity date of April 2006 and an amended interest rate
of 7.75%. The revised note calls for equal monthly payments of principal and
interest in the amount of approximately $9,000. During Fiscal 2004 and 2003,
ATSI did not make any payments; therefore the note is in technical default and
has been classified as current. The holders of this note can demand full payment
of the total outstanding principal balance and accrued interest. As of the date
of this filing, the holders of this note have not demanded full payment on this
note. Currently ATSI is in negotiations with the note holders to satisfy this
obligation in an exchange for equity in ATSI. However, there can be no assurance
that a favorable agreement will be reached.

In December 2002, ATSI entered into a note payable with a related party, a
director of ATSI, in the amount of $25,000. The note called for 12 monthly
payments of approximately $2,000 including interest, commencing on February 1,
2003. The note has an annual interest rate of 7% and a maturity date of January
1, 2004. Additionally, during fiscal 2004 ATSI made payments towards this note
for approximately $9,000.Currently ATSI is in negotiations with the note holders
to extend its maturity date. However, there can be no assurance that a favorable
agreement will be reached.

NOTE 7 - WARRANTS

On October 13, 2003, ATSI entered into consulting agreements with Recap
Marketing & Consulting, LLP that provide for the issuance of compensation
warrants to purchase a total of 3,900,000 shares of ATSI's common stock at
prices as indicated in the following table. These warrants expire on November
30, 2005. During fiscal 2004 ATSI recognized $7,052,999 of non-cash compensation
expense associated with the issuance of these warrants.

<TABLE>
<CAPTION>
                    Common     Exercise
                    Shares       Price
                    ---------  ---------
<S>                            <C>
                    2,000,000  $    0.01
                      800,000  $    0.25
                      850,000  $    0.50
                      250,000  $    0.75
</TABLE>


                                       39
<PAGE>
During  fiscal  2004,  Recap  Marketing & Consulting, LLP exercise the following
warrants:

<TABLE>
<CAPTION>
                            Exercise     Common
          Exercise Date       Price      Shares
          -------------     ----------  -------
<S>                         <C>         <C>

          June 21, 2004     $    0.01   150,000
          July 12, 2004     $    0.01   208,000
          July 27, 2004     $    0.01   208,574
                                        -------
                                TOTAL:  566,574
                                        -------
</TABLE>


MODIFICATION  OF  NON-EMPLOYEE  AWARDS  ACCOUNTED  FOR  UNDER  FAS  123
-----------------------------------------------------------------------

ATSI granted 3,900,000 warrants to outsiders in 2004 where the warrant
agreements contained a provision whereby the number of neither the warrant
amount nor the exercise price would be adjusted by reverse splits. Effective May
24, 2004, ATSI authorized a 1 for 100 reverse split. This triggered a
modification for this award. A modification of the terms of an award that makes
it more valuable shall be treated as an exchange of the original award for a new
award. In substance, the entity repurchases the original instrument by issuing a
new instrument of greater value, incurring additional compensation cost for that
incremental value. The incremental value shall be measured by the difference
between (a) the fair value of the modified option determined in accordance with
the provisions of this section and (b) the value of the old option immediately
before its terms are modified, determined based on the shorter of (1) its
remaining expected life or (2) the expected life of the modified option. As of
July 31, 2004, the additional value totaled $7,052,999, which was recorded as
non-cash compensation expense.

NOTE 8 - CONVERTIBLE SUBORDINATED DEBENTURES

During fiscal 2002 ATSI received $275,000 of advances without specific terms of
repayment or interest. In January 2003 ATSI issued 275 9% Convertible
Subordinated Debentures with a face value of $1,000 each, due January 2005 and
warrants to purchase 137,500 shares of common stock in exchange for the $275,000
previously advanced. Each debenture accrues interest at the rate of 9% per annum
payable quarterly. The debentures convert into common stock at a conversion
price of $13.50 and the warrants are priced at $11.20. At July 31, 2004, ATSI
was in default of the terms of the debentures for non-payment of quarterly
interest. As of July 31, 2004 ATSI had approximately $55,000 in accrued interest
related to these debentures.

NOTE 9 COMMITMENTS AND CONTINGENCIES

In March 2001, Comdisco sued ATSI's subsidiary, ATSI-Texas, for breach of
contract for failing to pay lease amounts due under a lease agreement for
telecommunications equipment. Comdisco claims that the total amount owed
pursuant to the lease was $926,185 and that the lease terms called for 36 months
of lease payments. Comdisco is claiming that ATSI-Texas only paid thirty months
of lease payments. ATSI-Texas disputes that the amount owed was $926,185 since
it received only $375,386 in financing and has paid over $473,000 in lease
payments and, thus, believe that it has satisfied its obligation under the lease
terms. Comdisco has filed a claim with the United States Bankruptcy Court of the
Western District of Texas in which the bankruptcy of ATSI-Texas is pending. We
believe that ATSI does not have a liability for the lease payments; additionally
we believe that the obligation by ATSI-Texas will be discharged upon completion
of the pending Chapter 7 case.

In July 2002, ATSI-Texas was notified by the Dallas Appraisal District that the
administrative appeal from the appraisal of the office in the Dallas InfoMart
location was denied. The property was appraised at over $6 million dollars. The
property involved included a Nortel DMS 250/300 switch, other telecommunications
equipment and office furniture and computers. ATSI-Texas was unable to proceed
in its appeal of the appraisal due to its failure to pay the taxes under
protest. During fiscal 2002 we recorded approximately $260,000 of property tax
expense related to the ATSI-Texas InfoMart location. Currently the Dallas County
taxing authority has filed a claim with the United


                                       40
<PAGE>
States Bankruptcy Court of the Western District of Texas for approximately
$783,843. This amount also included a property tax estimate of approximately
$230,572 for calendar year 2003. We believe this amount is incorrect; since all
of the property was removed and impaired from the Dallas site as a result of
ATSI-Texas filing for protection under Chapter 11 of the Bankruptcy code. We
believe that this obligation by ATSI-Texas will be discharged upon the
completion of the pending Chapter 7 case.

In October 2002, ATSI filed a lawsuit in the Southern District of New York
against several financial parties for stock fraud and manipulation. The case is
based on convertible preferred stock financing transactions involving primarily
two firms, Rose Glen Capital and the Shaar Fund. ATSI believes that Rose Glenn
and the Shaar Fund engaged in a scheme to defraud ATSI into selling multiple
series of convertible preferred stock and to manipulate the price of ATSI's
stock downward in order to take advantage of increased conversion rates
resulting from the decline in stock price. If we receive an adverse decision in
this lawsuit, it is likely we would be required to issue a substantial amount of
our common shares to our Series D and Series E preferred holders and the current
owners of our common shares would be substantially diluted.

In June 2003, ATSI filed a lawsuit in the 150th Judicial District Court, Bexar
County, Texas against NIFTI Communications Systems, LLC. for breach of contract,
fraudulent misrepresentation, and negligent misrepresentation relating to a
letter of intent for NIFTI to acquire the concession license in Mexico owned by
ATSICOM. NIFTI failed to provide proof of funding to consummate this
transaction, lacked interest in the transaction and failed to commit to a
definite date for the completion of this transaction. As a result this
transaction was never consummated and in May 2003 we sold 51% of ATSICOM's stock
to Telemarketing de Mexico S.A de C.V. In July 21, 2003, NIFTI counterclaimed
for damages allegedly arising from ATSI failing to provide all the proper
documentation associated with concession license liabilities, accounting and
requirements by the Mexican Government. During fiscal 2004, the parties reached
a settlement and agreed to dismiss both lawsuits without compensation.

In December 2003, ATSI filed a cause of action in the 407th Judicial District of
Bexar County, Texas against James C. Cuevas, Raymond G. Romero, Texas Workforce
Commission, ATSI-Texas and Martin W. Seidler seeking judicial review on the
decision issued by the Texas Workforce Commission awarding a claim for unpaid
wages against ATSI. ATSI is vigorously pursuing this action but cannot predict
the outcome of this litigation or the financial impact on our ongoing
operations.

In January 2004, ATSI filed a petition in the 150th Judicial District of Bexar
County, Texas against Inter-tel.net, Inc. and Vianet Communications, Inc. d/b/a
Inter-tel.net seeking declaratory relief that ATSI Communications, Inc. is not
bound by the Carrier Services Agreement between Vianet Communications, Inc. and
ATSI-Texas. On February 27, 2004 the Bankruptcy Court in the ATSI-Texas
Bankruptcy case allowed Vianet Communications, Inc. to amend its claim against
ATSI-Texas that was pending in the Bankruptcy of ATSI-Texas and assert its
claims for breach of contract against ATSI. The Bankruptcy Court then ordered
the lawsuit to be remanded back to the state court for hearing. ATSI is the
plaintiff in this case and is seeking a declaratory relief from the Bexar County
court. Currently we cannot predict the outcome of this litigation or the
financial impact on our ongoing operations.

ATSI is also a party to additional claims and legal proceedings arising in the
ordinary course of business. We believe it is unlikely that the final outcome of
any of the claims or proceedings to which we are a party would have a material
adverse effect on ATSI'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 our results of operations in the period in which it occurred.

NOTE 10 - EQUITY

COMMON  STOCK
-------------

During the year ended July 31, 2004, prior to the reincorporation to the state
of Nevada ATSI issued 401,130 common shares. Of this total, 101,786 shares were
issued as a result of the conversions of ATSI's Series F Preferred


                                       41
<PAGE>
Stock and accumulated dividends, 297,974 shares were issued as a result of the
conversion of ATSI's Series G Preferred Stock and accumulated dividends, 1,205
shares were issued as a result of the conversion of ATSI's Series A Preferred
Stock and 165 shares were issued for services rendered to ATSI. ATSI has not
registered the shares issued for services rendered, nor does ATSI have any
obligation to register such shares.

On May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI into a
wholly owned subsidiary, ATSI Merger Corporation in the state of Nevada. And as
a result of the merger, ATSI's Stockholders of record as of May 24, 2004
received one (1) share of New ATSI Common Stock and ten (10) shares of New ATSI
Series H Convertible Preferred Stock for each 100 shares of Old ATSI Common
Stock surrendered. As a result of the merger ATSI exchanged 143,751,710 common
shares of the Old ATSI for 1,437,517 shares of the New ATSI Common stock and
14,385,000 shares of the New ATSI Series H Convertible Preferred Stock.
Additionally, after the reincorporation ATSI issued 566,574 shares of the New
ATSI Commons stock related to the exercise of warrants. (See footnote 7)
Furthermore, ATSI issued 912,800 shares for debt conversion. ATSI has not
registered the shares issued for services rendered, nor does ATSI have any
obligation to register such shares

During the fiscal 2003, ATSI issued 86,449 common shares. Of this total, 39,187
shares were issued as a result of the conversions of ATSI's Series E Preferred
Stock and accumulated dividends, 12,722 shares were issued as a result of the
conversion of ATSI's Series F Preferred Stock and accumulated dividends, 1,354
shares were issued as a result of the accumulated dividends of ATSI's Series G
Preferred Stocks and 33,186 shares were issued for services rendered to ATSI.
ATSI has not registered the shares issued for services rendered, nor does ATSI
have any obligation to register such shares.

No dividends were paid on ATSI's common stock during fiscal 2004 and 2003.

PREFERRED  STOCK
----------------

On May 6, 2004 ATSI's stockholders approved the reincorporation of ATSI into a
wholly owned subsidiary, ATSI Merger Corporation in Nevada. As a result of the
merger, ATSI's Stockholders of record as of May 24, 2004 received one (1) share
of New ATSI Common Stock and ten (10) shares of New ATSI Series H Convertible
Preferred Stock for each 100 shares of Old ATSI Common Stock surrendered. During
fiscal 2004, 14,385,000 shares of the New ATSI Series H Convertible Preferred
Stock were then issued.

Pursuant to ATSI's Certificate of Incorporation, ATSI's board of directors may
issue, in series, 16,000,000 of the New ATSI Series H Convertible Preferred
shares, with a par value of $0.001.

At ATSI's annual stockholders meeting held May 21, 1997, ATSI's stockholders of
ATSI Canada approved the creation of a class of preferred stock at ATSI's annual
stockholders meeting on May 21, 1997. This class of preferred stock was
authorized, effective June 25, 1997. According to ATSI's amended Articles of
Incorporation, ATSI's board of directors may issue, in series, an unlimited
number of preferred shares, without par value. No preferred shares of ATSI
Canada have been issued as of July 31, 2004.

Pursuant to ATSI's Certificate of Incorporation, ATSI's board of directors may
issue, in series, 10,000,000 of preferred shares, with a par value of $0.001.

The terms of ATSI's Series A, Series B, Series C, Series D, Series E, Series F,
Series G and Series H preferred stock restrict ATSI from declaring and paying
dividends on ATSI's common stock until such time as all outstanding dividends
have been fulfilled related to the preferred stock. The outstanding Series A,
Series D, Series E, Series F and Series G preferred stock have liquidation
preference prior to common stock and ratably with each other.

SERIES  A  PREFERRED  STOCK
---------------------------

In March 2004, the holder of 620 Series A Preferred shares elected to convert
all their shares into 1,206 shares of common. As of July 31, 2004, 3,750 shares
of Series A Preferred Stock remain outstanding for which ATSI has accrued
approximately $175,000 for dividends.


                                       42
<PAGE>
The Series A Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year at the average closing price of
the Common Stock for twenty (20) trading days preceding the Date of Closing (the
"Initial Conversion Price"). On each Anniversary Date up to and including the
fifth Anniversary Date, the Conversion price on any unconverted Preferred Stock,
will be reset to be equal to 75% of the average closing price of the stock for
the then twenty (20) preceding days provided that the Conversion price can not
be reset any lower than 75% of the Initial Conversion Price. As these conversion
features are considered a "beneficial conversion feature" to the holder, ATSI
allocated approximately $3.6 million of the approximate $5.0 million in proceeds
to additional paid-in capital as a discount to be amortized over various periods
ranging from ninety days to a twelve-month period. During fiscal year 2001 the
remaining beneficial conversion feature was fully amortized. The Series A
Preferred Stock is callable and redeemable by ATSI at 100% of its face value,
plus any accumulated, unpaid dividends at ATSI's option any time after the
Common Stock of ATSI has traded at 200% or more of the conversion price in
effect for at least twenty (20) consecutive trading days, so long as ATSI does
not call the Preferred Stock prior to the first anniversary date of the Date of
Closing.

SERIES  D  PREFERRED  STOCK
---------------------------

The Series D Preferred Stock accrues cumulative dividends at the rate of 6% per
annum payable quarterly. As of July 31, 2004, 742 shares of Series D Preferred
Stock remain outstanding, for which ATSI accrued approximately $196,000 for
dividends. Additionally, on January 24, 2003 ATSI received a demand redemption
letter from the Series D Preferred holders. ATSI has not issued these shares; it
is the position of ATSI that the investor's shares are not owed. Further ATSI
has filed a lawsuit against one or more parties to whom the investors share are
allegedly owed. ATSI is seeking damages from the parties involved for stock
manipulation and fraud.

The Series D Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to two years at the lesser of a) the market
price on the day prior to closing or b) 83% of the five lowest closing bid
prices on the ten days preceding conversion.

The terms of ATSI's Series D Preferred Stock allow for mandatory redemption by
the holder upon certain conditions. The Series D Preferred Stock allows the
holder to elect redemption upon the change of control of ATSI at 120% of the sum
of $1,300 per share and accrued and unpaid dividends. Additionally, the holder
may elect redemption at $1,270 per share plus accrued and unpaid dividends if
ATSI refuses to honor conversion notice or if a third party challenges
conversion. During the year ended July 31, 2003, ATSI received a redemption
letter. As a result ATSI adjusted Series D Preferred Stock to the full
redemption amount of approximately $942,000 by recording an additional amount of
dividend expense of approximately $284,000.

SERIES  E  PREFERRED  STOCK
---------------------------

During Fiscal 2003, the holder converted 285 of the shares outstanding and
accumulated interest resulting in the issuance of 41,217 shares of common stock.
As of July 31, 2004, 1,170 shares of Series E Preferred Stock remain outstanding
and accrued dividends of approximately $216,000.

The Series E Preferred Stock may be converted into Common Stock for up to three
years at the lesser of a) the market price - defined as the average of the
closing bid price for the five lowest of the ten trading days prior to
conversion or b) the fixed conversion price - defined as 120% of the lesser of
the average closing bid price for the ten days prior to closing or the October
12, 2000 closing bid price. Of the approximate $1.5 million of proceeds assigned
to the first issuance of Series E Preferred Stock approximately $802,000 was
allocated to additional paid-in capital as a discount to be amortized over the
lesser of the period most beneficial to the holder or upon exercise of the
conversion feature. In accordance with the agreement, the conversion price was
reset on February 11, 2001 to the then defined "market price". The reset of the
conversion price resulted in additional "beneficial conversion feature" of
approximately $188,000, which was allocated to additional paid-in capital as a
discount and recognized during fiscal 2001. No beneficial conversion expense was
required to be recognized related to the second and third issuance of Series E
Preferred Stock.


                                       43
<PAGE>
The terms of ATSI's Series E Preferred Stock allow for mandatory redemption by
the holder upon certain conditions. The Series E Preferred Stock allows the
holder to elect redemption at $1,250 per share plus 6% per annum if: 1) ATSI
refuses conversion notice, 2) an effective registration statement was not
obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated
against ATSI, 4) The Secretaria de Comunicaciones y Transportes of the SCT
limits or terminates the scope of the concession or, 5) if ATSI fails to
maintain a listing on NASDAQ, NYSE or AMEX.

SERIES  F  PREFERRED  STOCK
---------------------------

The Series F Preferred Stock accrues cumulative dividends at the rate of 15% per
annum. During fiscal 2003, holders of 1,250 of the shares outstanding converted
into 4,808 shares of common stock and ATSI issued 12,722 of common stock for
accumulated dividends.

In fiscal 2004, holders of the total 7,260 shares of Series F Preferred Stock
outstanding were converted into 90,750 shares of common stock and ATSI issued
11,036 shares of common stock for $163,357 of accumulated dividends.

The Series F Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year (the "Anniversary Date") from the
Date of Closing at a conversion price of $54.00. On each Anniversary Date up to
and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to the average closing price of the stock for the five (5) preceding
trading days. The initial beneficial conversion feature, which represents the
difference between the Initial Conversion Price and the market price on the
Commitment Date, is $247,991, which ATSI recognized in March 2001 as preferred
dividends. In addition, ATSI issued 8,528 warrants at a price of 133% of the
original conversion price. The warrants are exercisable for a period of three
years from the Date of Closing.

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

SERIES G PREFERRED STOCK
------------------------

The Series G Preferred Stock accrues cumulative dividends at the rate of 15% per
annum. In fiscal 2004, holders of the total 6,500 shares of Series G Preferred
Stock outstanding were converted into 254,900 shares of common stock and ATSI
issued 43,072 shares of common stock for $170,627 of accumulated dividends.

The Series G Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year (the "Anniversary Date") from the
Date of Closing at a conversion price of $44.00. On each Anniversary Date up to
and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to 85% of the Market Price on the first Anniversary Date and at all
times from and after the second Anniversary Date, the Conversion Price shall
equal 85% of the Market Price on the second Anniversary Date.

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

NOTE 11 - STOCK PURCHASE WARRANTS AND STOCK OPTIONS

Following is a summary of warrant activity from August 1, 2001 through July 31,
2004: (Excluding warrants issued under the 2004 Stock Compensation plan)


                                       44
<PAGE>
<TABLE>
<CAPTION>
                                     YEAR ENDING JULY 31,
                                 ----------------------------
                                   2004     2003      2002
                                 --------  -------  ---------
<S>                              <C>       <C>      <C>
Warrants outstanding, beginning   45,088   48,338     50,138
Warrants issued                        -        -          -
Warrants expired                 (25,214)  (3,250)    (1,800)
Warrants exercised                     -        -          -
                                 --------  -------  ---------
Warrants outstanding, ending      19,874   45,088     48,338
                                 ========  =======  =========
</TABLE>


Warrants  outstanding  at  July  31,  2004  expire  as  follows:

<TABLE>
<CAPTION>
               NUMBER OF  EXERCISE  EXPIRATION
               WARRANTS   PRICE         DATE
               ---------  --------  ---------
<S>                       <C>       <C>
                     200  119       Sep-24-04

                   9,090  172       Oct-11-04

                   1,818  172       Oct-11-04

                   5,454  172       Oct-11-04

                     500  172       Oct-11-04

                   1,750  172       Oct-11-04

                   1,062  94        Dec-08-04

               ---------
                  19,874  TOTAL WARRANTS
               =========
</TABLE>

No shares have been issued during fiscal 2004, 2003 or 2002 under the 1997 or
1998 Stock Option Plans adopted during those years.

In December 2000, ATSI's board of directors adopted the 2000 Incentive Stock
Option Plan. Under the 2000 Incentive Stock Option Plan, options to purchase up
to 98,000 shares of common stock may be granted to employees, directors and
certain other persons. Like the 1997 and 1998 Stock Option Plans, the 2000
Incentive Stock Option Plan is intended to permit ATSI to retain and attract
qualified individuals who will contribute to ATSI'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. The 2000 Incentive Stock Option Plan was approved by a vote
of the stockholders at ATSI's Annual Meeting of Stockholders on February 7,
2001. On May 7, 2001, the board of directors granted a total of 18,640 options
to purchase common stock to employees of ATSI. In August 2001, the board
approved the granting of additional 30,500 in options to directors, officers and
employees of ATSI. The Board further approved the granting of an aggregate total
of 22,275 options to directors, officers and employees in September 2001,
December 2001, March 2002 and June 2002. The Board also approved the granting of
an additional 6,300 options to directors, officers and employees in September
2002. During the year ending July 31, 2004 no options were issued under the 2000
Stock Option Plan.

In May 2004, ATSI's board of directors adopted the 2004 Stock Compensation Plan.
The 2004 Stock Compensation Plan authorizes the grant of up to 7.5 million of
warrants, stock options, restricted common stock, non-restricted common stock
and other awards, or a combination, to employees, directors, consultants and
certain other persons. The 2004 Stock Compensation Plan is intended to permit
ATSI to retain and attract qualified individuals who will contribute to ATSI's
overall success of ATSI. The exercise price of all of the warrants, stock
options, restricted


                                       45
<PAGE>
common stock, non-restricted common stock and other awards will vary based on
the market price of the shares of common stock as of the date of grant. The
warrants, stock options, restricted common stock, non-restricted common stock
and other awards vest pursuant based in the individual security granted.

During the year ending July 31, 2004, the Board of directors granted the
issuance of 3,900,000 warrants to consultants for services rendered, the
warrants exercise price range from $0.01 to $0.75. As of July 31, 2004, 566,574
warrants have been exercised at an average exercised price of $0.01 and
3,333,426 warrants remained outstanding at an average exercise price of $0.25.
These warrants expired on November 30, 2005. Additionally, the board granted the
issuance of 57,786 non-restricted common stock for professional services
rendered during fiscal 2003 and 2004, the non-restricted common stock exercise
price range from $0.71 to $1.08. During fiscal year ending July 31, 2004 no
stock options or restricted common stock were issued to employees, board of
director or any other individual.

A summary of the status of ATSI's 1997, 1998, 2000 and 2004 Stock Option Plans
for the fiscal 2004, and 2003 changes during the periods are presented below:
(All options and exercise prices have been adjusted to reflect the 1:100 reverse
split effective as of May 24, 2004.)

<TABLE>
<CAPTION>
                                                     Years Ended July 31,
                            -----------------------------------------------------------------------
1997 Stock
Option Plan                               2004                      2003                    2002
                                                                                          Weighted
                                        Weighted                  Weighted                 Average
                                         Average                   Average                Exercise
                            Shares   Exercise Price   Shares   Exercise Price    Shares     Price
                            -----------------------------------------------------------------------
<S>                         <C>      <C>              <C>      <C>              <C>       <C>
Outstanding,
beginning of year               20   $            58   2,020   $           187     2,020  $     187
Granted                          -                 -       -                 -         -          -
Exercised                        -                 -       -                 -         -          -
Forfeited                      (20)  $            58  (2,000)  $           187         -          -
                             ------  ---------------  -------  ---------------  --------  ---------
Outstanding, end
of year                          -                 -      20   $            58     2,020  $     187
                                 =                 =      ==    ==============     =====  =========
Options exercisable at end
of year                          -                 -      20   $            58     2,020  $     187
                                 =                 =      ==    ==============     =====  =========
Weighted average
fair value of
options granted
during the year                      N/A                       N/A                        N/A
                                     ===                       ===                        ===
</TABLE>


<TABLE>
<CAPTION>
                                          Years Ended July 31,
                        -----------------------------------------------------------
1998 Stock
Option Plan                       2004                2003                  2002
                        -----------------------------------------------------------
                                Weighted            Weighted              Weighted
                                 Average             Average               Average
                                Exercise            Exercise              Exercise
                        Shares    Price    Shares     Price     Shares      Price
                        -----------------------------------------------------------
<S>                     <C>     <C>        <C>      <C>        <C>        <C>
Outstanding,
Beginning of year        3,559  $      56  10,152   $      91    10,268   $      91
Granted                      -          -       -           -         -           -
Exercised                    -          -       -           -         -           -
Forfeited                    -          -  (6,593)  $      91      (116)  $      78
                        ------  ---------  -------  ---------  ---------  ---------


                                       46
<PAGE>
Outstanding, end
of year                  3,559  $      56   3,559   $      56    10,152   $      91
                         =====  =========   =====   =========    ======   =========
Options
exercisable at end
of year                  3,559  $      56   3,458   $      56     8,918   $      82
                         =====  =========   =====   =========    ======   =========
Weighted average
fair value of
options granted
during the year                 $     N/A           N/A                   N/A
                                =========           ===                   ===
</TABLE>


<TABLE>
<CAPTION>
                                          Years Ended July 31,
                        ------------------------------------------------------------
2000 Stock
Option Plan                      2004               2003              2002
                        ------------------------------------------------------------
                                 Weighted              Weighted            Weighted
                                  Average               Average             Average
                                 Exercise              Exercise            Exercise
                        Shares     Price     Shares      Price    Shares     Price
                        ------------------------------------------------------------
<S>                     <C>      <C>        <C>        <C>        <C>      <C>
Outstanding,
beginning of year       38,100   $      45    64,251   $      48  18,640   $      56

Granted                      -           -     6,300   $       8  52,774           -
Exercised                    -           -         -           -       -           -
Forfeited               (9,333)  $      48   (32,451)  $      48  (7,163)  $      49
                        -------  ---------    -------  ---------  -------  ---------
Outstanding, end
of year                 28,767   $      48    38,100   $      45  64,251   $      48
                        =======  =========    =======  =========  =======  =========
Options
exercisable at end
of year                 22,466   $      47    18,322   $      55  18,769   $      59
                        =======  =========    =======  =========  =======  =========
Weighted average
fair value of
options granted
during the year                  $     N/A             $       8           $      27
                                 =========             =========           =========
</TABLE>

<TABLE>
<CAPTION>
                                                     Years Ended July 31,
                              -------------------------------------------------------------------
2004 Stock
Compensation
Plan                                  2004                    2003                 2002
                              -------------------------------------------------------------------
                                          Weighted                                       Weighted
                                           Average                Weighted               Average
                                          Exercise                Average                Exercise
                               Warrants     Price    Warrants  Exercise Price  Warrants   Price
                              -------------------------------------------------------------------
<S>                           <C>         <C>        <C>       <C>             <C>       <C>
Outstanding,
beginning of year                     -           -         -               -         -         -

Granted                       3,900,000   $    0.21         -               -         -         -
Exercised                      (566,574)  $    0.21         -               -
Forfeited                             -           -         -               -         -         -
                              ----------  ---------  --------  --------------  --------  --------
Outstanding, end of
year                          3,333,426   $    0.25         -               -         -         -
                              ==========  =========         =               =         =         =


                                       47
<PAGE>
Weighted average fair
value of warrants
granted during the
year                                      $    0.21                         -                   -
                                          =========                         =                   =
</TABLE>

<TABLE>
<CAPTION>
                                                            Years Ended July 31,
                              ----------------------------------------------------------------------------------
2004 Stock
Compensation
Plan                                   2004                           2003                     2002
                              ----------------------------------------------------------------------------------
                                                                                                        Weighted
                                 Non-         Weighted                         Weighted        Non-     Average
                              Restricted       Average      Non-restricted     Average      Restricted  Exercise
                                Shares     Exercise Price       Shares      Exercise Price    Shares     Price
                              ----------------------------------------------------------------------------------
<S>                           <C>          <C>              <C>             <C>             <C>         <C>
Outstanding,
beginning of year                      -                 -               -               -           -         -

Granted                           57,786   $          0.95               -               -           -         -
Exercised                        (57,786)  $          0.95               -               -
Forfeited                              -                 -               -               -           -         -
                              -----------  ---------------  --------------  --------------  ----------  --------
Outstanding, end of
year                                   -                 -               -               -           -         -
                                       =                 =               =               =           =         =
Weighted average fair
value of non-restricted
shares granted during
the year                                   $          0.95                               -                     -
                                           ===============                               =                     =
</TABLE>



During the year ending July 31, 2004 all options granted but not exercised under
the 1997 Stock Option Plan expired. The weighted average remaining contractual
life of the stock options outstanding at July 31, 2004 is approximately 4.3
years for options granted under the 1998 Stock Option Plan, approximately 7.6
years for options granted under the 2000 Incentive Stock Option Plan and 1.1
years for warrants issued under the 2004 Stock Compensation plan.

The following table summarizes information about stock options and warrants
outstanding for all plans at July 31, 2004:

<TABLE>
<CAPTION>
                                                             Options and Warrants
                 Options and Warrants Outstanding                 Exercisable
                 -----------------------------------------------------------------------
                                                 Weighted
                                                 Average
                                 Weighted       Remaining                    Weighted
Range of           Number         Average      Contractual     Number         Average
Exercise Price   Outstanding  Exercise Price   Life (Years)  Exercisable  Exercise Price
----------------------------------------------------------------------------------------
<S>              <C>          <C>              <C>           <C>          <C>
Options
-------
8 - 94               32,325  $            42          7.00       26,025  $            49
Warrants
---------
1.09 - 1.72       3,353,300  $          1.24          0.90    3,353,300  $          1.24
----------------------------------------------------------------------------------------
0.08 - 1.72       3,385,625  $          1.63          3.20    3,379,325  $          1.61
----------------------------------------------------------------------------------------
</TABLE>


                                       48
<PAGE>
NOTE 12 - SALE 51% OF ATSI COMUNICACIONES S.A DE C.V.

In May 2003, ATSI sold 51% of ATSI's Mexican subsidiary, ATSI Comunicaciones,
S.A. de C.V. (ATSICOM) to Telemarketing de Mexico, S.A. de C.V. (Telemarketing).
The agreement provided for an initial payment of $194,000 plus payment of
approximately $200,000 of ATSICOM'S liabilities and the remaining purchase price
of $747,000 to be paid as follows:

     -    Beginning in May 2003, ATSI was schedule to receive from Telemarketing
          $20,750 per month for 12 months.
     -    Beginning in May 2004, ATSI was scheduled to receive from
          Telemarketing $20,750 per month for 24 months, contingent on ATSI
          generating 20,750,000 minutes of monthly traffic through ATSICOM's
          network. In the event ATSI does not reach the above-mentioned volume
          of monthly minutes, the monthly payment will be adjusted based on the
          same percentage of the shortfall in minutes, until Telemarketing pays
          the total purchase price. On the other hand, if ATSI exceeds the
          volume of monthly traffic, Telemarketing can make additional payments,
          without penalty.

As of the date of this filing, ATSI has been experiencing difficulties with
DialMex's network. Additionally ATSI Comunicaciones S.A de C.V. has not been
able to complete the required interconnections with other Mexican carriers, such
as Telmex, to process domestic and international VoIP traffic. As result, ATSI
has not been able to generate the monthly minutes required under the
Telemarketing agreement. Consequently, ATSI has not received any more payments
from Telemarketing since May 2004. Currently ATSI is in negotiations with
Telemarketing to amend the Share purchase agreement for the remaining balance
owed to ATSI of approximately $498,000. However, there can be no assurance that
will be able to reach a favorable agreement with Telemarketing in the near
future.

Currently ATSI has an unrecorded note receivable associated with the $498,000
still owed to ATSI by Telemarketing. This note is secured by 10% of ATSICOM
stock, which originally was sold to Telemarketing under the "Share Purchase
Agreement" dated May 2003.

Since Telemarketing may not have the resources to perform, because there is no
agreement to modify the "Share purchase agreement" dated May 2003 and because
ATSI may not have sufficient resources to realize its remaining investment in
the Mexican concession license, all recorded investment and unpaid balance of
$702,000 have been impaired as of July 31, 2004.

NOTE 13 - SALE OF ATSI MEXICO AND SINFRA

On July 2, 2003, the U.S. Bankruptcy Court overseeing the Chapter 7 cases for
ATSI Texas and TeleSpan approved the sale of two of its foreign subsidiaries,
ATSI-Mexico and SINFRA to Latingroup Ventures, L.L.C. (LGV), a non-related
party. Under the purchase agreement, LGV acquired all the communication centers
and assumed all related liabilities. Additionally, under the agreement, LGV"
acquired the Comercializadora License owned by ATSI-Mexico and the Teleport and
Satellite Network License owned by SINFRA. The Chapter 7 Bankruptcy Trustee
received all the proceeds from the sale of these entities of approximately
$17,500 and the use of these funds is restricted for the Chapter 7 case related
expenses. As a result of this transaction, ATSI recognized in ATSI Texas and
TeleSpan a loss on the sale of assets of approximately $452,123 on the sale of
ATSIMexico and $510,502 on the sale of SINFRA.

NOTE 14 - INCOME TAXES

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


                                       49
<PAGE>
<TABLE>
<CAPTION>
                                                July 31,
                                                --------
                                          2004           2003
                                          ----           ----
<S>                                   <C>            <C>
Net operating loss carry-forward      $ 15,714,000   $ 15,438,000
Valuation allowance                    (15,714,000)   (15,438,000)
Total deferred tax asset (liability)  $          -   $          -
</TABLE>


ATSI conducts a periodic examination of its valuation allowance. Factors
considered in the evaluation include recent and expected future earnings and
ATSI's liquidity and equity positions. As of July 31, 2004 and 2003, ATSI has
determined that a valuation allowance is necessary for the entire amount of
deferred tax assets.

At July 31, 2004 and 2003, ATSI had net operating loss carry-forwards related to
U.S. operations of approximately $45,614,000 and $45,303,000 with expiration
dates ranging from 2009 through 2023.

NOTE 15 - DISCONTINUED OPERATIONS

On June 12, 2002 ATSI discontinued ATSI's E-commerce operations through the sale
of ATSI's majority-owned subsidiary, GlobalSCAPE, Inc. for approximately
$2,250,000. The sale of this segment resulted in a gain of approximately
$1,100,000.

Additionally, on July 2, 2003, the bankruptcy Trustee for ATSI Texas & TeleSpan
under the Chapter 7 liquidation case sold the stock of ATSI Texas and TeleSpan,
Inc. subsidiaries, ATSIMEX and SINFRA; see footnote 21. The trustee received the
funds of approximately $18,000 from the sale of these entities. These funds will
be used by the trustee to pay those fees associated with managing ATSI Texas and
TeleSpan Chapter 7 cases. The sale of these assets resulted in a loss of
approximately $963,000.

For the years ended July 31, 2004 and 2003 assets and liabilities from
discontinued operations consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                      July 31,
                                                   -------------
                                                   2004    2003
                                                   -----  ------
<S>                                                <C>    <C>
PROPERTY AND EQUIPMENT, net                        $   -  $  245
                                                   -----  ------
CURRENT LIABILITIES:
 Accounts payable                                      -     944
 Notes payable                                         -     453
                                                   -----  ------
  Total current liabilities                            -   1,397
                                                   -----  ------

                                                   -----  ------
  Total liabilities from discontinued operations:  $   -  $1,397
                                                   =====  ======
</TABLE>

Consolidated Income statement presentation for the years ended July 31, 2004 and
2003 reflects the elimination of the following E-commerce revenues and the
expenses of GlobalSCAPE. And the elimination of retail services revenue and
expenses of ATSIMEX for the years ended July 31, 2004 and 2003 (in thousands):

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------

                                      E-COMMERCE

                                                        For the Year Ending July 31,
                                                    -------------------------------------
                                                      2004       2003           2002
                                                    --------  -----------  --------------
<S>                                                 <C>       <C>          <C>
E-commerce revenues                                 $      -  $         -  $        4,404

Costs and expenses                                         -            -           4,208

Net (loss) income before taxes                             -            -             196
& minority interest


                                       50
<PAGE>
Net (loss) income before minority interest                 -            -             195

Net (loss) income                                   $      -  $         -  $          399

-----------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------

                                      RETAIL SERVICES

                                                           For the Year Ending July 31,
                                                    -------------------------------------------
                                                      2004          2003              2002
                                                    --------  -----------------  --------------
<S>                                                 <C>       <C>                <C>
Retail Services revenue                             $      -  $          4,543   $       7,555

Costs and expenses                                         -             7,383          16,660

Net (loss) income before taxes & minority interest         -            (2,840)         (9,105)

Net (loss) income before minority interest                 -            (2,919)         (9,214)

Net loss                                            $      -  $         (2,919)  $      (9,214)

-----------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------

                            TOTAL DISCONTINUED OPERATIONS

                                                    For the Year Ending July 31,
                                             ----------------------------------------
                                                2004         2003          2002
                                             -----------  ----------  ---------------
<S>                                          <C>          <C>         <C>
Retail Services revenue                      $         -  $   4,543   $       11,959

Costs and expenses                                     -      7,383           20,868

Net income before taxes & minority interest            -     (2,840)          (8,909)

Net loss before minority interest                      -     (2,919)          (9,019)

Net loss                                     $         -  $  (2,919)  $       (8,815)

-------------------------------------------------------------------------------------
</TABLE>

NOTE 16 - QUARTERLY FINANCIAL DATA

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

                                                                    For the Quarters Ended
                                                    --------------------------------------------------------
                                                      7/31/2004      4/30/2004     1/31/2004     10/31/2003
<S>                                                 <C>            <C>            <C>           <C>


                                       51
<PAGE>
OPERATING REVENUES:
  Services
    Carrier services                                $        294   $        484   $       209   $        33
    Network services                                          73             77            42            42
                                                    -------------  -------------  ------------  ------------

     Total operating revenues                                367            561           251            75

OPERATING EXPENSES:
    Cost of services (exclusive of depreciation
    and amortization, shown below)                           304            501           218            48
    Selling, general and administrative                    7,297            216           231           198
    Impairment expense                                       702              -             -             -
    Bad debt expense                                           -              -             -             4
    Depreciation and amortization                             13              6             -             1
                                                    -------------  -------------  ------------  ------------

    Total operating expenses                               8,316            723           449           251
                                                    -------------  -------------  ------------  ------------

OPERATING LOSS                                            (7,949)          (162)         (198)         (176)

OTHER INCOME (EXPENSE):
  Other income (expense), net                                  6              -             -             1
  Debt forgiveness income                                    257              -             -             -
  Loss on an unconsolidated affiliate                        (22)           (25)          (53)           (7)
  Interest expense                                           (86)           (29)          (25)          (26)
  Gain/(loss) from sale of assets                              -             25             -             -
                                                    -------------  -------------  ------------  ------------

    Total other income (expense)                             155            (29)          (78)          (32)

LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX                              (7,794)          (191)         (276)         (208)

NET LOSS FROM DISCONTINUED
OPERATIONS                                                     -              -             -             -
NET LOSS FROM THE SALE OF
DISCONTINUED OPERATIONS                                        -              -             -             -
                                                    -------------  -------------  ------------  ------------

NET LOSS                                                  (7,794)          (191)         (276)         (208)

LESS: PREFERRED DIVIDENDS                                    (38)           (82)          (93)          (93)
                                                    -------------  -------------  ------------  ------------

NET LOSS TO COMMON STOCKHOLDERS                          ($7,832)         ($273)        ($369)        ($301)
                                                    =============  =============  ============  ============

BASIC AND DILUTED LOSS PER SHARE                          ($5.05)        ($0.23)       ($0.36)       ($0.26)
                                                    =============  =============  ============  ============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                                  1,551,581      1,174,662     1,036,550     1,174,662
                                                    =============  =============  ============  ============
<FN>
              See accompanying summary of accounting policies and notes to financial statements
</TABLE>


                                       52
<PAGE>
<TABLE>
<CAPTION>
                               ATSI COMMUNICATIONS, INC. AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                                (In thousands, except per share amounts)

                                                                For the Quarters Ended
                                                    ---------------------------------------------------
                                                     7/31/2003    4/30/2003    1/31/2003    10/31/2002
                                                    -----------  -----------  -----------  ------------
<S>                                                 <C>          <C>          <C>          <C>
OPERATING REVENUES:
Services
      Carrier services                              $        0   $        0   $    1,096   $     5,436
      Network services                                      40           70          122           185
                                                    -----------  -----------  -----------  ------------

      Total operating revenues                              40           70        1,218         5,621

OPERATING EXPENSES:
      Cost of services (exclusive of depreciation           33           86        1,120         5,005
       And amortization, as shown below)
      Selling, general and administration                1,151          310        2,073         1,269
      Impairment expense                                   418            -            -             -
      Bad debt expense                                       -           22            -            13
      Depreciation and Amortization                         17          363          442           407

                                                    -----------  -----------  -----------  ------------
      Total operating expenses                           1,619          781        3,635         6,694
                                                    -----------  -----------  -----------  ------------

OPERATING LOSS                                          (1,579)        (711)      (2,417)       (1,073)

OTHER INCOME (EXPENSE):
  Other income (expense), net                               (6)           -           (6)          (13)
  Interest expense                                        (765)        (228)        (191)         (193)
  Loss from the sale of assets                          (1,492)           -          (28)            -
                                                    -----------  -----------  -----------  ------------

     Total other income (expense)                       (2,263)        (228)        (225)         (206)

LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAX                            (3,842)        (939)      (2,642)       (1,279)

INCOME TAX BENEFIT (EXPENSE)                                 -            -            -             -
                                                    -----------  -----------  -----------  ------------

NET LOSS FROM CONTINUING
OPERATIONS                                              (3,842)        (939)      (2,642)       (1,279)

NET LOSS FROM DISCONTINUED
OPERATIONS                                                 (98)        (421)        (750)       (1,650)


                                       53
<PAGE>
NET LOSS FROM THE SALE OF
DISCONTINUED OPERATIONS                                   (962)           -            -             -
                                                    -----------  -----------  -----------  ------------

NET LOSS                                                (4,902)      (1,360)      (3,392)       (2,929)

LESS: PREFERRED DIVIDENDS                                 (375)         (91)         (91)          (96)
                                                    -----------  -----------  -----------  ------------

NET LOSS APPLICABLE  TO COMMON
STOCKHOLDERS                                           ($5,277)     ($1,451)     ($3,483)      ($3,025)
                                                    ===========  ===========  ===========  ============

BASIC AND DILUTED LOSS PER SHARE                        ($5.09)      ($1.40)      ($3.38)       ($3.13)
                                                    ===========  ===========  ===========  ============

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                                1,036,390    1,036,390    1,031,730       966,790
                                                    ===========  ===========  ===========  ============
<FN>
          See accompanying summary of accounting policies and notes to financial statements
</TABLE>

NOTE 17 - RISKS AND UNCERTAINTIES AND CONCENTRATIONS

ATSI is subject to regulations by the United States and Mexican Government. And
according to ATSI's concession requirements, ATSI is required to maintain
approximately $10 million in capital. As of July 31, 2004, ATSICOM has not met
this requirement. Currently, Telemarketing, ATSI's partner in the joint venture
on ATSICOM is in negotiations with the Mexican government on meeting this
requirement.

ATSI's business is dependent upon key pieces of equipment, switching and
transmission facilities capacity from ATSI's carriers. Should ATSI experience
service interruptions from ATSI's underlying carriers, equipment failures there
would likely be a temporary interruption of ATSI's services, which could
adversely or materially affect ATSI's operations. ATSI believes that suitable
arrangements could be obtained with other satellite operators to provide
transmission capacity. Although there can be no assurance that such arrangement
could be obtained or obtained when needed.

NOTE 18 - RELATED PARTY TRANSACTIONS

ATSI 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 ATSI with
various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, ATSI pay the
consulting firm $3,750 per month plus expenses. In November 2000 the agreement
was terminated and ATSI is now billed solely for expenses related to board
meetings. At July 31, 2004 and July 31, 2003, ATSI had a payable to Technology
Impact Partners of approximately $82,329 and approximately $79,794,
respectively.

In December 2002, ATSI entered into a note payable with a related party, a
director of ATSI, Mr. John R. Fleming, in the amount of $25,000. The note called
for 12 monthly payments of $2,163.17 including interest, commencing on February
1, 2003. The note has an interest rate of 7% annually and a maturity date of
January 1, 2004. Subsequent to yearend, ATSI renegotiated the note to extend its
maturity date to September 2005; all other terms remained the same.
Additionally, during fiscal 2004 ATSI made payments towards this note in the
amount of $9,000. Additionally, at July 31, 2004, ATSI had a payable of
approximately $41,583 for board fees and related expenses.

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


                                       54
<PAGE>
Information  regarding changes in the Company's Accountants has been provided in
previously  filed  reports  on  Form  8-K.

ITEM 9A. CONTROLS AND PROCEDURES.

     The  Company has adopted and implemented disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the  SEC's rules and forms.  Under the supervision and with the participation of
the  Company's management, including the Company's President and Chief Executive
Officer  and  the  Company's  Controller  and  Principal  Financial Officer, the
Company  has  evaluated  the  effectiveness  of  the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of
the  end  of  the  period covered by this report.  Based on that evaluation, the
President and Chief Executive Officer and the Controller and Principal Financial
Officer  have  concluded  that  these  disclosure  controls  and  procedures are
effective  as  of  the  end of the period covered by this report.  There were no
changes  in  the  Company's internal control over financial reporting during the
fourth  fiscal quarter covered by this report that have had a material affect or
are  reasonably  likely  to  have  a  material  affect  on internal control over
financial  reporting.  The  registered  public  accounting firm that audited the
financial statements included in this report has issued an attestation report on
management's  assessment  of  the  Company's  internal  control  over  financial
reporting.

                                    PART III
                                    --------

ITEM 10.  DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS  AND  CONTROL  PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

BUSINESS  EXPERIENCE

     The  following  table contains the name, age of our directors and executive
officers.

<TABLE>
<CAPTION>
     NAME               AGE   POSITION HELD
     ----               ---   -------------
<S>                     <C>  <C>
     Arthur L. Smith     39  President, Chief Executive Officer and Director
     Ruben Caraveo       36  Vice President, Sales and Operations
     Antonio Estrada     30  Corporate Controller
     John R. Fleming     50  Interim Executive Chairman of the Board
     Murray R. Nye       51  Director
     Michael G. Santry   56  Director
</TABLE>

     Arthur  L.  Smith  has  served  as our Chief Executive Officer and Director
since  May 2003. Mr. Smith also served as the President of ATSI de Mexico S.A de
C.V.  from  August  2002  to  April  2003,  as our Chief Executive Officer and a
Director  from June 1996 to August 2002 and as our President since our formation
in  June  1996 to July 1998. Mr. Smith also served as President, Chief Operating
Officer  and  a  director  of  ATSI-Canada since its formation in May 1994. From
December  1993  until  May  1994,  Mr.  Smith  served in the same positions with
Latcomm  International Inc., which amalgamated with Willingdon Resources Ltd. to
form  ATSI-Canada  in May 1994. Mr. Smith has also served as President and Chief
Executive  Officer  of  American  TeleSource  International,  Inc.,  a  Texas
corporation  ("ATSI-Texas"),  one of our principal operating subsidiaries, since
December  1993.  From  June  1989  to  December  1993, Mr. Smith was employed as
director  of  international  sales  by  GeoComm  Partners,  a  satellite-based
telecommunications  company located in San Antonio, providing telecommunications
services  to  Latin  America.  Mr.  Smith  has  over 13 years' experience in the
telecommunications  industry.

     Ruben  R.  Caraveo has served as our Vice President of Sales and Operations
since May 2003. Mr. Caraveo is responsible for Carrier Sales and the delivery of
Carrier  Services  for  both the U.S. and Mexico. Mr. Caraveo served as our Vice
President  of  Operations  from May 2001 to January 2003. Prior to joining ATSI,
Mr.  Caraveo  served  as  Vice President of Operations and Engineering at Vycera
Communications  where  he  was  responsible for overseeing all daily operations,
including  network engineering, marketing, and the network trouble reporting and
resolution  departments.  His  prior  experience  also  includes  positions with
Worldtel  Interactive,  Frontier,  and  WorldCom. Mr.


                                       55
<PAGE>
Caraveo  is  armed  with  more  than  14  years'  telecommunications  industry
experience,  specializing  in the areas of Network Engineering, Data and Systems
Analysis,  Product  Marketing,  and  Systems  Development.  Mr. Caraveo attended
California  State  University,  Northridge,  School  of  Engineering.

     Antonio  Estrada  has  served  as  our Corporate Controller since May 2003.
From  January  2002  through January 2003, Mr. Estrada served as our Director of
International  Accounting and Treasurer.  From January 2001 to January 2002, Mr.
Estrada  served in various roles within ATSI, including International Accounting
Manager  and  general  Accountant.  Prior to joining ATSI in 1999 he served as a
Senior  Accountant  for the Epilepsy Association of San Antonio and South Texas.
Mr.  Estrada  graduated  from  the  University  of  Texas at San Antonio, with a
Bachelors  of  Business  Administration,  with  a  concentration  in Accounting.

     John  R.  Fleming has served as our Interim Executive Chairman of the Board
since  August  2002 and as one of our Directors since January 2001.  Mr. Fleming
is  the  principal  and founder of Vision Corporation, an early-stage investment
company  that  focuses  on  communications  technologies,  service and hardware.
Prior  to  forming  Vision  Corporation,  Mr.  Fleming  served  as  President,
International  of  IXC  Communications,  Inc.  from April 1998 to December 1999.
Immediately  prior to that he served as IXC's President of Emerging Markets from
December  1997,  as  Executive  Vice  President  of  IXC from March 1996 through
November  1997  and  as  Senior  Vice President of IXC from October 1994 through
March  1996.  He served as Vice President of Sales and Marketing of IXC from its
formation in July 1992 until October 1994.  Prior to that, Mr. Fleming served as
Director  of Business Development and Director of Carrier Sales of CTI from 1986
to March 1990 and as Vice President - Marketing and Sales of CTI from March 1990
to  July  1992.  Mr. Fleming was a Branch Manager for Satellite Business Systems
from  1983  to  1986.

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

     Michael  G.  Santry has served as one of our Directors since May 2004.  Mr.
Santry  is President of Bishopsgate Investment Corporation, providing consulting
services  to companies in a variety of industries. Mr. Santry is also a director
of  a  privately  held  publisher of children's books and educational materials.

AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT

     The  Company  has  established an Audit Committee of the Board of Directors
consisting  of  three  external  independent  directors.  As of the date of this
report, one of the positions on the Audit Committee is vacant as a result of the
removal  on October 21, 2004 of Mr. Richard C. Benkendorf because of a potential
conflict  of  interest.  Mr.  Benkendorf  was  serving  as  the  Audit Committee
Financial Expert.  The Company intends to replace Mr. Benkendorf with a director
that  meets  the  requirements  of  an  Audit  Committee  Financial  Expert.

RECENT DEVELOPMENTS WITH ATSI BOARD OF DIRECTORS

     On  October 21, 2004 the majority of the Board of Directors voted to remove
a  Director,  Mr.  Richard  C. Benkendorf. The Bylaws of the corporation provide
that  a  majority of the Board of Directors may remove a director for cause. Mr.
Benkendorf  was removed due to a conflict of interest. The vacancy caused by the
removal  will  either be filled by a candidate receiving a vote of a majority of
the  Board  or the seat could remain vacant until the next election of directors
at  the  corporation's  next  annual  stockholder  meeting.


                                       56
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section  16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers and persons who own more than 10%
of a registered class of the Company's equity securities to file various reports
with  the  Securities  and Exchange Commission concerning their holdings of, and
transactions  in,  securities  of  the Company.  Copies of these filings must be
furnished  to  the  Company.  Based  on  a  review  of  the copies of such forms
furnished  to  the  Company  and  other  information, the Company believes that,
during  the  fiscal year ended July 31, 2004, all of its directors and executive
officers  were  in  compliance  with  the  applicable  filing  requirements.

CODE OF ETHICS

     ATSI  is  currently developing an Executive Code of Ethics to be applied to
our  Chief  Executive  Officer,  Chief  Financial  Officer, Controller and other
members  of  our  management  team.  The  Board of Directors has not completed a
review  of  the  best  practices  relating to the adoption of Codes of Ethics or
acted  to  adopt  the  Code  of  Ethics  proposed by members of management. When
adopted,  the  code  will be available for viewing on our Website, www.atsi.net.
Upon  request, a copy of the code of ethics will be provided without charge upon
written  request  to  ATSI  Communications,  Inc.,  8600  Wurzbach  Road,  Suite
700W.,San  Antonio,  TX  78240

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

     The  following  table  sets  forth  information concerning the compensation
earned  during  the  Company's  last  three  fiscal years by the Company's Chief
Executive  Officer  and  each  of  the  Company's  four  most highly compensated
executive  officers whose total cash compensation exceeded $100,000 for services
rendered  in  all  capacities  for  the  fiscal  year  ended  July  31,  2004
(collectively,  the  "Named  Executive  Officers").

<TABLE>
<CAPTION>
                                         Annual Compensation                           Long- Term Compensation
                             --------------------------------------------------------------------------------------------------
                                                                                    Awards               Payouts
                                                                             --------------------------------------
                                                                                          SECURITIES
                                                              OTHER ANNUAL   RESTRICTED   UNDERLYING                 ALL OTHER
    NAME AND PRINCIPAL       FISCAL                           COMPENSATION      STOCK      OPTIONS/    LTIP PAYOUT    COMPENS-
    -----------------
        POSITION              YEAR   SALARY ($)   BONUS ($)      ($)(1)      AWARDS ($)    SARS (#)        ($)       ATION ($)
        --------              ----   ----------   ---------      ------      ----------    --------        ---       ---------
<S>                          <C>     <C>          <C>         <C>            <C>          <C>          <C>           <C>
                               2004  $   128,000  $        -             -             -           -              -           -
Arthur L. Smith (2)            2003       90,808      14,105             -             -    3,000 (4)             -           -
CEO                            2002      184,058     25,004-             -             -   11,666 (4)             -           -

                               2004  $   115,000           -             -             -           -              -           -
Ruben Caraveo (3)              2003       71,154           -             -             -    1,500 (4)             -           -
Vice President, Operations     2002      110,504           -             -             -           -              -           -
</TABLE>

-----------------------------

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

(2)  Mr.  Smith  has  served  as  CEO  and  Director  of ATSI Nevada (Formerly a
     Delaware  Corp.)  since May 2003. From August 2002 to April 2003, Mr. Smith
     served  as  President  of  ATSI  de  Mexico S.A de C.V. Since May 2003, Mr.
     Smith's  compensation has been paid by ATSI Nevada. Prior to December 2002,
     Mr.  Smith's  Compensation  was  paid  by  ATSI-Texas.

(3)  Mr.  Caraveo  has  served as Vice President of Sales and Operations of ATSI
     Nevada  since  May 2003. Mr. Caraveo served as Vice President of Operations
     of  ATSI Texas from May 2001 to January 2003. Since May 2003, Mr. Caraveo's
     compensation  has  been  paid  by  ATSI Nevada. Prior to December 2002, Mr.
     Caraveo's  compensation  was  paid  by  ATSI-Texas.

(4)  Represents  underlying  options  that  have  been  adjusted  to reflect the
     reverse  split  of  1:100  effective  May  24,  2004


                                       57
<PAGE>
AGGREGATE OPTIONS EXERCISABLE AND UNEXERCISABLE DURING FISCAL 2004

     The  following  table  shows  the Company's officers shares covered by both
exercisable  and  unexercisable stock options as of July 31, 2004.  (All options
have been adjusted to reflect the reverse split of 1:100 effective May 24, 2004)

<TABLE>
<CAPTION>
                  SHARES
                 ACQUIRED                               NUMBER OF SECURITIES              VALUE OF UNEXERCISED IN-THE-
                    ON        VALUE                     UNDERLYING UNEXERCISED             MONEY OPTIONS AT FYE ($)
                 EXERCISE   REALIZED                      OPTIONS AT FYE(#)
                 --------   --------
NAME                (#)        ($)           EXERCISABLE                UNEXERCISABLE          EXERCISABLE  UNEXERCISABLE
----                ---        ---           -----------                -------------          -----------  -------------
<S>              <C>        <C>        <C>                      <C>                            <C>          <C>
Arthur L. Smith          -          -                   13,999                          2,000            -              -
Ruben Caraveo            -          -                    3,500                          1,000            -              -
</TABLE>

COMPENSATION OF DIRECTORS

     ATSI  Directors  are  reimbursed their reasonable out-of-pocket expenses in
connection  with  their  travel  to  and  attendance at meetings of the Board of
Directors.  In  addition,  each  Director  that is not an officer of the Company
receives  1,500 shares of Common Stock for each meeting of the Board attended in
person  and  $250  for  each  meeting  attended by telephone. In January 2004 we
issued  a  total  of  16,500  shares  of  our common stock, valued at $2,115, to
outside  directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following table lists the beneficial ownership of shares of our Common
Stock  and  Series  A Preferred Stock by (i) all persons and groups known by the
Company to own beneficially more than 5% of the outstanding shares of our Common
Stock  or  Series  A  Preferred Stock, (ii) each director and nominee, (iii) the
Named  Executive  Officers,  and  (vi)  all  directors  and officers as a group.
Information with respect to officers, directors and their families is as of July
31,  2004  and  is based on the books and records of the Company and information
obtained  from  each individual.  Information with respect to other stockholders
is  based  upon the Schedule 13D or Schedule 13G filed by such stockholders with
the  Securities  and Exchange Commission.  Unless otherwise stated, the business
address  of each individual or group is the same as the address of the Company's
principal executive office and solely the person indicated beneficially owns all
shares.  (All  options  have been adjusted to reflect the reverse split of 1:100
effective  May  24,  2004)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------

NAME OF                                  COMMON            % OF        SERIES A             % OF     TOTAL VOTING         % OF
INDIVIDUAL OR GROUP                      STOCK           CLASS (1)  PREFERRED STOCK       CLASS (2)    INTEREST         CLASS (3)
------------------------------------  ------------       ---------  ---------------       ---------  ------------       ---------
<S>                                   <C>           <C>  <C>        <C>              <C>  <C>        <C>           <C>  <C>
5% STOCKHOLDERS

Peter Blindt                                     0              *               500           13.3%           743              *
30 E. Huron #5407
Chicago, IL 60611

Edward Corcoran                                  0              *               500           13.3%           743              *
6006 W. 159th Street
Bldg. C 1-W
Oak Forest, IL 60452

Gerald Corcoran                                  0              *               500           13.3%           743              *
11611 90th Avenue
St. John, IN 46373

Joseph Migilio                                   0              *               500           23.0%           743              *
13014 Sandburg Ct.


                                       58
<PAGE>
Palos Park, IL 60464

Jeffrey Tessiatore                               0              *               500           13.3%           743              *
131 Settlers Dr.
Naperville, IL 60565

Albert Vivo                                      0              *               500           13.3%           743              *
9830 Circle Parkway
Palos Park, IL 60464

Gary Wright                                      0              *               750           20.0%         1,115              *
3404 Royal Fox Dr.
St. Charles, IL 60174

INDIVIDUAL OFFICERS,
DIRECTORS AND NOMINEES

Arthur L. Smith                             36,884  (4)       1.3%                0              *         36,884  (4)       1.3%
President, Chief Executive Officer
Director


Ruben R. Caraveo                             4,000  (5)         *                 0              *          4,000  (5)         *
Vice President, Sales and Operations

John R. Fleming                              3,724  (6)         *                 0              *          3,724  (6)         *
Director

Murray R. Nye                                3,100  (7)         *                 0              *          3,100  (7)         *
Director

Michael G. Santry                                -  (8)         *                 0              *              -  (8)         *
Director

ALL OFFICERS AND
DIRECTORS AS A GROUP

                                      53,69850,708  (9)    1.81.7%                     0         *   53,69850,708  (9)    1.81.7%

---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

*  Less than 1%
(1)  Based  on 2,948,365 shares of Common Stock outstanding as of July 31, 2004.
     Any  shares  represented  by  options  exercisable  w

(2)  Based  on  3,750  shares of Series A Preferred Stock outstanding as of July
     31,  2004.

(3)  Based  on  2,953,940  voting interests outstanding as of July 31, 2004. Any
     shares  represented  by  options  exercisable  within  6 (4) Includes 1,000
     shares  subject  to options exercisable within 60 days after July 31, 2004.

(5)  Includes  500  shares  subject  to options exercisable within 60 days after
     July  31,  2003.

(6)  Includes  667  shares  subject  to options exercisable within 60 days after
     July31,  2004.

(7)  Includes  667  shares  subject  to options exercisable within 60 days after
     July  31,  2004.

(8)  Mr.  Santry  was  elected  as  a Director in May 2004; no options have been
     awarded  as  of  July  31,  2004

(9)  Includes  3,801  shares subject to options exercisable within 60 days after
     July  31,  2004.


                                       59
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     We  have  entered  into  a  month-to-month agreement with Technology Impact
Partners,  a  consulting  firm  of  which  Company  former  director  Richard C.
Benkendorf  is  principal  and  owner.  Under  the  agreement, Technology Impact
Partners  provides  us  with  various  services that include strategic planning,
business  development  and  financial advisory services.  Under the terms of the
agreement,  we  pay  the  consulting  firm  $3,750  per month plus expenses.  In
November  2000 the agreement was terminated and the Company is now billed solely
for  expenses related to board meetings.  At July 31, 2004 and July 31, 2003, we
had  a  payable  to  Technology  Impact  Partners  of  approximately $82,329 and
approximately  $79,794,  respectively.

     In  December  2002,  the Company entered into a note payable with a related
party,  a  director of ATSI, Mr. John R. Fleming, in the amount of $25,000.  The
note  called for 12 monthly payments of $2,163.17 including interest, commencing
on  February  1,  2003.  The  note  has  an  interest  rate of 7% annually and a
maturity date of January 1, 2004. Currently we are in negotiations with the note
holder  to  extend  the  maturity  date  of  the  note, however there can be any
assurance  that  we  will that a favorable agreement will be reached in the near
future.  Additionally,  during fiscal 2004 we made payments towards this note in
the  amount  of  $9,000.  Additionally,  at  July  31, 2004, we had a payable of
approximately  $41,583  for  board  fees  and  related  expenses.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

     The  Company  paid  the  following  fees  to  its  principal  independent
accountants  for  services  during the fiscal years ended July 31, 2004 and July
31,  2003.

<TABLE>
<CAPTION>
                               Year Ended ,   July 31
<S>                            <C>            <C>
          Description of Fees           2004      2003

          Audit Fees           $      14,000  $ 46,000
          Audit Related Fees             -0-       -0-
          Tax Fees                       -0-       -0-
          All Other Fees                 -0-       -0-
</TABLE>

     The Audit Committee has instructed Malone and Bailey PLLC that any fees for
non-audit  services  must  be  approved  before  being  incurred.

                                     PART IV

ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
<S>     <C>

(a)     Exhibits.  The following documents are exhibits to this report.

2.1     Plan and Agreement of Merger of ATSI Communications, Inc. with and into ATSI Merger Corporation,
        dated as of March 24, 2004. (Exhibit 2.1 to Form 8-K of ATSI filed on May 24, 2004)

3.1     Articles of Incorporation of ATSI Merger Corporation. (Exhibit 3.1 to Form 8-K of ATSI filed on May 24,
        2004)

3.2     Bylaws of ATSI Merger Corporation. (Exhibit 3.2 to Form 8-K of ATSI filed on May 24, 2004)

3.3     Articles of Merger of ATSI Communications, Inc. with and into ATSI Merger Corporation. (Exhibit 3.3 to
        Form 8-K of ATSI filed on May 24, 2004)

4.1     Certificate of Designations relating to the Series A, Series D, Series E, and Series H Convertible Preferred
        Stock of ATSI Merger Corporation *

4.2     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)


                                       60
<PAGE>
4.3     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)

4.4     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)

4.5     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)

4.6     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)

4.7     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)

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

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

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

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

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

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

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

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

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

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

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

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


                                       61
<PAGE>
4.20    Stock Purchase Warrant between ATSI and RGC International Investors, LDC dated October 11, 2000
        (Exhibit 10.6 to Form 8-K filed October 18, 2000)

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

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

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

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

4.25    Convertible Debenture Agreement (Exhibit 4.37 to Annual Report on Form 10-K for the year ended July 31,
        2003 filed November 12, 2003)

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

10.2    2000 Option Plan (Exhibit 4.36 to annual Report on Form 10-K for the year ended July 31, 2003 filed
        November 12. 2000.)

10.3    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))

10.4    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))

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

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

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

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

10.9    Commercial Lease with BDRC, Inc (Exhibit 10.24 to Annual Report on Form 10-K for year ended July 31,
        2003 filed November 12, 2003)

10.10   Stock Purchase Agreement with Telemarketing (Sale of ATSICOM) (Exhibit 10.1 to Form 8-K filed June
        16, 2003)

10.11   Interconnection Agreement TELMEX and ATSICOM (English summary) (Exhibit 10.26 to Annual Report
        on Form 10-K for year ended July 31, 2003 filed November 12, 2003)

10.12   Interconnection Agreement TELMEX and ATSICOM (English Translation) (Exhibit 10.27 to Amended
        Annual Report on Form 10-K/A for the year ended July 31, 2003 filed March 2, 2004)


                                       62
<PAGE>
10.13   Carrier Service Agreement DialMex and ATSI (Exhibit 10.27 to Annual Report on Form 10-K for year
        ended July 31, 2003 filed November 12, 2003)

21      Subsidiaries of ATSI (Exhibit 21 to Annual Report on Form 10-K for year ended July 31, 2004 filed
        November 9, 2004)*

31.1    Certification of our President and Chief Executive Officer, under Section 302 of the Sarbanes-Oxley Act of
        2002. *

31.2    Certification of our Corporate Controller and Principal Financial Officer, under Section 302 of the Sarbanes-
        Oxley Act of 2002. *

32.1    Certification of our President and Chief Executive Officer, under Section 906 of the Sarbanes-Oxley Act of
        2002. *

32.2    Certification of our Corporate Controller and Principal Financial Officer, under Section 906 of the Sarbanes-
        Oxley Act of 2002. *

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

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

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

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

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

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

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

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

(b)     Reports on Form 8-K
</TABLE>

     -    On  May 13, 2004, we filed a Current Report on Form 8-K announcing the
          voting  results  from the Annual Meeting of Stockholders under Items 5
          and  7.
     -    On June 18, 2004, we filed a Current Report on Form 8-K announcing the
          completion  of  the  merger of ASTI Communications, Inc. with and into
          ATSI  Merger  Corporation  under  Items  5  and  7.


                                       63
<PAGE>
                                   SIGNATURES

     In  accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                             ATSI  COMMUNICATIONS,  INC.

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

     In  accordance  with the Exchange Act, this report has been signed below by
the  following  persons on behalf of the registrant and in the capacities and on
the  dates  indicated.

<TABLE>
<CAPTION>
SIGNATURE              TITLE                                     DATE
---------              -----                                     ----
<S>                    <C>                                       <C>

/s/ Arthur L. Smith    Principal Executive Officer and Director  November 9, 2004
-------------------
Arthur L. Smith

/s/ Antonio Estrada    Principal Accounting Officer              November 9, 2004
-------------------
Antonio Estrada        Principal Finance Officer

/s/ John R. Fleming    Director                                  November 9, 2004
-------------------
John R. Fleming

/s/ Murray R. Nye      Director                                  November 9, 2004
-------------------
Murray R. Nye

/s/ Michael G. Santry  Director                                  November 9, 2004
-------------------
Michael G. Santry
</TABLE>


                                       64
<PAGE>