================================================================================

                      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 January 31, 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

                    AMERICAN TELESOURCE INTERNATIONAL, 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) 558-6090
   (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 March
14, 2001 was 75,743,348

================================================================================


                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES

                         QUARTERLY REPORT ON FORM 10-Q
                    FOR THE QUARTER ENDED JANUARY 31, 2001

                                     INDEX


                                                                                              

Part I   FINANCIAL INFORMATION
                                                                                                 Page
                                                                                                 ----
Item 1.  Interim Consolidated Financial Statements (Unaudited)
         Consolidated Balance Sheets as of July 31, 2000 and January 31, 2001....................   3
         Consolidated Statements of Operations for the Three and Six Months Ended
           January 31, 2000 and 2001.............................................................   4
         Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended
           January 31, 2000 and 2001.............................................................   5
         Consolidated Statements of Cash Flows for the Six Months Ended January 31, 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.  Changes in Securities and Use of Proceeds...............................................  21

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



                                       2


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


                                                                     July 31,       January 31,
                                                                       2000            2001
                                                                  ------------     ------------
                                                                                    (unaudited)
                                                                             
ASSETS
------
CURRENT ASSETS:
 Cash and cash equivalents                                            $  1,550        $    757
 Accounts receivable, net of allowance of $ 757 and $ 769,               3,186           2,698
  respectively
 Inventory                                                                  74              90
 Prepaid expenses and other assets                                         631             781
                                                                  ------------    ------------
     Total current assets                                                5,441           4,326
                                                                  ------------    ------------

PROPERTY AND EQUIPMENT (At cost):                                       19,388          20,727
 Less - Accumulated depreciation and amortization                       (8,330)        (10,370)
                                                                  ------------    ------------
     Net property and equipment                                         11,058          10,357
                                                                  ------------    ------------

OTHER ASSETS, net
 Goodwill, net                                                           4,901           4,831
 Concession license, net                                                 4,422           4,318
 Trademarks, net                                                           570             480
 Other assets                                                              502             432
                                                                  ------------    ------------
     Total assets                                                     $ 26,894        $ 24,744
                                                                  ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
 Accounts payable                                                     $  3,931        $  6,736
 Accrued liabilities                                                     2,350           2,254
 Current portion of notes payable                                          544             456
 Current portion of convertible long-term debt                             289             565
 Current portion of obligations under capital leases                     3,411           3,639
 Deferred revenue                                                          167             577
                                                                  ------------    ------------
     Total current liabilities                                          10,692          14,227
                                                                  ------------    ------------
LONG-TERM LIABILITIES:
 Obligations under capital leases, less current portion                  2,506           1,923
 Other long-term liabilities                                                56              74
                                                                  ------------    ------------
     Total long-term liabilities                                         2,562           1,997
                                                                  ------------    ------------
MINORITY INTEREST                                                            -             467
                                                                  ------------    ------------

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 January 31,
  2001, carrying value of $2,662,375 and $1,316,880 at July 31,
  2000 and January 31, 2001, respectively                                2,662           1,317
 Series E Cumulative Preferred Stock, 10,000 shares authorized,
  no shares issued and outstanding at July 31, 2000, 2,500 shares
  issued and outstanding at January 31, 2001, carrying value of
  $1,573,309                                                                 -           1,573

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,
  14,255 shares issued and outstanding at January 31, 2001                   -               -
 Common stock, $0.001 par value, 100,000,000 shares authorized,
  67,408,979 issued and outstanding at July 31, 2000,
  72,166,769 issued and outstanding at January 31, 2001                     67              72
 Additional paid in capital                                             51,625          53,904
 Accumulated deficit                                                   (39,125)        (47,924)
 Warrants outstanding                                                      417           1,381
 Notes due from officers                                                (1,108)         (1,108)
 Deferred compensation                                                    (119)            (98)
 Other comprehensive loss                                                 (779)         (1,064)
                                                                  ------------    ------------
     Total stockholders' equity                                         10,978           5,163

     Total liabilities and stockholders' equity                       $ 26,894        $ 24,744
                                                                  ============    ============

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

                                       3


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




                                                        Three months ended January 31,            Six months ended January 31,
                                                           2000                2001                 2000                2001
                                                        ---------           ---------            ---------           ---------
                                                                                                    
OPERATING REVENUES:
  Telco services
     Network services                                   $   6,891           $   5,122            $  12,997           $   9,474
     Integrated prepaid                                     1,520               1,505                2,922               2,894
     Postpaid                                                 987                 169                2,162                 505
  Internet e-commerce                                       1,290               1,254                2,071               2,676
                                                        ---------           ---------            ---------           ---------

     Total operating revenues                              10,688               8,050               20,152              15,549
                                                        ---------           ---------            ---------           ---------

OPERATING EXPENSES:
  Cost of services                                          7,104               5,417               13,631              10,945
  Selling, general and administrative                       3,252               4,057                6,627               9,278
  Bad debt expense                                             93                  79                  212                 130
  Depreciation and amortization                             1,427               1,087                2,335               2,236
                                                        ---------           ---------            ---------           ---------

     Total operating expenses                              11,876              10,640               22,805              22,589
                                                        ---------           ---------            ---------           ---------

Operating loss                                            (1,188)              (2,590)             (2,653)              (7,040)

OTHER INCOME(EXPENSE):
  Interest income                                               2                  33                    7                  60
  Other income (expense)                                        -                 444                    1                 641
  Interest expense                                           (626)               (377)              (1,114)               (810)
                                                        ---------           ---------            ---------           ---------

     Total other income (expense)                            (624)                100               (1,106)               (109)
                                                        ---------           ---------            ---------           ---------

LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)                   (1,812)             (2,490)              (3,759)             (7,149)

INCOME TAX EXPENSE (BENEFIT)                                    -                  (1)                   -                  64

MINORITY INTEREST                                               -                  88                    -                 129
                                                        ---------           ---------            ---------           ---------

NET LOSS                                                  ($1,812)            ($2,401)             ($3,759)            ($7,084)

LESS: PREFERRED DIVIDENDS                                    (791)               (233)              (2,051)             (1,121)
                                                        ---------           ---------            ---------           ---------

NET LOSS TO COMMON STOCKHOLDERS                           ($2,603)            ($2,634)             ($5,810)            ($8,205)
                                                        =========           =========            =========           =========

BASIC AND DILUTED LOSS PER SHARE                           ($0.05)             ($0.04)              ($0.12)             ($0.12)
                                                        =========           =========            =========           =========

WEIGHTED AVERAGE COMMON
   SHARES OUTSTANDING                                      50,058              69,071               49,372              67,654
                                                        =========           =========            =========           =========



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


                                      4


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




                                                           For the three months ended               For the six months ended
                                                         ------------------------------          ------------------------------
                                                                   January 31,                             January 31,
                                                         ------------------------------          ------------------------------
                                                            2000                2001                2000                2001
                                                         ----------          ----------          ----------          ----------
                                                                                                         
Net loss to common stockholders                             ($2,603)            ($2,634)            ($5,810)            ($8,205)

   Other comprehensive income (loss), net of tax:

   Foreign currency translation adjustments                    (220)               (245)                 18                (285)
                                                         ----------          ----------          ----------          ----------

Comprehensive loss to common stockholders                   ($2,823)            ($2,879)            ($5,792)            ($8,490)
                                                         ==========          ==========          ==========          ==========






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

                                       5


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



                                                                                 Six months ended January 31,
                                                                                     2000            2001
                                                                                 --------------   -------------
                                                                                              
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                              ($3,759)       ($7,084)
  Adjustments to reconcile net loss to net cash provided by
   (used in) operating
    activities-
     Depreciation and amortization                                                        2,335          2,236
     Amortization of debt discount                                                          353            129
     Deferred compensation                                                                  283            277
     Minority interest                                                                        -           (127)
     Provision for losses on accounts receivable                                            213            130
     Changes in operating assets and liabilities
       (Increase) Decrease in accounts receivable                                          (863)           721
       Increase in other assets-current and long-term                                      (555)          (362)
       Increase in accounts payable                                                       1,293          2,310
       Increase (Decrease) in accrued                                                       232           (179)
        liabilities
       Decrease in deferred revenue                                                         (47)           (90)
                                                                                      ---------       --------
Net cash used in operating activities                                                      (515)        (2,039)
                                                                                      ---------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment                                                      (688)          (604)
                                                                                      ---------       --------
Net cash used in investing activities                                                      (688)          (604)
                                                                                      ---------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of debt                                                           106            428
   Net decrease in short-term borrowings                                                   (306)             -
   Net increase from advanced funding arrangements                                          161            106
   Payments on debt                                                                        (503)          (417)
   Capital lease payments                                                                  (678)          (602)
   Payments on long-term liabilities                                                        (34)             -
   Proceeds from issuance of preferred stock, net
    of issuance costs                                                                     1,821          2,249
   Proceeds from issuance of common stock, net
    of issuance costs                                                                       920             86
                                                                                      ---------       --------
Net cash provided by financing activities                                                 1,487          1,850
                                                                                      ---------       --------
Net increase  (decrease) in  cash                                                           284           (793)
Cash, beginning of period                                                                   379          1,550
                                                                                      ---------       --------
Cash, end of period                                                                   $     663       $    757
                                                                                      =========       ========


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

                                       6


                    AMERICAN TELESOURCE INTERNATIONAL, INC.
                               AND SUBSIDIARIES
              NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                   (In thousands, except per share amounts)


     1.   PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements, which include
the following subsidiaries: ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico,
ATSI-COM, Computel, ATSI de CentroAmerica, 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 accounting principles generally accepted in the U.S.
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 and its subsidiaries
("ATSI" or "the Company") as of January 31, 2001, the results of their
operations for the three and six months ended January 31, 2000 and 2001,
comprehensive loss for the three and six months ended January 31, 2000 and 2001,
and cash flows for the six months ended January 31, 2000 and 2001. All
adjustments are of a normal recurring nature. 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 audited consolidated financial statements and the notes
thereto for the year ended July 31, 2000 included in the Company's annual report
on Form 10-K filed with the SEC on November 14, 2000. 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 January 31, 2001, the Company has incurred cumulative
net losses of approximately $47.9 million. Further, the Company has a working
capital deficit of approximately $9.9 million at January 31, 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 sufficient
to support operations or recover its investments in property and equipment,
goodwill and other
                                       7


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.   DEFERRED REVENUE

     In November 2000, the Company settled an outstanding claim against one of
its carrier services customers. The terms of the settlement called for the
Company to receive $500,000 in cash, which has been recorded as other income in
the consolidated financial statements. In addition to the $500,000 in cash, the
settlement calls for an additional $500,000 to be applied to network services
provided by ATSI to its customer. We have recorded the $500,000 as deferred
revenue to be recorded as revenue as the customer's traffic is routed to ATSI's
network. As of January 31, 2001, approximately $439,000 remains in deferred
revenue.

     4.   PREFERRED STOCK

     In the quarter ended January 31, 2001, the holder of 10,000 shares of
Series A Preferred Stock elected to convert its last 3,333 shares and
accumulated dividends of approximately $27,000 into shares of common stock
resulting in the issuance of 195,027 shares of common stock.

     In addition, the holder of 3,000 shares of Series D Preferred Stock elected
to convert 1,358 shares and accumulated dividends of approximately $73,000 into
shares of common stock resulting in the issuance of 3,946,464 shares of common
stock. As of January 31, 2001, 1,642 shares of Series D Preferred Stock remain
outstanding.

     5.   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

                                       8


periods beginning after December 15, 1997. In an attempt to identify its
reportable operating segments, the Company considered a number of factors or
criteria. These criteria included segmenting based upon geographic boundaries
only, segmenting based on the products and services provided, segmenting based
on legal entity and segmenting by business focus. Based on these criteria or
factors the Company has determined that it has three reportable operating
segments: (1) U.S. Telco; (2) Mexico Telco; and (3) Internet e-commerce. The
Company's Internet e-commerce subsidiary, GlobalSCAPE, Inc. and its operations
can be differentiated from the telecommunication focus of the rest of the
Company. Additionally, the Company believes that its U.S. and Mexican
subsidiaries should be separate segments in spite of the fact that many of the
products are borderless. Both the U.S. Telco and Mexican Telco segments include
revenues generated from Integrated Prepaid, Postpaid, and Network Services. The
Company has included the operations of ATSI-Canada, ATSI-Delaware and all
businesses falling below the reporting threshold in the "Other" segment. The
"Other" segment also includes intercompany eliminations.


                                                     For the three months ended                   For the six months ended
                                                   January 31,        January 31,              January 31,        January 31,
U.S. Telco                                            2000               2001                     2000               2001
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                    
External revenues                                 $  7,622,248       $  5,040,444             $ 14,643,005       $  9,491,712
Intercompany revenues                             $    763,192       $    342,140             $  1,370,828       $    870,650
                                                  ------------       ------------             ------------       ------------
          Total revenues                          $  8,385,440       $  5,382,584             $ 16,013,833       $ 10,362,362
                                                  ============       ============             ============       ============

EBITDA                                               ($257,741)         ($944,277)               ($609,664)       ($3,668,193)

Operating loss                                       ($622,018)       ($1,440,697)             ($1,557,109)       ($4,752,887)

Net loss                                             ($729,015)       ($1,049,436)             ($1,728,639)       ($4,449,802)

Total assets                                      $ 11,413,817       $ 15,683,730             $ 11,413,817       $ 15,683,730

Mexico Telco
-----------------------------------------------------------------------------------------------------------------------------
External revenues                                 $  1,776,530       $  1,755,505             $  3,437,567       $  3,381,406
Intercompany revenues                             $    631,032       $    468,549             $  1,287,583       $    975,795
                                                  ------------       ------------             ------------       ------------
          Total revenues                          $  2,407,562       $  2,224,054             $  4,725,150       $  4,357,201
                                                  ============       ============             ============       ============

EBITDA                                               ($229,359)         ($517,173)               ($706,630)       ($1,061,004)

Operating loss                                     ($1,214,181)         ($924,405)             ($1,940,758)       ($1,851,928)

Net loss                                           ($1,400,242)       ($1,146,910)             ($2,359,538)       ($2,250,472)

Total assets                                      $ 10,449,024       $  8,766,249             $ 10,449,024       $  8,766,249

Internet  e-commerce
-----------------------------------------------------------------------------------------------------------------------------
External revenues                                 $  1,289,563       $  1,254,048             $  2,071,138       $  2,675,880
Intercompany revenues                                        -                  -                        -                  -
                                                  ------------       ------------             ------------       ------------
          Total revenues                          $  1,289,563       $  1,254,048             $  2,071,138       $  2,675,880
                                                  ============       ============             ============       ============

EBITDA                                            $    731,005           ($35,992)            $  1,003,019           ($69,012)

Operating income (loss)                           $    654,978          ($161,797)            $    858,164          ($314,802)

Net income (loss)                                 $    643,055          ($173,016)            $    838,311          ($404,550)

Total assets                                      $  1,816,530       $  1,709,694             $  1,816,530       $  1,709,694


                                       9



                                                                                                    
Other
-----------------------------------------------------------------------------------------------------------------------------
External revenues                                                  -                  -                  -                  -
Intercompany revenues                                    ($1,394,224)         ($810,689)       ($2,658,411)       ($1,846,445)
                                                        ------------       ------------       ------------       ------------
          Total revenues                                 ($1,394,224)         ($810,689)       ($2,658,411)       ($1,846,445)
                                                        ============       ============       ============       ============

EBITDA                                                       ($5,000)           ($5,769)           ($5,000)           ($5,769)

Operating loss                                               ($7,160)          ($62,841)          ($13,385)         ($120,435)

Net loss                                                 ($1,116,325)         ($264,707)       ($2,559,615)       ($1,100,006)

Total assets                                            $    267,285        ($1,415,501)      $    267,285        ($1,415,501)


Total
-----------------------------------------------------------------------------------------------------------------------------
External revenues                                       $ 10,688,341       $  8,049,997       $ 20,151,710       $ 15,548,998
Intercompany revenues                                              -                  -                  -                  -
                                                        ------------       ------------       ------------       ------------
          Total revenues                                $ 10,688,341       $  8,049,997       $ 20,151,710       $ 15,548,998
                                                        ============       ============       ============       ============

EBITDA                                                  $    238,905        ($1,503,211)         ($318,275)       ($4,803,978)

Depreciation, Depletion and Amortization                 ($1,427,286)       ($1,086,529)       ($2,334,813)       ($2,236,074)

Operating loss                                           ($1,188,381)       ($2,589,740)       ($2,653,088)       ($7,040,052)

Net loss to Common Stockholders                          ($2,602,527)       ($2,634,069)       ($5,809,481)       ($8,205,307)

Total assets                                            $ 23,946,656       $ 24,744,172       $ 23,946,656       $ 24,744,172




     6.   SUBSEQUENT EVENTS

     On December 1, 2000, the Company elected to use its option to extend the
maturity of the $565,000 convertible note to January 31, 2001. Subsequent to
January 31, 2001, we negotiated an extension with the holder of the convertible
note that allowed the Company to extend the maturity date until July 31, 2001.
The note accrues interest at the rate of twelve percent (12%) per annum until
paid in full July 31, 2001. The lender's options to elect conversion upon
maturity remain unchanged.

     On February 26, 2001, the Company and Genesis Communications International,
Inc. announced that both parties mutually agreed to terminate the previously
announced definitive agreement to combine both companies. Both parties cited the
fact that certain conditions required to close the transaction had not been met.
Also in response to significant changes that have occurred in the
telecommunications marketplace since the original agreement and subsequent
amendment were executed, both companies concluded that terminating the
definitive agreement would be in the mutual best interest of the stockholders of
each company. Although both companies mutually agreed to terminate the
definitive agreement, both companies agreed to continue their existing business
relationship.

     On February 27, 2001, the Company announced that all seven proposals
submitted for approval by its shareholders were approved at its Annual Meeting
of Stockholders held February 26, 2001. The seven proposals approved by the ATSI
stockholders are as follows:

     1.   The issuance of shares in the Genesis Merger. Although the
          shareholders approved the

                                       10


          issuance of shares for the acquisition of Genesis, both parties agreed
          to terminate the definitive agreement.
     2.   The issuance of shares upon conversion of preferred stock and exercise
          of warrants.
     3.   The amendment to the Certificate of Incorporation of the Company to
          increase the number of authorized shares of common stock from 100
          million to 200 million shares.
     4.   The amendment to the Certificate of Incorporation of the Company to
          change its name to ATSI Communications, Inc.
     5.   The election of Arthur L. Smith and John R. Fleming as Class C members
          of the Company's Board of Directors, with their terms expiring at the
          Annual Meeting of Stockholders held in 2004.
     6.   The 2001 Incentive Stock Option Plan.
     7.   The ratification of the selection of Arthur Andersen LLP as
          independent public accountants for the fiscal year ending July 31,
          2001.

     Additional information regarding the seven proposals can be found in the
Company's Proxy Statement as filed with the SEC on February 7, 2001.

     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 of the investment by
the holder of the Series E Preferred Stock was approximately $1,012,000.

     In March 2001, the Company received commitments of approximately $800,000
in preferred stock funding.

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

     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

                                       11


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
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

                                       12


development, marketing, distribution and customer relationship strategies.
Utilizing CuteFTP as its flagship product, GlobalSCAPE's downloads of products
increased from approximately 2.32 million for the quarter ended January 31, 2000
to approximately 3.91 million for the quarter ended January 31, 2001,
respectively.

     As discussed in Note 5 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 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 January 31, 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 improved results of operations and
liquidity in the last half of fiscal 2001.   However, we cannot 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 six-month periods ended January 31, 2000 and 2001.



                                          Three months ended January 31,                 Six months ended January 31,
                                          -----------------------------                  ---------------------------
                                            2000                  2001                    2000                 2001
                                            ----                  ----                    ----                 ----
                                                                          (unaudited)
                                        $        %             $        %             $        %            $        %
                                    --------  -------      --------  -------      --------  -------     --------  -------
                                                                                          
Operating revenues:
------------------
  Telco Services
    Network services                $  6,891      65%      $  5,122      64%      $ 12,997      65%     $  9,474      61%
    Integrated prepaid                 1,520      14%         1,505      19%         2,922      14%        2,894      19%
    Postpaid                             987       9%           169       2%         2,162      11%          505       3%
  Internet e-commerce                  1,290      12%         1,254      15%         2,071      10%        2,676      17%
                                    --------  -------      --------  -------      --------  -------     --------  -------

Total operating revenues              10,688     100%         8,050     100%        20,152     100%       15,549     100%
                                    --------  -------      --------  -------      --------  -------     --------  -------

Cost of services                       7,104      66%         5,417      67%        13,631      68%       10,945      70%
                                    --------  -------      --------  -------      --------  -------     --------  -------

Gross margin                           3,584      34%         2,633      33%         6,521      32%        4,604      30%

Selling, general and
 administrative expense                3,252      31%         4,057      50%         6,627      33%        9,278      60%

Bad debt expense                          93       1%            79       1%           212       1%          130       1%

Depreciation and amortization          1,427      13%         1,087      14%         2,335      11%        2,236      14%
                                    --------  -------      --------  -------      --------  -------     --------  -------


                                       13



                                                                                          

Operating loss                        (1,188)    (11%)       (2,590)    (32%)       (2,653)    (13%)      (7,040)    (45%)

Other, net                              (624)     (6%)          100       1%        (1,106)     (6%)        (109)     (1%)
                                    --------  -------      --------  -------      --------  -------     --------  -------

Net loss                              (1,812)    (17%)       (2,490)    (31%)       (3,759)    (19%)      (7,149)    (46%)

Income tax & minority interest, net        -       0%            89       1%             -       0%           65       0%

Less: preferred dividends               (791)     (7%)         (233)     (3%)       (2,051)    (10%)      (1,121)     (7%)
                                    --------  -------      --------  -------      --------  -------     --------  -------

Net loss to common stockholders      ($2,603)    (24%)      ($2,634)    (33%)      ($5,810)    (29%)     ($8,205)    (53%)
                                    ========  =======      ========  =======      ========  =======     ========  =======


Three Months Ended January 31, 2001 Compared to Three Months Ended January 31,
2000

     Operating revenues. Operating revenues decreased approximately $2.6
million, or 25%, primarily due to significant decreases in our network services
and postpaid services revenues.

     Network services, which represent sales to corporate and/or carrier
customers who utilize portions of the Company's international network to move
communications traffic, decreased approximately $1.8 million, or 26% between
quarters. This decline was principally due to a decline in the price per unit
the Company charged for carrying communication traffic from quarter to quarter.
The actual traffic processed increased approximately 12% from the quarter ended
January 31, 2000 to the quarter ended January 31, 2001. Network services is a
highly competitive and volatile industry with the key component being the price
per unit. The price per unit declined between quarters as the Company carried
significantly less non-equal access (NEA) traffic quarter to quarter. NEA
traffic results in a higher revenue per unit as well as significantly higher
costs per unit. During the quarter ended January 31, 2000, approximately 50% of
the traffic carried was NEA traffic as compared to approximately 2% of NEA
traffic carried during the quarter ended January 31, 2001.

     Postpaid service revenues decreased approximately $818,000, or 83% between
quarters.  The decline was principally attributable 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 core services of the Company.

     Our integrated prepaid and e-commerce services remained relatively flat
between the quarters ended January 2000 and 2001.

     Cost of Services. Cost of services decreased approximately $1.7 million, or
24%, between quarters and increased slightly as a percentage of revenues from
66% to 67%. The decrease in cost of services was principally attributable to the
decline in the variable cost of our network services product. As mentioned
previously, the mix of our carrier services product changed between quarters as
the Company went from carrying a high percentage of NEA traffic for the quarter
ended January 31, 2000 to a low percentage of NEA traffic for the quarter ended
January 31, 2001. The increase in cost of sales, as a percentage of revenues,
was due primarily to a decline in our network services gross margin between
quarters. The decline in our network services gross margin led to an increase in
the combined telco operations cost of services from 75% to 79% between the
quarters.

     Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
25%, or approximately $805,000, between quarters. As a percentage of revenues,
these expenses increased from 31% to 50% between quarters. Our e-commerce
subsidiary accounted for approximately 87% or

                                       14


$702,000 of the increase between quarters. This increase was a result of
increased salaries and wages related to personnel growth, increased research and
development (R&D) costs associated with the enhancing of its existing products
as well as costs related to the subsidiary's relocation to its new office space,
professional fees related to public filings and other matters, and travel to
promote and market GlobalSCAPE's products. SG&A costs associated with our telco
businesses slightly increased from approximately $2.8 million to $2.9 million
between quarters or approximately 4%. The increase in SG&A, as a percentage of
revenues, was principally attributable to the decline in revenues between
quarters.

     Depreciation and Amortization. Depreciation and amortization decreased
approximately $341,000, or 24%, between quarters and remained relatively flat as
a percentage of revenues. The decrease was primarily related to the Company
fully amortizing acquisition costs as of July 31, 2000. The Company historically
recognized approximately $66,000 per month related to this intangible asset.
Additionally, during the quarter ended January 31, 2000, the Company fully
depreciated approximately $165,000 of our fixed assets for which we believed
there were no associated future benefits.

     Operating Loss. Our operating loss increased approximately $1.4 million
between quarters and increased as a percentage of revenues from 11% to 32%, due
primarily to an increase in selling, general and administrative expenses.

     Other Income (Expense). Other income (expense) improved approximately
$724,000 between quarters from an expense of approximately $624,000 to income of
approximately $100,000. This improvement was principally attributable to a
$500,000 gain recognized from the settlement of a litigation case with one of
our carrier customers. In addition, during the quarter ended January 31, 2000,
debt discount expense was being recognized that was associated with our
convertible notes and a note payable. These notes were fully converted in fiscal
year 2000.

     Preferred Dividends. During the second quarter of fiscal 2001, we recorded
approximately $233,000 of non-cash dividends and beneficial conversion feature
expense related to cumulative convertible preferred stock as compared to
approximately $791,000 during the second quarter of fiscal 2000. As of December
31, 2000, the Company recognized the last amount of amortization expense related
to the beneficial conversion feature.

     Net loss. The net loss between quarters increased approximately $31,000 or
1% due primarily to decreased revenues and increased selling, general, and
administrative expenses. This increase was somewhat offset by the improvement in
other income, and the decrease in preferred stock expenses.

Six Months Ended January 31, 2001 Compared to Six Months Ended January 31, 2000

     Operating revenues. Operating revenues decreased approximately $4.6
million, or 23%, principally due to declines in our network services and
postpaid services. This decrease was offset to some extent by the increase in
our Internet e-commerce business.

     Network services decreased approximately $3.5 million, or 27% between
periods. This decline is related to several changes within the industry, which
has resulted in pricing pressures and much lower per-unit revenues for carrier-
to-carrier services. Management believes the entrance of new 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

                                       15


Monterrey; a steady increase in the calling options available within Mexico; and
a decrease in the cost of long distance phone calls due to more competition. As
a result, large increases in volumes have resulted in comparatively smaller
revenue increases, and lower margins on network services. While the volume of
traffic processed by the Company increased by approximately 10% between the
periods, revenues actually decreased.

     Postpaid service revenues decreased approximately $1.7 million, or 77%
between periods. As a result of the industry changes made within Mexico
mentioned above, 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. 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. Management
continues to de-emphasize its postpaid services business as it focuses its
efforts on the core services of the Company.

     Our Internet e-commerce services increased approximately $605,000, or 29%
between periods. While downloads grew from nearly 4.3 million during the six-
months ended January 2000 to approximately 6.6 million during the six-months
ended January 2001, actual registrations declined from approximately 87,000 for
the six months ended January 31, 2000 to approximately 82,000 for the six months
ended January 31, 2001. Although registrations declined period to period, the
revenue per registration increased as GlobalSCAPE sold fewer multi-seat licenses
during the six months ended January 31, 2001 as compared to the same period in
the prior year.

     Our integrated prepaid services remained relatively flat between the
periods ended January 2000 and 2001.

     Cost of Services. Cost of services decreased approximately $2.7 million, or
20% between periods, but increased as a percentage of revenues from 68% to 70%
between periods. The decrease in cost of services was principally attributable
to the decline in the variable cost of our network services product. The
increase in cost of sales, as a percentage of revenues, was due primarily to the
decline in our network services gross margin between the periods, which led to
an increase in the combined telco operations cost of services from 75% to 84%
between the periods.

     Selling, General and Administrative (SG&A) Expense. SG&A expenses increased
40%, or approximately $2.7 million, between periods. As a percentage of
revenues, these expenses increased from 33% to 60%, between periods. Our
e-commerce subsidiary accounted for approximately 60% or $1.6 million of the
increase between the periods. The majority of the subsidiary's increase relates
to increased salaries and wages, professional fees related to the Form 10 and
other SEC filings, R&D costs related to existing product enhancements and the
development of new products, and compensation expense associated with the
granting of stock options. SG&A costs associated with our telco businesses
accounted for the remaining 40% increase, or $1.1 million, between periods.
Approximately $914,000 of this increase was principally attributed to expenses
recognized during the first quarter ended October 31, 2000. During the quarter
ended October 31, 2000, the Company recorded and incurred expenses related to
severance packages and professional fees related to SEC filings, strategic
research services, and the recently terminated Genesis transaction.

     Depreciation and Amortization. Depreciation and amortization decreased
slightly from $2.3 million to $2.2 million or 4%, between periods. The principal
reason for the decrease is related to the

                                       16


Company fully amortizing acquisition cost during fiscal 2000. This decrease was
offset somewhat by purchases of equipment during the period.

     Operating Loss. Our operating loss increased approximately $4.4 million
between periods and increased as a percentage of revenues from 13% to 45%, due
to lower network service margins and increases in selling, general, and
administrative expenses.

     Other Income (Expense). Other income (expense) improved approximately $1.0
million or 90%, between periods. This improvement 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 were fully
converted in fiscal 2000, and a $500,000 gain recognized as a result of the
settlement of a litigation case with one of our carrier customers.

     Preferred Dividends. During the six months ending January 31, 2001, we
recorded approximately $1.1 million of non-cash dividends and beneficial
conversion feature expense related to cumulative convertible preferred stock.
This compares with approximately $2.1 million of non-cash dividends and
beneficial conversion feature expense during the six months ending January 31,
2000. As of December 31, 2000, the Company recognized its last month of
amortization for the beneficial conversion feature expense. The net proceeds
from preferred stock issuances were approximately $2.2 million for the six-month
period ended January 2001.

     Net loss. The net loss for the six months ended January 31, 2001 increased
approximately $2.4 or 41%, between periods. The increase was principally
attributed to lower carrier service margins and increases in selling, general
and administrative expenses. This increase was somewhat offset by the
improvement in other income and the decrease in preferred stock expenses.

Liquidity and Capital Resources

     Due to lower margin revenues and the overall revenue decline during the
three and six months ended January 31, 2001, the Company did not sufficiently
cover our selling, general and administrative costs which resulted in negative
cash flows from operations. 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 six-months ended January 31, 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 $4.4 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 positive cash flows of approximately $2.4 million, resulting in the
negative operating cash flows for the period of $2.0 million. Accordingly, our
accounts payable balance increased by approximately $2.3 million from July 31,
2000.

     During the six-months ended January 31, 2001, the Company acquired
approximately $604,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included the payment of
approximately $602,000 towards our capital lease obligations and an additional
$417,000 towards note payables. As of January 31, 2001, the Company has an
additional

                                       17


$760,000 of equipment related to its infrastructure build-out included in its
accounts payable balance. 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.

     For the quarter ended January 31, 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 $1.2 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 $163,000, resulting in the negative operating cash
flows for the period of $1.4 million. Accordingly, our combined accounts payable
balance increased by approximately $921,000 between October 31, 2000 and January
31, 2001.

     During the quarter ended January 31, 2001, the Company acquired
approximately $308,000 in equipment which was not financed through capital lease
or financing arrangements. Additional cash outflows included the payment of
approximately $390,000 towards our capital lease obligations and an additional
$59,000 towards note payables.

     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. Until then, our operating activities may result in net
cash being used, or provided, during quarterly periods, regardless of our income
statement results for the periods. 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.

     In an effort to improve our working capital position, management reduced
the Company's SG&A between the quarters ended October 2000 and January 2001 by
approximately $1.2 million by reducing departmental overhead spending and the
elimination of a number of personnel positions. Although management has made
strides to reduce the working capital deficit, our accounts payable increased
approximately $921,000 for the quarter. The net result of the Company's
operating, investing and financing activities during the quarter was a working
capital deficit at January 31, 2001 of approximately $9.9 million and cash on
hand of approximately $757,000. This represents a $2.3 million and a $4.6
million increase in our working capital deficit 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 $456,000 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 to use its option that 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 January 31, 2001. Although the Company does not anticipate NTFC Capital
Corporation calling the amounts due under the

                                       18


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 January 31, 2001, we will most likely be in
default of these same covenants at the end of our next fiscal quarter April 30,
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 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. 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, and had entered into a definitive agreement to purchase
Genesis Communications International, Inc. in an effort to do so, the Company
announced on February 26, 2001 that the agreement had been terminated. As such,
the Company will most likely be dependent upon growth in its network services
business in order to improve cash flow results in the near term. Although the
Company has historically been subject to pricing pressures and declining per-
unit revenues related to this business, through the management of the mix of
traffic processed the Company was able to increase its revenue per unit during
the quarter ended January 31, 2001 as compared to the quarter ended October 31,
2000. No assurance may be given that this trend will continue, however.

     Given its dependency on network services business, in order for the Company
to improve its financial performance going forward it must be able to expand its
network capacity to allow for the processing of more traffic and continuously
attempt to reduce both its variable and fixed costs of transporting this
traffic. In January 2001, the Company announced that it had increased capacity
on its fiber-based international network backbone; however, its ability to
transport additional international traffic for other carriers is also dependent
on additional capacity being provided by other carriers within Mexico outside of
its network backbone, as well as the Company's ability to extend its own network
backbone under its Mexican long distance concession to connect to the local
telecommunications network in Mexico. The Company's largest variable cost of
processing traffic has historically been with other carriers in Mexico,
primarily a single carrier within Mexico. In order to obtain additional capacity
within Mexico and to lower its variable cost of processing this traffic within
Mexico in the near term, the Company must obtain additional interconnection
agreements with other long distance carriers within Mexico. This would provide
additional capacity, as well as give the Company the ability to route its
traffic on a least-cost basis. Longer term, the Company must focus on extending
its own network infrastructure within Mexico in order to convert existing
variable per-unit costs to fixed costs where possible. Any such network build-
out is not expected to occur until the latter half of calendar 2001.

     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, 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.

                                       19


Inflation/Foreign Currency

     Inflation has not had a significant impact on the Company's operations.
With the exception of integrated prepaid revenues from the Company's
communication centers and payphones, almost all of the Company's revenues are
generated and collected in U.S. dollars. Integrated prepaid services from the
Company's communication centers and payphones are provided at the time of the
call in exchange for cash payment, so the Company does not maintain receivables
on its books that are denominated in pesos. In an effort to reduce foreign
currency risk, the Company attempts to convert pesos collected to U.S. dollars
quickly and attempts to maintain minimal cash balances denominated in pesos.
Some expenses related to certain services provided to the Company are incurred
in foreign currencies, primarily Mexican pesos. The devaluation of the Mexican
peso over the past several years has not had a material adverse effect on the
Company's financial condition or operating results.

Seasonality

     The Company's integrated prepaid revenues are typically higher on a per
phone and per communication center basis during January through July, the peak
tourism months in Mexico.

Market Risk

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

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

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

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

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

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

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

     As previously discussed under the caption "Inflation", we face risks
related to certain of our revenue streams, namely, integrated prepaid services
from our own Mexican communication centers and payphones and the transacting of
business in pesos as opposed to U.S. dollars. Historically, we have

                                       20


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 in
our assets and liabilities 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 Changes in Securities and Use of Proceeds

     Our Registration Statement on Form S-3 (File No. 333-50008), on which we
registered 19,568,940 shares of common stock, became effective on November 27,
2000. This common stock is issuable under the terms of our Series E Preferred
Stock and a warrant for the purchase of 3,636,364 shares of common stock to RGC
International Investors. Included in this Registration Statement are the terms
of two warrants for the purchase of 75,000 and 100,000 shares of common stock to
Jesup & Lamont Securities Corporation and Binkley LLC, issued in conjunction
with the signing of our private equity line of credit in April 2000.

     We did not receive any of the proceeds of the sale of common stock
registered on this Form S-3. We received $2.5 million of proceeds upon the
issuance of the Series E Preferred Stock in October 2000. We incurred expenses
in connection with the issuance of the series E preferred stock and registration
of the underlying common stock as follows (approximate amounts except for the
SEC registration fees):

               Legal fees:                  $ 5,000.00
               Registration fees:             6,309.30
               Printing & Miscellaneous:      5,500.00
               ---------------------------------------
               Total:                        16,809.30

     We used the remaining proceeds after payment of expenses 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 March 16, 2001)

     (b)  Current Reports on Form 8-K.

          None.

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                                   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.


                    AMERICAN TELESOURCE INTERNATIONAL INC.
                                 (Registrant)



Date:   March 16, 2001           By:      /s/ H. Douglas Saathoff
                                          -----------------------
                                 Name:    H. Douglas Saathoff
                                 Title:   Chief Financial Officer

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