Exhibit
        4.2

      
        
          

        

      

      Documents
        included:

      


      
        	1)  	
                Secured
                  Promissory Note between ATSI Communications, Inc. and CSI Business
                  Finance, Inc. 

              


      

      
        	2)  	
                Security
                  Agreement between ATSI Communications, Inc. and CSI Business Finance,
                  Inc.
                  

              


      

      
        
          

        



      SECURED
        PROMISSORY NOTE

       

    

    
      
        
          	
                  $50,000.00

                	
                  Houston,
                    Texas

                	
                  November
                    4, 2005

                


        



      The
        undersigned, ATSI
        COMMUNICATION, INC., a
        Nevada
        corporation, whose address is 8600 Wurzbach, Suite 700W, San Antonio, Texas
        78240 (“Maker”),
        for
        value received, promises to pay to the order of CSI
        BUSINESS FINANCE, INC.
        (“Payee”),
        in
        lawful money of the United States of America, the principal sum of FIFTY
        THOUSAND AND NO/100 DOLLARS ($50,000.00). All principal and any interest
        hereunder shall be payable at
        109
        North Post Oak Lane, Suite 422, Houston, Harris County,
        Texas 77024,
        or such
        other place that Payee may hereafter designate in writing.

      


      This
        promissory
        note (the “Note”)
        shall be
        due and payable upon the sooner to occur of demand or November 4, 2006. Accrued
        and unpaid interest on the principal amount outstanding hereunder shall be
        payable on the last day of each month. Interest
        shall accrue on the unpaid amounts hereunder at the lesser of eighteen percent
        (18%) per annum or the maximum rate allowed by law. All interest that shall
        accrue in accordance herewith on the indebtedness evidenced by this Note
        shall
        be computed on the basis of a year of 365 or 366 days, as the case may
        be.

       

      Each
        of
        the following events shall be herein referred to as an "Event
        of Default":
        (i)
        the failure of Maker to make payment of any of the principal or interest
        hereunder when due; (ii) any default by Maker of any of its obligations under
        the Security Agreement (hereinafter defined), or any other instrument or
        agreement that secures the repayment of this Note; (iii) the filing of a
        petition in bankruptcy by or relating to Maker; (iv) the assignment of assets
        for the benefit of creditors of Maker; (v) any default by Maker under that
        certain Factoring Agreement (the "Factoring
        Agreement"),
        executed or to be executed by Maker and Payee; and (vi) the termination of
        the
        factoring relationship between Payee and Maker under the Factoring Agreement.
        It
        is especially agreed that upon the occurrence of an Event of Default, Payee
        or
        any other holder hereof at any time thereafter may, at its option, (a) declare
        the entire unpaid principal of and accrued interest on this Note immediately
        due
        and payable without notice, demand or presentment, all of which are hereby
        waived, and upon such declaration, the same shall become and shall be
        immediately due and payable, and (b) take any and all other actions available
        to
        Payee or any holder under this Note at law, in equity or otherwise. The failure
        of the holder hereof to exercise any of the foregoing options shall not
        constitute a waiver of the right to exercise the same upon the occurrence
        of a
        subsequent default. 

      


      
        
          
          

        

        
          -1-

          
            

          

        

        
          
          

        

      

      It
        is the
        intention of the parties hereto to conform strictly to applicable usury laws
        as
        in effect from time to time during the term of this Note. Accordingly, if
        any
        transaction or transactions contemplated hereby would be usurious under
        applicable law (including the laws of the United States of America, or of
        any
        other jurisdiction whose laws may be mandatorily applicable), then, in that
        event, notwithstanding anything to the contrary in this Note, it is agreed
        as
        follows: (i) the provisions of this paragraph shall govern and control; (ii)
        the
        aggregate of all interest under applicable laws that is contracted for, charged
        or received under this Note shall under no circumstances exceed the maximum
        amount of interest allowed by applicable law, and any excess shall be promptly
        credited to Maker by Payee (or, if such consideration shall have been paid
        in
        full, such excess shall be promptly refunded to Maker by Payee); (iii) neither
        Maker nor any other person or entity now or hereafter liable in connection
        with
        this Note shall be obligated to pay the amount of such interest to the extent
        that it is in excess of the maximum interest permitted by the applicable
        usury
        laws; and (iv) the effective rate of interest shall be ipso facto
        reduced
        to the maximum lawful interest rate.

      


      Maker
        shall have the privilege to prepay this Note at any time, and from time to
        time,
        in whole or in part, without penalty or fee. Any prepayment of principal
        under
        this Note shall include accrued interest to the date of prepayment on the
        total
        outstanding principal balance at the time such prepayment is made.

      


      
        
          
          

        

        
          -2-

          
            

          

        

        
          
          

        

      

      Maker
        and
        any other co-makers, endorsers, guarantors and sureties severally (i) waive
        notice (including, but not limited to, notice of protest, notice of dishonor
        and
        notice of intent to accelerate or notice of acceleration), demand, presentment
        of payment, protest and filing of suit for the purpose of fixing liability,
        (ii)
        consent that the time of payment hereof may be extended without notice to
        them
        or any of them, (iii) expressly agree that it will not be necessary for any
        holder hereof, in order to enforce payment of this Note by them, to first
        institute suit or exhaust its remedies against Maker or any others liable
        hereunder, or to enforce its rights against any security hereunder, and (iv)
        consent to any extensions or postponements of time of payment of this Note
        or
        any other indulgences with respect hereto without notice thereof to any of
        them.

      


      Maker
        and
        Payee hereby agree that this Note is performable in Houston, Harris County,
        Texas. 

      


      This
        Note
        is secured by a Security Agreement (the "Security
        Agreement"),
        executed or to be executed by Maker, as debtor, and Payee, as secured party,
        covering certain collateral more particularly therein.

       

      
        
          	 	 	MAKER:	 
	 	 	 	 	 
	 	 	 	 	 
	 
 	 	
                  ATSI
                    COMMUNICATIONS, INC.,

                  a
                    Nevada corporation 

                	 
	 	 	 	 
	 	 	 	 
	 	 	By:  	/s/ Arthur
                  L. Smith	 
	 	 	
                  Name:

                  
                    Title:

                  

                	
                  Arthur L. Smith 
                    CEO

                  

                	 


        

      

       

      
        
          
          

        

        
          -3-

          
            

          

        

        
          
          

        

      

      SECURITY
        AGREEMENT

       

      THIS
        SECURITY AGREEMENT (the
        “Security Agreement”) is made as of the date set forth on the signature page
        hereof by and between ATSI
        COMMUNICATIONS, INC. (the
        “Company”) and CSI
        BUSINESS FINANCE, INC.
        (“Factor”).

       

      W
        I T N E S S E T H:

       

      WHEREAS,
        the Company has entered into that certain Factoring Agreement of even date
        herewith (the “Factoring Agreement”), pursuant to which Factor will purchase
        certain accounts receivable billed to customers of the Company (“Accounts”) on
        the basis of, and in reliance upon the representations, warranties and covenants
        of the Company contained in the Factoring Agreement and this Security
        Agreement;

       

      WHEREAS,
        the Company has entered into that certain Secured Promissory Note of even
        date
        herewith (the “Note”), pursuant to which the Company has promised to pay the
        principal sum of Fifty Thousand and No/100 Dollars ($50,000.00), all as more
        particularly described therein; and

       

      WHEREAS,
        it is a condition precedent to the Factor undertaking obligations under both
        the
        Factoring Agreement and the Note that the Company shall have entered into
        this
        Security Agreement, for the purpose of securing the performance of the
        representations, warranties and covenants of the Company in the Factoring
        Agreement, the Note, and the payment and performance by the Company of its
        other
        obligations under the Factoring Agreement and the Note;

       

      NOW,
        THEREFORE, to induce Factor to enter into the Factoring Agreement, purchase
        Accounts pursuant thereto, advance funds under the Note, and in consideration
        thereof and for other good and valuable consideration, the receipt and
        sufficiency of which is hereby acknowledged, it is hereby agreed as
        follows:

       

      1. Defined
        Terms.

      


      (a) Unless
        otherwise defined in this Security Agreement, terms defined in Chapter 9
        of the
        UCC are used in this Security Agreement as defined in Chapter 9 of the
        UCC.

      


      (b) As
        used
        in this Security Agreement, the following terms shall have the following
        meanings:

      


      “Accounts”
        has the
        meaning specified in the recitals hereto.

      


      “Collateral”
        has the
        meaning specified in Section
        2.

      


      “Equipment”
        means
        all “equipment”
        (as defined in the UCC) wherever located, now or hereafter existing and all
        parts thereof and all accessions thereto.

      


      “Default”
        has the
        meaning specified in Section
        10.

      


      “Deposit
        Account”
        means
        that certain “deposit
        account”
        (as
        defined in the UCC) located and in existence with Sterling Bank. 

      


      
        
          
          

        

        
          -4-

          
            

          

        

        
          
          

        

      

      “Financing
        Documents”
        means
        the Security Agreement, the Note, and the Factoring Agreement.

      


      “Inventory”
        means
        all “inventory” (as defined in the UCC) in all of its forms, wherever located,
        now or hereafter existing and whether acquired by purchase, merger or otherwise,
        including (a) all goods held for sale or lease or to be furnished under
        contracts of service or so leased or furnished and (b) all raw materials,
        work
        in process, all finished goods and all materials and supplies used, consumed
        or
        to be used or consumed in the manufacture, packing, shipping, advertising,
        selling, leasing or production of such inventory, including (whether or not
        included in such UCC definition) goods in which the Company has an interest
        in
        mass or joint or other interest or right of any kind and goods that are returned
        to or repossessed by the Company and all accessions thereto and products
        thereof
        and all documents of title therefore.

      


      “Note”
        has the
        meaning specified in the recitals hereto.

      


      “Perfection
        Certificate”
        means a
        certificate substantially in the form of Exhibit A
        to this
        Security Agreement, completed and supplemented with the schedules and
        attachments contemplated by such form of certificate to the satisfaction
        of
        Factor, and duly executed by an officer or other authorized representative
        of
        the Company.

      


      “Permitted
        Collateral Liens”
        means
        (a) the Security Interests, (b) liens for taxes not yet delinquent or which
        are
        being contested in good faith by appropriate proceedings; provided that adequate
        reserves with respect thereto are being maintained on the books of the Company
        in conformity with GAAP, (c) liens (other than liens in favor of landlords
        or
        taxing entities) in favor of carriers’, warehouseman’s, mechanics’,
        materialmen’s, repairmen’s or other like liens arising in the ordinary course of
        business and not overdue for a period of more than sixty (60) days or which
        are
        being contested in good faith by appropriate proceedings, (d) liens in favor
        of
        landlords of the Company, provided that all such liens must be subordinated
        to
        Factor’s Security Interests, (e) liens securing equipment acquired in the
        ordinary course of business under equipment leases or vendor-financed purchases,
        provided that the Company is current in the payment of all amounts owed under
        such leases or purchase money financings, (f) nonconsensual liens and rights
        of
        financial institutions in checking, savings, money market and similar accounts
        opened and maintained by the Company in the ordinary course of business,
        and (g)
        liens encumbering the Collateral as of the date hereof, provided, however,
        that
        such liens permitted pursuant to this subsection (g) shall only be considered
        Permitted Collateral Liens pursuant to this subsection for the ten (10)
        consecutive calendar days following the date of this Security
        Agreement.

      


      “Proceeds”
        means
        all proceeds of, and all other profits, rentals or receipts, in whatever
        form,
        arising from the collection, sale, lease, exchange, assignment, licensing
        or
        other disposition of, or realization upon, Collateral, including all claims
        of
        the Company against third parties for loss of, damage to or destruction of,
        or
        for proceeds payable under, or unearned premiums with respect to, policies
        of
        insurance in respect of, any Collateral, and any condemnation or requisition
        payments with respect to any Collateral, in each case whether now existing
        or
        hereafter arising.

      


      “Receivables”
        means
        all “accounts”,
        “chattel
        paper”, “instruments”, “documents”, “general intangibles”
        (including “payment intangibles”) (as each such term is defined in the UCC) and
        other obligations owed to the Company of any kind, now or hereafter existing,
        whether or not arising out of or in connection with the sale or lease of
        goods
        or the rendering of services, and whether or not evidenced by a written
        agreement, and all rights now or hereafter existing in and to all security
        agreements, leases, and other contracts including support agreements (as
        such
        term is defined in the UCC) (all such written or unwritten agreements, security
        agreements, leases and other contracts, including all support agreements,
        being
        the “Related
        Contracts”),
        securing or otherwise relating to any such accounts, chattel paper, instruments,
        documents, general intangibles or other obligations; provided, however,
        Receivables shall not mean accounts owned by the Factor.

      


      
        
          
          

        

        
          -5-

          
            

          

        

        
          
          

        

      

      “Secured
        Liabilities”
        means
        all present and future obligations and liabilities (whether actual or contingent
        and whether now or hereafter owed jointly or severally or as principal debtor,
        cautioner, guarantor, surety or otherwise or as the equivalent obligor under
        the
        laws of any jurisdiction) of the Company to Factor under this Security
        Agreement, the Note, or the Factoring Agreement, together with:

      


      (i) all
        costs, charges and expenses incurred by Factor in connection with or arising
        out
        of the protection, preservation or enforcement of Factor’s rights under the
        Financing Documents;

       

      (ii) any
        modification, renewal or extension of or increase in any of those obligations
        or
        liabilities;

       

      (iii) any
        claim
        for damages or restitution in the event of rescission of any of those
        obligations or liabilities or otherwise in connection with the Financing
        Documents;

       

      (iv) any
        claim
        against the Company flowing from the recovery by the Company of a payment
        or
        discharge in respect of any of those obligations or liabilities on grounds
        of
        preference or otherwise;

       

      


      (v) all
        other
        amounts now or in the future owed by the Company to Factor; and

       

      (vi) any
        amounts that would be included in any of the foregoing but for any discharge,
        non-provability, unenforceability or non-allowability of the same in any
        insolvency, bankruptcy or other proceedings.

      


      “Security
        Interests”
        means
        the security interests granted in accordance with Section 2,
        as well
        as all other security interests created or assigned as additional Collateral
        for
        the Secured Liabilities in accordance with the provisions of this Security
        Agreement.

      


      “UCC”
        means
        the Uniform Commercial Code in effect from time to time in the State of Texas;
        provided that
        if
        by reason of mandatory provisions of law, the perfection or the effect of
        perfection or non-perfection of the Security Interest in any Collateral is
        governed by the Uniform Commercial Code as in effect in a jurisdiction other
        than the State of Texas, “UCC”
        means
        the Uniform Commercial Code as in effect in such other jurisdiction for purposes
        of the provisions of this Agreement relating to such perfection or effect
        of
        perfection or non-perfection.

      


      
        
          
          

        

        
          -6-

          
            

          

        

        
          
          

        

      

      2. Security
        Interest.
        In
        order to secure the full and punctual payment of the Secured Liabilities
        in
        accordance with the terms thereof, including to secure the performance of
        all of
        the obligations of the Company under this Security Agreement, the Company
        hereby
        grants and assigns to Factor a continuing security interest in and to all
        right,
        title and interest of the Company in all of the following property, whether
        now
        owned or existing or hereafter acquired or arising and regardless of where
        located (all being collectively referred to as the “Collateral”):

       

      (a)           (i) Equipment;

      


      (ii) Deposit
        Account;

      


      (iii) Inventory;

      


      (iv) Receivables;

      


      (v) Related
        Contracts; and

      


      (vi) All
        Proceeds of or substitutions for all or any of the Collateral described in
        Clauses (i),
        (ii),
        (iii),
        (iv),
        and
(v)
        of this
Section
        2.
        

       

      


      (b) The
        Security Interests are granted as security only and shall not subject Factor
        to,
        or transfer or in any way affect or modify, any obligation or liability of
        the
        Company with respect to any of the Collateral or any transaction in connection
        therewith.

       

      (c) The
        inclusion of Proceeds in this Agreement does not authorize the Company to
        sell,
        dispose of or otherwise use the Collateral in any manner not specifically
        authorized by the Financing Documents.

       

      3.  Representations
        and Warranties.
        The
        Company represents and warrants as follows:

       

      (a) The
        exact
        legal name of the Company, as the legal name appears in the Company’s articles
        of incorporation (or similar organizational document filed with the State)
        as of
        the date of this Agreement, is as set forth in the introductory paragraph
        of
        this Security Agreement. The
        Company has no other tradename except as listed on the Perfection
        Certificate.

      


      (b) The
        place
        of business or, if the Company has more than one place of business, the chief
        executive office is located at the address of the Company specified in the
        Perfection Certificate.

      


      (c) INTENTIONALLY
        DELETED.

      


      (d) The
        office where the Company keeps its records concerning the Receivables, and
        all
        originals of all chattel paper which evidence Receivables, is located at
        the
        address of the Company specified in the Perfection Certificate. None
        of
        the Receivables is evidenced by a promissory note or other
        instrument.

      


      (e) The
        Company owns the Collateral free and clear of any lien, security interest,
        charge or encumbrance except for the Permitted Collateral Liens. No effective
        financing statement or other instrument similar in effect covering all or
        any
        part of the Collateral is on file in any recording office, except such as
        may
        have been filed relating to Permitted Collateral Liens.

      


      
        
          
          

        

        
          -7-

          
            

          

        

        
          
          

        

      

      (f) This
        Agreement creates a valid and perfected first priority security interest
        in the
        Collateral (except with respect to Permitted Collateral Liens), securing
        the
        payment of the Secured Liabilities, and all filings and other actions necessary
        or desirable to perfect and protect such security interest have been duly
        taken.

      


      (g) No
        authorization, approval or other action by, and no notice to or filing with,
        any
        governmental authority or regulatory body is required either (i) for
        the
        grant by the Company of the security interest granted hereby or for the
        execution, delivery or performance of this Security Agreement by the Company
        or
        (ii) for the perfection of or the exercise by Factor of its rights
        and
        remedies under this Security Agreement, other than the filing of a UCC-1
        financing statement.

      


      (h) The
        Company is “located” (as such term is defined and used in the UCC) in its
        jurisdiction of incorporation specified in the Perfection
        Certificate.

      


      (i) The
        Company is a corporation duly organized, validly existing and in good standing
        under the laws of the Company’s jurisdiction of incorporation, qualified to do
        business in all jurisdictions in which the nature of the business conducted
        by
        the Company makes such qualification necessary and where failure so to qualify
        would not have a material adverse effect on the Company’s financial condition,
        operations, prospects or business, or the Company’s ability to perform all the
        Company’s obligations under this Security Agreement and the other Financing
        Documents to which the Company is a party.

      


      (j) The
        Company is not in violation of any applicable law, which violations,
        individually or in the aggregate, would affect the Company’s performance of any
        obligation under this Security Agreement or the other Financing Documents
        to
        which the Company is a party; there is no litigation before any court or
        governmental authority now pending or (to the Company’s knowledge after
        reasonable inquiry) threatened against the Company which, if adversely
        determined, could reasonably be expected to have a material adverse effect
        on
        the Company’s financial condition, operations, prospects or business as a whole,
        or ability to perform all the Company’s obligations under this Security
        Agreement and the other Financing Documents to which the Company is a
        party.

      


      (k) The
        Company is the holder of all governmental approvals, permits and licenses
        required to permit the Company to enter into and perform the Company’s
        obligations under this Security Agreement and the other Financing Documents
        to
        which the Company is a party.

      


      (l) None
        of
        the execution and delivery of this Security Agreement, the consummation of
        the
        transactions contemplated in this Security Agreement or the other Financing
        Documents to which the Company is a party, or compliance with the terms and
        provisions of this Security Agreement or the other Financing Documents to
        which
        the Company is a party will conflict with or result in a breach of, or require
        any consent under, the Company’s charter or bylaws, or any applicable law, or
        any agreement or instrument to which the Company is a party or by which the
        Company is bound or to which the Company or any of the Company’s respective
        assets are subject, or constitute a default under any such agreement or
        instrument.

      


      (m) The
        Company has all necessary power and authority to execute, deliver and perform
        the Company’s respective obligations under this Security Agreement and the other
        Financing Documents to which the Company is a party; the Company’s execution,
        delivery and performance of this Security Agreement and the other Financing
        Documents to which the Company is a party has been duly authorized by all
        necessary action on the Company’s part; and this Security Agreement and the
        other Financing Documents to which the Company is a party have been duly
        and
        validly executed and delivered by the Company and constitutes the Company’s
        legal, valid and binding obligation, enforceable in accordance with its and
        their terms, except as the enforceability thereof may be limited by bankruptcy,
        insolvency, reorganization or moratorium or other similar laws relating to
        the
        enforcement of creditors' rights generally and by general equitable
        principles.

      


      
        
          
          

        

        
          -8-

          
            

          

        

        
          
          

        

      

      4. Places
        of Business.
        The
        Company will notify Factor promptly of the addition or discontinuance of
        any
        place of business or any change in the address of its principal or any other
        place of business. None of the Collateral shall be removed from the locations
        specified herein, as from time to time supplemented, unless Factor is given
        thirty (30) days prior written notice of such removal, which notice shall
        state
        the location or locations to which said Collateral will be removed. The Company
        warrants that all of the Collateral is and shall continue to be located at
        the
        locations set forth herein or such other locations of which Factor receives
        notice in accordance with this Section.

       

      5. Encumbrances.
        The
        Company will notify Factor of any lien, security interest or other encumbrance
        securing an obligation against the Collateral, will defend the Collateral
        against any claim, lien, security interest or other encumbrance adverse to
        Factor, and will not create, incur, assume, or suffer to exist now or at
        any
        time throughout the duration of the term of this Security Agreement, any
        lien,
        security interest or other encumbrances against the Collateral, whether now
        owned or hereafter acquired, except for liens in favor of Factor, any liens
        listed herein, and any other liens allowed in writing by the
        Factor.

       

      6. Maintenance
        of Collateral.
        The
        Company shall preserve the Collateral for the benefit of Factor. Without
        limiting the generality of the foregoing, the Company shall:

       

      
        	 	 	
                (a)

              	
                preserve
                  all beneficial contract rights to the extent commercially reasonable;
                  and

              


      

       

      
        	 	 	
                (b)

              	
                in
                  conjunction with, and at the direction of, Factor, take commercially
                  reasonable steps to collect all accounts.


              


      

       

      7. Additional
        Provisions Concerning the Collateral.

       

      (a) The
        Company authorizes Factor to file, without the signature of the Company,
        where
        permitted by law, one or more financing or continuation statements, and
        amendments thereto, relating to the Collateral, all in the discretion of
        Factor.

       

      (b) The
        Company hereby irrevocably appoints Factor as its attorney-in-fact (which
        power
        of attorney is coupled with an interest) and proxy, with full authority in
        the
        place and stead of the Company and in its name or otherwise, from time to
        time
        in Factor's discretion, to take any action or execute any instrument which
        Factor may deem necessary or advisable to accomplish the purposes of this
        Agreement, including, without limitation: (i) to obtain and adjust insurance
        required to be paid to Factor pursuant to Section
        8
        hereof;
        (ii) to ask, demand, collect, sue for, recover, compound, receive and give
        acquittance and receipts for moneys due and to become due under or in respect
        of
        any of the Collateral from any account whatsoever in the name of the company;
        (iii) to receive, endorse, and collect any cash, checks, drafts or other
        instruments, documents, and chattel paper in connection with clause (i) or
        clause (ii) above; (iv) to sign the Company's name on any invoice or bill
        of
        lading relating to any account, on drafts against customers, on schedules
        and
        assignments of accounts, on notices of assignment, financing statements and
        other public records, on verification of accounts and on notices to customers
        (including notices directing customers to make payment directly to Factor);
        (v)
        during the continuation of a default hereunder, to notify the postal authorities
        to change the address for delivery of its mail to an address designated by
        Factor, to receive, open and process all mail addressed to the Company; (vi)
        to
        send requests for verification of accounts to customers; and (vii) to file
        any
        claims or take any action or institute any proceedings which Factor may deem
        necessary or desirable for the collection of any of the Collateral or otherwise
        to enforce the rights of Factor with respect to any of the Collateral. The
        Company hereby ratifies and approves in advance all acts of said attorney;
        and
        so long as the attorney acts in good faith and without gross negligence it
        shall
        have no liability to the Company for any act or omission as to such
        attorney.

       

      
        
          
          

        

        
          -9-

          
            

          

        

        
          
          

        

      

      (c) If
        the
        Company fails to perform any agreement contained herein, Factor may itself
        perform, or cause performance of, such agreement or obligation, and the costs
        and expenses of Factor incurred in connection therewith shall be payable
        by the
        Company and shall be fully secured hereby.

       

      (d) The
        powers conferred on Factor hereunder are solely to protect its interest in
        the
        Collateral and shall not impose any duty upon Factor to exercise any such
        powers. Except for the safe custody of any Collateral in its possession and
        the
        accounting for moneys actually received by it hereunder, Factor shall have
        no
        duty as to any Collateral or as to the taking of any necessary steps to preserve
        rights against prior parties or any other rights pertaining to any
        Collateral.

       

      (e) Anything
        herein to the contrary notwithstanding, (i) the Company shall remain liable
        under any contracts and agreements relating to the Collateral, to the extent
        set
        forth therein, to perform all of its obligations thereunder, to the same
        extent
        as if this Security Agreement had not been executed; (ii) the exercise by
        Factor
        of any of its rights hereunder shall not release the Company from any of
        its
        obligations under the contracts and agreements relating to the Collateral;
        and
        (iii) Factor shall not have any obligation or liability by reason of this
        Security Agreement under any contracts and agreements relating to the
        Collateral, nor shall Factor be obligated to perform any of the obligations
        or
        duties of the Company thereunder or to take any action to collect or enforce
        any
        claim for payment assigned hereunder.

       

      (f) The
        Company will maintain (A) the location of its place of business and
        its
        chief executive office (if it has more than one place of business) and
        (B) the location where the Company keeps or holds any Collateral or
        records
        relating thereto at (1) the applicable locations described in the Perfection
        Certificate, or (2) at locations within other States if, prior to
        such
        relocation, the Company shall have given Factor not less than ten (10) days’
        notice thereof.

      


      (g) Until
        the
        Secured Liabilities are paid in full, the Company agrees that the Company
        will
        (i) preserve the Company’s corporate existence and not, in one transaction or a
        series of related transactions, convert to a different type of entity, merge
        into or consolidate with any other entity, or sell all or substantially all
        of
        its assets; (ii) not change the state of the Company’s incorporation; and (iii)
        not change the Company’s name or identity in any manner, unless in the case of
        this clause only, the Company shall have given Factor not less than forty-five
        (45) days prior notice thereof.

      


      
        
          
          

        

        
          -10-

          
            

          

        

        
          
          

        

      

      8. INTENTIONALLY
        DELETED.

      


      9. INTENTIONALLY
        DELETED.

       

      10. Default.
        Any one
        or more of the following events shall constitute a default
        ("Default"):

      


      
        	 	
                (a)

              	
                any
                  representation or warranty made or deemed made by the Company in
                  this
                  Security Agreement or any other Financing Document shall prove
                  to have
                  been incorrect, false, incomplete or
                  misleading;

              


      

       

      
        	 	
                (b)

              	
                the
                  Company shall breach or fail to perform or observe any term, covenant
                  or
                  agreement contained in this Security Agreement or any other Financing
                  Document and such failure shall continue for a period of five (5)
                  days
                  after written notice thereof shall have been given by
                  Factor.

              


      

       

      11. Remedies.
        (a)
        Upon the occurrence of a Default and at any time or times during the continuance
        thereof, unless such Default shall have been cured within the applicable
        time
        period, if any, or waived in writing by Factor, and subject to the provisions
        of
        applicable law, Factor may exercise any one or more of the following
        remedies:

       

      
        	 	
                (i)

              	
                Factor
                  shall have full power and authority to sell or otherwise dispose
                  of the
                  Collateral or any part thereof. Any such sale or other disposition,
                  subject to the provisions of applicable law, may be by public or
                  private
                  proceedings and may be made by one or more contracts, as a unit
                  or in
                  parcels, at such time and place, by such method, in such manner
                  and on
                  such terms as Factor may determine. Except as required by law,
                  such sale
                  or other disposition and such notice will be deemed to have been
                  sufficiently given if such notice is hand-delivered or mailed postage
                  prepaid, at least ten (10) days before the time of such sale or
                  other
                  disposition, to the Company at its address as specified in the
                  Agreement.
                  To the extent permitted by law, Factor may buy any or all of the
                  Collateral upon any sale thereof. To the extent permitted by law,
                  upon any
                  such sale or sales, the Collateral so purchased shall be held by
                  the
                  purchaser absolutely free from any claims or rights of whatsoever
                  kind or
                  nature, including any equity of redemption and any similar rights
                  being
                  hereby expressly waived and released by the Company. In connection
                  with
                  any such sale, Factor shall be permitted to limit its warranties
                  to the
                  maximum extent provided in the UCC. After deducting all reasonable
                  costs
                  and expenses of collection, custody, sale or other disposition
                  or delivery
                  (including legal costs and reasonable attorneys' discounts) and
                  all other
                  charges due against the Collateral, the residue of the proceeds
                  of any
                  such sale or other disposition shall be applied to the payment
                  of the
                  Obligations, except as otherwise provided by law or directed by
                  any court
                  of competent jurisdiction thereof, and any surplus shall be returned
                  to
                  the Company, except as otherwise provided by law or any such court.
                  The
                  Company shall be liable for any deficiency in payment of the Obligations,
                  including all reasonable costs and expenses of collection, custody,
                  sale
                  or other disposition or delivery and all other charges due against
                  the
                  Collateral, as herein enumerated.

              


      

       

      
        
          
          

        

        
          -11-

          
            

          

        

        
          
          

        

      

      
        	 	
                (ii)

              	
                Factor
                  may notify an account debtor to make payment to Factor whether
                  the Company
                  or Factor was previously making collections on any of the accounts
                  receivable; and Factor may also take control of any proceeds from
                  any
                  Collateral.

              


      

       

      
        	 	
                (iii)

              	
                At
                  any other time, with or without notice, Factor is authorized to
                  offset and
                  charge against any other credits and obligations ever owed by Factor
                  to
                  the Company, any amount for which the Company may become obligated
                  to
                  Factor at any time, whether under the Financing Documents or otherwise.
                  The obligation secured by the Security Interest granted and by
                  Factor's
                  right of offset includes all obligations of any kind or type now
                  or
                  hereafter arising, owed by the Company to Factor, whether liquidated
                  or
                  unliquidated, direct or indirect, contingent or
                  not.

              


      

       

      
        	 	
                (iv)

              	
                Factor
                  may commence proceedings in any court of competent jurisdiction
                  for the
                  appointment of a receiver (which term shall include a receiver-manager)
                  of
                  the Collateral or of any part thereof or may by instrument in writing
                  appoint any person to be a receiver of the Collateral or any part
                  thereof
                  and may remove any receiver so appointed by Factor and appoint
                  another in
                  his stead; and an such receiver appointed by instrument in writing
                  shall
                  have power (a) to take possession of the Collateral or any part
                  thereof,
                  (b) to carry on the business of the Company, (c) to borrow money
                  on the
                  security of the Collateral in priority to this Security Agreement
                  to the
                  extent required for the maintenance, preservation or protection
                  of the
                  Collateral or any part thereof or for the carrying on of the business
                  of
                  the Company, and (d) to sell lease or otherwise dispose of the
                  whole or
                  any part of the Collateral at public auction, by public tender
                  or by
                  private sale, either for cash or upon credit, at such time and
                  upon such
                  terms and conditions as the receiver may determine; provided that
                  any such
                  receiver shall be deemed the agent of the Company and Factor shall
                  not be
                  in any way responsible for any misconduct or negligence of any
                  such
                  receiver.

              


      

       

      
        	(v)  	
                Factor
                  shall have all other rights and remedies of a secured party provided
                  under
                  the UCC.

              


      

       

      
        
          	(vi)  	
                  Factor
                    shall have the right to convert any outstanding balance into
                    free trading
                    shares of ATSI Communications common stock at a conversion price
                    of $.01
                    per share.

                


        

        
          	 	 


        

        
          	
                       
                     (vii)

                	
                  
                    Factor
                      shall have all other rights and remedies allowed at law and/or
                      in
                      equity.

                  

                


        

      

       

      b. It
        is
        provided, however, that notwithstanding Factor's efforts in collection on
        the
        Collateral, the Company shall be liable and responsible for any
        deficiency.

       

      12. Limitation
        on Duty of Factor in Respect of Collateral.
        The
        powers conferred on Factor under this Security Agreement are solely to protect
        Factor’s interest in the Collateral and shall not impose any duty upon Factor to
        exercise any such powers. Except for reasonable care in the custody of any
        Collateral in Factor’s possession and the accounting for moneys actually
        received by Factor under this Security Agreement, Factor shall have no duty
        as
        to any Collateral or as to the taking of any necessary steps to preserve
        rights
        against prior parties or any other rights pertaining to any Collateral. Factor
        shall be deemed to have exercised reasonable care in the custody and
        preservation of the Collateral in Factor’s possession if the Collateral is
        accorded treatment substantially equal to that which Factor accords Factor’s own
        property, it being understood that Factor shall not be liable or responsible
        for
        any loss or damage to any of the Collateral, or for any diminution in the
        value
        thereof, by reason of the act or omission of any warehouseman, carrier,
        forwarding agency, consignee or other bailee selected by Factor in good faith.
        Except as otherwise expressly provided in this Section
        12,
        the
        Company has the risk of loss of the Collateral. Further, Factor has no duty
        to
        collect any income accruing on the Collateral or to preserve any rights relating
        to the Collateral. Factor shall have no obligation to clean up or otherwise
        prepare the Collateral for sale.

      


      
        
          
          

        

        
          -12-

          
            

          

        

        
          
          

        

      

      13. Concerning
        Factor.
        In
        furtherance and not in derogation of the rights, privileges and immunities
        of
        Factor set forth in the Factoring Agreement:

      


      (a) Factor
        is
        authorized to take all such action as is provided to be taken by Factor under
        this Security Agreement and all other action reasonably incidental thereto.
        As
        to any matters not expressly provided for in this Security Agreement (including
        the timing and methods of realization upon the Collateral), Factor shall
        act or
        refrain from acting in Factor’s discretion.

      


      (b) Factor
        shall not be responsible for the existence, genuineness or value of any of
        the
        Collateral or for the validity, perfection, priority or enforceability of
        the
        Security Interests in any of the Collateral, whether impaired by operation
        of
        law or by reason of any action or omission to act on Factor’s part under this
        Security Agreement. Factor shall have no duty to ascertain or inquire as
        to the
        performance or observance of any of the terms of this Security Agreement
        by the
        Company.

      


      14. Payment
        of Taxes, Charges, Etc.
        Factor,
        at its option, after notice to the Company, may discharge any taxes, charges,
        assessments, security interest, liens or other encumbrances upon the Collateral
        or otherwise protect the value thereof. All such expenditures incurred by
        Factor
        shall become payable by the Company to Factor upon demand, shall bear interest
        at the highest legal rate from the date incurred to the date of payment,
        and
        shall be secured by the Collateral.

       

      15. Waivers.
        To the
        extent permitted by law, the Company hereby waives demand for payment, notice
        of
        dishonor or protest and all other notices of any kind in connection with
        the
        Secured Liabilities except notices required hereby, by law or by any other
        agreement between the Company and Factor. Factor may release, supersede,
        exchange or modify any Collateral or security which it may from time to time
        hold and may release, surrender or modify the liability of any third party
        without giving notice hereunder to the Company. Such modifications, changes,
        renewals, releases or other actions shall in no way affect the Company's
        obligations hereunder.

       

      16. Transfer
        Expenses, Etc.
        The
        Company will pay, indemnify and hold Factor harmless from and against all
        costs
        and expenses (including taxes, if any) arising out of or incurred in connection
        with any transfer of Collateral into or out of the name of Factor and all
        reasonable costs and expenses, including reasonable legal discounts, of Factor
        arising out of or incurred in connection with this Security
        Agreement.

       

      17. Termination.
        This
        Security Interest shall terminate upon the latter of (i) the expiration,
        cancellation or other termination of all duties of the Company under both
        the
        Factoring Agreement and the Note; or (ii) ninety days following the full
        payment, satisfaction, or discharge of all Secured Liabilities. Upon such
        termination, the Factor will deliver to the Company appropriate UCC termination
        statements with respect to Collateral so released from the Security Interest
        for
        filing with each filing officer with which UCC financing statements have
        been
        filed by Factor to perfect the Security Interest in such
        Collateral.

       

      
        
          
          

        

        
          -13-

          
            

          

        

        
          
          

        

      

      18. Successors
        and Assigns.
        This
        Agreement shall be binding upon and inure to the benefit of the Company and
        Factor and their respective successors and assigns.

       

      19. Severability
        of Provisions.
        Any
        provision of any Financing Document which is prohibited or unenforceable
        in any
        jurisdiction shall, as to such jurisdiction, be ineffective to the extent
        of
        such prohibition or unenforceability without invalidating the remaining
        provisions of such Financing Document or affecting the validity or
        enforceability without invalidating the remaining provisions of such Financing
        Document or affecting the validity or enforceability of such provision in
        any
        other jurisdiction.

       

      20. Submission
        to Jurisdiction.
        (a)
        ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS SECURITY AGREEMENT AND
        THE
        OTHER FINANCING DOCUMENTS TO WHICH THE COMPANY IS A PARTY MAY BE BROUGHT
        IN THE
        COURTS OF THE STATE OF TEXAS OR OF THE UNITED STATES LOCATED IN HARRIS COUNTY,
        TEXAS AND, BY EXECUTION AND DELIVERY OF THIS SECURITY AGREEMENT, THE COMPANY
        HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF THE COMPANY’S PROPERTY,
        UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO
        ANY
        SUCH ACTION OR PROCEEDING. THE COMPANY FURTHER IRREVOCABLY CONSENTS TO THE
        SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION
        OR
        PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
        POSTAGE PREPAID, TO THE COMPANY PURSUANT TO SECTION
        22,
        SUCH SERVICE TO BECOME EFFECTIVE THIRTY (30) DAYS AFTER SUCH MAILING. NOTHING
        IN
        THIS SECURITY AGREEMENT SHALL AFFECT THE RIGHT OF FACTOR TO SERVE PROCESS
        IN ANY
        OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
        PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.

      


      (b) THE
        COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH THE COMPANY MAY NOW
        OR
        HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR
        PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN
        THE
        COURTS REFERRED TO IN CLAUSE
        (a)
        OF THIS SECTION
        20
        AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN
        ANY
        SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS
        BEEN
        BROUGHT IN AN INCONVENIENT FORUM.

      


      21. Waiver
        of Jury Trial. THE
        COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
        LAW, ANY
        RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND
        ANY
        RIGHTS UNDER THIS SECURITY AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT,
        DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN
        CONNECTION WITH THIS AGREEMENT OR ARISING FROM OR RELATING TO ANY RELATIONSHIP
        EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED
        BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE
        A
        COURT AND NOT BEFORE A JURY.

      


      
        
          
          

        

        
          -14-

          
            

          

        

        
          
          

        

      

      22. Notice.
        Any
        notice or communication required or permitted hereunder shall be deemed to
        be
        delivered, whether actually received or not, when deposited in the United
        States
        mail, postage fully prepaid, registered or certified mail, and addressed
        to the
        intended recipient at the address provided pursuant to the Factoring Agreement.
        Any address for notice may be changed by written notice delivered as provided
        herein.

      


      23. Governing
        Law.
        THIS
        SECURITY AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
        THE
        LAW OF THE STATE OF TEXAS, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF
        LAW AND
        EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS,
        OR REMEDIES UNDER THIS SECURITY AGREEMENT, IN RESPECT OF ANY PARTICULAR
        COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE
        OF
        TEXAS.

       

      [REMAINDER
        OF PAGE INTENTIONALLY LEFT BLANK]

       

      


      
        
          
          

        

        
          -15-

          
            

          

        

        
          
          

        

      

       

      IN
        WITNESS WHEREOF, the parties hereto have executed this Security Agreement
        as of
        the date indicated below each signature.

       

      
        
           

          
            	
                    COMPANY:

                  	 	 	 	 
	 	 	 	 	 
	ATSI COMMUNICATIONS,
                    INC.	 	 	 
	 	 	 	 	 
	By:	 /S/
                    Arthur L. Smith 	 	 	 
	
                    Name:

                    Title:

                    Address:

                  	
                    Arthur L. Smith 
                      CEO

                      
                        8600
                          Wurzbach

                        Suite
                          700W

                        San
                          Antonio, Texas 78240

                      

                    

                  	
                     

                    
                       

                    

                  	
                    
                       

                    

                  	 
	 	 	 	 	 
	Date: November
                    4, 2005	 	 	 


          

        

      

       

      
        
          
            	 	 	FACTOR:	 
	 	 	 	 	 
	 
 	 	
                    CSI
                      BUSINESS FINANCE, INC.

                  	 
	 	 	 	 
	 	 	 	 
	 	 	By:  	/S/
                    Timothy Connolly 	 
	 	 	
                    Name:

                    
                      Title:

                      Address:

                    

                  	
                    Timothy Connolly
                      CEO

                      109
                        North Post Oak Lane
                        Suite
                          422

                        Houston,
                          Texas 77024

                      

                    

                  	 
	 	 	 	 	 
	 	 	Date:
                    November 4, 2005	 


          

        

      

       

       

      
        
          
          

        

        
          -16-

          
            

          

        

        
          
          

        

      

      PERFECTION
        CERTIFICATE

      


      The
        undersigned, the President of ATSI
        COMMUNICATIONS INC.,
        a
        Nevada corporation (the “Grantor”),
        hereby certifies, in connection with the Security Agreement, dated as of
        November 4, 2005 (the “Security
        Agreement”;
        initial capitalized terms used but not defined in this Perfection Certificate
        shall have the meanings ascribed to such terms in the Security Agreement),
        by
        Grantor in favor of  CSI
        BUSINESS FINANCE, INC.
        (“Factor”),
        to
        Factor as follows:

      


      1. Name.
        (a) The
        exact legal name of Grantor, as the legal name appears in Grantor’s articles of
        incorporation as of the date of this Perfection Certificate, is as
        follows:

      


      ATSI
        COMMUNICATIONS INC. 

      


      The
        following is a list of all other names (including trade names or similar
        appellations) used by Grantor or any of its divisions or other business units
        at
        any time since its date of incorporation:

       

      ATSI
        Communications, Inc., a Nevada Corporation 

      ATSI
        Communications, Inc., a Delaware Corporation

      Telefamilia
        Communciations, Inc. 

      Digerati
        Networks, Inc. 

      ATSI
        Costa Rica 

      ATSI
        Comunicaciones S.A de C.V. 

      


      (c) The
        jurisdiction of organization of Grantor is Nevada and its organizational
        identification number is C27974-2003 and Tax ID is 742849995.

      


      2. Current
        Location.
        (a) The
        only place of business of Grantor is located at the following
        address:

       

      
        
          	 	
                  Street
                    Address:

                	
                  8600
                    Wurzbach, Suite 700W

                
	 	 	
                  San
                    Antonio, Texas 78240

                
	 	 	 
	 	
                  Mailing
                    Address:

                	
                  SAME

                


        

      

       

      (b) The
        following are all the locations where Grantor maintains any books or records
        relating to any Collateral (if more than two locations, please attach additional
        pages including all addresses):

       

      
        
          
            	 	
                    Street
                      Address:

                  	
                    8600
                      Wurzbach, Suite 700W

                  
	 	 	
                    San
                      Antonio, Texas 78240

                  
	 	 	 


          

        

      

      (c) The
        following are all the locations where Grantor maintains any Inventory or
        Equipment (if more than two locations, please attach additional pages including
        all addresses):

       

      
        
          
            	 	
                    
                      Street
                        Address:

                    

                  	
                    SAME

                  
	 	 	 


          

        

      

      (d) The
        following are all the locations outside the State of Texas where Grantor
        maintains or has maintained any Inventory or Equipment or other tangible
        personal property or any office since its incorporation:

       

      
        
          
            	 	
                     

                  	
                    
                      N/A

                    

                  


          

        

         

        
          
            
            

          

          
            -1-

            
              

            

          

          
            
            

          

        

      

      
        EXECUTED
          this 4th
          day of
          November, 2005.

      

       

      
        
          
            	 
 	 	
                    ATSI
                      COMMUNICATIONS, INC.

                  	 
	 	 	 	 
	 	 	 	 
	 	 	By:  	/s/ Arthur
                    L. Smith	 
	 	 	
                    Name:

                    
                      Title:

                    

                  	
                    Arthur L. Smith 
                      CEO

                    

                  	 


          

        

         

      

      
        
          
          

        

        
          -2-