AMERICAN TELESOURCE INTERNATIONAL INC, 10-K, 2000-11-14

AMERICAN TELESOURCE INTERNATIONAL INC
10-K, 2000-11-14
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended July 31, 2000

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to

Commission File Number:

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

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

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

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

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

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

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

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

The aggregate market value of the Registrant's outstanding Common Stock
held by non-affiliates of the Registrant at November 9, 2000, was approximately
$10,500,000. There were 67,986,944 shares of Common Stock outstanding at
November 9, 2000, and the closing sales price on the NASDAQ/OTCB for our Common
Stock was $1.50 on such date.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held in January 2001, are incorporated by reference in Part
III hereof.

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TABLE OF CONTENTS

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Page
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PART I

Item 1. Business.................................................................. 3
Overview and Recent Developments........................................ 3
Strategy and Competitive Conditions..................................... 5
Retail Distribution Network............................................... 7
Services and Products..................................................... 8
Network Management Services.......................................... 8
Call Services........................................................ 10
Electronic Commerce Via Internet..................................... 11
Network................................................................... 12
Year 2000 Issue......................................................... 13
Licenses/Regulatory..................................................... 13
Employees............................................................... 15
Additional Risk Factors................................................. 15
Item 2. Properties................................................................ 27
Item 3. Legal Proceedings......................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders....................... 29

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..... 29
Item 6. Selected Financial and Operating Data..................................... 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 32
General................................................................. 32
Results of Operations................................................... 33
Liquidity and Capital Resources......................................... 42
Inflation/Foreign Currency.............................................. 46
Seasonality............................................................. 46
Year 2000 Compliance.................................................... 46
Market Risk............................................................. 46
Item 8. Financial Statements and Supplementary Data............................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures..................................................... 84

PART III

Item 10. Directors and Officers of the Registrant.................................. 84
Item 11. Executive Compensation.................................................... 84
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 84
Item 13. Certain Relationships and Related Transactions............................ 84

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......... 84
</TABLE>

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

PART I.
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ITEM I. BUSINESS

Overview and Recent Developments

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

Our subsidiary GlobalSCAPE, Inc. distributes Internet productivity
software.

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

We have had operating losses for almost every quarter since we began
operations in 1994. The auditor's opinion on our financial statements as of July
31, 2000 calls attention to substantial doubts about our ability to continue as
a going concern. This means that they question whether we can continue in
business. We have experienced difficulty in paying our vendors and lenders on
time in the past, and may experience difficulty in the future. If we are unable
to pay our vendors and lenders on time, they may stop providing critical
services or repossess critical equipment that we need to stay in business.

Our principal operating subsidiaries are:

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

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

. Sistema de Telefonia Computarizada, S.A. de C.V. or Sistecom, which we
acquired in August 1997; this subsidiary owns 136 casetas in 66 cities in
Mexico;

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

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

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

Recent Developments

During our fiscal year ending July 31, 2000, we:

. obtained a listing on the American Stock Exchange;

. secured a long distance concession license in Mexico through our
acquisition of Grupo Intelcom, S.A. de C.V. which will permit us to
carry our own intra-Mexico long distance traffic and interconnect
directly with the local Mexican network thereby reducing our costs;

. signed a definitive agreement to acquire Genesis Communications
International, Inc. furthering our long-term commitment to a retail
strategy;

. were selected to join the Russell 3000 and 2000 indexes;

. secured coverage from our first analyst;

. announced the distribution of a portion of our ownership in our wholly
owned subsidiary, GlobalSCAPE, Inc. to our shareholders.

Subsequent to year-end we have completed our partial distribution of
GlobalSCAPE to our shareholders and closed a $10 million equity funding, $2.5
million of which was funded on closing.

In fiscal year 2000, our subsidiary GlobalSCAPE also achieved certain
milestones. They released a new Internet productivity software product, CuteZIP
1.0 and introduced version 4.0 of its chief software product CuteFTP. Subsequent
to July 31, 2000, GlobalSCAPE has continued its momentum with the effectiveness
of its Form 10, allowing it to become a publicly reporting company, the hiring
of a new Chief Executive Officer and the signing of an agreement with Best Buy
to distribute CuteFTP in its stores.

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Strategy and Competitive Conditions

Our strategy is to position ourselves to take advantage of the de-
monopolization of the Latin American telecommunications market, as well as the
increasing demand for services in this market. Historically,
telecommunications services in Latin America have been provided by state-run
companies operating as a legal or de facto monopoly. Although these companies
failed to satisfy the demand for services in their countries, the regulatory
scheme effectively precluded competition by foreign carriers. Currently, there
is a trend toward demonopolization of the telecommunications industry in Latin
America, and many of these countries are in various stages of migration toward a
competitive, multi-carrier market.

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

. rapid growth of the Latino segment of the United States population

. increase in trade and travel between Latin America and the United
States

. the build-out of local networks and corresponding increase in the
number of telephones in homes and businesses in Latin countries

. proliferation of communications devices such as faxes, mobile phones,
pagers, and personal computers

. declining rates for services as a result of increased competition.

In addition, technological advances have provided emerging carriers with
the means to provide high quality transmission on a cost-effective basis. Most
notably, we as well as other emerging carriers now use packet switching
technology, which is a method of transmitting telecommunications traffic by
breaking the information into packets. The packets can then be organized in a
way that permits the information to be transmitted over long distances more
quickly and using less capacity than traditional methods. The packets are
reassembled at the receiving end to re-create the message. We have also
incorporated asynchronous transfer mode or "ATM" technology into our network.
ATM is a high-speed, packet switching technology that allows voice, facsimile,
video and data packets to be carried simultaneously on the same network.

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

Strategy and Competitive Conditions - Mexican Market. Telefonos de Mexico
(or Telmex) had a legal franchise to control the entire market for local and
long distance telecommunications in Mexico until June of 1995, when new laws
began to open the market to competition. This means that Telmex owned or
controlled all of the physical infrastructure needed to transport
telecommunications traffic, including the local network of telephone lines to
homes and business in a given area, and the long distance network of lines
between the local networks. In January 1997, the Mexican government began
granting licenses to provide long distance service to competing companies, and
has licensed at least 21 new long distance providers. Two of these new license
holders are Mexican based affiliates of top tier U.S. carriers MCI/Worldcom and
AT&T. Although the Mexican government has also licensed additional local
competitors, the build out of additional local infrastructure is just beginning,
and the local network in Mexico is still dominated by Telmex. We began
assembling a framework of licenses, reciprocal services agreements with other
carriers, other service agreements, network facilities, and distribution
channels in Mexico, in 1994, in anticipation of the demonopolization of this
market. In

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

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

Wholesale. The U.S. wholesale market for termination to Mexico has
become increasingly dynamic as competition, call volumes and industry capacity
along U.S. - Mexico routes have all increased. Although we nearly doubled the
volume of wholesale minutes we transmitted to Mexico during fiscal year 2000,
downward pricing pressure in this market resulted in a less than proportional
increase in revenues. We continue to expect our wholesale volume of traffic
transported to increase during the upcoming year. Additionally, we plan to
explore ways to exploit our wholesale operation without the investment of
significant new resources (see Network Management Services - Carrier Services).

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

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Retail Distribution Network

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

Communication centers. Communication centers, formerly called casetas, are
indoor calling centers strategically located to serve travelers and the large
population of the country who do not have personal telephones. Communications
centers are a widely recognized and utilized medium in Mexico, but do not
currently have a real equivalent in the U.S. Our centers have traditionally
offered local, domestic Mexico and international long distance calling and in
fiscal 2000, we began offering additional enhanced services such as prepaid and
Internet services. We are the largest communication center operator in Mexico
with approximately 136 casetas in 66 cities operating under the trade name
"Computel(TM)". Each location employs at least one attendant, who processes
calls, monitors call duration, collects money and runs daily reports on call
activity. As compared to public pay telephones, our centers offer privacy and
comfort as well as the personalized attention needed by customers who are not
accustomed to using a telephone. Key factors favoring us over competing caseta
operators are the well-recognized Computel name, a reliable platform and billing
system, the provision of facsimile services (which are not offered by many other
operators) and a larger distribution network. The next largest competitor in
Mexico has only 70 locations.

Using these communication centers as the cornerstone, we intend to further
increase our retail presence in Mexico and the U.S. Prior to the announcement
of our Genesis acquisition we had initiated a plan to bring the Communication
Center concept to strategic markets in the U.S., targeting Mexican nationals and
U.S. citizens of Mexican origin who are familiar with the caseta concept and the
Computel(TM) name. The Communication Centers were seen as a way to distribute
"borderless" products that function in the same manner regardless of the users
location north or south of the U.S./Mexico border. These products were to be
marketed to established Latino households, and on a prepaid basis to recent
immigrants and transient Latinos who may have acculturation issues, or identity,
credit or economic challenges. It is our belief that we can capture customer
loyalty by serving these challenged consumers, and then keep their business as
they establish households in the U.S. Subsequent to the receipt of our long
distance concession license in Mexico and the announcement of our definitive
agreement to acquire Genesis, we have closed all four of these U.S.
Communication Centers so that we can better utilize our resources. One form that
this may take is the expansion of our communication center presence in Mexico.

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

We market our pay telephone services in Mexico through direct sales efforts
as well as some independent marketing representatives working on a commission
basis. We have targeted a significant portion of our pay telephone marketing
efforts toward various resort areas in Mexico, specifically on locations with
high tourist-traffic such as airports, ship ports and marinas, restaurants and
bars. Approximately 16 million U.S. tourists visit Mexico each year, and the
country's vacation destinations are major hubs for northern visitors via major
U.S. airline carriers, and cruise ships. Although we target the tourist market
for payphones and operator-assisted calling, these services are available for
Mexican nationals as well.

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As of November 1, 2000, there were 31 authorized payphone providers in
Mexico, of which Telmex is the largest. We believe we are the second largest
provider after Telmex in the tourist markets, where we have focused our efforts.
Our multi-pay payphones give us a significant advantage over our largest
competitor, Telmex, which accepts only pre-paid Telmex calling cards. Vendors
of the cards are often difficult to locate and denominations tend to be higher
than needed by consumers. Although other companies have plans to install pay
telephones, we believe that we will be one of the few providers with our own
network, allowing us to maintain flexibility with respect to rates.

Genesis Communications International, Inc.

As previously mentioned, in June 2000 we announced that we had signed a
definitive agreement to acquire Genesis Communications International, Inc., a
privately-held telecommunications company focused on the retail Hispanic market
with approximately 75,000 local and long-distance customers. The acquisition
will greatly expand our current retail presence and Genesis's applications and
current efforts to function, as a CLEC in the states with the largest Hispanic
markets will allow for the continued growth of our retail strategy.

Services and Products

In the presentation of our historical financial results, we have divided
our revenues into three categories: Network Management Services, consisting of
both carrier services and private network services; Call Services, consisting of
both integrated prepaid and postpaid services; and Internet e-commerce.

Network Management Services

We offer private network telecommunications services between the United
States and Latin America and within Latin America.

Carrier Services

We offer wholesale termination services to U.S. and Latin American carriers
who lack transmission facilities, require additional capacity or do not have
regulatory permission to terminate traffic in Mexico. Revenues from this
service accounted for approximately 57% of our overall revenues in fiscal 2000.
The percentage of our total volume of wholesale traffic sent by customer
fluctuates dramatically, on a quarterly, and sometimes, daily basis. Although
two customers may make up 50% of this volume at a given time, a month later the
volumes sent by these two customers may be less than 5%. In general, our
agreements with these customers do not require significant volume commitments
from them, so they are free to re-route their traffic away from us to a lower
priced carrier at will. While we are the primary route choice for certain
customers and certain segments of some customer's traffic we are the second or
third route choice for some of these customers, meaning that they send us their
overflow traffic if their primary route choice does not have sufficient capacity
to meet their demand. The volume of this overflow traffic may fluctuate
dramatically from day to day. For fiscal 2000, we had two customers whose
traffic accounted for more than 10% of our consolidated revenues. This market
continued to experience tremendous downward pricing pressure during fiscal year
2000 due to a combination of several factors, most notably an increase in the
activation of fiber optic cable along U.S.-Mexico routes and regulatory changes
which permitted the top tier carriers to lower their international wholesale
rates. Therefore, although we experienced significant increased volumes in this
line of business during the year, the increased additional revenue was not
proportional. We have seen a substantial increase in volume since we activated
our high-quality fiber route in July 1999, and believe

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this fiber network will continue to attract increased volumes from top tier
carriers. Additionally, we believe it will generate opportunities to transport
traffic for Mexican carriers. We should be able to use the increased volumes to
negotiate more favorable termination costs in Mexico, and with the receipt of
our Mexican long distance license, we should be able to cut our costs for
carrying this traffic by further extending our own network facilities in Mexico.

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

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

Private Networks

We offer private communications links for multi-national and Latin American
customers who use a high volume of telecommunications services and need greater
dependability than is available through public networks. These services include
data, voice, and fax transmission as well as videoconferencing and Internet.
During fiscal 2000, we did not devote significant resources toward the
development of this business in Mexico. However, expansion of this line of
business is consistent with our plans to build out our network in Mexico, since
many of the same facilities that would be used for delivery of retail consumer
products could be used for private network services as well.

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

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

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

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Call Services

We currently offer call services between Mexico and the United States
primarily for traffic originating in Mexico.

Integrated Prepaid Services

Our principal call services product during fiscal 2000 is integrated
prepaid services, which are generated by calls processed by us without live or
automated operator assistance. A majority of these calls are generated by our
public telephones and communication centers in Mexico in exchange for immediate
cash payment in pesos.

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

Postpaid

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

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

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

Our postpaid services product has declined due to lower volumes of
operator-assisted calls originating in Mexico and terminating in the U.S, new
services such as prepaid cellular being introduced into the market by our
competitors, and Mexican cellular providers recently introducing the concept of
"calling party pays". In spite of these declines we believe our owned retail
distribution network will continue to generate call services traffic.
Competition for traffic from third parties in this market revolves largely
around the amount of commissions the operator services provider is willing to
pay. We are currently focusing more on improving our profitability rather than
simply generating additional revenues, and it has therefore lost ground to
competitors willing to accept lower profit margins by paying higher commissions.
However, we believe we have a reputation as a reliable provider, and we are also
able to offer the value-added service of intelligent pay telephones in hotel
lobbies.

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Other than Telmex we compete with BBG Communications, Helix Communications
and International Communication Services in the Call Services area.

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

Electronic Commerce via Internet

GlobalSCAPE was formed in April 1996 to implement Internet related
strategies that are not complementary to our core business. GlobalSCAPE's
revenues are attributable to sales of Internet productivity software, primarily
its flagship product CuteFTPTM which it has historically distributed via its web
site. GlobalSCAPE operates autonomously, generating substantially all funds for
its development and expansion internally from its own operations. In fiscal year
2000 GlobalSCAPE released a new Internet productivity software product, CuteZIP
1.0 and introduced version 4.0 of its chief software product CuteFTP. Subsequent
to July 31, 2000, GlobalSCAPE has continued its momentum with the effectiveness
of its Form 10, allowing it to become a publicly reporting company, the hiring
of a new Chief Executive Officer and the signing of an agreement with Best Buy
to distribute CuteFTP in its stores.

GlobalSCAPE's market includes all computer users on the Internet.
GlobalSCAPE's products are distributed as shareware, meaning that users may
download and use the products for free on a trial basis for a limited time.
After the expiration of the trial period, the user must register the product to
be in compliance with the license and to obtain product support. GlobalSCAPE's
primary source of revenue is generated through product registration, with
additional revenues generated by advertising in the form of ad banners and
sponsorships in its "live" software products and on our web site. On a monthly
basis, GlobalSCAPE receives approximately 1.2 million unique visitors to its web
site and displays more than 15 million in-product and web site ad banners. For
the year ended July 31, 2000, approximately 11,200,000 copies of software
products were downloaded from GlobalSCAPE's servers, of which approximately
183,000 copies were registered (including approximately 24,000 upgrades of
previously registered products).

GlobalSCAPE's's flagship product, CuteFTP, is a Windows-based file transfer
protocol (FTP) utility allowing users the ability to transfer and manage files
via the Internet, including MP3's, web pages, software, videos and graphics. We
believe that CuteFTP has 30% of the U.S. market share for FTP programs. Their
portfolio of products also includes CuteHTML, an advanced HTML editor for
developing web sites, CuteMAP, an image mapping utility for graphic navigation
through web sites, CuteMX, a file-searching and sharing program that enables
users to interact directly with each other in real time to search for and share
all types of files, including multi-media files, as well as providing chat,
instant messaging, a Windows multi-media player, and streaming audio and video
capacity, and others in various stages of alpha and beta testing.

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

GlobalSCAPE operates in a highly competitive environment with respect to
all its products. CuteFTP's primary competitors are WS_FTP, FTP Voyager and
Bulletproof FTP. While many FTP products have mimicked CuteFTP's features, they
are not commercially successful due to their late arrival to the marketplace and
lack of support infrastructure. CuteHTML and CuteMAP, although relatively new to
the market, have the advantage of being able to piggyback on the success of
CuteFTP through product integration and cross-marketing efforts. CuteMX competes
against approximately a dozen file sharing programs on the market, including
Napster, the current market leader. The CuteMX program has broad applications
allowing end users to transfer all file types and is positioned as a mainstream
application.

Network

We have established a technologically advanced network which uses both
satellite and fiber optic cable to transmit telecommunications traffic between
the U.S. and Mexico. Our network incorporates ATM technology, which is
compatible with other transmission technologies such as frame relay and Internet
protocols, permitting us to explore even more cost-effective transmission
methods in the future. See page 5, "Strategy and Competitive Conditions" for a
description of ATM technology. Frame relay is a method of allocating capacity
on demand so that a customer's needs may be filled with less capacity than the
traditional system of dedicating a certain amount of capacity to a particular
purpose. Internet protocol refers to a method of organizing information such
that it may be carried on the Internet. Our network also employs compression
technology to carry greater volumes on the same facilities.

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

We lease fiber capacity from third parties, primarily Bestel USA, Inc. with
whom we have a 3-year lease for fiber optic cable from San Antonio, Texas to
Mexico City, Mexico until March 2002. We lease satellite capacity on the
Mexican satellites Solidaridad I and II, from Satelites Mexicanos, S.A. de C.V.
or "SATMEX, with whom we have an agreement for capacity through April 2001.
ATSI has leased a fixed amount of capacity from each of these vendors for a
fixed monthly price. Each of these vendors has the right to terminate service
for non-payment. During 1999, ATSI was unable to make payments to SATMEX on
time. SATMEX agreed not to suspend service under the terms of a payment plan
calling for ATSI to bring our account current by December 15, 1999. ATSI has
met the terms of the payment plan, and is now current in our payments to both of
these vendors.

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

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

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

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

Year 2000 Compliance

Prior to January 1, 2000 we initiated a program to identify and address
issues associated with the ability of our date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. We
expended approximately $100,000 in our efforts to ensure readiness for year 2000
issues. As of October 31, 2000, we have experienced no problems associated with
Year 2000 issues that would have caused a disruption in our normal business
operations, within our internal systems or the systems of our external vendors
or customers.

Licenses/Regulatory

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

Federal

Pursuant to Section 214 of the Communications Act of 1934, the Federal
Communications Commission ("FCC") has granted us global authority to provide
switched international telecommunications services between the U.S. and certain
other countries. We maintain informational tariffs on file with the FCC for our
international retail rates and charges. On October 19, 2000 we announced that
we had been informed by the FCC that they had consented to the transfer of
Genesis Communications International, Inc.'s 214 certificate to ATSI. Genesis is
now providing international telecommunications services under our 214
certificate.

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

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

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

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

State

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

Mexico

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

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

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

Packet Switching Network License - a 20-year license issued in October 1994
allowing for the installation and operation of a network interconnecting packet
switching nodes via our proprietary

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

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

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

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

Other Foreign Countries

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

Employees

At September 1, 2000, we (excluding ATSI-Mexico) had 85 full-time
employees, of whom 18 were sales and marketing personnel, and 67 performed
operational, technical and administrative functions, and 15 part-time employees.
Of the foregoing, 26 were employed by GlobalSCAPE, and three were employed by
Sinfra. We believe our future success will depend to a large extent on our
continued ability to attract and retain highly skilled and qualified employees.
We consider our employee relations to be good. None of these aforementioned
employees belong to labor unions.

At September 1, 2000, ATSI-Mexico had 437 full-time employees of whom 408
were operators and 29 performed sales, marketing, operational, technical and
administrative functions. A portion of ATSI-Mexico's employees, chiefly
operators, belong to a union.

ADDITIONAL RISK FACTORS

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

RISKS RELATED TO OPERATIONS

. Our auditors have questioned our viability

Our auditors' opinion on our financial statements as of July 31, 2000 calls
attention to substantial doubts as to our ability to continue as a going
concern. This means that they question whether we can continue in business.
If we cannot continue in business, our common stockholders would likely

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lose their entire investment. Our financial statements are prepared on the
assumption that we will continue in business. They do not contain any
adjustments to reflect the uncertainty over our continuing in business.

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

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

- delays in negotiating acceptable interconnection agreements with
Telefonos de Mexico, the former monopoly carrier in Mexico;

- delays in construction of our network; and

- operational delays caused by our inability to obtain additional
financing in a timely fashion.

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

As of July 31, 2000, we had negative working capital of approximately $5.3
million. In order to maintain our financial position going forward it will
be necessary for us to raise funds necessary to cover our recurring
negative cash flows from operations. We cannot estimate what that amount
will be with reasonable certainty. For the twelve months ended July 31,
2000, our negative cash flows from operations prior to debt service and
capital expenditures were approximately $4.7 million. Conservatively, we
will need to be able to raise similar capital over the next nine to twelve
months.

. We must expand and operate our network

Our success and ability to increase our revenues depends upon our ability
to deliver telecommunication services which, in turn, depends on our
ability to integrate new and emerging technologies and equipment into our
network and to successfully expand our network. Our ability to continue to
expand, operate and develop our network will depend on, among other
factors, our ability to accomplish the following:

- obtain switch sites;

- interconnect with the local, public switched telephone network
and/or other carriers; and

- obtain access to or ownership of transmission facilities that
link our switches to other network switches.

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

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

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

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

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

. Competition could harm us

International telecommunications providers like us compete based on price,
customer service, transmission quality and breadth of service offerings.
Our carrier and prepaid card customers are especially price sensitive. Many
of our larger competitors enjoy economies of scale that can result in lower
termination and network costs. This could cause significant pricing
pressures within the international communications industry. In recent
years, prices for international and other telecommunications services have
decreased as competition continues to increase in most of the markets in
which we currently compete or intend to compete. For example, from October
1999 to October 2000, the prevailing price per minute to carry traffic from
the U.S. to Mexico declined by approximately 41%. Although we carried more
than twice as much wholesale traffic in fiscal year 2000 than in fiscal
year 1999, we only recognized an increase in revenues of approximately 60%.
If these pricing pressures continue, we must continue to lower our costs in
order to maintain sufficient profits to continue in this market. We believe
competition will intensify as new entrants increase as a result of the new
competitive opportunities created by the Telecommunications Act of 1996,
implementation by the Federal Communications Commission of the United
States' commitment to the World Trade Organization, and privatization,
deregulation and changes in legislation and regulation in many of our
foreign target markets. We cannot assure you that we will be able to
compete successfully in the future, or that such intense competition will
not have a material adverse effect on our business, financial condition and
results of operations.

. Competition in Mexico

Mexican regulatory authorities have granted concessions to 20 companies,
including Telmex and Telereunion, to construct and operate public, long
distance telecommunications networks in Mexico. Some of these new
competitive entrants have as their partners major U.S. telecommunications
providers including AT&T (Alestra), MCIWorldcom (Avantel) and Bell Atlantic
Corp. (Iusatel). Mexican regulatory authorities have also granted
concessions to provide local exchange services to

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several telecommunications providers, including Telmex and Telefonia
Inalambrica del Norte S.A. de C.V., Megacable Comunicaciones de Mexico and
several of Mexico's long distance concessionaires. We compete or will
compete to provide services in Mexico with numerous other systems
integration, value-added and voice and data services providers, some of
which focus their efforts on the same customers we target. In addition to
these competitors, recent and pending deregulation in Mexico may encourage
new entrants.

Moreover, while the WTO Agreement could create opportunities to enter new
foreign markets, the United States' and other countries' implementation of
the WTO Agreement could result in new competition from operators previously
banned or limited from providing services in the United States. For
example, the FCC granted the Sprint/Telmex joint venture authority, subject
to various conditions, to enter the United States market and to provide
resold international switched services between the United States and
Mexico. This and other competitive developments could result in increased
competition, which could materially and adversely effect our business,
financial condition and results of operations.

. Our Mexican facilities-based license poses risks

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

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

- we will be able to obtain financing to finish the Mexican
network;

- if we obtain financing it will be in a timely manner or on
favorable terms; or

- we will be able to comply with the Mexican concession's
conditions.

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

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

The markets that we service are characterized by:

- rapidly changing technology;

- evolving industry standards;

- emerging competition; and

- the frequent introduction of new services, software and other
products.

Our success partially depends upon our ability to enhance existing
products, software and services and to develop new products, software and
services that meet changing customer requirements on a

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

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

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

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

We have not always paid all of our suppliers on time due to temporary cash
shortfalls. Our critical suppliers are SATMEX for satellite transmission
capacity and Bestel for fiber optic cable. We also rely on various Mexican
and U.S. long distance companies to complete the intra-Mexico and intra-
U.S. long distance portion of our calls. For fiscal 2000, the monthly
average amount due to these suppliers as a group was approximately
$1,372,000. We currently have overdue outstanding balances with long
distance carriers for fiscal 2000 of $300,000 on which we are making
payments. Critical suppliers may discontinue service if we are not able to
make payments on time in the future. In addition, equipment vendors may
refuse to provide critical technical support for their products if they are
not paid on time under the terms of support arrangements. Our ability to
make payments on time depends on our ability to raise additional capital or
improve our cash flow from operations.

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

We purchased some of our significant equipment with borrowed money,
including a substantial number of our payphones located in Mexico, our DMS
250/350 International gateway switch from Nortel, and packet-switching
equipment from Network Equipment Technologies. We pay these three lenders
approximately $171,165 on a monthly basis. The Notes to our Consolidated
Financial Statements included in this Form 10-K include more information
about our equipment, equipment debt and capital lease obligations. The
lenders have a security interest in the equipment to secure repayment of
the debt. This means that the lenders may take possession of the equipment
and sell it to repay the debt if we do not make our payments on time. We
have not always paid all of our equipment lenders on time due to temporary
cash shortfalls. These lenders may exercise their right to take possession
of certain critical equipment if we are not able to make payments on time
in the future. Our ability to make our payments on time depends on our
ability to raise additional capital or improve our cash flow from
operations. We defaulted on our Nortel switch loan agreement as of the end
of our fiscal year, July 31, 2000, by failing to meet financial covenants
related to revenues, gross margins and EBITDA. Though we have requested and
received a waiver for that default, it appears likely that we will be in
default of those financial covenants again at the end of the quarter ending
October 31, 2000. Accordingly, we have accounted for our capital lease
obligation with NTFC as a current liability in our accompanying
consolidated financial statements. For more information on

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this expected default, you should see the Liquidity and Capital Resources
section of this 10-K for the year ending July 31, 2000. For more
information on our other loans and capital leases you should see the
footnotes of this 10-K for the year ended July 31, 2000.

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

Our revenues from wholesale services currently comprise about 63% of our
total revenues. The volume of business sent by each customer fluctuates,
but this traffic is often heavily concentrated among three or four
customers. During some periods in the past, two of these customers have
been responsible for 50% of this traffic. Generally, our wholesale
customers are able to re-route their traffic to other carriers very quickly
in response to price changes. If we are not able to continue to offer
competitive prices, these customers will find some other supplier and we
will lose a substantial portion of our revenue very quickly. In addition,
mergers and acquisitions in our industry may reduce the already limited
number of customers for our wholesale services.

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

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

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

There are only 20-licensed Mexican long distance companies, and we
currently have agreements with four of them. One of these, Avantel, S.A. de
C.V. has said publicly that it may not continue in the business because of
its difficulty in achieving a desired profit margin. If the number of
carriers who provide intra-Mexico long distance is reduced, we will have
fewer route choices and may have to pay more for this service.

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

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

To stay competitive, we will attempt to integrate the latest technologies
into our network. We are currently implementing "packet switching"
transport capabilities such as Asynchronous Transfer

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Mode and we will continue to explore new technologies as they are
developed. Our 10-K describes these technologies. The risk of network
problems increases during periods of expansion and transition to new
technologies.

. Changes in telecommunications regulations may harm our competitive
position

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

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

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

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

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

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

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Approximately 20% of ATSI's revenue is collected in Mexican Pesos. If the
value of the Peso relative to the Dollar declines, that is, if Pesos are
convertible into fewer Dollars, then our earnings, which are stated in
dollars, will decline. We do not engage in any type of hedging transactions
to minimize this risk and do not intend to do so.

. We may not successfully integrate the operations of Genesis

If we are unable to integrate the operations of Genesis Communications
International, Inc. upon completion of the acquisition, it may adversely
affect our future operations, specifically, the shift towards and
implementation of our retail strategy.

RISKS RELATED TO FINANCING

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

In the event of a change of control of ATSI, the terms of the Series D
Preferred Stock permit the holder to choose either to receive whatever cash
or stock the common stockholders receive in the change of control
transaction as if the Series D stock Preferred Stock had been converted, or
to require us to redeem the Series D Preferred Stock at $1,560 per share.
If all 3,000 shares of the Series D Preferred Stock were outstanding at the
time of a change of control, this could result in a payment to the holder
of $4,680,000. The possibility that we might have to pay this large amount
of cash would make it more difficult for us to agree to a merger or other
opportunity that might arise even though it would otherwise be in the best
interest of the stockholders.

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

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

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

Second, if we refuse to honor a conversion notice or a third party
challenges our right to honor a conversion notice by filing a lawsuit, the
holder may require us to redeem any shares it then holds for $1,270 per
share. If all 3,000 shares were outstanding at the time of a redemption,
this would result in a cash payment of $3,810,000 plus accrued and unpaid
dividends. If we were required to make a cash payment of this size, it
would severely restrict our ability to fund our operations.

22
<PAGE>

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

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

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

RISKS RELATING TO MARKET FOR OUR COMMON STOCK

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

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

- announcements of new products or technologies innovations by us
or others;

- variations in our results of operations;

- the gain or loss of significant customers;

- the timing of acquisitions of businesses or technology licenses;

- legislative or regulatory changes;

- general trends in the industry;

23
<PAGE>

- market conditions; and

- analysts' estimates and other events in our industry.

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

Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings. As of
November 7, 2000, we had 67,986,944 shares of common stock outstanding, of
which our affiliates held approximately 7,000,000 shares, and 2,091,056
shares issuable upon exercise of outstanding options and warrants, of which
approximately 1,113,000 were held by affiliates. In addition, we had
19,582,203 shares reserved for issuance upon conversion of our outstanding
Series A, D and E Preferred Stock (subject to adjustment). The shares held
by our affiliates are "restricted shares" and, accordingly, may not be sold
publicly except in compliance with Rule 144. The remaining outstanding
shares of our common stock and the shares issuable upon conversion of our
preferred stock and exercise of warrants are freely tradable. In addition,
we may issue a significant number of additional shares of common stock as
consideration for acquisitions or other investments as well as for working
capital. For example, we have agreed to issue approximately 9.6 million
shares of our common stock in connection with our acquisition of Genesis.
Sales of a substantial amount of common stock in the public market, or the
perception that these sales may occur, could adversely affect the market
price of our common stock prevailing from time to time in the public market
and could impair our ability to raise funds in additional stock offerings.

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

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

From January 1, 1999 to November 7, 2000, we issued 29,793,437 new shares
of common stock on a fully diluted basis, which represents approximately
33% of our fully diluted outstanding common stock. The fully diluted
outstanding common stock includes an assumed number of shares of common
stock that have not yet been issued, but are issuable upon conversion of
convertible preferred stock, warrants and stock options. Our convertible
preferred stock has a conversion price that floats with the market price of
our common stock. We calculated the number of shares included in this
amount by using an assumed conversion price based on our market price as of
November 10, 2000. The actual number of shares that may be issued may be
materially higher or lower.

. We have signed an agreement for a private equity line of credit, which
could further dilute your ownership of ATSI

We signed an agreement on April 10, 2000 with an investor under which we
may require the investor to purchase up to 5 million shares of common stock
over an eighteen month period at 92% of the market price for our common
stock at the time of purchase. We are not required to use this credit line
facility, but if we do use this facility, we must issue to the investor
warrants for 1,500 shares of common stock for every $100,000 that is
invested at an exercise price of 120% of the

24
<PAGE>

average of the five closing sale prices preceding the date of the
investment, and an additional 1,000 warrants per 100,000 invested as a
finder's fee on the same terms. The sale of additional securities would
further dilute your ownership of ATSI and put additional downward pricing
pressure on the stock.

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

Our Series A, D and E Preferred Stock is convertible into common stock
based on a conversion price that is a discount to the market price for
ATSI's common stock. The conversion price for the Series A Preferred Stock
is reset each year on the anniversary of the issuance of the stock, and the
conversion price for the Series D and Series E Preferred Stock floats with
the market on a day-to-day basis. For each series, the number of shares of
common stock that will be issued on conversion increases as the price of
our common stock decreases. Therefore, as our stock price falls, the
potential dilution to the common stock increases, and the amount of pricing
pressure on the stock resulting from the entry of the new common stock into
the market increases.

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

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

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

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

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

The rules of The American Stock Exchange, or the AMEX, require that the
voting rights of existing stockholders may not be disparately reduced or
restricted through any corporate action or issuance. The AMEX has stated in
its interpretive materials relating to the exchange rules that floating
priced convertible securities that vote on an as converted basis, such as
our Series A Preferred Stock, raise voting rights concerns because of the
possibility that, due to a decline in the price of the underlying common
stock the preferred stock holder will having voting rights disproportionate
to its investment in our company. These interpretive materials also
indicate that the AMEX may view the issuance of

25
<PAGE>

floating rate convertible securities, such as our Series A, D or E
Preferred Stock as a violation of their rule against engaging in operations
which are contrary to the public interest since the returns on securities
of this type may become excessive compared with those of public investors
in our common stock.

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

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

The Series A Preferred Stock requires quarterly dividends of 10% per annum,
and the Series D Preferred Stock requires quarterly dividends of 6% per
annum. We have the option of paying these dividends in shares of common
stock instead of cash and we expect to use that option. The number of
shares of common stock that are required to pay the dividends is calculated
based on the same floating conversion price applicable to the conversion of
the preferred stock, so the lower our common stock price, the more shares
of common stock it takes to pay the dividends. The issuance of these
additional shares of common stock will further dilute your ownership of
ATSI and put additional downward pricing pressure on the common stock. The
amount of dividends accrued as of October 31, 2000 is approximately
$146,000 on Series A Preferred Stock, and approximately $135,000 on the
Series D Preferred Stock.

. We have agreed to issue additional shares as consideration for the purchase
of Genesis Communications International, Inc.

We will have to issue up to an additional 9.6 million shares upon the
closing of this transaction. The entry of these shares will put further
market pressure on the price of common stock.

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

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

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

The AMEX has in the past delisted stock that fell below $4 per share for an
extended period of time. If our common stock falls to this level and is
delisted, trading in our common stock would be conducted in the over-the-
counter market on the electronic bulletin board or in the pink sheets
administered by the NASD. This would likely adversely affect the liquidity
of the common stock because it would be more difficult for stockholders to
obtain accurate stock quotations. In addition, if our stock were not traded
on a national exchange, sales of our stock would likely be subject to the

26
<PAGE>

SEC's penny stock rules which generally create a delay between the time
that a stockholder decides to sell shares and the time that the sale may be
completed.

. The partial distribution of shares of our subsidiary GlobalSCAPE will tend
to decrease the price of our common stock

On September 14, 2000, we completed a partial distribution of GlobalSCAPE
to our stockholders. Completion of this transaction partially separates the
value of GlobalSCAPE that was historically inherent in our stock price and
may reduce the price of our stock price.

. A delay or failure to complete a public offering may have a negative impact
on us

If we experience a delay or fail to complete a public offering we may
inhibit GlobalSCAPE's ability to accelerate the implementation of their
business plan. Additionally, a delay or failure to complete a public
offering may adversely impact the influx of further capital into ATSI
and/or GlobalSCAPE.

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

Certain provisions of our certificate of incorporation, our bylaws and the
Delaware General Corporation Law could, together or separately, discourage
potential acquisition proposals or delay or prevent a change in control.
Currently, those provisions include a classified board of directors, a
prohibition on written consents in lieu of meetings of the stockholders and
the authorization to issue up to 10,000,000 shares of preferred stock and
up to 100,000,000 shares of common stock. Our board of directors has the
power to issue any or all of these additional shares without stockholder
approval, subject to the rules of the AMEX that require stockholder
approval of the issuance of common stock or securities convertible into
common stock equal to or in excess of 20.0% of the number of shares of
common stock or the voting power outstanding before the issuance. The
preferred shares can be issued with such rights, preferences and
limitations as may be determined by the board. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the
commitments or contracts to issue any additional shares of common stock or
any shares of preferred stock. Authorized and unissued preferred stock and
common stock could delay, discourage, hinder or preclude our unsolicited
acquisition, could make it less likely that the stockholders receive a
premium for their shares as a result of any such attempt and could
adversely affect the market price of, and the voting and other rights of,
the holders of outstanding shares of common stock.

ITEM 2. PROPERTIES

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

27
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

In January 1999, we terminated a wholesale carrier services contract with
Twister Communications, Inc. for failure to pay for services rendered. On
January 29, 1999, while we were attempting to collect payments from them, they
filed a Demand for Arbitration seeking damages for breach of contract before the
American Arbitration Association. The customer claims that we wrongfully
terminated an International Carrier Services Agreement executed by the parties
in June 1998 under which we provided wholesale carrier services from June 1998
to January 1999. The customer's claims for damages represent amounts that it
claims it had to pay in order to replace the service provided by us.

We dispute that we terminated the contract wrongfully and assert that the
customer breached the agreement by failing to pay for services rendered and by
intentionally making false representation regarding our traffic patterns and on
March 3, 1999 we filed a Demand for Arbitration seeking damages for breach of
contract in an amount equal to the amounts due to us for services rendered plus
interest, plus additional damages for fraud. Although an arbitration panel was
initially selected, Twister has since filed for bankruptcy and has not pursued
any discovery in this matter. We are monitoring the bankruptcy proceeding to
determine whether we can recover a portion of the amount owed us.

We believe that we have a justifiable basis for our arbitration demand and
that we will be able to resolve the dispute without a material adverse effect on
our financial condition. Moreover, given the bankruptcy proceeding, we do not
believe that Twister will pursue the arbitration. Until the arbitration
proceedings are formally dropped or take place, we can not reasonably estimate
the possible loss, if any, and there can be no assurance that the resolution of
this dispute would not have an adverse effect on our results of operations.

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

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.

28
<PAGE>

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

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

PART II.
--------

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

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

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

Fiscal 2000 High Low
---------------------------------------------------------------------
First - ........................................$ 1 11/32 $ 45/64
Second - .......................................$ 2 29/32 $ 45/64
Third - ........................................$ 9 7/16 $ 2 1/2
Fourth - ...................................... $ 6 5/16 $ 4 1/2

Fiscal 2001 High Low
---------------------------------------------------------------------
First - ........................................$ 4 $ 1 3/8
Second - (through November 10, 2000)............$ 1 13/16 $ 1 1/2
</TABLE>

At November 10, 2000, the closing price of our Common Stock as reported by
AMEX was $1.50 per share. As of November 10, 2000, we had approximately 15,000
stockholders, including both beneficial and registered owners. The terms of
our Series A and Series D Preferred Stock restrict us from paying dividends on
our Common Stock until such time as all outstanding dividends have been
fulfilled related to the Preferred Stock. ATSI has not paid dividends on our
common stock the past three years and does not expect to do so in the
foreseeable future.

Since the filing of our Registration Statement on Form S-4 on March 6,
1998, we have had several sales of unregistered securities. They are as follows:

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

29
<PAGE>

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

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

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

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

In our second and third quarter 10-Q's we noted additional sales of
unregistered securities for additional Series A preferred stock, Series C
preferred stock, Series D preferred stock and the conversion of certain notes.
Further detail regarding these issuances can be found in the 2nd and 3rd quarter
10-Q's.

A Registration Statement on Form S-3 (File No. 333-89683) on which we
registered 2,076,001 shares of common stock was declared effective September 8,
2000. This common stock was issuable under the terms of our 6% Series C
Cumulative Convertible Preferred Stock and our 6% Series D Cumulative
Convertible Preferred Stock. We did not receive any of the proceeds of the sale
of common stock registered on this Form S-3. We received $500,000 and $3,000,000
of proceeds upon the issuance of the Series C Preferred Stock in September 1999
and the Series D Preferred Stock in February 2000. We incurred expenses in
connection with the issuance of the Series C and Series D Preferred Stock and
the registration of the underlying common stock as follows (approximate
amounts):

30
<PAGE>

<S> <C>
Legal fees $25,000.00
Registration fees 2,910.94
Printing & Miscellaneous 13,500.00
----------
Total $41,410.94
</TABLE>

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

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

</TABLE>

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

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.

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

Years ended July 31,
--------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(In thousands of $, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Operating revenues:
Postpaid services $10,807 $12,545 $13,858 $ 7,202 $ 3,623
Integrated prepaid services - 1,421 5,774 5,424 5,949
Network services 2,614 1,698 13,362 19,250 24,729
Internet e-commerce 54 564 1,526 2,642 5,128
------- ------- ------- ------- -------
Total operating revenues 13,475 16,228 34,520 34,518 39,429
Operating expenses:
Cost of services 10,833 12,792 22,287 21,312 26,798
Selling, general and administrative 3,876 6,312 12,853 12,652 14,884
Bad debt 554 735 1,024 2,346 898
Depreciation and amortization 281 591 1,822 3,248 4,681
------- ------- ------- ------- --------
Total operating expenses 15,544 20,430 37,986 39,558 47,261
Loss from operations (2,069) (4,202) (3,466) (5,040) (7,832)
------- ------- ------- ------- --------
Net loss $(2,205) $(4,695) $(5,094) $(7,591) $(17,138)
======= ======= ======= ======= ========
</TABLE>

31
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Per share information:
Net loss $ (0.11) $ (0.18) $ (0.12) $ (0.16) $ (0.30)
------- ------- ------- ------- -------
Weighted average common shares 19,928 26,807 41,093 47,467 56,851
outstanding ------- ------- ------- ------- -------
Consolidated Balance Sheet Data:
Working capital (deficit) $ (592) $ 195 $(5,687) $(6,910) $(5,251)
Current assets 1,789 5,989 5,683 5,059 5,441
Total assets 4,348 15,821 24,251 24,154 26,894
Long-term obligations, including
current portion 604 3,912 8,303 10,168 6,750
Total stockholders' equity 1,629 6,936 7,087 6,137 10,561
</TABLE>

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

SPECIAL NOTE: Certain Statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Securities Act. See
page 2 for additional factors relating to such statements.

The following is a discussion of the consolidated financial condition and
results of operations of ATSI for the three fiscal years ended July 31, 1998,
1999, and 2000. 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 1998 or 1998 refers to the year ended July 31,
1998, fiscal 1999 or 1999 refers to the year ended July 31, 1999 and fiscal 2000
or 2000 refers to the year ended July 31, 2000.

General

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

Utilizing the framework described above, we provide local, domestic long
distance and international calls from our own public telephones and
communication centers within Mexico, and provide similar services to some third
party-owned casetas, public telephones and hotels in Mexico. Consumers visiting
a Company-owned communication center or public telephone may dial directly to
the desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-to-person, etc.) or calling card, or to a U.S. dollar-
denominated credit card with the assistance of an operator. In July 1998, we
began providing domestic U.S. and international call services to Mexico to

32
<PAGE>

residential customers on a limited basis in the U.S. Callers may either pre-
subscribe to our one-plus residential service, or dial around their pre-
subscribed carrier by dialing 10-10-624, plus the area code and desired number.
Where possible, these retail calls are transported over our own network
infrastructure.

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

We also own approximately 70% of GlobalSCAPE, Inc., which is rapidly
becoming a leader in electronic commerce of top Internet-based software,
utilizing the Web as an integral component of its development, marketing,
distribution and customer relationship strategies. Utilizing CuteFTP as its
flagship product, GlobalSCAPE's downloads for products increased from
approximately 7.5 million for the year ended July 31, 1999 to approximately 11.2
million for the year ended July 31, 2000.

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

Additionally, we have determined that our U.S. and Mexican subsidiaries
should be reported as separate segments although many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Network Management Services and Direct Dial Services. For the three years
presented, all of the call services revenues were generated by our U.S. Telco
segment. GlobalSCAPE, Inc. and its operations are accounted for exclusively as a
part of the Internet e-commerce operating segment.

Our consolidated financial statements have been prepared assuming that we
will continue as a going concern. We have incurred losses since inception and
have a working capital deficit as of July 31, 2000. Additionally, we have had
recurring negative cash flows from operations with the exception of the three-
month period ended January 31, 1998. For the reasons stated in Liquidity and
Capital Resources and subject to the risks referred to in Liquidity and Capital
Resources, we expect improved results of operations and liquidity in the last
half of fiscal 2001. However, we cannot assure you that this will be the case.

Results of Operations

The following table sets forth certain items included in our results of
operations in thousands of dollar amounts and as a percentage of total revenues
for the years ended July 31, 1998, 1999 and 2000.

<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------------------------------------------------
1998 1999 2000
----------------- ------------------ ----------------
$ % $ % $ %
- - - - - -
<S> <C> <C> <C> <C> <C> <C>
Operating revenues
------------------
Network services
Carrier $10,047 29% $14,123 41% $22,191 57%
Private Network 3,315 10% 5,127 15% 2,538 6%
Call Services
Postpaid 13,858 40% 7,202 21% 3,623 9%
Integrated Prepaid 5,774 17% 5,424 16% 5,949 15%
</TABLE>

33
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Internet e-commerce 1,526 4% 2,642 7% 5,128 13%
--------- --------- --------
Total operating revenues 34,520 100% 34,518 100% 39,429 100%

Cost of services 22,287 65% 21,312 62% 26,798 68%
--------- --------- --------
Gross margin 12,233 35% 13,206 38% 12,631 32%

Selling, general and
Administrative expenses 12,853 37% 12,652 37% 14,884 38%

Bad debt expenses 1,024 3% 2,346 7% 898 2%

Depreciation and amortization 1,822 5% 3,248 9% 4,681 12%
--------- --------- --------
Operating loss (3,466) -10% (5,040) -15% (7,832) -20%

Other, net (1,628) -5% (1,696) -5% (2,221) -5%
--------- --------- --------
Net loss (5,094) -15% (6,736) -20% (10,053) -25%

Less: preferred stock dividends - 0% (855) -2% (7,085) -18%
--------- --------- --------
Net loss to common shareholders $(5,094) -15% $(7,591) -22% $(17,138) -43%
========= ========= ========
</TABLE>

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

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

As of July 31, 2000, 19 long distance concessions had been granted to
companies desiring to compete against the former Telmex monopoly. The entrance
of these alternative long distance providers into the Mexican market has
resulted in several changes, most notably more fiber optic capacity,
particularly in the crystal triangle made up of Mexico City, Guadalajara and
Monterrey; a steady

34
<PAGE>

increase in the calling options available within Mexico; and a decrease in the
cost of long distance phone calls on both a retail and wholesale basis due to
more competition. Callers now have a variety of ways to make calls from public
telephones or cellular telephones, many of which are made on a prepaid basis at
lower premiums than postpaid calls used to be. As a result of the decreasing
volumes of postpaid calls generated and processed by the Company, and lower
margin associated with those calls, the Company stopped providing these services
to most non-owned locations, closed its operator center in November 1999 and
began utilizing the services of third-party owned operator centers. As such,
revenues generated from postpaid services declined from $7.2 million in fiscal
1999 to $3.6 million in fiscal 2000. During fiscal 2000, we processed
approximately 50,000 calls from Mexico as compared to approximately 160,000 in
fiscal 1999.

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

In 1997, the Company acquired Sinfra, which owns licenses allowing the
Company to transport traffic internationally on a packet-switched basis.
Utilizing these licenses, the Company set up a satellite-based network between
San Antonio, Texas and Monterrey and Mexico City, Mexico. The Company also
leased fiber optic capacity between San Antonio, Dallas, Monterrey and Mexico
City in July 1999. Together, these two networks represent the Company's fixed
costs of operation today. Armed with this hybrid network, the Company has
focused its efforts during the past two years on maintaining its retail presence
of payphones and communications centers in Mexico, and adding third party
traffic to its network between the U.S. and Mexico. As such, integrated prepaid
traffic from its Mexican locations has remained relatively constant during the
past three years, and the amount of wholesale carrier traffic transported by the
Company has increased dramatically during this time frame. However, increased
fiber optic capacity into the major metropolitan areas of Mexico has resulted in
pricing pressures and much lower per-minute revenues for carrier services.
Large increases in volumes have resulted in comparatively smaller revenue
increases, and lower margins on carrier services. While the number of minutes
of carrier traffic processed by the Company increased by 146% from 78.6 million
minutes in fiscal 1999 to 193.4 million minutes in fiscal 2000, revenues
increased by only 57% from $14.1 million in fiscal 1999 to $22.2 million in
fiscal 2000.

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

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

35
<PAGE>

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

Cost of Services. Cost of services increased approximately $5.5 million or
26% between years from $21.3 million in fiscal 1999 to $26.8 million in fiscal
2000, and increased as a percentage of revenues from 62% to 68%. The increase in
cost of services was principally attributable to the increased volume of carrier
service business. The shift toward prepaid services away from postpaid
services, which historically were sold at high premiums, in Mexico has also
contributed to lower margins. Our carrier services business is exclusively
accounted for in our U.S. Telco segment. Carrier services revenues increased
from 41% to 57% of overall corporate revenues, period to period. During this
timeframe, variable and fixed costs associated with the Company's carrier
services business increased, causing margins to decrease. This resultant change
in our traffic mix was the primary contributor to an increase in the combined
telco operations cost of services from 66% to 78% from fiscal 1999 to fiscal
2000. As long as wholesale carrier services comprise a large percentage of our
revenues, the trend of decreasing margins as a percentage of revenues will
continue unless the Company is able to negotiate lower costs with its underlying
carriers in Mexico, or is able to extend its network under its long distance
concession to decrease its reliance on the underlying carriers. As such, we
continue to desire to produce retail growth, with a desired ultimate
retail/wholesale mix of 70% retail and 30% wholesale. We cannot estimate when we
will be able to achieve this desired mix.

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

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

Depreciation and Amortization. Depreciation and amortization rose
approximately $1.4 million, or 44%, and rose as a percentage of revenues from 9%
to 12% between years. The increased depreciation and amortization is
attributable to an approximate $2.0 million increase in fixed assets between
years as well as increased amortization related to acquisition costs, trademarks
and goodwill. The Company also began providing additional depreciation expense
as a result of a change in

36
<PAGE>

accounting estimate for useful lives within its Mexican subsidiaries.
Additionally, the Company fully depreciated approximately $165,000 of our fixed
assets for which we believe there are no associated future benefits.

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

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

Preferred Stock Dividends. During fiscal 2000, we recorded approximately
$7.1 million of non-cash expense related to cumulative convertible preferred
stock. In addition to cumulative dividends on our Series A, Series B, Series C,
and Series D Preferred Stock, which are accrued at 10%, 6%, 6%, and 6%,
respectively, we have recorded approximately $6.7 million related to the
discount or "beneficial conversion feature" associated with our various
preferred stock issuances. Accounting rules call for us to amortize as a
discount the difference between the market price and the most beneficial
conversion price to the holder over the lesser of the period most beneficial to
the holder or upon exercise of the conversion feature. Due to increases in our
stock price at the time such issuances occurred this "beneficial conversion
feature" has in some instances been substantial. The period over which this
amortization is recorded ranges from immediately for our Series D Preferred
Stock to one year for our various Series A Preferred Stock issuances. The
proceeds of the preferred stock issuances during fiscal 2000 were approximately
$5.7 million. As of July 31, 2000, we had approximately $335,000 of discount
recorded related to the beneficial conversion features of our Series A Preferred
Stock issued in December 1999 which will be amortized over the next four months.

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

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

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

Network services, which includes both retail and wholesale transport
services, increased 44%, or $5.9 million, from 1998 to 1999. Carrier service
revenues derived from the wholesale transport of traffic for U.S.-based carriers
increased as we processed approximately 78.6 million minutes in 1999 as compared
to 46.1 million minutes in 1998. The 70% increase in minutes did not result in a
proportional increase in revenues as competitive and other market factors caused
our revenue per minute to decline from period to period. Our fourth quarter 1998
agreement with Satelites Mexicanos, S.A. de C.V., or ("SATMEX"), allowed us to
secure and resell additional bandwidth capacity. This increased capacity and
flexibility allowed us to increase billings to existing corporate clients who
previously dealt with SATMEX directly and to add additional retail corporate
clients more quickly. All of the above revenues are included in our U.S. Telco
results in Footnote 12 in the accompanying financial statements as

37
<PAGE>

external revenues with the exception of approximately $467,000 of private
network revenues included in our external Mexico Telco results.

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

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

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

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

Selling, General and Administrative (SG&A) Expenses. SG&A expenses
decreased 2%, or approximately $200,000 between years, as we did not incur
expenses incurred in the prior year associated with the exchange of shares
between ATSI-Canada and ATSI-Delaware. As a percentage of revenue, these
expenses remained flat at 37%. We had anticipated that these expenses would
decline as a percentage of revenues, but they did not do so as a result of the
delay of fiber capacity available to us.

38
<PAGE>

In the fourth quarter of 1999, we began to further integrate our two primary
operating subsidiaries in our Mexico Telco segment, Computel and ATSI-Mexico, as
we continued to seek ways to lower our SG&A expenses. Net of non-cash expenses,
related to our option plans, SG&A expenses decreased approximately $300,000.

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

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

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

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

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

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

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

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

Network services increased 687% from $1.7 million in 1997 to $13.4 million
in 1998. The majority of this growth was due to the amount of wholesale network
services provided to other carriers seeking transmission facilities or
additional capacity for their services. We began providing these services in
October 1997, and produced approximately $10 million in revenues from this
service during 1998. All of the above revenues are included as external revenues
in our U.S. Telco results in the

39
<PAGE>

accompanying financial statements with the exception of approximately $197,000
included as private network revenues in our Mexico Telco results.

Postpaid service revenues increased approximately $1.3 million, or 10%,
primarily due to growth in our customer base in Mexico that produces calls to
the United States from hotels, public telephones and casetas. As a result of
the installation of public telephones, the implementation of a direct sales
strategy, and the purchase of Computel in August 1997, we processed
approximately 314,000 international calls originating in Mexico during fiscal
1998. This compares to approximately 200,000 calls processed the year before.
This increase in international calls from Mexico was offset to a large extent by
a decrease in domestic and international operator-assisted calls originating in
the United States and Jamaica. During 1998, we de-emphasized these services due
to relatively lower profit margins on this business. On July 16, 1998, we
ceased providing these services altogether. Revenues from these services
decreased from approximately $3.9 million in 1997 to approximately $2.9 million
in 1998. We do not anticipate producing significant revenues from such
services, if any, during fiscal 1999. With the exception of approximately
$327,000 of revenues included in Mexico Telco results, all of the remaining
revenues are included as external revenues in our U.S. Telco results.

Integrated prepaid services, calls processed in exchange for cash without
utilizing our operator center in San Antonio, Texas, increased 306% from
approximately $1.4 million in fiscal 1997 to approximately $5.8 million in
fiscal 1998. This increase was primarily due to the acquisition in May and
August 1997 of Computel, the largest private caseta operator in Mexico. We also
began processing local and domestic long distance calls within Mexico during the
latter half of 1997 from our own intelligent payphones installed in resort areas
of Mexico. These calls are made by depositing coins (pesos or quarters) in our
phones to initiate service. All of the above revenues are included in our Mexico
Telco results.

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

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

40
<PAGE>

planned acquisition of additional concessions from the Mexican regulatory
authorities, and the expensing of costs related to our reincorporation from
Canada to Delaware. Approximately $890,000 of the increase was due to the
acquisition of Computel, which operates approximately 134 retail-based casetas
in approximately sixty cities throughout Mexico, and employs in excess of 400
people. In August 1997, ATSI-Mexico expanded our operations and began
procuring, installing, operating and maintaining coin-operated, intelligent
payphones. During 1998, we expensed $631,000 in costs incurred relative to our
reincorporation. Approximately $268,000 in expenses were incurred during 1997
relative to the reincorporation. All of the costs associated with our ATSI-
Mexico operations are included in our Mexico Telco segment while the
reincorporation costs have been included in the segment defined as Other as they
are corporate in nature.

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

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

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

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

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

Because the Company has not been producing positive cash flows from
operations, it is still reliant on outside debt and/or equity sources to fund
its past and current operations, as well as its near term growth. Although the
Company signed a $10.0 million funding commitment in October 2000 and
immediately received $2.5 million in cash proceeds, the Company must achieve
certain objectives, some of which are not in its direct control, in order to
receive the remaining $7.5 million. One of the terms to be met is a $5 million
equity investment by a second investor, acceptable to the first investor. The
first investor also has the right to invest up to an additional $8.0 million
during the term of the agreement. In summary, even though the Company has
received only $2.5 million to date, total cash proceeds under the arrangement,
ignoring warrants awarded as part of the arrangement, could reach $23.0 million.
Company management is optimistic that additional funding will take place under
the arrangement as

41
<PAGE>

objectives are met. However, we cannot assure you that we will receive any of
the funds beyond the original $2.5 million in proceeds.

Because of the uncertainties regarding the Company's current funding
arrangement, as well as the current status of the public equities markets,
particularly in regards to telecommunications companies, the Company has
developed a business plan through January 31, 2001 designed to preserve cash
balances. Subsequent to July 31, 2000, the Company has reduced the number of
employees in both the U.S. and Mexico in an effort to minimize cash outflows for
the near term. The majority of revenues under this plan will come from the
future sale of wholesale carrier services.

As mentioned earlier, the Company is also evaluating the speed and the
extent to which it will extend its network infrastructure in Mexico under its
long distance concession. If additional cash inflows are not received under the
current funding arrangement described above, or from alternative sources, the
buildout will be limited. However, the Company has ordered equipment which will
enable it to expand its available capacity to carry both retail and wholesale
carrier traffic. Although margins on carrier traffic have continued to decline
subsequent to July 31, 2000, as of November 2000 the Company has been able to
negotiate lower rates with its underlying carriers in Mexico in order to reduce
its cost of operating. Management is optimistic that this will enable it to
enhance margins in the near term and thereby produce additional cash flows from
operations. Additionally, under its long distance concession, the Company should
be able to reduce its dependence over time on underlying carriers, and lower its
costs by interconnecting directly to local service providers in Mexico. Mexican
regulators recently announced that these interconnection rates will be lowered
by more than 60% in calendar 2001. We cannot assure you that we will be able to
sell any, or additional carrier services minutes at higher margins in the
future.

The Company also anticipates that Genesis, based on historical results and
current predictions, will produce positive cash flows from operations after
being acquired by the Company. Near term growth of the Company's retail
services offerings is, in large part, contingent upon the closing of the
acquisition of Genesis.

Liquidity and Capital Resources

Because we did not produce sufficient gross margin dollars to cover our
selling, general and administrative costs, we generated negative cash flows from
operations during fiscal 2000 of approximately $4.7 million. The amount of cash
used in our operations is a result of the net loss incurred during the period,
the timing of cash receipts from our customers, as well as activities related to
payments to vendors. We have historically operated with negative cash flows and
have sought to fund those losses and deficits by completing private equity
placements.

For fiscal 2000, our net loss, after adjustments for non-cash items
(depreciation and amortization, amortization of debt discount, deferred
compensation and the provision for losses on accounts receivable) was
approximately $3.7 million. Management of the operating assets and liabilities,
which consists mainly of collections on accounts receivable and payments made on
outstanding payables and accrued liabilities, produced negative cash flows of
approximately $1.0 million, resulting in the negative cash flows for the period
of $4.7 million. Although we have produced negative earnings before interest,
taxes, depreciation and amortization ("EBITDA") of approximately $3.2 million
during the year ended July 31, 2000, cash raised from private equity issuances
(discussed below) has allowed us to reduce our combined accounts payable/accrued
liabilities balance by approximately $1.1 million between July 31, 1999 and
July 31, 2000.

42
<PAGE>

Until we are able to produce positive cash flows from operations on a
recurring basis, management will be faced with deciding whether to use available
funds to pay vendors and suppliers for services necessary for operations, to
service its debt requirements, or to purchase equipment to be used in the growth
of our business. Until then, our operating activities may result in net cash
being used, or provided, regardless of our income statement results. As noted in
this Form 10-K we have not always paid all of our suppliers on time. Some of
these suppliers are critical to our operations. These suppliers have given us
payment extensions in the past, although there is no guarantee they will do so
in the future. Our ability to continue to make payments to these suppliers is
dependent on our ability to continue to raise additional capital and improve our
cash flows from operations.

During the year ended July 31, 2000, we received cash proceeds, net of
issuance costs, of $5.7 million from the issuance of preferred stock, and $4.9
million from the issuance of common stock as a result of warrant and option
exercises. These funds were used to pay down outstanding payables balances, to
make payments on our debt and capital lease obligations, and to purchase
approximately $2.0 million in equipment, including furniture, equipment and
leasehold improvements associated with both ATSI and GlobalSCAPE's moves to new
office space during fiscal 2000. Additionally, in January 31, 2000, we converted
approximately $2.9 million in outstanding notes and accrued interest which had
been classified as a current liability into common stock of the Company. The
net result of our operating, investing and financing activities was an increase
in cash during the period of $1.2 million and negative working capital at
July 31, 2000 of approximately $5.3 million. This represents a $1.6 million
improvement over our working capital deficit of $6.9 million at July 31, 1999.

Our current liabilities as of July 31, 2000 were approximately $10.7
million. Included in our current obligations, are notes payable and convertible
debt of approximately $833,000, $500,000 of which was originally due October 31,
2000 but has been extended an additional 30 days. Additionally, we have
approximately $3.4 million of current capital leases and approximately $6.3
million of accounts payable and accrued liabilities. Until we are able to
produce positive cash flows from operations in an amount sufficient to meet our
debt service and capital expenditure requirements, we must be able to access
debt and/or equity capital to assist us in doing so, although no assurance may
be given that it will be able to do so.

As of July 31, 2000, we were in default of financial covenants related to
revenues, gross margins and EBITDA with NTFC Capital Corporation, which provided
a long-term capital lease of approximately $2.0 million for our international
gateway switch in Dallas, Texas. We have requested and received a waiver of
those requirements as of that date. Based upon our results before and after the
period ended July 31, 2000, we will most likely be in default of these same
covenants at the end of our next fiscal quarter October 31, 2000. As such, we
have requested that NTFC review our current business plan, including expected
results and capital requirements, in order to re-set the financial covenants
applicable to its capital lease obligation and prevent events of default from
occurring on a quarterly basis going forward. Based on discussions with NTFC,
management believes it is probable that NTFC will re-set the financial covenants
after it has completed its review of this information. As of July 31, 2000, we
have classified the entire obligation due as a current liability in the
accompanying financial statements.

On October 2000, we issued 2,500 shares of Series E Preferred Stock
resulting in cash proceeds of approximately $2.5 million. Subject to the
satisfaction of certain conditions, we may issue an additional 7,500 shares of
Series E Preferred Stock resulting in additional cash proceeds of approximately
$7.5 million. We cannot assure you that we will be able to fulfill the
outstanding conditions and receive the additional $7.5 million of cash proceeds.
The terms of the Series E Preferred Stock are very similar to that of our Series
B, C and D Preferred Stock and are explained in more detail

43
<PAGE>

in footnote 8 of the Notes to Consolidated Financial Statements. The terms of
the series E preferred stock and the related warrants include many potentially
adverse effects for us and our shareholders as described in the Risk Factors
section of this Form 10-K. However, as described in our risk factor captioned,
"If we do not raise additional capital, we may go out of business," we are not
able to raise funds on terms as favorable as those available to profitable
companies. At the time these issuances were made, we needed funds to continue
operations and were not able to find financing on more favorable terms. Our
board of directors believed it to be in the best interest of the shareholders to
raise the funds needed to continue operations.

In the near term, we must continue to manage our costs of providing
services and overhead costs as we begin focusing on optimizing use of our
network. In July 2000, we announced that we had acquired a Mexican company
which holds a long distance concession license in that country, which we believe
will eventually allow us to significantly reduce our cost of transporting
services. The terms of the agreement called for us and our Mexican affiliates to
purchase 100% of the stock of Grupo Intelcom de Mexico, S.A. de C.V. from
Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A. de C.V. (a
49% stockholder) for a total purchase price of approximately $4,176,000
consisting of $755,000 in cash, $500,000 in the form of a note payable, which
was paid off prior to July 31, 2000, 400,000 shares of our common stock and
100,000 warrants at $6.00 for a period of three years. At July 31, 2000, Grupo
Intelcom had total assets of approximately $10,000 and a net loss for the seven
months ending July 31, 2000 of approximately $8,000. In order for us to
significantly reduce costs with the concession, we will need to purchase a
significant amount of hardware and software, allowing us to expand and operate
our own network in Mexico. This expansion of our network will allow us to reduce
our origination and termination costs through the elimination of interconnection
costs we currently pay to other concessionaires. We are evaluating the speed,
and the extent, of our planned network buildout in an effort not to overextend
ourselves financially. Operationally, we can choose how and where to extend our
network into niche areas with proven demand for services to provide the best
impact on our financial condition, cash flows and earnings.

We believe that these capital expenditures may approximate up to $60
million over a five-year period. We will likely need to raise these funds
through additional debt and/or equity capital.

On April 14, 2000, in anticipation of these and future funding
requirements, and to meet our current cash flow needs, we signed an agreement
with a private equity fund, under which the fund agreed to purchase up to
5,000,000 shares of our common stock over an eighteen-month period at 92% of the
market price for our common stock at the time of purchase. We have no initial
commitment to draw on the facility, but may do so based upon average trading
volumes on an as-needed basis as often as every twenty days, subject to certain
restrictions. If we use this facility we must issue the investor warrants for
1,500 shares of common stock for every $100,000 that is invested at an exercise
price of 120% of the average of the five closing sale prices preceding the date
of the investment, and an additional 1,000 warrants per $100,000 invested as a
finder's fee on the same terms. The amount of funds to be generated under the
facility for us will depend on the price of ATSI's common stock at the time each
draw is executed. Before we can draw on the facility, any shares to be issued
under the facility must be registered with the Securities and Exchange
Commission. As of November 1, 2000, no registration statement had been filed to
do so.

As planned, we continued to shift our focus during the year away from
traffic generated outside of our core market of Mexico, and focused on
generating and transporting traffic over our own international network
infrastructure in order to produce better cash flow results. The result was an
increase in wholesale network transport traffic flowing over our network.
Overall, network services contributed approximately 63% of overall corporate
revenues during the year. We continue to

44
<PAGE>

experience market pressures on our carrier services business. In order to
produce better cash flows, we must focus on keeping our international network
between Mexico and the U.S. optimally utilized with a blend of retail and
wholesale traffic. However, we anticipate that pricing pressures will continue
in our wholesale transport market, so it will focus our efforts on implementing
a retail strategy which targets the growing and underserved Latino markets in
both the U.S. and Mexico. Although management does not expect improved results
from this effort until the latter stages of fiscal 2000, it believes that our
retail strategy combined with the deployment of leading edge technology for
communications transport will ultimately bring about improved profitability and
sustainable growth in the future.

Consistent with our shift towards a more retail-oriented strategy, on June
14, 2000, we announced that we signed a definitive agreement to acquire
privately held San Diego, California-based Genesis Communications International,
Inc. ("Genesis") in exchange for approximately $37.3 million in shares of ATSI
common stock. Closing of the transaction is contingent upon, among other
things, required U.S. regulatory approval and approval by the Genesis
shareholders. In accordance with the agreement, the number of shares to be
issued upon consummation of the transaction will vary depending on the average
of the closing price of our common stock for the ten days preceding closing,
between an agreed range of approximately 4.7 million to 9.6 million shares.

Over the past five years, Genesis has successfully penetrated the Latino
markets in the United States and has captured a customer base consisting of
65,000 long distance customers and 10,000 local service customers. Genesis is
certified as an inter-exchange carrier ("IXC") in California, Colorado, New
Jersey, Nevada, New Mexico, Oregon, Illinois, Florida, New York, Utah and Texas.
Genesis is also certified as a local exchange carrier ("CLEC") in California,
Arizona, Nevada, New Mexico, New Jersey, Oregon, Florida, New York and Texas.
For the year ended December 31, 1999, Genesis produced revenues of approximately
$24.1 million, EBITDA of approximately $1.6 million and net income before taxes
of approximately $570,000. Through July 31, 2000, Genesis has continued to
produce positive EBITDA. We cannot assure that it will continue to produce
positive EBITDA. Based on Genesis's historical performance, ATSI management
believes that, if the transaction is consummated, the acquisition of Genesis
will enhance our cash flows and will be accretive to earnings.

Going forward, the Company hopes to improve its performance during the next
year primarily by consolidating the Genesis customer base and operations in the
U.S. with its own Mexico-based retail customer base and operations, and by
extending its own network between its customers utilizing its long distance
concession in order to better control its costs of doing business. The Company
would also like to increase and integrate its service offerings on a retail
basis on both sides of the U.S.-Mexico border. However, neither of these
objectives can be satisfied fully in the near term without first closing on the
Genesis transaction.

On September 12, 2000, we completed the distribution of a portion of our
ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders. The
distribution was part of a previously announced plan to distribute or spin-off a
portion of our ownership in GlobalSCAPE contemporaneously with a public offering
of GlobalSCAPE, in order to raise funds for GlobalSCAPE's growth and ATSI's
general corporate purposes. GlobalSCAPE and ATSI decided not to make a public
offering of GlobalSCAPE common stock contemporaneously with the distribution in
light of current market conditions. We are still evaluating different ways to
potentially benefit financially by giving up some, or all of our current
ownership in GlobalSCAPE. Because GlobalSCAPE currently contributes
significantly to our consolidated EBITDA results, we expect our consolidated
operating and cash flow results to decline after the distribution and offering,
if one is made.

45
<PAGE>

Inflation/Foreign Currency

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

Seasonality

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

Year 2000 Compliance

Prior to January 1, 2000 we initiated a program to identify and address
issues associated with the ability of our date-sensitive information, telephony
and business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. We
expended approximately $100,000 in our efforts to ensure readiness for year 2000
issues. As of October 31, 2000, we have experienced no problems associated with
Year 2000 issues, that have caused a disruption in our normal business
operations, within our internal systems or the systems of our external vendors
or customers.

Market Risk

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

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

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

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

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

46
<PAGE>

of those financings will be largely dependent on our stock price, our operations
and the future dilution to our shareholders.

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

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

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

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

47
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Public Accountants.......................................................... 49

Consolidated Balance Sheets as of July 31, 1999 and 2000.......................................... 50

Consolidated Statements of Operations for the Years Ended July 31, 1998, 1999 and 2000............ 51

Consolidated Statements of Comprehensive Loss for the Years Ended July 31, 1998,
1999 and 2000..................................................................................... 52

Consolidated Statements of Stockholders' Equity for the Years Ended July 31, 1998, 1999 and 2000.. 53

Consolidated Statements of Cash Flows for the Years Ended July 31, 1998, 1999 and 2000............ 54

Notes to Consolidated Financial Statements........................................................ 55
</TABLE>

48
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To American TeleSource International, Inc.:

We have audited the accompanying consolidated balance sheets of American
TeleSource International, Inc. (a Delaware corporation) and subsidiaries (the
Company) as of July 31, 1999 and 2000, and the related consolidated statements
of operations, comprehensive loss, stockholders' equity and cash flows for the
years ended July 31, 1998, 1999 and 2000. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American TeleSource
International, Inc. and subsidiaries as of July 31, 1999 and 2000, and the
results of their operations and their cash flows for the years ended July 31,
1998, 1999 and 2000, in conformity with accounting principles generally accepted
in the United States.

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

/s/ ARTHUR ANDERSEN LLP

San Antonio, Texas
September 29, 2000

49
<PAGE>

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

<TABLE>
<CAPTION>
July 31,
--------------------------------------
1999 2000
-------------- ---------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 379 $ 1,550
Accounts receivable, net of allowance of $1,600 and $757, respectively 3,693 3,186
Inventory - 74
Prepaid expenses and other 987 631
-------------- ---------------
Total current assets 5,059 5,441
-------------- ---------------

PROPERTY AND EQUIPMENT (At cost): 16,669 19,388
Less - Accumulated depreciation (4,713) (8,330)
-------------- ---------------
Net property and equipment 11,956 11,058
-------------- ---------------

OTHER ASSETS, net:
Goodwill, net 5,032 4,901
Concession license, net - 4,422
Contracts, net 703 -
Trademarks, net 789 570
Other assets 615 502
-------------- ---------------
Total assets $ 24,154 $ 26,894
============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 4,164 $ 3,931
Accrued liabilities 2,849 2,350
Current portion of notes payable 1,351 544
Current portion of convertible long-term debt 1,942 289
Current portion of obligations under capital leases 1,430 3,411
Deferred revenue 233 167
-------------- ---------------
Total current liabilities 11,969 10,692
-------------- ---------------

LONG-TERM LIABILITIES:
Notes payable, less current portion 312 -
Obligations under capital leases, less current portion 5,523 2,506
Other 213 56
-------------- ---------------
Total long-term liabilities 6,048 2,562
-------------- ---------------

COMMITMENTS AND CONTINGENCIES:

REDEEMABLE PREFERRED STOCK
Series D Cumulative Convertible Preferred Stock, 3,000 shares authorized, no shares
issued and outstanding at July 31, 1999, 3,000 shares issued and outstanding at
July 31, 2000, carrying value of $3,079,000, mandatory redemption value of $4,680,000 - 3,079
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, Series A
Cumulative Convertible Preferred Stock, 50,000 shares authorized, 24,145
shares issued and outstanding at July 31, 1999 and 2,425 issued and
outstanding at July 31, 2000 - -
Series B Cumulative Convertible Preferred Stock, 2,000 shares
authorized, 2,000 shares issued and outstanding at July 31, 1999;
no shares issued and outstanding at July 31, 2000 - -
Common stock, $0.001 par value, 100,000,000 shares authorized,
48,685,287 issued and outstanding at July 31, 1999
67,408,979 issued and outstanding at July 31, 2000 49 67
Additional paid in capital 29,399 51,625
Accumulated deficit (21,987) (39,125)
Notes issued to officers - (1,108)
Other comprehensive loss (858) (779)
Deferred compensation (466) (119)
-------------- ---------------
Total stockholders' equity 6,137 10,561
-------------- ---------------

Total liabilities and stockholders' equity $ 24,154 $ 26,894
============== ===============
</TABLE>

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

50
<PAGE>

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

For the Years Ended July 31,
1998 1999 2000
-------------- ------------- ----------
<S> <C> <C> <C>
OPERATING REVENUES:
Network Services
Carrier $ 10,047 $ 14,123 $ 22,191
Private Network 3,315 5,127 2,538
Call services
Integrated Prepaid 5,774 5,424 5,949
Postpaid 13,858 7,202 3,623
Internet e-commerce 1,526 2,642 5,128
------------- ----------- -----------
Total operating revenues 34,520 34,518 39,429
------------- ----------- -----------

OPERATING EXPENSES:
Cost of services 22,287 21,312 26,798
Selling, general and administrative 12,853 12,652 14,884
Bad debt expense 1,024 2,346 898
Depreciation and amortization 1,822 3,248 4,681
------------- ----------- -----------
Total operating expenses 37,986 39,558 47,261
------------- ----------- -----------

OPERATING LOSS (3,466) (5,040) (7,832)

OTHER INCOME (EXPENSE):
Interest income 76 59 77
Other income 32 - 70
Other expense (24) (10) (20)
Interest expense (1,573) (1,745) (2,348)
------------- ----------- -----------
Total other income (expense) (1,489) (1,696) (2,221)
------------- ----------- -----------

LOSS BEFORE INCOME TAX EXPENSE (4,955) (6,736) (10,053)

FOREIGN INCOME TAX EXPENSE (139) - -
------------- ----------- -----------
NET LOSS (5,094) (6,736) (10,053)

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

NET LOSS TO COMMON SHAREHOLDERS ($5,094) ($7,591) ($17,138)
============= =========== ===========

BASIC AND DILUTED LOSS PER SHARE ($0.12) ($0.16) ($0.30)
============= =========== ===========
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 41,093 47,467 56,851
============= =========== ===========
</TABLE>

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

51
<PAGE>

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

For the Years Ended July 31,
1998 1999 2000
------- ------- --------
<S> <C> <C> <C>
Net loss to common shareholders ($5,094) ($7,591) ($17,138)

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

Foreign currency translation adjustments ($160) ($714) $79
------- ------- --------
Comprehensive loss to common shareholders ($5,254) ($8,305) ($17,059)
======= ======= ========
</TABLE>

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

52
<PAGE>

AMERICAN TELESOURCE INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)
<TABLE>
<CAPTION>

Preferred Stock Common Stock
--------------- --------------- Additional Accumulated
Shares Amount Shares Amount Paid in Capital Deficit
------ ------ ------ ------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, July 31, 1997 - - 36,788 $17,376 ($9,302)
Issuances of common shares for cash - - 5,500 3,496
Issuances of common shares for reduction in indebtedness - - 2,871 1,075
Conversion of convertible debt to common shares - - 200 100
Issuances of common shares for services - - 245 246
Compensation expense - -
Cumulative effect of translation adjustment - -
Exchange of common shares for common stock - - (22,248) 22,248
Net loss - - (5,094)
------ ------ ------ ------ --------------- -----------
BALANCE, July 31, 1998 - - 45,604 $46 $22,248 ($14,396)
Issuances of common shares for cash - - 2,706 3 1,637
Issuances of common shares for services - - 96 40
Issuances of common shares for acquisition - - 279 179
Issuances of preferred stock 26 - 4,176
Deferred Compensation - - 344
Dividends - - (80)
Amortization of equity discount - -
Compensation expense - - 775 (775)
Cumulative effect of translation adjustment - -
Net loss - - (6,736)
------ ------ ------ ------ --------------- -----------
BALANCE, July 31, 1999 26 - 48,685 $49 $29,399 ($21,987)
Issuances of common shares for cash - - 8,470 8 6,279
Issuances of common shares for services - - 419 25
Issuances of common shares for acquisition - - 400 2,921
Issuances of preferred stock 28 - 2,646
Conversion of preferred stock (27) - 6,802 7 267
Conversion of convertible debt to common shares - - 2,633 3 3,115
Dividends - - (432)
Amortization of equity discount - - 6,653 (6,653)
Compensation expense - -
Warrants issued with debt - - 300
Notes receivable from shareholders - -
Cumulative effect of translation adjustment - -
Net loss - - (10,053)
------ ------ ------ ------ --------------- -----------
BALANCE, July 31, 2000 27 - 67,409 $67 $51,625 ($39,125)
====== ====== ====== ====== =============== ===========
</TABLE>

Notes Cumulative Total
receivable from Translation Deferred Stockholders'
officers Adjustment Compensation Equity
--------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, July 31, 1997 $16 (1,154) $6,936
Issuances of common shares for cash - 3,496
Issuances of common shares for reduction in indebtedness - 1,076
Conversion of convertible debt to common shares - 100
Issuances of common shares for services - 248
Compensation expense 487 487
Cumulative effect of translation adjustment (160) - (160)
Exchange of common shares for common stock - 0
Net loss - (5,094)
--------------- ---------- ------------ -------------
BALANCE, July 31, 1998 ($144) ($667) $7,087
Issuances of common shares for cash - 1,640
Issuances of common shares for services - 40
Issuances of common shares for acquisition - 179
Issuances of preferred stock - 4,176
Deferred Compensation (344) 0
Dividends - (80)
Amortization of equity discount - 0
Compensation expense 545 545
Cumulative effect of translation adjustment (714) - (714)
Net loss - (6,736)
--------------- ---------- ------------ -------------
BALANCE, July 31, 1999 ($858) ($466) $6,137
Issuances of common shares for cash - 6,287
Issuances of common shares for services - 25
Issuances of common shares for acquisition - 2,921
Issuances of preferred stock - 2,646
Conversion of preferred stock - 294
Conversion of convertible debt to common shares - 3,118
Dividends - (432)
Amortization of equity discount - 0
Compensation expense 347 347
Warrants issued with debt - 300
Notes receivable from shareholders (1,108) - (1,108)
Cumulative effect of translation adjustment 79 - 79
Net loss - (10,053)
--------------- ---------- ------------ -------------
BALANCE, July 31, 2000 ($1,108) ($779) ($119) $10,561
=============== ========== ============ =============
</TABLE>

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

53
<PAGE>

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

For the Years Ended July 31,
1998 1999 2000
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($5,094) ($6,736) ($10,053)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization 1,822 3,248 4,681
Amortization of debt discount 307 346 442
Deferred compensation 487 545 347
Provision for losses on accounts receivable 1,024 2,346 898
Changes in operating assets and liabilities-
Increase in accounts receivable (2,495) (2,568) (678)
(Increase) decrease in prepaid expenses and other 197 (1,632) 88
Increase (decrease) in accounts payable 3,479 (1,139) (776)
Increase (decrease) in accrued liabilities (192) 1,857 462
Increase (decrease) in deferred revenue 71 (191) (66)
--------- ---------- ---------
Net cash used in operating activities (394) (3,924) (4,655)
--------- ---------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,297) (956) (1,993)
Acquisition of business, net of cash acquired (2,112) (171) (1,334)
--------- ---------- ---------
Net cash used in investing activities (5,409) (1,127) (3,327)
--------- ---------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 2,547 437 745
Net increase (decrease) in short-term borrowings 353 (488) (137)
Net increase (decrease) from advanced funding arrangements (228) 361 217
Payments on debt (1,141) (679) (745)
Capital lease payments (1,044) (941) (1,424)
Payments on long-term liabilities (67) (123) (36)
Proceeds from issuance of preferred stock,
net of issuance costs - 4,176 5,646
Proceeds from issuance of common stock,
net of issuance costs 4,553 1,596 4,887
--------- ---------- ---------
Net cash provided by financing activities 4,973 4,339 9,153
--------- ---------- ---------

NET INCREASE (DECREASE) IN CASH (830) (712) 1,171

CASH AND CASH EQUIVALENTS, beginning of year 1,921 1,091 379
--------- ---------- ---------

CASH AND CASH EQUIVALENTS, end of year $1,091 $379 $1,550
========= ========== =========
</TABLE>

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

<PAGE>

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

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

Through our subsidiaries, we provide retail and wholesale communications
services within and between the United States (U.S.) and select markets within
Latin America. Utilizing a framework of licenses, interconnection and service
agreements, network facilities and distribution channels, our intentions are to
provide U.S standards of reliability to Mexico and other markets within Latin
America which have historically been underserved by telecommunications
monopolies. As of July 31, 2000, our operating subsidiaries are as follows:

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

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

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

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

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

ATSI-Mexico owns and operates coin-operated public telephones in Mexico.
Utilizing our 20-year comercializadora license which expires in February 2017,
ATSI purchases telephone lines and resells local, long distance and
international calls from public telephones connected to the lines. Direct dial,
or integrated prepaid calls may be made from the telephones using pesos or
quarters, and users may use the services of ATSI-Texas to place calls to the
U.S. by billing calls to valid third parties, credit cards or calling cards.

55
<PAGE>

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

Computel is the largest private operator of communication centers in
Mexico, operating approximately 136 casetas in 66 cities. Direct dial calls may
be made from the communication centers using cash or credit cards, and users may
use the services of ATSI-Texas to place calls to the U.S. by billing calls to
valid third parties, credit cards or calling cards. Computel utilizes telephone
lines owned by ATSI-Mexico.

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

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

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

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

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

GlobalSCAPE markets CuteFTP and other digitally downloadable software
products and distributes them over the Internet utilizing electronic software
distribution ("ESD"). See Note 18 related to the distribution of a portion of
ATSI's ownership in GlobalSCAPE.

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

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

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

The accompanying consolidated financial statements have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to July 31, 2000, we have incurred cumulative net
losses of $39.1 million. We had a working capital deficit of $6.9 million at
July 31, 1999 and $5.3 million at July 31, 2000 and we had negative cash flows
from operations of $.4 million, $3.9 million and $4.7 million for the years
ended July 31, 1998, 1999 and 2000, respectively. We have limited capital
resources available to us, and these resources may not be available to support
our ongoing operations until such time as we are able to generate positive cash
flow from operations. There is no assurance we will be able to achieve future
revenue levels sufficient to support operations or recover our investment in
property and equipment, goodwill and other intangible assets. These matters
raise substantial doubt about our ability to continue as a going concern. Our
ability to continue as a going concern is dependent upon the ongoing support of
our stockholders and

56
<PAGE>

customers, our ability to obtain capital resources to support operations and our
ability to successfully market our services.

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

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.

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

We recognize revenue from our integrated prepaid and postpaid services as
such services are performed, net of unbillable calls. Revenue from carrier
services and private network contracts are recognized when service commences for
service commencement fees and monthly thereafter as services are provided. We
recognize revenue from equipment sales when the title for the equipment
transfers to the customer and from equipment installation projects when they are
completed. Revenues related to our Internet products are recognized at the
point of delivery, as we bear no additional obligation beyond the provision of
our software product other than post-contract customer service. Post-contract
customer costs approximated $22,000, $33,000 and $58,000 at July 31, 1998, 1999
and 2000, respectively.

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

Until January 1, 1999, Mexico's economy was designated as highly
inflationary. GAAP requires the functional currency of highly inflationary
economies to be the same as the reporting currency. Accordingly, the
consolidated financial statements of all of our Mexican subsidiaries, whose
functional currency is the peso, were remeasured from the peso into the U.S.
dollar for consolidation. Monetary and nonmonetary assets and liabilities were
remeasured into U.S. dollars using current and historical exchange rates,
respectively. The operating activities of these subsidiaries were remeasured
into U.S. dollars using a weighted-average exchange rate. The resulting
translation gains and losses were charged

57
<PAGE>

directly to operations. As of January 1, 1999, Mexico's economy was deemed to be
no longer highly inflationary. According to GAAP requirements the change from
highly inflationary to non-highly inflationary requires that the nonmonetary
assets be remeasured using not the historical exchange rates, but the exchange
rate in place as of the date the economy changes from highly inflationary to
non-highly inflationary. As such, our non-monetary assets in Mexico have been
remeasured using the exchange rate as of January 1, 1999. Subsequent to January
1, 1999, monetary assets and non-monetary assets are translated using current
exchange rates and the operating activity of these Mexican subsidiaries
remeasured into U.S. dollars using a weighted average exchange rate. The effect
of these translation adjustments are reflected in the other comprehensive income
account shown in stockholders' equity.

Restricted Cash
---------------

In the year ended July 31, 2000, we issued a Letter of Credit (LOC) secured
by Certificates of Deposit to our provider of satellite transmission capacity,
SATMEX, S.A. de C.V., ("SATMEX") in the amount of $250,000 to secure outstanding
amounts payable to them. As of July 31, 2000, SATMEX has not drawn down on the
LOC.

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

We utilize the services of credit card processing companies for the billing
of commercial credit card calls. We receive cash from these calls, net of
transaction and billing fees, generally within 20 days from the dates the calls
are delivered. All other calls (calling card, collect, person-to-person and
third party billed) are billed under an agreement between a billing
clearinghouse and us. This agreement allows ATSI to submit call detail records
to the clearinghouse, which in turn forwards these records to the local
telephone company to be billed. The clearinghouse collects the funds from the
local telephone company and then remits the funds, net of charges, to ATSI.
Because this collection process can take up to 90 days to complete, ATSI
participates in an advance funding program offered by the clearinghouse whereby
100% of the call records are purchased for 75% of their value within five days
of presentment. The remaining 25% value of the call records are remitted to
ATSI, net of interest and billing charges and an estimate for uncollectible
calls, as the clearinghouse collects the funds from the local telephone
companies. Under the advanced funding agreement, the collection clearinghouse
has a security interest in the unfunded portion of the receivables as well as
future receivables generated by our long distance business. The allowance for
doubtful accounts reflects our estimate of uncollectible calls at July 31, 1999
and 2000. ATSI currently pays a funding charge of prime plus 4% per annum on the
amounts that are advanced to ATSI. Receivables sold with recourse during fiscal
years 1998, 1999, and 2000 were $11,127,221, $6,138,549 and $2,858,574
respectively. At July 31, 1998, 1999 and 2000, $484,381, $444,398 and $227,793
of such receivables were uncollected, respectively. See Note 5 for additional
disclosure regarding advanced funding.

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

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

Our Mexican subsidiaries are required to report a value-added tax related
to both purchases and sales of services and assets, for local tax reporting.
Accordingly, each subsidiary maintains both an IVA receivable and IVA payable
account on their subsidiary ledgers. For consolidated reporting purposes, we

58
<PAGE>

net our Mexican subsidiaries IVA receivable and IVA payable accounts as allowed
by regulatory requirements in Mexico. For the year ended July 31, 1999, this
netting of IVA accounts resulted in the elimination of IVA payable, a
corresponding reduction in IVA receivable of approximately $1.2 million and a
net IVA receivable of $85,000. For the year ended July 31, 2000, this netting of
IVA accounts resulted in the elimination of IVA receivable, a corresponding
reduction in IVA payable of approximately $225,000 and a net IVA payable of
$228,000.

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

Loss per share was calculated using the weighted average number of common
shares outstanding for the years ended July 31, 1998, 1999 and 2000. Common
stock equivalents, which consist of the stock purchase warrants and options
described in Note 9, were excluded from the computation of the weighted average
number of common shares outstanding because their effect was antidilutive. We
have also excluded the convertible preferred stock described in Note 8, from the
computation of the weighted average number of common shares outstanding, as
their effect will also be antidilutive.

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

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

Effective for the fiscal years beginning after July 31, 1996, we follow
rules as prescribed under Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"). SFAS 121 requires an assessment of the
recoverability of our investment in long-lived assets to be held and used in
operations whenever events or circumstances indicate that their carrying amounts
may not be recoverable. Such assessment requires that the future cash flows
associated with the long-lived assets are estimated over their remaining useful
lives and an impairment loss is recognized when the undiscounted future cash
flows are less than the carrying value of such assets. As of July 31, 2000, we
have determined that the estimated undiscounted future cash flows associated
with our long-lived assets are greater than the carrying value of such assets
and that no impairment loss needs to be recognized.

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

At July 31, 1999 and 2000, other assets consisted primarily of
goodwill, trademarks and acquisition costs with the exception of concession
license costs which were incurred for the first time in the year ended July
31, 2000. For the years ended July 31, 1999 and 2000, goodwill, primarily
related to the purchase of Computel, was $5,296,646 and $5,310,490,
respectively, net of accumulated amortization of $265,089 and $408,908,
respectively. Goodwill is amortized over 40 years. Concession license costs
related to our acquisition in the fourth quarter of fiscal 2000 of Grupo
Intelcom, S.A. de C.V., a Mexican company that held a concession license,
were approximately $4,421,931. The concession license costs are being
amortized over 28 years, the remaining life of the concession license. As of
July 31, 1999 and 2000, acquisition costs were $1,596,620, related to our
acquisition of several independent marketing representatives, net of
accumulated amortization of $893,212, and $1,596,620, respectively.
Acquisition costs were fully amortized as of July 31, 2000. As of July 31,
1999 and 2000, other assets included $898,943 related to the purchase of the
rights to CuteFTP, net of accumulated amortization of $110,352 and $329,096,
respectively. This trademark is being amortized over an estimated five-year
life. As of July 31, 1999 and 2000, other assets also included approximately
$615,000 and

59
<PAGE>

$502,000, not identified as goodwill, concession license, acquisition costs
or trademarks. As it relates to SFAS 121, as of July 31, 2000, we have
determined that the estimated future cash flows associated with our goodwill,
concession license, and other intangible assets are greater than the carrying
value of such assets and that no impairment loss needs to be recognized. For
the years ended July 31, 1998, 1999 and 2000, we recorded amortization
expense of $369,219, $925,440 and $1,075,566, respectively related to our
other assets.

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

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

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

Our subsidiary, GlobalSCAPE, Inc. incurs Research and Development Expenses.
These research and development expenses include all direct costs, primarily
salaries for Company personnel and outside consultants, related to the
development of new products and significant enhancements to existing products
and are expensed as incurred until such time as technological feasibility is
achieved. For the years ended July 31, 1998, 1999 and 2000, research and
development expenses were $0, $101,716 and $414,541, respectively.

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

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

<TABLE>
<CAPTION>
For the Years Ended July 31,
-----------------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Cash payments for interest $1,349,679 $1,101,771 $2,272,111
Cash payments for taxes $ 148,097 $ - $ -
Non-cash:
Common shares issued for services $ 246,591 $ 40,000 $ 24,968
Notes receivable and accrued interest issued to
exercise options for common shares $ - $ - $1,107,898
Common shares issued for acquisition $ - $ 178,750 $2,921,008
Conversion of convertible debt to common shares $ 100,000 $ - $3,333,664
Capital lease obligations incurred $4,635,693 $ - $ 275,096
Common share subscriptions sold $ - $ 42,500 $ -
</TABLE>

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

60
<PAGE>

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

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC's views in applying accounting principles
generally accepted in the U.S. to selected revenue recognition issues. We have
reviewed the guidance of this SAB and believe that our accounting policies and
the disclosures in the consolidated financial statements and in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" are appropriate and adequately address the requirements of this SAB.

In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", an amendment of
SFAS 133. SFAS 133 established accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 138 amends the
accounting and reporting standards of SFAS 133. The adoption of this statement
has not had a material effect on the financial condition or results of
operations of the Company.

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

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

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

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

4. PROPERTY AND EQUIPMENT, NET (at cost)

Following is a summary of our property and equipment at July 31, 1999 and
2000:

<TABLE>
<CAPTION>
July 31, 1999 July 31, 2000
------------------- -------------------
<S> <C> <C>
Telecommunication equipment $ 6,476,395 $ 8,332,035
Land and buildings 447,348 516,915
Furniture and fixtures 902,873 1,560,097
Equipment under capital leases 7,758,739 7,255,673
Leasehold improvements 474,748 834,035
Other 608,914 888,307
------------------- ------------------
16,699,417 19,387,062
Less: accumulated depreciation (4,712,671 (8,329,671)
------------------- ------------------
Total - property and equipment, net $11,956,746 $11,057,391
=================== ==================
</TABLE>

61
<PAGE>

Depreciation expense as reported in our Consolidated Statements of
Operations includes depreciation expense related to our capital leases. For the
years ended July 31, 1998, 1999 and 2000, we recorded approximately $1,453,000,
$2,323,000 and $3,605,0000, respectively of depreciation expense related to our
fixed assets. The Company reviewed its' depreciable lives among its
telecommunication assets in Mexico and the U.S. and made a downward revision of
the estimated lives of telecommunication assets in Mexico to conform with lives
in the U.S. This change did not have a significant effect on the consolidated
financial statements of the Company.

5. NOTES PAYABLE AND CONVERTIBLE DEBT

<TABLE>
<CAPTION>
Notes payable are comprised of the following:
July 31,1999 July 31,2000
-------------- --------------
<S> <C> <C>
Note payable to a company, see terms below. $ 137,071 $ -

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

Note payable to a bank, see terms below. 150,000 70,000

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

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

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

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

Notes payable to taxing entity see terms below. 390,173 379,466

Notes payable to various banks see terms below. 56,878 20,730

Notes payable to a company, net of discount, see
terms below. 309,588 -
-------------- --------------
$1,662,478 $544,935

Less: current portion $1,350,696 $544,935
-------------- --------------

Total non-current notes payable $ 311,782 $ -
============== ==============
</TABLE>

During November 1996, we entered into an agreement with a financing company
under which we are advanced an additional 13.75% of our receivables sold to a
billing clearinghouse, as discussed in Note 3. These advances are typically
outstanding for periods of less than 90 days, and are repaid, including accrued
interest, by the clearinghouse on behalf of us as our receivables from long
distance call services are collected. We were charged 4% per month for these
fundings. In November 1999, we paid off the remaining amounts due under the
arrangement. The financing company now claims that we owe them an additional
$14,000. We believe the amount claimed by the financing company is in error and
that the billing clearinghouse has, in fact, paid approximately $183,000 more to
the financing company than what it is owed. Accordingly, we have a receivable in
the amount of approximately $169,000 as

62
<PAGE>

of July 31, 2000, included as a part of accounts receivable in the accompanying
consolidated balance sheet. We continue to work with the financing company to
resolve this dispute.

During February 1999, we entered into a note payable with an individual,
for working capital purposes, in the amount of $150,000. Interest accrued at an
interest rate of 12% per year, principal and interest due at maturity. The note
originally matured in May 1999, but was extended until November 1999. During the
year ended July 31, 2000, the note was paid off in full, including accrued
interest.

During January 1999, one of our subsidiaries entered into a note payable
with a bank in the amount of $180,000 related to our acquisition of a computer
software program known as "CuteFTP/TM/". (See Note 11). The note calls for
principal payments of $5,000 per month for twelve months and $10,000 per month
for twelve months. Interest accrues monthly at an interest rate of the Lender's
"Prime Rate" plus 1%. At July 31, 2000, the Lender's "Prime Rate" was
approximately 9.50%.

During October 1999, one of our subsidiaries entered into a note payable
with a bank, for working capital purposes, in the amount of $50,000. The note
calls for principal payments of $1,000 per month for six months and $3,667 per
month for twelve months. Interest accrues monthly at an interest rate of the
Lender's "Prime Rate" plus 1%. At July 31, 2000, the Lender's "Prime Rate" was
approximately 9.50%.

During February 2000, one of our subsidiaries entered into a note payable
with a bank, for working capital purposes, in the amount of $70,000. The note
calls for principal plus interest payments of $6,142 per month for twelve
months. The principal plus interest payments are subject to changes based on
the Lender's "Prime Rate" plus 1%. At July 31, 2000, the Lender's "Prime Rate"
was 9.50%.

In February 1999, we entered into notes payable with related parties, all
of whom were officers or directors of ATSI, in the amount of $250,000. The notes
accrued interest at a rate of 12% per year until paid in full. The notes were
paid off in full prior to July 31, 2000.

In January 1999, one of our subsidiaries entered into an agreement with an
individual related to an acquisition of a computer software program known as
"CuteFTP/TM/". (See Note 11). The agreement calls for twelve principal and
interest payments of $63,000 per month beginning February 28, 1999. We have
imputed interest using an interest rate of 12% per annum. The note was paid off
in full prior to July 31, 2000.

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

The Company, through its acquisition of Computel, assumed notes payables to
various banks in Mexico. The notes have interest rates ranging from 8% to 15%,
with monthly principal and interest payments of approximately $3,000. The notes
were originally scheduled to mature

63
<PAGE>

between October 1999 and December 2015 and are collaterized by the assets of
Computel. In the year ended July 31, 1999, we, through Computel, exchanged
certain assets collaterized by the notes for a reduction in our indebtedness.
The balance of $20,730 remaining at July 31, 2000 matures during the fiscal year
ended July 2001.

During October 1997, we entered into a note payable with a company in the
amount of $1,000,000. The note calls for quarterly payments of principal and
interest beginning in January 1998 and continuing until October 2004. Interest
accrues on the unpaid principal at the rate of 13% per year. We also issued
250,000 warrants to the note holder which carry an exercise price of $3.56 per
warrant. These warrants expire in October 2000. The amount of debt discount
recorded by us related to the issuance of these warrants was $103,333. The fair
value of the warrants was calculated on the date of issuance using an option
pricing model with the following assumptions: Dividend yield of 0.0%, expected
volatility of 30%, risk-free interest rate of 6.00%, and an expected life of
three years. The warrants expire three years from their date of issuance, and
are not exercisable for a period of one year after their initial issuance. In
January 1998, the noteholder exercised 700,000 warrants at an exercise price of
$0.70, unrelated to the warrants noted above, in consideration of a $490,000
reduction of the principal balance outstanding on the note. In January 2000,
the noteholder converted the remaining note payable balance inclusive of
principal, accrued interest and other fees into approximately 370,603 shares of
common stock at a conversion price of $1.1844 per share of common stock.

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

In January 2000, the note holders converted $2.2 million of convertible
notes, originally issued in March and May of 1997, which would have been due in
March 2000. The convertible notes' face value and accrued interest at the time
of conversion was approximately $2.2 million and $700,000, respectively. At
issuance, the convertible notes had 4,776,176 warrants to the convertible debt
holders at an exercise price of $0.27 per share. Unamortized debt discount
associated with the warrants at the time of conversion was approximately
$106,000, which the Company fully expensed in January 2000. In January 2000,
conversion of the notes resulted in the issuance of 726,257 shares of Common
Stock related to the warrants, 716,424 of which were the aforementioned $0.27
warrants and 9,833 of unrelated $0.85 warrants against the face value and
accrued interest owed them. The remaining convertible notes and accrued interest
were converted into 2,262,329 shares of Common Stock.

In July 2000, we entered into a convertible note in the amount of $500,000,
for working capital purposes. Interest accrues at a rate of 12% per annum and is
payable upon maturity or conversion. The note originally matured October 31,
2000 but was extended 30 days with the option to extend for two additional
thirty-day periods. Additionally, the note holder received 50,000 warrants to
purchase shares of American TeleSource International, Inc. priced at 115% of
market price on the date of note issuance. The warrants are exercisable for 3
years from the date of issuance. The fair value of the warrants was determined
to be $4.22 per share and the Company assigned $211,000 to the value of the
warrants in stockholder's equity. The Company has recorded the $211,000 as debt
discount and is amortizing the discount over the term of the debt based on the
effective interest rate. Principal outstanding as of July 31, 2000, net of debt
discount is $289,000. The terms of repayment of the note is contingent upon a
financing arrangement, which allows the note holder to elect payment in cash for
all outstanding principal and interest, or to convert into shares of preferred
stock on terms equivalent to a financing

64
<PAGE>

arrangement. If a financing arrangement does not take place by maturity of the
note, then all unconverted principal and accrued interest will convert into
shares of American TeleSource International, Inc at the rate of $5.00 per share.

6. LEASES

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

We lease office space, furniture, equipment and network capacity under
noncancelable operating leases and certain month-to-month leases. During fiscal
1998, 1999 and 2000, we also leased certain equipment under capital leasing
arrangements. Rental expense under operating leases for the years ended July
31, 1998, 1999 and 2000, was $942,750, $2,952,710 and $4,713,240, respectively.
Future minimum lease payments under the noncancelable operating leases at July
31, 2000 are as follows:

2001 $3,064,757
2002 1,980,530
2003 1,833,244
2004 584,597
2005 476,549
Thereafter 1,347,935
----------
Total minimum lease payments $9,287,612
==========

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

Future minimum lease payments under the capital leases together with the
present value of the net minimum lease payments at July 31, 2000 are as follows:

2001 $ 4,553,407
2002 1,553,250
2003 1,271,970
2004 50,151
Thereafter -
-----------
Total minimum lease payments 7,428,778
Less: Amount representing taxes (14,483)
-----------
Net minimum lease payments 7,414,295
Less: Amount representing interest (1,496,951)
-----------
Present value of minimum lease payments $ 5,917,344
===========

In April 1997, we, through ATSI-Mexico, secured a capital lease facility
with IBM de Mexico to purchase intelligent pay telephones for installation in
Mexico. The capital lease facility of approximately $1.725 million has allowed
us to install U.S. standard intelligent pay telephones in various Mexican
markets. In April 1998, we through ATSI-Mexico, secured an additional capital
lease facility with IBM de Mexico for approximately $2.9 million to increase
network capacity and to fund the purchase and installation of public telephones
in Mexico. In May 1999, we restructured our capital lease obligation with IBM
de Mexico by extending the

65
<PAGE>

payment of our total obligation. The restructured lease facility calls for
monthly payments of principal and interest of approximately $108,000 beginning
in July 1999 and extending through June 2003. Interest accrues on the facility
at an interest rate of approximately 13% per year. The obligation outstanding
under said facility at July 31, 1999 and July 31, 2000 was approximately
$3,826,000 and $3,120,000, respectively. As of October 31, 2000, we had not yet
made our July payment for approximately $108,000. Per the terms of our agreement
with IBM de Mexico they have the right to call all of the outstanding capital
lease facility should we be in arrears with our monthly payment. Subsequent to
July 31, 2000, IBM has agreed not to call the capital lease facility and has
restructured our capital lease obligation by increasing our monthly payments due
in calendar 2001. For this reason, the Company has not reclassified the capital
lease obligation to current liabilities as of July 31, 2000.

In December 1998, we ordered a DMS 250/300 International gateway switch
from Northern Telecom, Inc. at a cost of approximately $1.8 million. As of July
31, 1999, we entered into a capital lease transaction with NTFC Capital
Corporation, ("NTFC") to finance the switch and an additional approximate
$200,000 of equipment over a five and a half-year period with payments deferred
for six months. Quarterly payments approximate $141,000 and the capital lease
has an interest rate of approximately 12%. The lease facility requires that we
meet certain financial covenants on a quarterly basis beginning October 31,
1999, including minimum revenue levels, gross margin levels, EBITDA results and
debt to equity ratios. As of July 31, 2000, we are not in compliance with the
financial covenants related to revenues, gross margins and EBITDA results. We
have classified the entire capital lease in our accompanying consolidated
balance sheet as a current liability. As in previous quarters we have requested
and received a waiver for the non-compliance of the financial covenants and are
actively working to restructure the covenants. We also have certain affirmative
covenants under the facility, including a covenant on Year 2000 compliance,
under which we give assurance that our systems will be able to process
transactions effectively before, on and after January 1, 2000. The obligation
outstanding under said facility at July 31, 2000 was approximately $2,039,000.
The additional $39,000 is interest incurred during the deferment period.

We secured a capital lease for approximately $500,000 in December 1998 for
the purchase of Asynchronous Transfer Mode ("ATM") equipment from Network
Equipment Technologies ("N.E.T"). The capital lease is for thirty-six months
with monthly payments of approximately $16,000 a month. Our capital leases have
interest rates ranging from 11% to 14%. The obligation outstanding under said
facility at July 31, 1999 and July 31, 2000 was approximately $468,000 and
$306,000, respectively.

7. DEFERRED REVENUE

We record deferred revenue related to the private network services
provided. Customers may be required to advance cash to us prior to service
commencement to partially cover the cost of equipment and related installation
costs. Any cash received prior to the actual commencement of services is
recorded as deferred revenue until services are provided by us, at which time we
recognize the service commencement revenue. At July 31, 1999 and July 31, 2000
we had approximately $233,000 and $167,000 of deferred revenues outstanding,
respectively.

66
<PAGE>

8. SHARE CAPITAL

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

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

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

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

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

67
<PAGE>

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

At July 31, 1999, stock subscription receivables of $42,500, were
outstanding related to sales of common stock. We collected such amounts
subsequent to said date. No dividends were paid on our common stock during the
years ended July 31, 1998, 1999 and 2000.

The shareholders of ATSI-Canada approved the creation of a class of
preferred stock at our annual shareholders meeting on May 21, 1997. Effective
June 25, 1997, the class of preferred stock was authorized under the Ontario
Business Corporations Act. According to our amended Articles of Incorporation,
our Board of directors may issue, in series, an unlimited number of preferred
shares, without par value. No preferred shares have been issued as of July 31,
2000.

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

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

In December 1999 and February 2000, we issued 1,425 shares and 1,000
shares, respectively, of Series A Preferred Stock for cash proceeds of
approximately $1.4 million and $1.0 million, respectively. The Series A
Preferred Stock accrues cumulative dividends at the rate of 10% per annum
payable quarterly. As of July 31, 2000, we have accrued approximately $128,000
for dividends.

In February 2000, we also issued 3,000 shares of Series D Preferred Stock
for cash proceeds of approximately $3.0 million. The Series D Preferred Stock
accrues cumulative dividends at the rate of 6% per annum payable quarterly. As
of July 31, 2000, we have accrued approximately $90,000 for dividends.

68
<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, we
allocated approximately $3.6 million of the approximate $5.0 million in
proceeds to additional paid-in capital as a discount to be amortized over
various periods ranging from ninety days to a twelve month period. As of July
31, 2000, approximately $335,000 of beneficial conversion feature remains to be
amortized related to our December 1999 Series A Preferred Stock. The Series A
Preferred Stock is callable and redeemable by us at 100% of its face value, plus
any accumulated, unpaid dividends at our option any time after the Common Stock
of ATSI has traded at 200% or more of the conversion price in effect for at
least twenty (20) consecutive trading days, so long as we do not call the
Preferred Stock prior to the first anniversary date of the Date of Closing.

The terms of our Series B Preferred Stock allowed for the conversion of the
preferred shares and any accumulated, unpaid dividends to be converted into
Common Stock for up to two years at the lesser of a) the market price on the day
prior to closing or b) 78% of the five lowest closing bid prices on the ten days
preceding conversion. As this conversion feature is considered a "beneficial
conversion feature" to the holder, we allocated approximately $1.1 million, of
the $2.4 million in proceeds to additional paid-in capital as a discount to be
amortized over a three-month period. As of July 31, 2000, no beneficial
conversion feature remains to be amortized.

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

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

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

69
<PAGE>

The terms of our Series D Preferred Stock allow for mandatory redemption by
the holder upon certain conditions. The Series D Preferred Stock allows the
holder to elect redemption upon the change of control of ATSI at 120% of the sum
of $1300 per share and accrued and unpaid dividends. Additionally, the holder
may elect redemption at $1270 per share plus accrued and unpaid dividends if we
refuse to honor conversion notice or if a third party challenges conversion.

The outstanding Series A and Series D Preferred Stock have liquidation
preference prior to common stock and ratably with our recently issued Series E
Preferred Stock, as discussed in Note 18.

On April 14, 2000, we signed an agreement with a private equity fund, under
which the fund agreed to purchase up to 5,000,000 shares of our common stock
over an eighteen-month period at 92% of the market price for our common stock at
the time of purchase. We also issued 175,000 warrants as a finder's fee to the
entities that introduced us to the equity fund at an exercise price of $7.17 per
warrant. These warrants expire March 31, 2003. We have no initial commitment to
draw on the facility, but may do so based upon average trading volumes on an as-
needed basis as often as every twenty days, subject to certain restrictions. If
we use this facility we must issue the investor warrants for 1,500 shares of
common stock for every $100,000 that is invested at an exercise price of 120% of
the average of the five closing sale prices preceding the date of the
investment, and an additional 1,000 warrants per $100,000 invested as a finder's
fee on the same terms. The amount of funds to be generated under the facility
for us will depend on the price of ATSI's common stock at the time each draw is
executed. Before we can draw on the facility, any shares to be issued under the
facility must be registered with the Securities and Exchange Commission. As of
November 14, 2000, no registration statement had been filed to do so.

In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE, Inc.
amended their certificate of incorporation to increase the number of authorized
shares of capital stock which they had the authority to issue to 50,000,000
shares consisting of 40,000,000 shares of common stock, par value $0.001 per
share and 10,000,000 shares of preferred stock, par value $0.001 per share. The
Board of Directors also declared a 7.6 for 1 stock split of the outstanding
shares of the issued and outstanding common stock. The effect of the split was
to increase the outstanding shares from 1,700,000 shares to 12,920,000. At July
31, 2000, we held all of the outstanding shares of GlobalSCAPE's outstanding
stock.

9. STOCK PURCHASE WARRANTS AND STOCK OPTIONS

During the year ended July 31, 2000, certain shareholders and holders of
convertible debt were issued warrants to purchase shares of common stock at
exercise prices ranging from $0.94 to $7.17 per share. Following is a summary
of warrant activity from August 1, 1997 through July 31, 2000:

70
<PAGE>

<TABLE>
<CAPTION>
Year Ending July 31,
-------------------------------------------------
1998 1999 2000
-------------------------------------------------
<S> <C> <C> <C>
Warrants outstanding, beginning 14,489,942 7,562,168 4,203,925

Warrants issued 667,400 933,387 601,045

Warrants expired - (2,386,470) (80,000)
Warrants exercised (7,595,174) (1,905,160) (4,043,925)
-------------- ------------ ------------
Warrants outstanding, ending 7,562,168 4,203,925 681,045
============== ============ ============
</TABLE>

Warrants outstanding at July 31, 2000 expire as follows:

Number of Warrants Exercise Price Expiration Date
------------------ -------------- ----------------------
150,000 $4.37 February 22, 2002
30,000 $3.09 March 9, 2002
175,000 $7.17 March 31, 2003
100,000 $6.00 July 21, 2003
50,000 $5.46 July 25, 2003
50,000 $1.25 July 2, 2004
20,000 $1.19 September 24, 2004
106,045 $0.94 December 8, 2004

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

In September 1998, our Board of directors adopted the 1998 Stock Option
Plan. Under the 1998 Stock Option Plan, options to purchase up to 2,000,000
shares of common stock may be granted to employees, directors and certain other
persons. The 1997 and 1998 Stock Option Plans are intended to permit us to
retain and attract qualified individuals who will contribute to our overall
success. The exercise price of all of the options is equal to the market price
of the shares of common stock as of the date of grant. The options vest pursuant
to the individual stock option agreements, usually 33 percent per year beginning
one year from the grant date with unexercised options expiring ten years after
the date of the grant. On September 9, 1998, the Board of directors granted a
total of 1,541,000 options to purchase common stock to directors and employees
of ATSI. On December 16, 1998, the Board approved the granting of an additional
302,300 in options to employees of ATSI. The 1998 Stock Option Plan was approved
by a vote of the stockholders at our Annual Meeting of Shareholders on December
17, 1998.

Since December 16, 1998, the Board of Directors have approved the granting
of an additional 254,000 in options to employees of ATSI.

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<PAGE>

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

<TABLE>
<CAPTION>
Years Ended July 31,
--------------------------------------------------------
1997 Stock Option Plan 1998 1999
--------------------------------------------------------
Weighted Weighed
Average Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Outstanding, beginning of year 4,483,000 $0.58 4,655,333 $0.74
Granted 429,000 $2.33 - -
Exercised (245,000) $0.58 (298,000) $0.58
Forfeited (11,667) $1.28 (134,666) $0.71
--------- ---------
Outstanding, end of year 4,655,333 $0.74 4,222,667 $0.75
========= ===== ========= =====
Options exercisable at end of year 2,571,332 $0.58 3,271,333 $0.60
========= ===== ========= =====
Weighted average fair value of
options granted during the year $1.50 N/A
===== =====
</TABLE>

<TABLE>
<CAPTION>
Year Ended July 31,
------------------------------
1997 Stock Option Plan 2000
------------------------------
<S> <C> <C>
Weighted
Average
Shares Exercise
Price

Outstanding, beginning of year 4,222,667 $0.75
Granted - -
Exercised (3,907,331) $0.66
Forfeited (3,333) $0.58
----------
Outstanding, end of year 312,003 $1.59
========== =====
Options exercisable at end of year 171,667 $1.55
========== =====
Weighted average fair value of
options granted during the year N/A
=====
</TABLE>

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

</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Outstanding, end of year 1,881,800 $0.63 1,379,211 $0.70
========= ===== ========= =====
Options exercisable at end of year - - 85,499 $0.60
========= =====
Weighted average fair value of
options granted during the year $0.65 $1.92
===== =====
</TABLE>

The weighted average remaining contractual life of the stock options
outstanding at July 31, 2000 is approximately 6.5 years for options granted
under the 1997 Stock Option Plan and approximately 8 years for options granted
under the 1998 Stock Option Plan.

In January 1998, the Board of Directors of our subsidiary, GlobalSCAPE,
Inc. approved the 1998 Stock Option Plan (the Plan) for officers, other
employees, directors and consultants of GlobalSCAPE. Under the terms of the
Plan, up to 728,571 shares of the Company's common stock may be granted in the
form of incentive stock options or non-qualified stock options, awarded, or sold
to officers, other employees, directors and consultants. The Company awarded
approximately 384,000 options under the Plan, which were subsequently cancelled
in February 2000. The Company is currently in discussions with the previous
option holders regarding the issuance of replacement options.

In May 2000, the Board of Directors of our subsidiary, GlobalSCAPE approved
the 2000 stock option plan (the "Plan") for key employees, non-employee
directors, and advisors of GlobalSCAPE. Under the terms of the Plan, up to
3,660,000 shares of the Company's common stock may be granted in the form of
incentive stock options or non-qualified stock options. The maximum aggregate
number of shares of common stock which may be granted to any optionee during the
term of the Plan shall not exceed 2,000,000. The Plan provides that the
purchase price per share for incentive stock options and non-qualified stock
options shall not be less than the fair market value of the common stock on the
date of grant. The maximum term for an option granted is ten years from the date
of grant. As of July 31, 2000, no options have been granted under the Plan.

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

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

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<PAGE>

increase in our stock price from September 9, 1998 to December 17, 1998, when
the underlying 1998 Stock Option Plan was approved by our shareholders.

As of July 31, 1999 and July 31, 2000, we had $465,487 and $119,449,
respectively, of deferred compensation related to options granted.

Because we have elected to remain with the accounting prescribed by APB 25,
no compensation cost has been recognized for our fixed stock option plan based
on SFAS 123. Had compensation cost for our stock-based compensation plans been
determined on the fair value of the grant dates for awards under the fixed stock
option plans consistent with the method of SFAS 123, our net loss (in thousands)
and loss per share would have been increased to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Net loss to common shareholders
-----------------------------------
As reported ($5,094) ($7,591) ($17,138)
Pro forma ($5,936) ($8,046) ($17,657)
Basic and diluted loss per share
-----------------------------------
As reported ($0.12) ($0.16) ($0.30)
Pro forma ($0.14) ($0.17) ($0.31)
</TABLE>

The fair value of the option grant is estimated based on the date of grant
using an option pricing model with the following assumptions used for the grants
in 1998, 1999 and 2000: Dividend yield of 0.0%, expected volatility of 46%, 62%
and between 104% - 141%, (depending on the time of grant) respectively, risk-
free interest rate of 5.10%, 6.50% and 6.25%, respectively, and an expected life
of ten years. The fair value of these options is being amortized over the
three-year vesting period of the options.

10. EMPLOYEE BENEFIT PLAN

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

Participating employees may contribute from 2% to 15% of their total annual
compensation, including bonuses, subject to certain limitations, including a
$7,000 annual limitation, subject to inflation. Participants may elect to make
these contributions on a before-tax or after-tax basis, or both, with federal
income taxes on before-tax contributions being deferred until a distribution is
made to the participant. Participants' contributions of up to 3% of their
elective deferrals are matched 25% by the Company. Participant's contributions
in excess of 3% of their annual compensation are not matched by the Company. The
Employer may also

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<PAGE>

contribute an additional amount determined in its sole judgement. Such
additional contribution, if any, shall be allocated to each Participant in
proportion to his or her Compensation for the Plan Year while a Participant.

Subsequent to December 31, 1999, the Company made a matching contribution
of approximately $9,600. No discretionary contribution was made for the Plan
Year 1999.

11. ACQUISITIONS

As announced in June 2000, we have signed a definitive agreement to acquire
Genesis Communications International, Inc., a privately owned telecommunications
company for approximately $37.3 million, to be paid in shares of our common
stock. The number of shares to be issued will vary depending on the average of
the closing price of our common stock for the ten days preceding closing, with a
stated minimum of 4.7 million shares and a stated maximum of 9.6 million shares.

The following unaudited pro forma results of operations, for the three
years ended July 31, 2000, assumes the acquisition of Genesis occurred as of
August 1, 1997. Such pro forma information is not necessarily indicative of the
results of future operations. Although the Company believes the acquisition may
qualify for treatment as a pooling-of-interests, in accordance with generally
accepted accounting principles the following pro forma results were prepared
assuming the transaction was accounted for as a purchase.

<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------
July 31, 1998 July 31, 1999 July 31, 2000
---------------------- ---------------------- -------------------
(unaudited)
-------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $ 47,326 $ 56,382 $ 64,809
Gross margin $ 15,862 $ 22,021 $ 23,415
EBITDA ($3,489) $ 149 $ 93
Net loss to common
shareholders ($8,264) ($7,360) ($15,567)

Basic and diluted loss
per share ($0.16) ($0.13) ($0.23)
</TABLE>

These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments such as the amortization of
goodwill, the elimination of intercompany transactions and the elimination of
certain personnel costs and professional fees related to the acquisition. We
have valued the acquisition at $14,327,343 based on the issuance of 9,551,562
shares of our common stock at a stock price of $1.50 (our closing price on
November 8, 2000). For purposes of this pro-forma disclosure we have assumed
that the entire valuation will be accounted for as goodwill to be amortized over
a period of twenty years.

The unaudited pro forma information is not necessarily indicative of the
results that would have occurred had such transactions actually taken place at
the beginning of the period specified nor does such information purport to
project the results of operations for any future date or period.

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<PAGE>

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

In July 2000, we acquired Grupo Intelcom, S.A. de C.V., a Mexican company,
which owned a long distance license issued by the Mexican government. The terms
of the agreement called for us to purchase 100% of the stock of Grupo Intelcom
from Alfonso Torres Roqueni (a 51% stockholder) and COMSAT Mexico, S.A. de C.V.,
(a 49% stockholder) for a total purchase price of approximately $4,176,000
consisting of $755,000 in cash, $500,000 in the form of a note payable, which
was paid off prior to July 31, 2000, 400,000 shares of our common stock valued
at approximately $2.5 million and 100,000 warrants exercisable at $6.00 for a
period of three years and valued at approximately $440,000.

12. SEGMENT REPORTING

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for
reporting information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. SFAS No. 131 need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. In an attempt to identify our reportable
operating segments, we considered a number of factors or criteria. These
criteria included segmenting based upon geographic boundaries only, segmenting
based on the products and services provided, segmenting based on legal entity
and segmenting by business focus. Based on these criteria we have determined
that we have three reportable operating segments: (1) U.S. Telco; (2) Mexico
Telco; and (3) Internet e-commerce. Our Internet e-commerce subsidiary,
GlobalSCAPE, Inc. and its operations can be differentiated from the
telecommunication focus of the rest of ATSI. Additionally, we believe that our
U.S. and Mexican subsidiaries should be separate segments even though many of
the products are borderless. Both the U.S. Telco and Mexican Telco segments
include revenues generated from Integrated Prepaid, Postpaid, and Private
Network Services. Our Carrier Services revenues, generated as a part of our U.S.
Telco segment, are the only revenues not currently generated by both the U.S.
Telco and Mexico Telco segments. We have included the operations of ATSI-
Canada, ATSI-Delaware and all businesses falling below the reporting threshold
in the "Other" segment. The "Other" segment also includes intercompany
eliminations.

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<PAGE>

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

<TABLE>
<CAPTION>
As of and for the years ending
---------------------------------------------------------
July 31, 1998 July 31, 1999 July 31, 2000
U.S. Telco
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
External revenues $ 26,695,690 $ 25,519,967 $ 27,359,003
Intercompany revenues $ 1,300,000 $ 1,951,656 $ 2,617,760
------------ ------------ -------------
Total revenues $ 27,995,690 $ 27,471,623 $ 29,976,763
============ ============ =============

EBITDA ($16,807) ($1,785,694) ($4,680,052)

Operating loss ($1,294,037) ($3,782,919) ($6,912,446)

Net loss ($1,819,986) ($4,405,213) ($7,353,641)

Total assets $ 10,049,021 $ 11,229,863 $ 12,555,903

Mexico Telco
-----------------------------------------------------------------------------------------------
External revenues $ 6,298,620 $ 6,355,936 $ 6,941,761
Intercompany revenues $ 5,136,541 $ 3,901,246 $ 2,427,907
------------ ------------ -------------
Total revenues $ 11,435,161 $ 10,257,182 $ 9,369,668
============ ============ =============

EBITDA ($1,434,261) ($1,050,963) ($473,752)

Operating loss ($1,927,928) ($2,098,527) ($2,528,919)

Net loss ($2,564,103) ($2,437,230) ($3,295,340)

Total assets $ 17,228,025 $ 11,778,300 $ 9,808,068

Internet e-commerce
-----------------------------------------------------------------------------------------------
External revenues $ 1,525,517 $ 2,642,376 $ 5,128,096
Intercompany revenues 25,000 - -
------------ ------------ -------------
Total revenues $ 1,550,517 $ 2,642,376 $ 5,128,096
============ ============ =============

EBITDA $ 215,051 $ 1,052,015 $ 2,007,993

Operating income $ 188,658 $ 873,832 $ 1,623,067

Net income $ 197,698 $ 854,068 $ 1,570,857

Total assets $ 537,289 $ 1,222,238 $ 2,245,590
</TABLE>

77
<PAGE>

<TABLE>
<CAPTION>
Other
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
External revenues - - -
Intercompany revenues ($6,461,541) ($5,852,902) ($5,045,667)
------------ ------------ -------------
Total revenues ($6,461,541) ($5,852,902) ($5,045,667)
============ ============ =============

EBITDA ($408,783) ($7,000) ($5,000)

Operating loss ($433,683) ($31,900) ($13,385)

Net loss ($907,570) ($1,602,709) ($8,059,143)

Total assets ($3,563,743) ($76,108) $ 2,284,389

Total
-----------------------------------------------------------------------------------------------
External revenues $ 34,519,827 $ 34,518,279 $ 39,428,860
Intercompany revenues - - -
------------ ------------ -------------
Total revenues $ 34,519,827 $ 34,518,279 $ 39,428,860
============ ============ =============

EBITDA ($1,644,800) ($1,791,642) ($3,150,811)

Depreciation, Depletion and ($1,822,190) ($3,247,872) ($4,680,872)
Amortization

Operating loss ($3,466,990) ($5,039,514) ($7,831,683)

Net loss to common shareholders ($5,093,961) ($7,591,084) ($17,137,267)

Total assets $ 24,250,592 $ 24,154,293 $ 26,893,950
</TABLE>

13. INCOME TAXES

As of July 31, 2000, we had net operating loss carryforwards of
approximately $15,512,000 for U.S. federal income tax purposes which are
available to reduce future taxable income of which $534,000 will expire in 2009,
$2,385,000 will expire in 2010, $2,083,000 will expire in 2011, $2,894,000 will
expire in 2012, $2,028,000 will expire in 2019 and $5,588,000 will expire in
2020. The availability of the net operating loss (NOL) carryforwards to reduce
U.S. federal taxable income is subject to various limitations in the event of an
ownership change as defined in Section 382 of the Internal Revenue Code of 1986
(the "Code"). We experienced a change in ownership in excess of 50 percent, as
defined in the Code, during the year ended July 31, 1998. This change in
ownership limits the annual utilization of NOL under the Code to $1,284,000 per
year, but does not impact our ability to utilize our NOL's because the annual
limitation under the Code would allow full utilization within the statutory
carryforward period. It is likely that we have experienced an additional change
in ownership in excess of 50 percent, during or subsequent to fiscal year-end
2000 which may further limit the annual utilization of NOL's goingforward.

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<PAGE>

The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows as of July 31, 1999 and 2000:

July 31, 1999 July 31, 2000
------------------ ------------------
Net operating loss carryforward $ 3,174,000 $ 5,274,000

Other tax differences, net 839,000 467,000

Valuation allowance (4,013,000) (5,741,000)
------------------ ------------------
Total deferred income tax assets $ - $ -
================== ==================

A valuation reserve of $4,013,000 and $5,741,000, as of July 31, 1999 and
2000, respectively, representing the total of net deferred tax assets has been
recognized as we cannot determine that it is more likely than not that all of
the deferred tax assets will be realized.

Additionally, our effective tax rate differs from the statutory rate as the
tax benefits have not been recorded on the losses incurred for the years ended
July 31, 1998, 1999 and 2000.

14. COMMITMENTS AND CONTINGENCIES

During the years ended July 31, 1998 and 1999, nine of our officers entered
into employment agreements with ATSI-Texas or ATSI-Delaware, generally for
periods of up to three years (with automatic one-year extensions) unless
terminated earlier in accordance with the terms of the respective agreements.
The annual base salary under such agreements for each of these nine officers
range from $75,000 to $100,000 per annum, and is subject to increase within the
discretion of the Board. In addition, each of these officers is eligible to
receive a bonus in such amount as may be determined by the Board of directors
from time to time. Bonuses may not exceed 50% of the executive's base salary in
any fiscal year. No bonuses were paid during fiscal 1999 or fiscal 2000.

Effective August 1998, two of the aforementioned officers entered into
employment agreements with ATSI-Delaware, which superceded their previous
agreements, each for a period of three years (with automatic one-year
extensions) unless terminated earlier in accordance with the terms of the
respective agreements. The annual base salary under such agreements for each of
these two officers may not be less than $127,000 and $130,000, respectively, per
annum, and is subject to increase within the discretion of the Board. In
addition, each of these officers is eligible to receive a bonus in such amount
as may be determined by the Board of directors from time to time. Bonuses may
not exceed 50% of the executive's base salary in any fiscal year. No such
bonuses were awarded for fiscal 1999 and fiscal 2000.

During fiscal 2000, three officers whose employment agreements were to
expire January 1, 2000 were informed that their agreements would not be renewed
under the current terms and conditions. Two of the three officers have since
entered into new employment agreements with ATSI-Delaware, each for a period of
one year unless earlier terminated in accordance with the terms of the
respective agreements. The annual base salaries under such agreements may not be
less than approximately $101,000 and $105,000, respectively, per annum, and is
subject to

79
<PAGE>

increase within the discretion of the Board. In addition, each of these officers
is eligible to receive a bonus in such amount as may be determined by the Board
of directors from time to time. Bonuses may not exceed 50% of the executive's
base salary in any fiscal year. A bonus of $25,000 was declared by the Board of
Directors for one of these officers during fiscal year 2000. As of October 31,
2000, the bonus has not been paid.

During fiscal 2000, three additional officers whose employment agreements
were to expire January 1, 2001 were informed that their agreements would not be
renewed.

Additionally, during fiscal 2000, two additional officers entered into
employment agreements with ATSI-Delaware each for a period of one year unless
earlier terminated. The annual base salaries under such agreements may not be
less than approximately $75,000 and $150,000, respectively, per annum, and is
subject to increase within the discretion of the Board. In addition, each of
these officers is eligible to receive a bonus in such amount as may be
determined by the Board of directors from time to time. Bonuses may not exceed
50% of the executive's base salary in any fiscal year.

15. RISKS AND UNCERTAINTIES AND CONCENTRATIONS

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

During the year ended July 31, 1998, none of our customers had aggregated
revenues greater than 10%. During the years ended July 31, 1999 and 2000, our
carrier services business had two customers, whose aggregated revenues
approximated 10% and 40%, respectively, of our total revenues. In addition, one
customer generated revenues greater than 5% during the year ended July 31, 2000.

16. RELATED PARTY TRANSACTIONS

In February 2000, our Board of Directors approved a plan to lend
approximately $1.5 million, at a market interest rate, in the aggregate to
certain key executive officers to allow them to exercise approximately 2,250,000
of their vested options. The executive officers who borrowed under the plan must
adhere to the following conditions: 1) they must contribute 10% in cash of the
amount borrowed; 2) the stock obtained with the exercises must be escrowed under
a twelve month standstill agreement or until such time as the note is paid; and
3) any derivative equity obtained from the stock's ownership must be escrowed
for a six-month period. As of April 30, 2000, we had lent approximately $1.2
million to key executive officers allowing them

80
<PAGE>

to exercise vested options. We recognized the transaction by recording a note
receivable for each executive officer. As of July 31, 2000, the note receivable
balance was approximately $1.1 million.

In January 1997, ATSI-Canada entered into an agreement with an
international consulting firm, of which ATSI-Delaware director Carlos K. Kauachi
is president, for international business development support. Under the terms
of the agreement, we paid the consulting firm $8,000 per month for a period of
twelve months. In January 1998, the agreement was renewed at $10,000 per month
for a period of twelve months. In March 1999, the agreement was renewed at
$6,000 per month for a period of twelve months. Subsequent to February 2000, the
agreement was continued on a month-to-month basis until July 2000 when it was
terminated.

In April 1998, we engaged two companies for billing and administrative
services related to network management services we provide. The companies,
which are owned by Tomas Revesz, an ATSI-Delaware director, were paid
approximately $140,000 for their services during fiscal 1998. Subsequent to
year-end, we entered into an agreement with the two companies capping their
combined monthly fees at $18,500 per month. For fiscal 1999 and 2000, the
companies were paid for services rendered of approximately $180,000 and
$160,000, respectively. Additionally, we have a payable to Mr. Revesz of
$90,000.

In February 1999, we entered into notes payable with related parties, all
of whom were officers or directors of ATSI in the amount of $250,000. The notes
accrued interest at a rate of 12% per year until paid in full. As of July 31,
2000, the notes were paid in full.

We have entered into a month-to-month agreement with Technology Impact
Partners, a consulting firm of which Company director Richard C. Benkendorf is
principal and owner. Under the agreement, Technology Impact Partners provides us
with various services that include strategic planning, business development and
financial advisory services. Under the terms of the agreement, we pay the
consulting firm $3,750 per month plus expenses. At July 31, 1999 and July 31,
2000, we had a payable to Technology Impact Partners of approximately $74,000
and approximately $112,000, respectively.

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

17. LEGAL PROCEEDINGS

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<PAGE>

January 1999. The customer's claims for damages represent amounts that it claims
it had to pay in order to replace the service provided by us.

18. SUBSEQUENT EVENTS

On September 12, 2000, we completed the distribution of a portion of our
ownership in our wholly owned subsidiary GlobalSCAPE to our shareholders. The
distribution was part of a

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<PAGE>

previously announced plan to distribute or spin-off a portion of our ownership
in GlobalSCAPE contemporaneously with a public offering of GlobalSCAPE, in order
to raise funds for GlobalSCAPE's growth and ATSI's general corporate purposes.
GlobalSCAPE and ATSI decided not to make a public offering of GlobalSCAPE common
stock contemporaneously with the distribution in light of current market
conditions. We distributed approximately 3,444,833 of our 12,920,000 shares to
our shareholders. The distribution represented approximately 27% of our
ownership and does not include approximately 500,000 additional shares reserved
to be distributed to shareholders of Genesis Communications International, Inc.
pending the close of our acquisition of Genesis. The distribution did not
generate any proceeds to ATSI or GlobalSCAPE and resulted in approximately
$300,000 of expense to GlobalSCAPE for legal and accounting fees, printing and
distribution costs.

In October 2000, we issued 2,500 shares of Series E Preferred Stock and
warrants to purchase 909,091 shares of common stock for cash proceeds of
approximately $2.5 million. Subject to the completion of certain conditions, we
may issue an additional 7,500 shares of Series E Preferred Stock and warrants to
purchase 2,727,273 shares of common stock for cash proceeds of approximately
$7.5 million. The Series E Preferred Stock does not accrue dividends.

The conditions referenced above include: a) the closing of the Company's
acquisition of Genesis Communications International, Inc. b) registration of the
Common Stock underlying the Series E Preferred Stock and Warrants and c) an
investment in ATSI by an additional investor previously approved by the
institutional investor. The Series E Preferred Stock also allows the investor to
invest up to an additional $8 million, but restricts their ownership to no more
than 5% of our common stock at any point in time.

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. The conversion price will be reset on the later of
February 11, 2001 (four months from October 11, 2000) or the date of an
effective registration statement. The reset price will be the lesser of the
"market price" as defined above or the "fixed conversion price" defined above
subject to a floor price of 75% of the fixed conversion price. If the closing
bid price falls below the floor price for any ten trading days in a consecutive
twenty-day trading period, the floor price will be terminated.

The terms of our Series E Preferred Stock restrict us from declaring and
paying dividends on our common stock until such time as all outstanding
dividends have been fulfilled related to collectively, the Preferred Stock.

The terms of our Series E Preferred Stock allow for mandatory redemption by
the holder upon certain conditions. The Series E Preferred Stock allows the
holder to elect redemption at $1250 per share plus 6% per annum if: 1) ATSI
refuses conversion notice, 2) an effective registration statement is not
obtained by prior to March 11, 2001, 3) bankruptcy proceedings are initiated
against the Company, 4) the SCT limits or terminates the scope of the concession
or, 5) if the Company fails to maintain a listing on NASDAQ, NYSE or AMEX.

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

None.

PART III
--------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for by item 10 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement of the 2000 Annual
Meeting of Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by item 11 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2000
Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by item 12 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2000
Annual Meeting of Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by item 13 of Form 10-K is incorporated herein by
reference to such information included in our Proxy Statement for the 2000
Annual Meeting of Stockholders.

PART IV
-------

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

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

(b) Reports on Form 8-K
None.

3.1 Amended and Restated Certificate of Incorporation of American TeleSource
International, Inc., a Delaware corporation (Exhibit 3.3 to Amendment No.
2 to

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Registration statement on Form 10 (No. 333-05557) of ATSI filed on
September 11, 1997)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

10.3 Amendment to Agreement #094-1 with SATMEX (Exhibit 10.3 to Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document. Omitted
materials filed separately with the Commission.

10.4 Amendment to Agreement #095-1 with SATMEX (Exhibit10.4 to Amended Annual
Report on Form 10-K for year ended July 31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document. Omitted
materials filed separately with the Commission.

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

10.6 Addendum to Fiber Lease with Bestel, S.A. de C.V. (Exhibit 10.6 to Amended
Annual Report on Form 10-K for year ended July 31, 1999 filed August 25,
2000) Confidential treatment requested for portions of this document.
Omitted materials filed separately with the Commission.

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

10.8 between IBM de Mexico and ATSI-Mexico (to be filed)

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

10.10 BancBoston Master Lease Agreement (Exhibit 10.10 to Amended Annual Report
on Form 10-K for year ended July31, 1999 filed August 25, 2000)
Confidential treatment requested for portions of this document. Omitted
materials filed separately with the Commission.

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

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

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<PAGE>

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

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

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

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

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

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

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

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

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

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

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

11 Statement of Computation of Per Share Earnings (Exhibit 11 to Annual Report
on Form 10-K for year ended July 31, 2000 filed November 14, 2000)

22 Subsidiaries of ATSI (Exhibit 22 to Annual Report on Form 10-K for year
ended July 31, 2000 filed November 14, 2000)

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<PAGE>

23 Consent of Arthur Andersen LLP) (Exhibit to this Annual Report on Form 10-K
for year ended July 31, 2000 filed November 14, 2000)

27 Financial Data Schedule (Exhibit 27 to Annual Report on Form 10-K for year
ended July 31, 2000 filed November 14, 2000)

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)

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SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, in San Antonio, Texas on
November 14, 2000.

AMERICAN TELESOURCE INTERNATIONAL, INC.

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

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities indicated on November 14, 2000.

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

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

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

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

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

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

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