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



                                   FORM 10-Q


(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
-
ACT OF 1934

For the quarterly period ended April 30, 2001

                                       or

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the transition period from      to

                        Commission File Number 0-23007

                           ATSI COMMUNICATIONS, INC.
            (Exact name of registrant as specified in its charter)



             Delaware                                           74-2849995
   (State or other jurisdiction                               (IRS Employer
 of incorporation or organization)                         Identification No.)

                       6000 Northwest Parkway, Suite 110
                           San Antonio, Texas 78249
                                (210) 547-1000
   (Address, including zip code, of registrant's principal executive offices
                  and telephone number, including area code)

     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
                                              ---
     The number of shares outstanding of the registrant's common stock at
June 12, 2001 was 76,668,376

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


                           ATSI COMMUNICATIONS, INC.
                               AND SUBSIDIARIES

                         QUARTERLY REPORT ON FORM 10-Q
                     FOR THE QUARTER ENDED APRIL 30, 2001

                                     INDEX



Part I.  FINANCIAL INFORMATION

                                                                                                                        Page
                                                                                                                        ----
                                                                                                                     
Item 1.  Interim Consolidated Financial Statements (Unaudited)
         Consolidated Balance Sheets as of July 31, 2000 and April 30, 2001...........................................     3
         Consolidated Statements of Operations for the Three and Nine Months Ended April 30, 2000 and 2001............     4
         Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended April 30, 2000 and 2001....     5
         Consolidated Statements of Cash Flows for the Nine Months Ended April 30, 2000 and 2001......................     6
         Notes to Consolidated Financial Statements...................................................................     7

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations .......................    11

Part II. OTHER INFORMATION

Item 2.  Change in Securities and Use of Proceeds.....................................................................    20

Item 6.  Exhibits and Reports on Form 8-K.............................................................................    21


                                       2


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




                                                                                                   July 31,            April 30,
                                                                                                     2000                2001
                                                                                                 ------------        -------------
                                                                                                                      (unaudited)
                                                                                                               
ASSETS
------
CURRENT ASSETS:
 Cash and cash equivalents                                                                           $  1,550             $    238
 Accounts receivable, net of allowance of $757 and $622, respectively                                   3,186                2,727
 Inventory                                                                                                 74                   73
 Prepaid expenses and other assets                                                                        631                  742
                                                                                                 ------------        -------------
   Total current assets                                                                                 5,441                3,780
                                                                                                 ------------        -------------

PROPERTY AND EQUIPMENT (At cost):                                                                      19,393               21,263
 Less - Accumulated depreciation and amortization                                                      (8,335)             (11,410)
                                                                                                 ------------        -------------
   Net property and equipment                                                                          11,058                9,853
                                                                                                 ------------        -------------

OTHER ASSETS, net
 Goodwill, net                                                                                          4,901                4,789
 Concession license, net                                                                                4,422                4,263
 Trademarks, net                                                                                          570                  435
 Other assets                                                                                             502                  425
                                                                                                 ------------        -------------
   Total assets                                                                                      $ 26,894             $ 23,545
                                                                                                 ============        =============

LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------
CURRENT LIABILITIES:
 Accounts payable                                                                                    $  3,931             $  5,693
 Accrued liabilities                                                                                    2,350                2,208
 Current portion of notes payable                                                                         544                  436
 Current portion of convertible long-term debt                                                            289                  565
 Current portion of obligations under capital leases                                                    3,411                3,647
 Deferred revenue                                                                                         167                  142
                                                                                                 ------------        --------------
   Total current liabilities                                                                           10,692               12,691
                                                                                                 ------------        -------------

LONG-TERM LIABILITIES:
 Obligations under capital leases, less current portion                                                 2,506                1,575
 Other long-term liabilities                                                                               56                  159
                                                                                                 ------------        -------------
   Total long-term liabilities                                                                          2,562                1,734
                                                                                                 ------------        -------------

MINORITY INTEREST                                                                                           -                  345
                                                                                                 ------------        -------------

COMMITMENTS AND CONTINGENCIES:

REDEEMABLE PREFERRED STOCK
 Series D Cumulative Preferred Stock, 3,000 shares authorized, 3,000 shares
  issued and outstanding at July 31, 2000 and 1,642 shares issued and outstanding at
  April 30, 2001, carrying value of $2,662,375 and $1,341,505 at July 31, 2000 and
  April 30, 2001, respectively                                                                          2,662                1,342
 Series E Cumulative Preferred Stock, 10,000 shares authorized, no shares issued
  and outstanding at July 31, 2000, 2,375 shares issued and outstanding at April 30,
  2001, carrying value of $1,469,354                                                                        -                1,469

STOCKHOLDERS' EQUITY:
 Preferred stock, $0.001 par value, 10,000,000 shares authorized,
  Series A Cumulative Convertible Preferred Stock, 50,000 shares authorized,
  24,255 shares issued and outstanding at July 31, 2000, 4,255 shares issued
  and outstanding at April 30, 2001                                                                         -                    -
  Series F Cumulative Convertible Preferred Stock, 10,000 shares authorized,
  no shares issued and outstanding at July 31, 2000, 9,210 shares issued and
  and outstanding at April 30, 2001                                                                         -                    -
 Common stock, $0.001 par value, 200,000,000 shares authorized,
  67,408,979 issued and outstanding at July 31, 2000,
  75,743,350 issued and outstanding at April 30, 2001                                                      67                   76
 Additional paid in capital                                                                            51,625               56,779
 Accumulated deficit                                                                                  (39,125)             (50,228)
 Warrants outstanding                                                                                     417                1,381
 Notes due from stockholders                                                                           (1,108)              (1,108)
 Deferred compensation                                                                                   (119)                 (56)
 Other comprehensive loss                                                                                (779)                (880)
                                                                                                 ------------        -------------
   Total stockholders' equity                                                                          10,978                5,964

     Total liabilities, redeemable preferred stock and stockholders' equity                          $ 26,894             $ 23,545
                                                                                                 ============        =============


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

                                       3


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



                                                 Three months ended April 30,                   Nine months ended April 30,
                                                 2000                   2001                    2000                   2001
                                         --------------------   --------------------    -------------------    --------------------
                                                                                                   
OPERATING REVENUES:
  Telco services
      Network services                               $  5,850               $  8,330              $  18,847               $  17,804
      Integrated Prepaid                                1,590                  1,512                  4,511                   4,406
      Postpaid                                            690                    177                  2,853                     682
  Internet e-commerce                                   1,394                  1,449                  3,465                   4,125
                                         --------------------   --------------------    -------------------    --------------------

     Total operating revenues                           9,524                 11,468                 29,676                  27,017
                                         --------------------   --------------------    -------------------    --------------------

OPERATING EXPENSES:
  Cost of services                                      6,723                  7,619                 20,353                  18,564
  Selling, general and administrative                   3,755                  4,498                 10,382                  13,776
  Bad debt expense                                        172                     39                    385                     169
  Depreciation and amortization                         1,129                  1,041                  3,464                   3,277
                                         --------------------   --------------------    -------------------    --------------------

     Total operating expenses                          11,779                 13,197                 34,584                  35,786
                                         --------------------   --------------------    -------------------    --------------------

Operating loss                                         (2,255)                (1,729)                (4,908)                 (8,769)

OTHER INCOME(EXPENSE):
  Interest income                                          21                     30                     28                      90
  Other income (expense), net                               6                     (2)                     7                     689
  Interest expense                                       (384)                  (250)                (1,498)                 (1,110)
                                         --------------------   --------------------    -------------------    --------------------

     Total other income (expense)                        (357)                  (222)                (1,463)                   (331)
                                         --------------------   --------------------    -------------------    --------------------

LOSS BEFORE INCOME TAX EXPENSE                         (2,612)                (1,951)                (6,371)                 (9,100)

INCOME TAX EXPENSE                                          -                      -                      -                      65

MINORITY INTEREST                                           -                    122                      -                     251

NET LOSS                                              ($2,612)               ($1,829)               ($6,371)                ($8,914)

LESS: PREFERRED DIVIDENDS                              (4,683)                  (475)                (6,734)                 (1,596)
                                         --------------------   --------------------    -------------------    --------------------

NET LOSS TO COMMON STOCKHOLDERS                       ($7,295)               ($2,304)              ($13,105)               ($10,510)
                                         ====================   ====================    ===================    ====================


                                       4


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



                                                              For the three months ended     For the nine months ended
                                                             ----------------------------   ---------------------------
                                                                       April 30,                      April 30,
                                                             ----------------------------   ----------------------------
                                                                2000              2001         2000              2001
                                                             ---------         ----------   ----------        ----------

                                                                                                  
Net loss to common stockholders                               ($7,295)           ($2,304)    ($13,105)         ($10,510)

     Other comprehensive income (loss), net of tax:

     Foreign currency translation adjustments                     165                185           183             (101)
                                                             ---------         ----------   -----------       ----------

Comprehensive loss to common stockholders                     ($7,130)           ($2,119)     ($12,922)        ($10,611)
                                                             =========         ==========   ===========       ===========


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

                                       5


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



                                                                     Nine months ended April 30,
                                                                       2000             2001
                                                                 ---------------   ---------------
                                                                             
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                              ($6,371)          ($8,914)
  Adjustments to reconcile net loss to net cash used in
   operating activities-
     Depreciation and amortization                                        3,464             3,277
     Amortization of debt discount                                          353               129
     Deferred compensation                                                  317               724
     Minority interest                                                        -              (251)
     Provision for losses on accounts receivable                            385               169
     Changes in operating assets and liabilities
       Increase (Decrease) in accounts receivable                          (758)              163
       Increase in other assets-current and long-term                      (263)             (313)
       (Decrease) Increase in accounts payable                             (818)            1,269
       Decrease in accrued liabilities                                      (29)             (160)
       Decrease in deferred revenue                                        (110)              (25)
                                                                 ---------------   ---------------
Net cash used in operating activities                                    (3,830)           (3,932)
                                                                 ---------------   ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                    (1,206)             (716)
                                                                 ---------------   ---------------
Net cash used in investing activities                                    (1,206)             (716)
                                                                 ---------------   ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of debt                                           237               432
   Net decrease in short-term borrowings                                   (306)                -
   (Decrease) Increase from advanced funding arrangements                   (40)              116
   Payments on debt                                                        (723)             (445)
   Capital lease payments                                                (1,021)             (945)
   Proceeds from issuance of preferred stock, net
    of issuance costs                                                     5,683             3,564
   Proceeds from issuance of common stock, net
    of issuance costs                                                     4,774               614
                                                                 ---------------   ---------------
Net cash provided by financing activities                                 8,604             3,336
                                                                 ---------------   ---------------

Net increase (decrease) in cash                                           3,568            (1,312)

Cash, beginning of period                                                   379             1,550
                                                                 ---------------   ---------------

Cash, end of period                                                      $3,947              $238
                                                                 ===============   ===============



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

                                       6


                            ATSI COMMUNICATIONS, INC.
                                AND SUBSIDIARIES
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


     1.   PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements, which include
the accounts of ATSI-Delaware, ATSI-Canada, ATSI-Com, ATSI-Texas, ATSI-Mexico,
ATSI de CentroAmerica, Computel, Telespan, Sinfra and GlobalSCAPE have been
prepared in accordance with Rule 10-01 of Regulation S-X, "Interim Financial
Statements," and accordingly do not include all information and footnotes
required under generally accepted accounting principles in the United States for
complete financial statements. In the opinion of management, these interim
financial statements contain all adjustments, without audit, necessary to
present fairly the consolidated financial position of ATSI Communications, Inc.
and its subsidiaries ("ATSI" or "the Company") as of July 31, 2000 and April 30,
2001, the results of their operations for the three and nine months ended April
30, 2000 and 2001 and their cash flows for the nine months ended April 30, 2000
and 2001. All significant intercompany balances and transactions have been
eliminated in consolidation. It is recommended that these interim consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto for the year ended July 31, 2000 in the Form
10-K filed with the SEC on November 14, 2000. Further information related to our
subsidiary GlobalSCAPE can be found in their Form 10-Q for the quarter ended
March 31, 2001 filed May 15, 2001. Certain prior period amounts have been
reclassified for comparative purposes. The results of operations for any interim
period are not necessarily indicative of the results to be expected for the full
year.

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


     2.   FUTURE OPERATIONS

     The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the period
from December 17, 1993 to April 30, 2001, the Company has incurred cumulative
net losses of approximately $50.2 million. Further, the Company has a working
capital deficit of approximately $8.9 million at April 30, 2001. Although the
Company has capital resources available to it, these resources are limited and
may not be available to support its ongoing operations until such time as the
Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels

                                       7


sufficient to support operations or recover its investments in property and
equipment, goodwill and other intangible assets. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The ability of
the Company to continue as a going concern is dependent upon the ongoing support
of its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services.

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

     3.   PREFERRED STOCK

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

     The Series F Preferred Stock and any accumulated, unpaid dividends may be
converted into Common Stock for up to one year (the "Anniversary Date") from the
Date of Closing at a 15% discount to the average closing price of ATSI's Common
Stock for five (5) days preceding the Date of Closing (the "Initial Conversion
Price"). On each Anniversary Date up to and including the second Anniversary
Date, the Conversion Price on any unconverted Preferred Stock plus any
accumulated, unpaid dividends will be reset to be equal to the average closing
price of the stock for the five (5) preceding trading days. The initial
beneficial conversion feature, which represents the difference between the
Initial Conversion Price and the market price on the Commitment Date, is
$247,991, which the Company recognized in March 2001 as preferred dividends. The
Series F Preferred Stock is callable and redeemable by us at 100% of its face
value, plus any accumulated, unpaid dividends at our option any time after our
Common Stock has traded at 200% or more of the conversion price in effect for at
least twenty (20) consecutive trading days, so long as we do not call the
Preferred Stock prior to the first anniversary date of the Date of Closing. The
terms of our Series F 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 all outstanding Preferred Stock. In addition, we
issued 852,778 warrants at a price of 133% of the original conversion price. The
warrants are exercisable for a period of three years from the Date of Closing.

     Also, in March 2001, the holder of 10,000 shares of Series A Preferred
Stock elected to convert all of its shares and accumulated dividends of
approximately $125,000 into shares of common stock resulting in the issuance of
1,458,955 shares of common stock.

                                       8


     4.   REDEEMABLE PREFERRED STOCKS

     In March 2001, the holder of the Company's Series E Preferred Stock
converted 625 of the 2,500 shares outstanding and accumulated dividends into
common stock resulting in the issuance of 1,159,793 shares of common stock. In
accordance with the terms of the Investment Option of the Series E Preferred
Stock, the holder purchased an additional 927,834 shares of common stock for
$512,164. Additionally, the holder of the Company's Series E Preferred Stock
purchased an additional 500 shares of our Series E Preferred Stock for cash
proceeds of $500,000. Total cash proceeds to the Company, of the investment by
the holder of the Series E Preferred Stock, was approximately $1,012,000.


     5.   SEGMENT REPORTING

     In an attempt to identify its 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 or factors, we have determined that we have three
reportable operating segments: (1) U.S. Telco; (2) Mexico Telco; and (3)
Internet e-commerce. Clearly, our Internet e-commerce subsidiary, GlobalSCAPE,
Inc. and its operations can be differentiated from the telecommunication focus
of the rest of the Company. Additionally, we believe that our U.S. and Mexican
subsidiaries should be separate segments in spite of the fact that many of the
products are borderless. Both, the U.S. Telco and Mexico 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. 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.



                                            For the three months ended      For the nine months ended
                                             April 30,       April 30,       April 30,      April 30,
                                               2000            2001            2000           2001
U.S. Telco
-------------------------------------------------------------------------------------------------------
                                                                               
External revenues                          $  6,278,920    $  8,246,234    $ 20,921,925    $ 17,737,946
Intercompany revenues                      $    627,413    $    344,533    $  1,998,241    $  1,215,183
                                           ------------    ------------    ------------    ------------
                Total revenues             $  6,906,333    $  8,590,767    $ 22,920,166    $ 18,953,129
                                           ============    ============    ============    ============

EBITDA                                      ($1,605,658)      ($133,714)    ($2,521,324)    ($3,807,677)

Operating loss                              ($2,194,830)      ($631,095)    ($4,057,938)    ($5,504,418)

Net loss                                    ($2,262,871)      ($712,676)    ($4,297,509)    ($1,482,782)

Total assets                               $ 12,954,653    $ 19,873,827    $ 12,954,653    $ 19,873,827

Mexico Telco
-------------------------------------------------------------------------------------------------------
External revenues                          $  1,851,603    $  1,773,424    $  5,289,170    $  5,154,830
Intercompany revenues                      $    583,121    $    441,865    $  1,870,705    $  1,417,660
                                           ------------    ------------    ------------    ------------
                Total revenues             $  2,434,724    $  2,215,289    $  7,159,875    $  6,572,490
                                           ============    ============    ============    ============

EBITDA                                         ($76,916)      ($245,954)      ($515,546)    ($1,306,958)


                                       9



                                                                                                   
Operating loss                                                   ($522,410)      ($654,065)    ($2,195,168)    ($2,505,993)

Net loss                                                         ($693,790)      ($803,680)    ($2,785,327)    ($3,054,152)

Total assets                                                  $  9,788,515    $  8,421,175   $   9,788,515   $   8,421,175

Internet  e-commerce
---------------------------------------------------------------------------------------------------------------------------
External revenues                                             $  1,394,002    $  1,448,773   $   3,465,140   $   4,124,653
Intercompany revenues                                                   --              --              --              --
                                                               ------------    ------------    -----------    ------------
                     Total revenues                           $  1,394,002    $  1,448,773   $   3,465,140   $   4,124,653
                                                               ============    ============    ============    ============

EBITDA                                                        $    556,780       ($307,722)  $   1,597,799       ($376,733)

Operating income (loss)                                       $    462,281       ($442,989)  $   1,358,445       ($757,791)

Net income (loss)                                             $    444,358       ($451,697)  $   1,320,670       ($856,247)

Total assets                                                  $  2,467,180    $  1,680,654   $   2,467,180   $   1,680,654

Other
---------------------------------------------------------------------------------------------------------------------------
External revenues                                                       --              --              --              --
Intercompany revenues                                          ($1,210,534)      ($786,398)    ($3,868,946)    ($2,632,843)
                                                              ------------    ------------    ------------    ------------
                     Total revenues                            ($1,210,534)      ($786,398)    ($3,868,946)    ($2,632,843)
                                                              ============    ============    ============    ============

EBITDA                                                                  --              --         ($5,000)             --

Operating loss                                                          --              --        ($13,385)             --

Net loss                                                       ($4,782,700)      ($336,158)    ($7,342,314)    ($5,116,337)

Total assets                                                  $  1,385,395     ($6,430,483)  $   1,385,395     ($6,430,483)

Total
---------------------------------------------------------------------------------------------------------------------------
External revenues                                             $  9,524,525    $ 11,468,431   $  29,676,235   $  27,017,429
Intercompany revenues                                                   --              --              --              --
                                                              ------------    ------------     -----------    ------------
                     Total revenues                           $  9,524,525    $  9,517,279   $  29,676,235   $  27,017,429
                                                              ============    ============     ===========    ============

EBITDA                                                         ($1,125,794)      ($687,390)    ($1,444,071)    ($5,491,368)

Depreciation, Depletion and Amortization                       ($1,129,165)    ($1,040,759)    ($3,463,975)    ($3,276,834)

Operating loss                                                 ($2,254,959)    ($1,728,149)    ($4,908,046)    ($8,768,202)

Net loss                                                       ($7,295,003)    ($2,304,211)   ($13,104,480)   ($10,509,518)

Total assets                                                  $ 26,595,743    $ 23,545,173   $  26,595,743   $  23,545,173



     6. SUBSEQUENT EVENTS

     In May 2001, the holder of the Company's Series E Preferred Stock converted
185 of the 2,375 shares outstanding and accumulated interest into common stock
resulting in the issuance of 430,571 shares of common stock. In accordance with
the terms of the Investment Option of the Series E Preferred Stock, the holder
purchased an additional 344,457 shares of common stock for approximately
$152,939.

                                       10


     In June 2001, the holder of the Company's Series E Preferred Stock
purchased an additional 1,500 shares of our Series E Preferred Stock for cash
proceeds of $1,500,000.

     Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

     This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, the inability to obtain capital, changes in the
Mexican political or economic environment; the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically; increased or
redirected competition efforts, targeting the Company's services or operation,
by competitors; general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
said direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices, one-
time events and other factors described herein ("cautionary statements").
Reference is made to the risks and uncertainties contained in the Company's
annual report on Form 10-K. Although the Company believes that the expectations
are reasonable, it can give no assurance that such expectations will prove to be
correct. Based upon changing conditions, should any one or more of these risks
or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the applicable
cautionary statements.

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

                                       11


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 communication centers, 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.

     Utilizing the same framework described above, we also serve as a
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, and Costa Rica.

     We also own approximately 73% 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 of products remained relatively
constant between the quarters ended April 30, 2000 and 2001 at approximately 3.2
million. Registrations, the revenue driver, increased from approximately 38,000
to 46,000 between the respective quarters.

     As discussed in Note 5 - Segment Reporting, 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, even though many of our products are
borderless and utilize the operations of entities in both the U.S. and Mexico.
Both the U.S. Telco and Mexico Telco segments include revenues generated from
Network Services, Postpaid and Integrated Prepaid Services. 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 April 30, 2001. Additionally, we have had
recurring negative cash flows from operations with the exception of the three-
month periods ended January 31, 1998 and October 31, 1999. For the reasons
stated in Liquidity and Capital Resources and subject to the risks referred to
in Liquidity and Capital Resources, we expect our results of operations and
liquidity to continue to improve in the last quarter of fiscal 2001. We cannot,
however, guarantee that this will be the case.

Results of Operations

     The following table sets forth certain items included in our results of
operations in dollar amounts and as a percentage of total revenues for the three
and nine-month periods ended April 30, 2000 and 2001.

                                       12




                                            Three months ended April 30,                     Nine months ended April 30,
                                            -----------------------------                    ---------------------------
                                            2000                    2001                      2000                    2001
                                            ----                    ----                      ----                    ----
                                                                             (unaudited)
                                        $            %           $           %             $           %           $           %
                                     ----------   --------   ----------   --------    ------------  --------  ------------  --------
                                                                                                    
Operating revenues:
  Telco services
     Network services                  $5,850         61%      $8,330        72%         $18,847       63%        $17,804       66%
     Integrated Prepaid                 1,590         17%       1,512        13%           4,511       15%          4,406       16%
     Postpaid                             690          7%         177         2%           2,853       10%            682        3%
  Internet e-commerce                   1,394         15%       1,449        13%           3,465       12%          4,125       15%
                                     --------     ------     --------     -----       ----------    -----     -----------   ------

Total operating revenues                9,524        100%      11,468       100%          29,676      100%         27,017      100%

Cost of services                        6,723         71%       7,619        66%          20,353       69%         18,564       69%
                                     --------     ------     --------     -----       ----------    -----     -----------   ------

Gross margin                            2,801         29%       3,849        34%           9,323       31%          8,453       31%

Selling, general and administrative
expense                                 3,755         39%       4,498        39%          10,382       35%         13,776       51%

Bad debt expense                          172          2%          39         1%             385        1%            169        0%

Depreciation and amortization           1,129         12%       1,041         9%           3,464       12%          3,277       12%
                                     --------     ------     --------     -----       ----------    -----     -----------   ------

Operating loss                         (2,255)       (24%)     (1,729)      (15%)         (4,908)     (17%)        (8,769)     (32%)

Other, net                               (357)        (4%)       (222)       (2%)         (1,463)      (4%)          (331)      (2%)
                                     --------     ------     --------     -----       ----------    ------    -----------   ------

Loss before taxes and minority
interest                               (2,612)       (28%)     (1,951)      (17%)         (6,371)     (21%)        (9,100)     (34%)

Income tax expense                          -          -            -         -                -        -             (65)       0%

Minority interest                           -          -          122         1%               -        -             251        1%
                                     --------     ------     --------     -----       ----------    ------    -----------   ------

Net loss                               (2,612)       (28%)     (1,829)      (16%)         (6,371)     (21%)        (8,914)     (33%)

Less: preferred dividends              (4,683)       (49%)       (475)       (4%)         (6,734)     (23%)        (1,596)      (6%)
                                     --------     ------     --------     -----       ----------    ------    -----------   ------

Net loss to common stockholders       ($7,295)       (77%)    ($2,304)      (20%)       ($13,105)     (44%)      ($10,510)     (39%)
                                     ========     ======     ========     =====       ==========    ======    ===========   ======


Three Months Ended April 30, 2001 Compared to Three Months Ended April 30, 2000

         Operating revenues. Operating revenues increased approximately $1.9
million, or 20%, primarily due to an approximate $2.5 million increase in our
network services revenue. This increase in network services revenue was offset
somewhat by a decline in postpaid revenue of approximately $513,000 or 74%.

         Network services, which includes sales to corporate and/or carrier
customers who utilize portions of the Company's international network to move
communications traffic, increased by approximately $2.5 million, or 42% between
quarters. Although the average price per unit of approximately $0.10 was
comparable between quarters, the communications traffic significantly increased
by approximately 24.9 million units, or 49%. Management's efforts to increase
terminating capacity within the Mexico communications traffic corridor had a
positive impact on the ability to provide our customers more

                                       13


service; thus, increasing overall communications traffic.

         Postpaid service revenues decreased as noted above primarily due to
lower volumes of operator-assisted calls originating in Mexico and terminating
in the U.S. Management continues to de-emphasize its postpaid services business
as it focuses its efforts on the other services of the Company.

         The net changes for the Company's other services, integrated prepaid
and e-commerce, did not have a significant impact on overall operating revenues
between the quarters ended April 30, 2000 and 2001.

Cost of Services. Cost of services increased approximately $896,000, or 13%
between quarters but decreased as a percentage of revenues from 71% to 66%. The
increase in cost of services was principally attributable to increased variable
costs related to our carrier services product. As noted previously, our
communications traffic increased by approximately 49% from the previous year's
quarter. The decrease as a percentage of revenues can be tied to a number of
factors. The two biggest factors were the installation of Nortel Passport
equipment, which allowed us to increase the capacity of our packet-switching
network backbone, and the addition of alternate carriers of our traffic in
Mexico, which allowed us to lower our cost per unit for international traffic.
Each alternate carrier offers additional capacity to the Company, as well as
lower variable costs of transporting traffic into areas into which they have
their own proprietary network. Management further reduced costs by negotiating
reductions in certain of its fixed costs. Between the quarters, the mix in
communications traffic carried was fairly comparable but the decline of
approximately 6% in the average rate per unit plus reduced fixed costs
contributed to an improved gross margin. Our telco gross margin improved from
approximately 18% to 25% quarter to quarter.

         Selling, General and Administrative (SG&A) Expense. SG&A expenses
increased approximately 19%, or $743,000 between quarters. As a percentage of
revenues, these expenses remained unchanged. Of the $743,000 increase,
approximately $418,000 relates to the recording of stock option compensation
expense, a non-cash item, related to our e-commerce subsidiary GlobalSCAPE.
Excluding the non-cash expense, our e-commerce subsidiary's SG&A increased
approximately $531,000, or 70% between quarters. The increase is a result of
increased salaries and wages related to personnel growth, increased research and
development (R&D) costs associated with the enhancement of their products and
professional fees related to public filings and other matters. Combined telco
operations, including corporate expenses, decreased approximately $206,000 or 7%
between quarters. The decrease was primarily within our U.S. operations, which
decreased approximately 51%, between quarters, due to our expense cutting
efforts. As a percentage of telco revenues, telco SG&A expenses were
approximately 27%, our lowest level in approximately three years.

         Depreciation and Amortization. Depreciation and amortization decreased
slightly by approximately $88,000, or 8% between quarters and decreased as a
percentage of revenues from 12% to 9%. The decrease was primarily related to the
amortization of acquisition costs during the quarter ended April 30, 2000 of
approximately $176,000. No amortization of acquisition costs was recorded during
the quarter ended April 30, 2001 as the Company fully amortized acquisition
costs as of July 31, 2000. This decrease was somewhat offset by amortization
expense related to our concession of approximately $55,000 during the quarter
ended April 30, 2001.

         Operating Loss. Our operating loss improved between quarters by
approximately $526,000, or 23%. The improvement is attributable to the
generation by the Company of more gross margin dollars

                                       14


as well as the improvement in the gross margin percentage. This improvement,
however, was reduced by the overall increase in selling, general and
administrative expenses, approximately $418,000 of which relates to the non-cash
items previously discussed.

         Other Income (Expense). Other expense decreased by approximately
$135,000, or 38% between quarters. This decrease was principally attributable to
the recognition of $100,000 of expense during March 2000 resulting from the late
effectiveness of certain of the Company's registration statements during fiscal
2000. The remaining decrease is attributed to a decline in interest charges for
capital lease obligations.

         Minority Interest. As a result of the approximate 27% distribution of
GlobalSCAPE, the consolidated entity recognized minority interest of
approximately $122,000 resulting from GlobalSCAPE's net loss during the quarter
ended April 30, 2001.

         Preferred Dividends. During the third quarter of fiscal 2001, we
recorded approximately $111,000 of non-cash dividends for all preferred shares
outstanding during the quarter as well as beneficial conversion feature expense
of approximately $346,000 related to the issuance of preferred stock. The
beneficial conversion feature expense was expensed in full during the quarter.

         Net loss to Common Stockholders. The net loss between quarters improved
by approximately $5.0 million, or 68%, due primarily to the improvement in gross
margin dollars and gross margin percentage and the significant decrease in
preferred stock dividends and beneficial conversion expense.

Nine Months Ended April 30, 2001 Compared to Nine Months Ended April 30, 2000

         Operating revenues. Operating revenues decreased approximately $2.7
million, or 9%, due to the decline in combined telco revenues, primarily network
services and postpaid services. The increase in e-commerce revenues somewhat
offset the decline in telco revenues for the nine months ended April 30, 2001.

         Network services decreased approximately $1.0 million, or 5% between
periods. Although the average price per unit was stable between quarters, the
first six months of fiscal 2001 were affected by significant pricing pressures
within the market, which resulted in a decline in the average price per unit of
approximately $0.05, between periods. Even though the average price per unit
decreased approximately $0.03 between the nine-month periods ended April 30,
2000 and 2001, the Company's international communications traffic increased
approximately 34.0 million units, or 25%. This increase in units somewhat offset
the declining average price per unit caused by competitive market pressures. In
an effort to maintain a competitive advantage within the market, management is
focusing its efforts on increasing the terminating capacity within Mexico and
enhancing routing diversity. Management believes its efforts will allow the
Company to offer a competitively priced service to our existing and potential
customers as well as manage our costs. In addition, the Company will continue
its efforts to build-out our network within Mexico, which will ultimately allow
the Company to more effectively utilize our concession license.

         Postpaid service revenues significantly decreased by approximately $2.2
million, or 76% between periods. 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

                                       15


services of third-party owned operator centers. Management continues to
de-emphasize its postpaid services business as it focuses its efforts on the
other services of the Company.

         Our Internet e-commerce services increased approximately $660,000, or
19% between periods. While registrations and download primarily contribute to
the increase in revenues, our e-commerce subsidiary experienced increases in the
price per unit of approximately 31% between periods. The price per unit increase
coupled with increases of approximately 3% and 24% in registrations and
downloads, respectively, contributed to the growth in product revenue between
the periods.

         Cost of Services. Cost of services decreased approximately $1.8
million, or 9%, between periods but remained unchanged as a percentage of
revenues at 69%. During the first six months of fiscal 2001, the variable cost
associated with our carrier services product was a much higher percentage of
revenues. In response to this trend, management focused its efforts on improving
carrier margins. Two key responses were the installation of Nortel Passport
equipment, which allowed us to increase the capacity of our packet-switching
network backbone, and the addition of alternate carriers of our traffic in
Mexico, which allowed us to lower our cost per unit for international traffic.
Each alternate carrier offers additional capacity to the Company, as well as
lower variable costs of transporting traffic into areas into which they have
their own proprietary network. As a result of the reductions in cost and the
improvements realized from the installation of the Nortel Passport equipment,
the Company recognized a gross margin of approximately 17% for the quarter ended
April 30, 2001 as compared to 8% for the quarter ended April 30, 2000.
Management believes that its focus on reducing the costs associated with
utilizing our network will allow it to continue to maintain or improve these
margins.

         Selling, General and Administrative (SG&A) Expense. SG&A expenses
increased 33%, or approximately $3.4 million, between periods. As a percentage
of revenues, these expenses increased from 35% to 51% period to period. Our
e-commerce subsidiary's SG&A increased $2.6 million, or 153% between periods.
The majority of the subsidiary's increase relates to increased salaries and
wages, professional fees related to SEC filings and financial audits, R&D costs
related to existing product enhancements and the development of new products,
and approximately $636,000 of non-cash compensation expense associated with the
granting of stock options. SG&A costs associated with our telco operations
increased approximately $811,000, or 9% between periods, due primarily to
expenses of approximately $1.0 million, related to severance packages,
professional fees related to SEC filings, strategic research services and the
terminated Genesis transaction. Combining and comparing the 2nd and 3rd quarters
of fiscal 2000 and fiscal 2001, telco operation's SG&A decreased approximately
$103,000 between the two periods compared. This decrease is attributable to
management implementing and executing expense cutting measures as well as
maintaining its focus on necessary SG&A spending.

         Depreciation and Amortization. Depreciation and amortization decreased
approximately $187,000, or 5%, between periods but remained unchanged as a
percentage of revenues at 12%. The principal reason for the decrease is related
to the Company fully amortizing acquisition cost during fiscal 2000. This
decrease was offset somewhat by depreciation expense associated with capital
expenditures and amortization related to the purchase of our concession license
during the period.

         Operating Loss. Our operating loss increased approximately $3.9
million, or 79% between periods and increased as a percentage of revenues from
17% to 32%, due to less margin dollars generated, and significant increases in
selling, general and administrative expenses, which includes an increase in
non-cash items of approximately $408,000 between periods.

                                       16


         Other Income (Expense). Other expense improved approximately $1.1
million, or 77% between periods. This improvement primarily relates to
approximately $495,000 of debt discount expense recognized in the period ended
January 2000 associated with our convertible notes, and a note payable that was
fully converted in fiscal 2000. In addition, we recognized a gain of $500,000 as
a result of a settlement regarding a litigation case with one of our carrier
customers. The remaining decrease is attributed to a decline in interest charges
for capital lease obligations.

         Preferred Dividends. During the nine months ending April 30, 2001, we
recorded approximately $478,000 of non-cash dividends along with approximately
$1.1 million of beneficial conversion feature expense related to our cumulative
convertible preferred stock. This compares to approximately $325,000 of non-cash
dividends and approximately $6.4 million of beneficial conversion feature
expense recognized during the nine months ended April 30, 2000.

         Minority Interest. As a result of the approximate 27% distribution of
GlobalSCAPE, the consolidated entity recognized minority interest of
approximately $251,000 for the nine-months ending April 30, 2001.

         Net loss to Common Stockholders. The net loss for the nine months ended
April 30, 2001 improved by approximately $2.6 million to $10.5 million from the
$13.1 million net loss for the nine months ended April 30, 2000. The improvement
was due primarily to a significant decrease in preferred dividends recognized
during the period ending April 30, 2001. This decrease in preferred dividends
was somewhat offset by the increase in selling, general and administrative
expenses.

Liquidity and Capital Resources

         During the three and nine months ended April 30, 2001, we generated
negative cash flows from operations of approximately $1.8 and $3.9 million,
respectively. The amount of cash used in our operations is a result of the net
loss incurred during the period, the timing of cash receipts from our customers,
as well as activities related to payments to our vendors. We have historically
operated with negative cash flows and have sought to fund those losses and
deficits through the issuance of debt and the completion of private equity
placements.

         For the three-months ended April 30, 2001, our net loss, after
adjustments for non-cash items (depreciation and amortization, amortization of
debt discount, deferred compensation, provision for losses on accounts
receivable and minority interest) was approximately $424,000. Management of the
operating assets and liabilities, which consist mainly of collections on
accounts receivable and payments made on outstanding payables and accrued
liabilities, produced negative cash flows of approximately $1.37 million,
resulting in negative operating cash flows for the period of $1.8 million. While
we fell short of producing positive cash flows during the quarter, our net loss,
after adjustments for non-cash items, represented a significant improvement over
the quarters ended April 30, 2000, October 31, 2001 and January 31, 2001, when
our net loss, after adjustments for non-cash items, were $1.3 million, $3.2
million, and $1.2 million, respectively.

         For the nine-months ended April 30, 2001, our net loss, after
adjustments for non-cash items (depreciation and amortization, amortization of
debt discount, deferred compensation, provision for losses on accounts
receivable and minority interest) was approximately $4.9 million. Management of
the operating assets and liabilities, which consists mainly of collections on
accounts receivable and

                                       17


payments made on outstanding payables and accrued liabilities, produced positive
cash flows of approximately $930,000, resulting in the negative operating cash
flows for the period of $3.9 million.

         During the nine-months ended April 30, 2001, the Company acquired
approximately $716,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included payments of
approximately $945,000 towards our capital lease obligations and $445,000
towards notes payable. As of April 30, 2001, the Company has approximately
$863,000 of equipment related to its infrastructure build-out included in
accounts payable. The Company expects that it will be able to finance this
equipment through long-term capital lease arrangements resulting in a
corresponding improvement in its working capital deficit.

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

         During the nine months ended April 30, 2001, we received cash proceeds,
net of issuance costs, of $3.6 million from the issuance of preferred stock, and
$614,000 from the issuance of common stock as a result of warrants, stock
options, and investment options exercises. These funds were used to pay down
payable balances as mentioned above, to make payments on our debt and capital
lease obligations, and to purchase additional equipment used in our network
operations. The net result of the Company's operating, investing and financing
activities during the quarter was a working capital deficit at April 30, 2001 of
approximately $8.9 million and cash on hand of approximately $237,000. This
represents an improvement of approximately $1.0 million from $9.9 million at
January 31, 2001 but a decline of approximately $1.6 million and $3.6 million
from $7.6 million at October 31, 2000 and $5.3 million at July 31, 2000,
respectively.

         Included in the Company's current obligations are notes payable and
convertible debt of approximately $436,000 and $565,000, respectively. The terms
of the convertible debt that originally matured on November 30, 2000 gave the
Company the option to extend the maturity date two additional thirty-day
periods. The Company elected its option and extended the maturity date to
January 31, 2001. Subsequent to January 31, 2001, the Company negotiated with
the holder of the convertible debt to extend the maturity until July 31, 2001
under the same terms as before. The Company's current obligations also include
the total obligation under its debt facility with NTFC Capital Corporation due
to the Company's non-compliance with various covenants of the debt facility as
of April 30, 2001. Although the Company does not anticipate NTFC Capital
Corporation calling the amounts due under the debt facility, the Company has
classified the debt as current in accordance with accounting principles
generally accepted in the U.S. Based upon our results before and after the
period ended April 30, 2001, we will most likely be in default of these same
covenants at the end of our fiscal year ending July 31, 2001. 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 the Company's 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

                                       18


covenants after it has completed its review of this information, but can provide
no assurance this will occur.

         As planned, we continued to shift our focus 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 an effort to
produce better cash flow results. The result was an increase in the volume of
carrier services traffic transported over our network as compared to the prior
year's quarter and positive EBITDA for both March and April, four months ahead
of plan. Although the Company has emphasized a desire to transport a higher
percentage of retail vs. wholesale traffic in order to produce better margins
and cash flows, in the near term we will achieve better performance by leasing
additional capacity from third parties. The increased capacity will help us to
achieve greater routing diversity and allow us to more fully implement least
cost routing. Our ability to lease additional capacity will be dependent on
continuing to generate positive EBITDA and may require some equity funding as
well. Although the Company has historically been subject to pricing pressures
and declining per-unit revenues related to our carrier services business,
through the management of the mix of traffic processed the Company was able to
improve its carrier margin from 8% during the quarter ended January 31, 2001 to
17% during the quarter ended April 30, 2001. No assurance may be given that this
trend will continue, however. Better performance in the long term will come from
the build-out of our own network infrastructure.

         While there may be some equity funding requirements related to any such
network build-out, the Company expects to finance the majority of its build-out
needs through capital lease or debt facilities. In addition, the Company is
actively exploring ways to capitalize on its ownership in GlobalSCAPE, Inc. and
has engaged Roth Capital Partners, Inc. to assist it in doing so. The Company
would like to liquidate, or leverage off of, its ownership in GlobalSCAPE in
order to reduce, or eliminate, its current working capital deficit. Given the
current and anticipated market conditions, we believe that it is most likely a
private sale of all or part of our ownership of GlobalSCAPE that best helps us
achieve our objective.

Inflation/Foreign Currency

         Inflation has not had a significant impact on our operations. With the
exception of integrated prepaid revenues from our communication centers and
payphones, almost all of our revenues are generated and collected in U.S.
dollars. Integrated prepaid services from our communication centers and
payphones are provided 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. While the Mexican peso has
strengthened in recent months this has not had a material adverse effect on our
financial condition or operating results.

Market Risk

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

         Certain of our businesses, namely network services, operate in an
extremely price sensitive environment. The carrier service wholesale business
over the past twelve months has seen significant

                                       19


reductions in the price per unit charged for transporting 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 transport.

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

         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, direct dial or 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.

         We have also historically 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.

PART II OTHER INFORMATION

Item 2 Change in Securities and Use of Proceeds

         In March 2001, we issued 8,175 shares of our Series F preferred stock
for approximately $817,500 of cash proceeds and 1,035 shares for services
rendered, 535 shares of which specifically related to the Series F private
placement. As noted in Note 3 of our consolidated financial statements, our
Series F preferred stock converts to common stock at a discount to market
originally defined as the Initial Conversion Price. On each Anniversary Date up
to and including the second Anniversary Date, the Conversion Price on any
unconverted Preferred Stock plus any accumulated, unpaid dividends will be reset
to be equal to the average closing price of the stock for the five (5) preceding
trading days. The Series F preferred stock accrues dividends at 15% per annum.
We currently have not filed a Registration statement on Form S-3 to register
these shares. The cash proceeds were used for working capital needs.

         In March 2001, the holder of the Company's Series E Preferred Stock
converted 625 of the 2,500 shares outstanding and accumulated interest into
common stock resulting in the issuance of 1,159,793 shares of common stock. In
accordance with the terms of the Investment Option of the Series E Preferred
Stock, the holder purchased an additional 927,834 shares of common stock for
$512,164. Additionally, the holder of the Company's Series E Preferred Stock
purchased an additional 500 shares of its Series E Preferred Stock for cash
proceeds of $500,000. Total cash proceeds to the Company from

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the investment by the holder of the Series E Preferred Stock was approximately
$1,012,000, which were used for working capital needs.

         In May 2001, the holder of the Company's Series E Preferred Stock
converted 185 of the 2,375 shares outstanding and accumulated interest into
common stock resulting in the issuance of 430,571 shares of common stock. In
accordance with the terms of the Investment Option of the Series E Preferred
Stock, the holder purchased an additional 344,457 shares of common stock for
approximately $152,939. Proceeds from the investment option were used for
working capital purposes.

Item 6   Exhibits and Reports on Form 8-K

         (a)   Exhibits:

         The exhibits listed below are filed as part of this report.

Exhibit Number
11       Computation of Earnings per Share (Exhibit to this Form 10-Q filed
         June 14, 2001)

         (b)   Current Reports on Form 8-K.

               None.

                                   SIGNATURE


Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.


                           ATSI COMMUNICATIONS, INC.
                                 (Registrant)


Date: June 14, 2001                     By:    /s/ H. Douglas Saathoff
                                               -----------------------------
                                        Name:  H. Douglas Saathoff
                                        Title: Chief Financial Officer

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