Exhibit
10.1
 LOAN
AND SECURITY AGREEMENT
 
 $100,000
                  San
      Antonio, TXDate:
      November 10, 2009
 
 FOR VALUE
RECEIVED, the undersigned ATSI COMMUNICATIONS, INC., a Nevada corporation
(“Company),
hereby promises to pay to ATV Texas Ventures III, LP., a Delaware limited
partnership (“Lender”), at such
place as Lender may specify, in lawful money of the United States of America,
the principal amount of $100,000 (the “Principal Amount”) on
the earlier of: (i) a Mandatory Payment Event (as hereinafter defined), or (ii)
According to the attached Payback Schedule (the “Maturity Date”), plus
interest on the Principal Amount outstanding from time to time hereunder at a
rate equal to the lesser of (i) the maximum lawful rate or (ii) Twelve percent
(12%) per annum.  Interest shall be calculated in arrears through the
last day of each month and shall be due and payable on the first day of the each
month, as more fully set forth below in Section
1.
 
 1.           Advances;
Payments.  On the date of this Loan and Security Agreement (the
“Agreement”)
and subject to the accuracy of Company’s representations and the conditions set
forth in Section
3 herein, Lender will deliver to Company in immediately available funds
the Principal Amount specified above (the “Loan”).  All
payments under this Agreement shall be applied first to fees and expenses, then
to interest and then to reduction of the Principal Amount.  Any
Principal Amount outstanding after the occurrence and during the continuance of
an Event of Default under this Agreement shall bear interest at a rate equal to
the lesser of (i) the lawful legal rate or (ii) seven percent (7%) above the
interest rate otherwise applicable under this Agreement.
 
 2.           Secured
Agreement.
 
 2.1         General.To
secure repayment and performance of all Obligations hereunder, Company grants
Lender a security interest in the Company’s accounts receivable (other than
accounts factored with Wells Fargo),  ATSI’s ownership in ATSICOM,
whether now owned or hereafter acquired, or any value received in exchange for
any of the foregoing including, without limitation, all proceeds of insurance
covering the same and all tort claims in connection therewith (collectively, the
“Collateral”).  For
purposes of this Agreement and the other Loan Documents, “Obligations” means
and includes all loans, debts, liabilities, obligations, covenants and duties
owing by the Company to the Lender of any kind or nature, present or future,
whether or not evidenced by any note, guaranty or other instrument, which may
arise under, out of, or in connection with, this Agreement, the other Loan
Documents or any other agreement executed in connection herewith or therewith,
whether or not for the payment of money, whether arising by reason of a loan,
guaranty, indemnification or in any other manner, whether direct or indirect
(including those acquired by assignment, purchase, discount or otherwise),
whether absolute or contingent, due or to become due, and however
acquired.  The term includes, without limitation, all interest,
charges, expenses, reasonable attorneys’ fees, and any other sum properly
chargeable to the Company under this Agreement, the Note, the other Loan
Documents or any other agreement executed in connection herewith or
therewith.
 
 As
further security for the Obligations, and to provide other assurances to the
Lender, the Lender shall receive, among other things:
 
 (a)          This
Agreement shall constitute a security agreement for purposes of the
UCC.
 
 
 2.3         Recourse to
Security.  Recourse to security shall not be required for any
Obligation hereunder and the Company hereby waives any requirement that the
Lender exhausts any right or take any action against any of the Collateral
before proceeding to enforce the Obligations against the Company.
 
 2.4         Special Provisions Relating
to Receivables.
  (a)           Records, Collections,
Etc.  The Company shall report all customer credits, disputes
and discrepancies in calls and minutes in each case with a value in excess of
$100,000 to the Lender.  Such report shall include a general
description of each such dispute and resolution.  The Company shall
not settle or adjust any dispute or claim, or grant any discount (except
ordinary trade discounts), credit or allowance or accept any disputes, except in
the ordinary course of its business, without the Lender’s
consent.  Upon the occurrence and during the continuance of an Event
of Default, the Lender may (i) settle or adjust disputes or claims directly with
account debtors for amounts and upon terms which it considers advisable and (ii)
notify account debtors on the Company’s receivables that such receivables have
been assigned to the Lender, and that payments in respect thereof shall be made
directly to the Lender.  Where Company receives collateral of any kind
or nature by reason of transactions between itself and its customers or account
debtors, the Company will hold the same on the Lender’s behalf, subject to the
Lender’s instructions, and as property forming part of the Company’s
Receivables.  If the Company sells goods or services to a customer
which also sells goods or services to it or which may have other claims against
it, the Company will so advise the Lender immediately to permit the Lender to
establish a reserve therefore.
  
 
 (b)           Receivables
Covenants.  During the term of this Agreement, the Company
shall always maintain current unfactored receivables greater than or equal to
the Principal Amount.  The Company shall notify the Lender promptly
of:  any material delay in the Company’s performance of any of its
obligations to any account debtor or the assertion of any claims, offsets,
defenses or counterclaims by any account debtor or any disputes with account
debtors or any settlement, adjustment or compromise thereof, all material
adverse information relating to the financial condition of any account debtor
and any event or circumstance which, to the Company’s knowledge, could be
reasonably expected to cause an Event of Default.  The Lender shall
have the right at any time or times, in the Lender’s name or in the name of a
nominee of Lender, to verify the validity, amount or any other matter relating
to any account or other Collateral, by mail, telephone, facsimile transmission
or otherwise.
 
 2.5                     Continuation of Liens,
Etc.  The Company shall defend the Collateral against all
claims and demands of all persons at any time claiming any interest therein,
other than claims relating to liens permitted by this Agreement and the other
Loan Documents.  The Company agrees to comply with the requirements of
all state and federal laws to grant to the Lender valid and perfected security
interests in the Collateral and shall obtain a Deposit Account Control Agreement
or Control Agreement from any securities intermediary or depository bank in
possession of any of the Company’s investment property or deposit
accounts.  The Lender is hereby authorized by the Company to sign the
Company’s name on any document or instrument as may be necessary or desirable to
establish and maintain the liens covering the Collateral and the priority and
continued perfection thereof or file any financing or continuation statements or
similar documents or instruments covering the Collateral whether or not the
Company’s signature appears thereon.  The Company agrees, from time to
time, at the Lender’s request, to file notices of liens, financing statements,
similar documents or instruments, and amendments, renewals and continuations
thereof, and cooperate with the Lender’s representatives, in connection with the
continued perfection (and the priority status thereof) and protection of the
Collateral and the Lender’s liens thereon.  The Company agrees that
the Lender may file a carbon, photographic or other reproduction of this
Agreement (or any financing statement related hereto) as a financing
statement.
 
 2.7         Power of
Attorney.  In addition to all of the powers granted to the
Lender hereunder, the Company hereby irrevocably designates and appoints the
Lender (and all persons designated by the Lender) as the Company’s true and
lawful attorney-in-fact, and authorizes the Lender (and its designees), in the
Company’s or the Lender’s name, to, at any time an Event of Default exists or
has occurred and is continuing (i) demand payment on receivables or other
Collateral, (ii) enforce payment of receivables by legal proceedings or
otherwise, (iii) exercise all of the Company’s rights and remedies to collect
any receivable or other Collateral, (iv) sell or assign any receivable or other
Collateral upon such terms, for such amount and at such time or times as the
Lender deems advisable, (v) settle, adjust, compromise, extend or renew any
receivable, (vi) discharge and release any receivable, (vii) prepare, file and
sign the Company’s name on any proof of claim in bankruptcy or other similar
document against an account debtor or other obligor in respect of any
receivables or other Collateral, (viii) notify the post office authorities to
change the address for delivery of remittances from account debtors or other
obligors in respect of receivables or other proceeds of Collateral to an address
designated by the Lender, and open and dispose of all mail addressed to the
Company and handle and store all mail relating to the Collateral; (ix) make any
payment or take any action necessary or desirable to protect or preserve any
Collateral; and (x) do all acts and things which are necessary, in the Lender’s
determination, to fulfill the Company’s Obligations under this Agreement and the
other Loan Documents.  The Company hereby releases the Lender and each
Lender and their respective officers, employees and designees from any
liabilities arising from any act or acts under this power of attorney and in
furtherance thereof, whether of omission or commission, except as a result of
the Lender’s or any of its officer’s, employee’s or designee’s own gross
negligence or willful misconduct as determined pursuant to a final
non-appealable order of a court of competent jurisdiction.  The
Lender’s authority hereunder shall include, without limitation, the authority to
execute and give receipt for any certificate of ownership or any document, to
transfer title to any item of Collateral and to take any other actions arising
from or incident to the powers granted to the Lender under this
Agreement.  This power of attorney is coupled with an interest and is
irrevocable until the Obligations are repaid in full.
  
 
 2.8         Perfection of Security
Interests.
 
 (a)           The
Company irrevocably and unconditionally authorizes the Lender to file at any
time and from time to time such financing statements and similar instruments
with respect to the Collateral naming the Lender or its designee as the secured
party and the Company as debtor, as the Lender may require, and including any
other information with respect to the Company or otherwise required by the
Uniform Commercial Code of such jurisdiction as the Lender may determine,
together with any amendment and continuations with respect thereto, which
authorization shall apply to all financing statements and similar instruments
filed on, prior to or after the date hereof.  The Company hereby
ratifies and approves all financing statements naming the Lender or its designee
as secured party and the Company as debtor with respect to the Collateral (and
any amendments with respect to such financing statements and similar
instruments) filed by or on behalf of the Lender prior to the date hereof and
ratifies and confirms the authorization of the Lender to file such financing
statements and similar instruments (and amendments, if any).  The
Company hereby authorizes the Lender to adopt on behalf of the Company any
symbol required for authenticating any electronic filing.  In no event
shall the Company at any time file, or permit or cause to be filed, any
correction statement or termination statement with respect to any financing
statement or similar instrument (or amendment or continuation with respect
thereto) naming the Lender or its designee as secured party and the Company as
debtor, without the prior written consent of the Lender.
 
 (b)           The
Company does not have any chattel paper (whether tangible or electronic) or
instruments as of the date hereof.  In the event that any Company
shall be entitled to or shall receive any chattel paper or instrument after the
date hereof, the Company shall promptly notify the Lender thereof in
writing.  Promptly upon the receipt thereof, the Company shall
deliver, or cause to be delivered to the Lender, all tangible chattel paper and
instruments that the Company has or may at any time acquire, accompanied by such
instruments of transfer or assignment duly executed in blank as the Lender may
from time to time specify, in each case except as the Lender may otherwise
agree.  At the Lender’s option, the Company shall, or the Lender may
at any time on behalf of the Company, cause the original of any such instrument
or chattel paper to be conspicuously marked in a form and manner acceptable to
the Lender with the following legend referring to chattel paper or instruments
as applicable: “This [chattel paper][instrument] is subject to the security
interest of, ATV Texas Ventures III, LP as Lender, and any sale, transfer,
assignment or encumbrance of this [chattel paper][instrument] violates the
rights of such secured party.”
 
 (c)           The
Company does not have any deposit accounts, except for Wells Fargo, as of the
date hereof., The Company shall not, directly or indirectly, after the date
hereof open, establish or maintain any deposit account unless each of the
following conditions is satisfied: (i) the Lender shall have received not less
than one (1) Business Days prior written notice of the intention of the Company
to open or establish such account which notice shall specify in reasonable
detail and specificity reasonably acceptable to the Lender the name of the
account, the owner of the account, the name and address of the bank or other
financial institution at which such account is to be opened or established, the
individual at such bank or other financial institution with whom the Company is
dealing and the purpose of the account and (ii) on or before the opening of such
deposit account, the Company shall as the Lender may specify either (A) deliver
to the Lender a Deposit Account Control Agreement with respect to such deposit
account of the Company duly authorized, executed and delivered by the Company
and the bank at which such deposit account is opened and maintained or (B)
arrange for the Lender to become the customer of the bank with respect to such
deposit account of the Company on terms and conditions acceptable to the
Lender.  The terms of this subsection (C) shall not apply to deposit
accounts specifically and exclusively used for payroll, payroll taxes and other
employee wage and benefit payments to or for the benefit of any Company’s
salaried employees.
  
  (d)           The
Company shall take any other actions reasonably requested by the Lender from
time to time to cause the attachment and perfection of, and the ability of the
Lender to enforce, the security interest of the Lender in any and all of the
Collateral, including, without limitation, (i) executing, delivering and, where
appropriate, filing financing statements and similar instruments and amendments
relating thereto under the UCC or other applicable law, to the extent, if any,
that the Company’s signature thereon is required therefore, (ii) causing the
Lender’s name to be noted as secured party on any certificate of title for a
titled good if such notation is a condition to attachment, perfection or
priority of, or ability of the Lender to enforce, the security interest of the
Lender in such Collateral, (iii) complying with any provision of any statute,
regulation or treaty of the United States as to any Collateral if compliance
with such provision is a condition to attachment, perfection or priority of, or
ability of the Lender to enforce, the security interest of the Lender in such
Collateral, (iv) obtaining the consents and approvals of any Governmental Person
or third party, including, without limitation, any consent of any licensor,
lessor or other person obligated on Collateral, and taking all actions required
by any earlier versions of the UCC or by other law, as applicable in any
relevant jurisdiction.
 
 2.9         Right to
Cure.  The Lender may, at its option, (a) upon notice to the
Company, cure any default by the Company under any material agreement with a
third party that affects the Collateral, its value or the ability of the Lender
to collect, sell or otherwise dispose of the Collateral or the rights and
remedies of the Lender therein or the ability of the Company to perform its
Obligations hereunder or under the other Loan Documents, (b) pay or bond on
appeal any judgment entered against the Company, (c) discharge taxes, liens,
security interests or other encumbrances at any time levied on or existing with
respect to the Collateral and (d) pay any amount, incur any expense or perform
any act which, in the Lender’s good faith judgment, is necessary or appropriate
to preserve, protect, insure or maintain the Collateral and the rights of the
Lender with respect thereto.  The Lender may add any amounts so
expended to the Obligations, such amounts to be repayable by the Company on
demand.  The Lender shall be under no obligation to effect such cure,
payment or bonding and shall not, by doing so, be deemed to have assumed any
obligation or liability of the Company.  Any payment made or other
action taken by the Lender under this Section shall be without prejudice to any
right to assert an Event of Default hereunder and to proceed
accordingly.
 
 3.           Representations, Warranties
and Covenants of Company.
 
 3.1         Corporate Existence and
Authority.  Company is and will continue to be duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.  Company is and will continue to be
qualified and licensed to do business in all jurisdictions in which any failure
to do so would have a material adverse effect on Company.  Company has
all requisite power to transact the business it transacts and proposes to
transact, to execute and deliver this Agreement, and all other documents and
agreements contemplated by this Agreement, and to perform the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement. The
execution, delivery and performance of this Agreement, and all other documents
and agreements contemplated by this Agreement, and the consummation of the
transactions contemplated by this Agreement, have been duly authorized and
approved by Company.  This Agreement, and all other documents and
agreements contemplated by this Agreement have each been duly authorized,
executed and delivered by, and each is the valid and binding obligation of,
Company enforceable against Company in accordance with its terms, except as may
be limited by applicable bankruptcy, reorganization, insolvency, moratorium or
other similar laws or by legal or equitable principles relating to or limiting
creditors’ rights generally.
 
 3.2         No Conflicts. The
consummation of the transactions contemplated by this Agreement and the
performance of the terms and provisions of this Agreement, and any other
documents or agreements contemplated by this Agreement will not
(i) contravene, result in any breach of, or constitute a default under any
indenture, mortgage, deed of trust, bank loan or credit agreement, corporate
charter, by-laws or other material agreement or instrument to which Company is a
party or by which Company or any of its properties or the Collateral is
bound,  (ii) conflict with or result in a breach of any of the
terms, conditions or provisions of any order of any court, arbitrator or
Federal, State, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign (collectively, “Governmental Person”)
applicable to Company or (iii) violate any material provision of any statute or
other rule or regulation of any Governmental Person applicable to Company, which
could have a material adverse effect on Company.
 
 3.3         Place of Business; Location
of Collateral.  The address set forth in Section 9.3 of this
Agreement is Company’s chief executive office and the Collateral is located only
at such location and at such other location or locations listed
herein.  Company will give Lender prior written notice before opening
any additional place of business, changing its chief executive office, or moving
any of the Collateral to a location other than Company’s chief executive
office.
  
 
 3.4         Title to Collateral;
Permitted Liens.  Company is now, and will at all times in the
future be, the sole owner of all the Collateral, except for items of equipment
which are leased by Company.  The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, other than Permitted Liens.  Lender now has, and
will continue to have, a perfected and enforceable security interest in all of
the Collateral subject only to Permitted Liens, and Company will at all times
defend Lender and the Collateral against all claims of others (subject to the
rights of holders of the Permitted Liens).  So long as the Loan is
outstanding, none of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a
fixture.  Company is not and will not become a lessee under any real
property lease pursuant to which the lessor may obtain any rights in any of the
Collateral and no such lease now prohibits, restrains, impairs or will prohibit,
restrain or impair Company’s right to remove any Collateral from the leased
premises (subject to statutory rights of landlords).  Whenever any
Collateral is located upon premises in which any third party has an interest
(whether as owner, mortgagee, beneficiary under a deed of trust, lien or
otherwise), Company shall, whenever requested by Lender, use its best efforts to
cause such third party to execute and deliver to Lender, in form acceptable to
Lender, such waivers and subordinations as Lender shall specify, so as to ensure
that Lender’s rights in the Collateral are, and will continue to be, superior to
the rights of any such third party.  Company will keep in full force
and effect, and will comply with all the terms of, any lease of real property
where any of the Collateral now or in the future may be located.
 
 As used
in this Agreement, “Permitted Liens”
shall mean (a) the lien, charges, security interests in favor of the Lender (b)
liens, charges, security interests, licenses, leases, and other encumbrances
4 attached
hereto and made a part hereof, (c) liens, charges, security interests, and other
encumbrances arising under or relating to the sale of accounts receivable under
that certain Account Transfer Agreement with Wells Fargo Business Credit and any
renewal, extension or replacement thereof; (d) liens for taxes or assessments or
other charges by a Governmental Person that are not yet due and payable or, if
due and payable, are being contested in good faith by appropriate proceedings
and for which appropriate reserves are maintained; (e) mechanics’ materialmen’s,
landlords’, warehousemen’s, carrier’s and other similar liens imposed by law and
securing obligations incurred in the ordinary course of business which are not
past due for more than thirty (30) days or which are being diligently contested
in good faith by appropriate proceedings and for which appropriate reserves have
been established; (f) liens under workers’ compensation, unemployment insurance,
Social Security and other similar legislation’ (g) liens, deposits, or pledges
securing the performance of contracts, leases, public or statutory obligations,
surety, stay, appeal and performance bonds and other similar obligations
incurred in the ordinary course of business; (h) liens securing capital lease
obligations or the payment of the purchase price of any asset; and (i) with
respect to real property, easements, restrictive covenants, rights-of-way and
other similar liens and encumbrances that do not impair the continued use of
such real property.
 
 3.5         Maintenance of
Collateral.  Company will maintain the Collateral in good
working condition, ordinary wear and tear accepted, and Company will not use the
Collateral for any unlawful purposes.  Company will immediately advise
Lender in writing of any material loss or damage to the Collateral as more fully
set forth in Section
3.29(c).  The Company will not directly or indirectly, in any
fiscal year, sell, transfer or otherwise dispose of any of the Collateral (other
than sales of inventory in the ordinary course of business), or grant any
option.
 
 3.6         Books and
Records.  Company has maintained and will maintain at Company’s
chief executive or chairman’s office at the address set forth in Section 9.3 complete
and accurate books and records, comprising an accounting system in accordance
with generally accepted accounting principals.  The Company shall, (i)
maintain books and records (including computer records and programs) of account
pertaining to the assets, liabilities and financial transactions of the Company
in such detail, form and scope as is consistent with good business practice and
(ii) provide the Lender access to the premises of the Company at any time and
from time to time, during normal business hours and upon reasonable notice under
the circumstances, but in all events at least one (1) Business Day notice, and
at any time after the occurrence and during the continuance of an Event of
Default, for the purposes of (A) inspecting and verifying the Collateral, (B)
inspecting and copying (at the Company’ expense) any and all records pertaining
thereto, and (C) discussing the affairs, finances and business of the Company
with any officer or director thereof, all of whom are hereby authorized to
disclose to the Lender all financial statements, work papers, and other
information relating to such affairs, finances or business.
 
 3.7         Financial Condition,
Statements and Reports.  All financial statements now or in the
future delivered to Lender have been, and will be, prepared in conformity with
generally accepted accounting principles (“GAAP”) and now and in
the future will completely and fairly reflect the financial condition of
Company, at the times and for the periods therein stated.  Between the
last date covered by any such statement provided to Lender and the date hereof,
the Company represents that there has been no material adverse change in the
financial condition or business of Company.  The Company will not at
any time make or permit any material change in accounting policies or reporting
practices, except as required by GAAP.
  
 
 
 3.8         Compliance with
Law.  Company has complied, and will comply, in all material
respects, with all provisions of all applicable laws and regulations, including,
but not limited to, those relating to Company’s ownership of real or personal
property, the conduct and licensing of Company’s business, and all environmental
matters.
 
 3.9         Litigation.  Except
as disclosed, there is no claim, suit, litigation, proceeding or investigation
pending or (to the best of Company’s knowledge) threatened by or against or
affecting Company in any court or before any Governmental Person (or any basis
therefore known to Company) which could normally or reasonably be expected to
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Company, or in any material impairment in
the ability of Company to carry on its business in substantially the same manner
as it is now being conducted.  Company will promptly inform Lender in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Company.
 
 3.10       Use of
Proceeds.  All proceeds of the Loan shall be used solely in
accordance with this Agreement.  In no event shall the Company (i) use
any portion of the proceeds of the Loan for the purpose of purchasing or
carrying any “margin stock” (as defined in Regulation U of the Federal Reserve
Board) in any manner which violates the provisions of Regulation T, U or X of
the Federal Reserve Board or for any other purpose in violation of any
applicable statute or regulation, or of the terms and conditions of this
Agreement, or (ii) take, or permit any person acting on its behalf to take, any
action which could reasonably be expected to cause this Agreement or any
document or instrument delivered pursuant hereto to violate any regulation of
the Federal Reserve Board.
 
 3.11       Intellectual
Property.  Company possesses all material licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names and
any other tangible or intangible or intellectual property rights, or rights
thereto, required to conduct its business substantially as now conducted and as
currently proposed to be conducted, and such rights do not infringe any material
intellectual property rights of others in any material respect and no claim or
litigation is pending, or, to the best of the Company’s knowledge, threatened
against the Company that contests its right to sell or use any such product,
process, method, substance, part or other material.  The Company shall
do and cause to be done all things necessary to preserve and keep in full force
and affect all of its material registrations of intellectual property, including
without limitation all trademarks, service marks and other marks, trade names
and other trade rights.
 
 3.12       Indebtedness.  Except
as set forth on the Debt Schedule and as reported in the Company’s SEC filings,
Company has no outstanding indebtedness of any kind.
 
 3.13       Disclosure.  No
representation or other statement made by Company to Lender contains any untrue
statement of a material fact or omits to state a material fact necessary to make
any statements made to Lender not misleading.
 
 3.14               
No Actual or Pending
Material Modification of Business.  There exists no actual or,
to the best of the Company’s knowledge after due inquiry, threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship of the Company with any customer or group of customers
which individually or in the aggregate could reasonably be expected to have a
material adverse effect.
 
 3.15       No Broker’s or Finder’s
Fees.  No broker or finder brought about the obtaining, making
or closing of the Loan or financial accommodations afforded hereunder or in
connection herewith by the Lender or any of its affiliates.
 
 3.16       Investment
Company.  Company is not an “investment company,” or an
“affiliated person” of, or “promoter” or “principal underwriter” for, an
“investment company,” as such terms are defined in the Investment Company Act of
1940, as amended.  Neither the making of the Loan or the application
of the proceeds or repayment thereof by the Company, nor the consummation of the
other transactions contemplated by this Agreement or the other Loan Documents,
will violate any provision of such Act or any rule, regulation or order of the
Securities and Exchange Commission there under.
  
 
 3.17       Solvency.  Company
is Solvent and will be Solvent upon the completion of all transactions
contemplated to occur on or before the making of the Loan by the
Lender.  For purposes of this Agreement “Solvent” means, that
as of the date as to which the Company’s solvency is to be
measured:
 
 (a)           it
has sufficient capital to conduct its business; and
 
 (b)           it
is able to meet its debts as they mature.
 
 3.18       Affiliate
Transactions.  Except as specified in herein, the Company
is not a party to or bound by any agreement or arrangement (whether oral or
written) to which any affiliate of the Company is a party except (i) in the
ordinary course of and pursuant to the reasonable requirements of the business
of the Company and (ii) upon fair and reasonable terms no less favorable to the
Company than it could obtain in a comparable arm’s-length transaction with an
unaffiliated person.
 
 3.19       Performance.  Company
shall pay the Principal Amount of, and interest on, the Loan evidenced by this
Agreement in the manner provided in this Agreement.  The obligation of
Company described in the preceding sentence is absolute and unconditional,
irrespective of any tax or accounting treatment of such obligation including
without limitation any documentary stamp, transfer, ad valorem or other taxes
assessed by any jurisdiction in connection with this transaction.
 
 3.20       Stay, Extension and Usury
Laws.  Company agrees (to the extent it may lawfully do so)
that it will not at any time insist upon, plead or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law or any
usury law or other law that would prohibit or forgive Company from paying all or
a portion of the Principal Amount of, finance fee, or interest on the Loan
contemplated by this Agreement, wherever enacted, now or at any time hereinafter
in force, or that may materially affect the covenants or the performance of this
Agreement in any manner inconsistent with the provisions of this
Agreement.  Company expressly waives all benefit or advantage of any
such law.  If a court of competent jurisdiction prescribes that
Company may not waive its rights to take the benefit or advantage of any stay or
extension law or any usury law or other law in accordance with the prior
sentence, then the obligation to pay interest on the Principal Amount shall be
reduced to the maximum legal limit under applicable law governing the interest
payable in connection with this Agreement, and any amount of interest paid by
Company that is deemed illegal shall be deemed to have been a prepayment of the
Principal Amount on the Loan.
 
 3.21       Taxes.  The
Company has properly completed and timely filed all income tax returns it is
required to file. The information filed within such tax returns is complete and
accurate in all material respects.  All deductions taken in such
income tax returns are appropriate and in accordance with applicable laws and
regulations, except deductions that may have been disallowed but are being
challenged in good faith and for which adequate reserves have been established
in accordance with GAAP.  All taxes, assessments, fees and other
governmental charges for periods beginning prior to the date hereof have been
timely paid (or, if not yet due, adequate reserves therefore have been
established) by it and the Company has no liability for taxes in excess of the
amounts so paid or reserves so established.  No deficiencies for taxes
have been claimed, proposed or assessed by any taxing or other Governmental
Person against the Company and no tax liens have been filed with respect
thereto.  There are no pending or threatened audits, investigations or
claims for or relating to any liability of the Company for taxes and there are
no matters under discussion with any Governmental Person which could result in
an additional liability for taxes.  No extension of a statute of
limitations relating to taxes, assessments, fees or other governmental charges
is in effect with respect to the Company.  Company is not a party to,
and has no obligations under, any written tax sharing agreement or agreement
regarding payments in lieu of taxes.  Until payment and satisfaction
of all Obligations in full the Company shall pay, when due, (i) all tax
assessments, and other governmental charges and levies imposed against it or any
of its property and (ii) all lawful claims that, if unpaid, might by law become
a lien upon its property; provided, however, that, unless such tax assessment,
charge, levy or claim has become a lien on any of the property of the Company it
need not be paid if it is being contested in good faith, by appropriate
proceedings diligently conducted and an adequate reserve or other appropriate
provision shall have been established therefore as required in accordance with
GAAP.
  
 
 3.22       Limitations on
Indebtedness.  Without Lender’s prior written consent, Company
shall not, directly or indirectly, create, incur, assume, suffer to exist or
otherwise in any manner become liable or commit to become liable for any
indebtedness other than (a) indebtedness incurred under and in accordance with
this Agreement; (b) indebtedness listed on Debt Schedule, including
any extension and renewals thereof; (c) indebtedness incurred in connection with
the purchase (or the capitalized or capitalizable lease) of assets used in the
business, which shall not exceed the purchase price (or aggregate lease
obligations relating to) such assets; (d) indebtedness relating to or arising
from the sale of accounts receivable under that certain Account Transfer
Agreement with Wells Fargo Business Credit and any renewal, extension or
replacement thereof; and (e) indebtedness incurred in the ordinary course of
business not in excess of US $2.5 million in the aggregate.
 
 3.23       Qualified
Business.  Company acknowledges and agrees that Lender is
providing the Loan to the Company pursuant to the Texas CAPCO Law as a qualified
business.  The Company understands that in order for the Loan to be
made by the Lender the following representations must be true and correct as of
the date of this Agreement and as of the date that any Loan is outstanding by
the Lender.
 
 (a) The
Company is headquartered in Texas, its principal business operations and books
and records are in Texas and the Company at all times intends to remain in
Texas.  As of the date hereof, the Company does not and has not had
more than 100 employees at any given time.  At least 80% of the
Company’s employees reside in Texas or the Company pays at least 80% of its
payroll to Texas residents.
 
 (b)  The
Company’s primary business is and will continue to remain in: (i) manufacturing,
processing, or assembling products; (ii) conducting research and development; or
(iii) providing services.
 
 (c)  The
Company does not and will not incur more than 20% of its expenses and does not
receive more than 20% of its income from:
 
 (i)
retail sales;
 
 (ii) real
estate development;
 
 (iii) the
business of financial services including insurance, banking, or lending;
or
 
 (iv) the
provision of professional services provided by accountants, attorneys, or
physicians.
 
 
 3.24       Corporate
Changes.  Company will not merge or consolidate with any person
or entity, or make any investments, or dispose of any substantial portion of its
assets, or amend, alter or modify its Articles of Incorporation or by-laws, its
legal name, mailing address, chief executive office or principal places of
business, structure, status or existence, or liquidate or dissolve itself (or
suffer any liquidation or dissolution) or issue any capital stock or other
equity interests without Lender’s prior written consent or Loan
repayment.
 
 3.25       Insurance.  The
Company shall at all times, maintain with financially sound and reputable
insurers insurance with respect to the Collateral against loss or damage and all
other insurance of the kinds and in the amounts customarily insured against or
carried by corporations of established reputation engaged in the same or similar
businesses and similarly situated.  Such policies of insurance shall
be reasonably satisfactory to the Lender as to form, amount and
insurer.  The Company shall furnish certificates, policies or
endorsements to the Lender as the Lender shall request as proof of such
insurance, and, if the Company fails to do so, the Lender is authorized, but not
required, to obtain such insurance at the expense of the Company.  All
policies shall provide for at least thirty (30) days prior written notice to the
Lender of any cancellation or reduction of coverage and that the Lender may act
as attorney for the Company in obtaining, and at any time an Event of Default
exists or has occurred and is continuing, adjusting, settling, amending and
canceling such insurance.  The Company shall cause the Lender to be
named as a loss payee and an additional insured (but without any liability for
any premiums) under such insurance policies and the Company shall obtain
non-contributory lender’s loss payable endorsements to all insurance policies in
form and substance satisfactory to the Lender.  Such Lender’s loss
payable endorsements shall specify that the proceeds of such insurance shall be
payable to the Lender as its interests may appear and further specify that the
Lender shall be paid regardless of any act or omission by a Company or any of
its affiliates.  In the event of a loss that results in a material
adverse effect, at its option, the Lender may apply any insurance proceeds
received by the Lender at any time to the cost of repairs or replacement of
Collateral and/or to payment of the Obligations, whether or not then due, in any
order and in such manner as the Lender may determine or hold such proceeds as
cash collateral for the Obligations.  In all other circumstances, the
Company shall determine whether the insurance proceeds shall be applied to the
cost of repairs or replacement of Collateral or to payment of the
Obligations.
  
 
 3.26                      Investments.  Until
payment and satisfaction of all Obligations in full, the Company will not
directly or indirectly, at any time make or hold any investment in any person
(whether in cash, securities or other property of any kind) except the Company
may make investments in cash and cash equivalents so long as the Lender has a
perfected, lien on such cash and cash equivalents pursuant to a Control
Agreement or a Deposit Account Control Agreement;
 
 3.27       Financial
Covenants.  Until payment and satisfaction of all Obligations
in full, the Company shall:
 
 (a)
              omitted;
 (b)
              omitted;
 (c)
              permit
      Lender to conduct on site due diligence and asset review with reasonable
      notice;
 (d)
              properly
      identify all assets on Company’s books and records;
  and
 (e)           deliver
to Lender unaudited financial statements within 45 days of month end, audited
statements within 115 days of the fiscal year end.
 
 For
purposes of this Agreement
 
 “Tangible Net Worth”
shall mean at any date of determination, an amount equal to (i) the total assets
determined in accordance with GAAP, on a basis consistent with the latest
audited financial statements of the Company but excluding such assets as are
properly classified as intangible assets under GAAP, minus (ii) the total
liabilities determined in accordance with GAAP, on a basis consistent with the
latest audited financial statements of the Company, in each case as reported on
the most recent quarterly or annual financial statements prepared by the
Company.
 
 “Debt Service Ratio”
shall mean at any date of determination, the ratio of (a) the EBITDA reported by
the Company for the most recently completed fiscal quarter, to (b) all payments
by the Company pursuant to Loan for the most recently completed four fiscal
quarters (or lesser number if this Agreement has been in force for less than
four fiscal quarters) divided by four (or such lesser number of fiscal quarters
for which this Agreement has been in force..
 
 “EBITDA” shall mean,
in any period, all earnings of the Company before all (i) interest and tax
obligations, (ii) depreciation and (iii) amortization for said period, all
determined in accordance with GAAP on a consistent basis with the latest audited
financial statements of the Company, but excluding the effect of extraordinary
and/or non-reoccurring gains or losses for such period and excluding all
non-cash expenses deducted from earnings during such period.
 
 3.29       Notification
Requirements.  The Company shall timely give the Lender the
following notices and other documents:
 
 (a)          Notice of
Defaults.  Promptly, and in any event within five (5) Business
Days after becoming aware of the occurrence of an Event of Default, a
certificate of a senior officer of the Company specifying the nature thereof and
the Company’s proposed response thereto, each in reasonable detail.
 
 (b)         Proceedings or
Changes.  Promptly, and in any event within five (5) Business
Days after the Company becomes aware of (i) any proceeding being instituted or
threatened to be instituted by or against Company in any federal, state, local
or foreign court or before any commission or other regulatory body (federal,
state, local or foreign) involving a sum, together with the sum involved in all
other similar proceedings, in excess of $100,000 in the aggregate, (ii) any
order, judgment or decree involving a sum, together with the sum of all other
orders, judgments or decrees, in excess of $100,000 in the aggregate being
entered against the Company or any of its property or assets, (iii) any material
notice or correspondence issued to the Company thereof by a Governmental Person
warning, threatening or advising of the commencement of any investigation
involving the Company or its property or assets, (iv) any actual or prospective
change, development or event which has had or could reasonably be expected to
have a material adverse effect, (v) the cessation of the business relationship
with any customer of a Company whose purchases have accounted for more than 10%
of the sales of the Company in any year, (vi) a change in the location of any
Collateral from the locations specified herein except for changes as otherwise
permitted herein or (vii) a proposed or actual change of the name, identity,
corporate structure or jurisdiction of organization or formation of the
Company.
  
 
 (c)          Casualty
Loss.  The Company shall (i) provide written notice to the
Lender, within ten (10) Business Days, of any material damage to, the
destruction of or any other material loss to any asset or property owned or used
by the Company other than any such asset or property with a net book value
(individually or in the aggregate) less than $100,000, or any condemnation,
confiscation or other taking, in whole or in part, or any event that otherwise
diminishes so as to render impracticable or unreasonable the use of such asset
or property owned or used by the Company together with a statement of the amount
of the damage, destruction, loss or diminution in value (a “Casualty Loss”) and
(ii) diligently file and prosecute its claim for any award or payment in
connection with a Casualty Loss.
 
 (d)          Financial
Reporting.  The Company shall deliver to the Lender the
following:
 
 (i)           Annual
financial statements.  As soon as available, but not later than one
hundred fifteen (115) days after the end of each fiscal year, beginning with the
fiscal year ended July 31, 2009, audited financial statements for such fiscal
year together with an Unqualified opinion of the Company’s auditors with respect
thereto.
 
 (ii)          Monthly
financial statements.  As soon as available, but not later than
forty-five (45) days after the end of each month, commencing with the month in
which this Agreement is executed, (A) interim financial statements as at the end
of such month, for the most recently ended fiscal quarter and for the fiscal
year to date and (B) a certification by the Chief Financial Officer that such
financial statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit
adjustments).
 
 (iii)         Other
Financial Information.  Within ten (10) Business Days after the
request by the Lender therefore, such additional financial statements, budgets,
forecasts, projections and other related data and information as to the
Collateral and the business, prospects, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of Company as the
Lender may from time to time reasonably request, and the Company can produce
without unreasonable effort or expense, including, without limitation, reports
on sales and use tax collections, and sales and use tax accruals.
 
 For
purposes of this Agreement, “Unqualified” shall
mean without any material qualification (i) resulting from a limitation on the
scope of examination of such financial statements or the underlying data, (ii)
as to the capability of a Company to continue operations as a going concern or
(iii) which could be eliminated by changes in financial statements or notes
thereto covered by such report (such as by the creation of or increase in a
reserve or a decrease in the carrying value of assets) and which if so
eliminated by the making of any such change and after giving effect thereto
would result in an Event of Default.
 
 4.           Conditions to
Funding   The obligation of the Lender to make the Loan is
subject to the satisfaction of the following conditions prior to or concurrent
with the funding of such Loan.
 
 4.1         Closing
Documents.  The Lender shall have received the following; each
dated the date hereof or as of an earlier date acceptable to the Lender, in form
and substance satisfactory to the Lender and its counsel:
 
 (a)
              The
      Note, duly executed by the Company;
 
 (b)          Acknowledgment
copies of Uniform Commercial Code financing statements (naming the Lender as
secured party and the Company as debtor) and duly authorized release or
termination statements, in form and substance satisfactory to the Lender, duly
filed in all jurisdictions that the Lender deems necessary or desirable to
perfect and protect the liens created hereunder and under the Loan
Documents;
 
 (c)          Such
other agreements, instruments, documents and evidence as the Lender in good
faith deems necessary in its sole and absolute discretion in connection with the
transactions contemplated hereby.
  
 
 4.2         Perfection of
Liens.The liens in favor of the Lender shall have been duly
perfected, and the Collateral shall be free and clear of all liens other than
Permitted Liens.
 
 4.3         Representations and
Warranties.  All representations and warranties contained in
this Agreement and the other Loan Documents shall be true and correct in all
material respects on and as of the date of such Loan as if then made, other than
representations and warranties that expressly relate solely to an earlier date,
in which case they shall have been true and correct as of such earlier
date.
 
 5.           Prepayments.
 
 5.1         Optional.  Company
may, from time to time, prepay the Loan evidenced hereby, in whole or in part,
so long as each partial prepayment of the Principal Amount is equal to or
greater than $50,000 and Company has given Lender two (2) or more Business Days’
notice of such optional prepayment.  Any such optional prepayment of
the Principal Amount shall be without premium or penalty.  Any
Principal Amount prepaid pursuant to this Section shall be in addition to, and
not in lieu of, all payments otherwise required to be paid under this Agreement
at the time of such prepayment.
 
 5.2         Mandatory.  Unless
otherwise agreed to by Lender, Company shall prepay the Loan to the extent of
the net proceeds actually received by Company from the following events (each, a
“Mandatory Prepayment
Event”):
 (a)  a
public offering or private placement of equity or debt securities having an
aggregate market value in excess of $2,000,000; provided, however, that the
proceeds from the public offering or private placement of Excluded Securities
shall not be subject to this provision and shall not be considered a Mandatory
Prepayment Event; or
 
 (b)  the
sale of all or a substantial amount of the Company’s assets in a single or group
of related transactions.
 
 As used
in this Agreement, “Excluded Securities”
means (a) issuance and sale of equity securities pursuant to options, warrants,
convertible securities or other rights to acquire such securities outstanding as
of the date hereof; (b) issuance of equity securities pursuant to options,
warrants, convertible securities or other rights to acquire such securities
issued after the date hereof to employees or consultants of the Company pursuant
to an equity compensation plan adopted by the Company; and (c) equity or debt
securities issued in connection with the acquisition of any other company,
whether in the form of a merger, consolidation, acquisition of assets, exchange
of securities or otherwise.
 
 6.           Intentionally
Omitted.
 
 7.           Events of
Default.
 
 (a)  Events of Default Defined;
Acceleration of Maturity.  If any of the following events
(“Events of
Default”) shall occur and be continuing (for any reason whatsoever and
whether it shall be voluntary or involuntary or by operation of law or
otherwise):
 
 (i)  default shall be made in
the payment of the Principal Amount of, or interest on, the Loan or any other
Obligation when and as the same shall become due and payable, whether at stated
maturity, by acceleration, upon a Mandatory Prepayment Event or otherwise;
or
 
 (ii)  default shall be made
in the performance or observance of any covenant, agreement or condition
contained in this Agreement or in any of the other Loan Documents, including but
not limited to the failure of any financial covenant contained herein, and such
default shall have continued for a period of ten (10) Business Days; provided, that, such
ten (10) Business Day period shall not apply in the case of: (A) any failure to
observe any covenant which is not capable of being cured at all or within such
ten (10) Business Day period or which has been the subject of a prior failure
within a six (6) month period or (B) an intentional breach by the Company of any
covenant; or
  
  (iii)  Company shall (1)
apply for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of itself or of all or a substantial
part of its property and assets, (2) be generally unable to pay its debts as
such debts become due, (3) make a general assignment for the benefit of its
creditors, (4) commence a voluntary case under the United States Bankruptcy Code
or similar law or regulation (as now or hereafter in effect), (5) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (6) fail to controvert in a timely or appropriate manner, or acquiesce
in writing to, any petition filed against it in an involuntary case under the
United States Bankruptcy Code or other law or regulation, (7) dissolve, (8) take
any corporate action under any applicable law analogous to any of the foregoing,
or (9) take any corporate action for the purpose of effecting any of the
foregoing; or
 
 (iv)  a proceeding or case
shall be commenced, without the application or consent of Company in any court
of competent jurisdiction, seeking (1) the liquidation, reorganization,
dissolution, winding up or composition or readjustment of its debts, (2) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
for all or any substantial part of its assets, or (3) similar relief in respect
of Company, under any law providing for the relief of debtors, and such
proceeding or case shall continue undismissed, or unstayed and in effect, for a
period of sixty (60) days; or an order for relief shall be entered in an
involuntary case under the United States Bankruptcy Code or other similar law or
regulation, against Company; or action under the laws of any jurisdiction
affecting Company analogous to any of the foregoing shall be taken with respect
to Company and shall continue unstayed and in effect for any period of sixty
(60) days; or
 
 (v)  final judgment for the
payment of money shall be rendered by a court of competent jurisdiction against
Company and Company shall not discharge the same or provide for its discharge in
accordance with its terms, or procure a stay of execution thereof within sixty
(60) days from the date of entry thereof and within said period of sixty (60)
days, or such longer period during which execution of such judgment shall have
been stayed, appeal therefrom and cause the execution thereof to be stayed
during such appeal, and such judgment together with all other such judgments
shall exceed in the aggregate US$100,000; or
 
 (vi)  any representation or
warranty made by Company in this Agreement, Loan Document, or any other
documents or agreements contemplated hereby and thereby or in any certificate or
other instrument delivered hereunder or pursuant hereto or in connection with
any provision hereof shall be false or incorrect in any material respect on the
date as of which made; or
 
 (vii)           the
indictment by any Governmental Person under any criminal statute, or
commencement or threatened commencement of criminal or civil proceedings against
the Company, pursuant to which statute or proceedings the penalties or remedies
sought or available include forfeiture of (i) any of the Collateral having a
value in excess of $100,000 or (ii) any other property of the Company which is
necessary or material to the conduct of its business; or
 
 (viii)         (A)
the acquisition by any person (or group of persons as defined by the Securities
Exchange Act of 1934 and the regulations thereunder) of more than 20% of the
outstanding voting securities of the Company, (B) the public offer by any person
(or group of persons as defined by the Securities Exchange Act of 1934 and the
regulations thereunder) to acquire more than 20% of the outstanding voting
securities of the Company; (C) the election in a contested proxy solicitation of
candidates nominated by a person other than the Company that represent more than
a majority of the full board of directors; or (D) any other event or
circumstance in which any person acquires the right or ability to direct the
management or control of the Company who does not presently have the right or
ability to direct the management or control of the Company without the prior
approval of the Company’s board of directors.
 
 (ix)
              the
      occurrence of any event or condition that has a material adverse
      effect.
 
 then (x)
upon the occurrence of any Event of Default described in Section 7(a)(iii) or
(iv), the
unpaid Principal Amount of the Loan, together with the interest accrued thereon
and all other amounts payable by Company under this Agreement, shall
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind, all of which are hereby expressly
waived by Company or (y) upon the occurrence of any other Event of Default,
Lender may, by notice to Company, declare the unpaid Principal Amount of the
Loan to be, and the same shall forthwith become, due and payable, together with
the interest accrued thereon and all other amounts payable by Company
hereunder.
  
 
 8.           Other
Remedies.
 
 8.1         General.
 
 (a) Upon the
occurrence and during the continuance of an Event of Default, the Lender shall
have all rights and remedies with respect to the Obligations and the Collateral
under applicable law and the Loan Documents, an, subject to the rights of the
holder of any Permitted Lien, the Lender may do any or all of the
following:
 
 (i) remove
for copying all documents, instruments, files and records (including the copying
of any computer records) relating to the Company’s receivables or use (at the
expense of the Company) such supplies or space of the Company at the Company’s
places of business necessary to administer, enforce and collect such receivables
and any supporting obligations;
 
 (ii) accelerate
or extend the time of payment, compromise, issue credits, or bring suit on a the
Company’s receivables (in the name of the Company or the Lender) and otherwise
administer and collect such receivables;
 
 (iii) sell,
assign and deliver a Company’s receivables with or without advertisement, at
public or private sale, for cash, on credit or otherwise, subject to applicable
law;
 
 (iv) foreclose
the security interests created pursuant to the Loan Documents by any available
procedure, or take possession of any or all of the Collateral, without judicial
process and enter any premises where any Collateral may be located for the
purpose of taking possession of or removing the same;
 
 (v) require
the Company, at the Company’s expense, to assemble and make available to the
Lender any part or all of the Collateral at any place and time designated by the
Lender; or
 
 (vi) collect,
foreclose, receive, appropriate, setoff and realize upon any and all Collateral;
or
 
 (vii) remove
any or all of the Collateral from any premises on or in which the same may be
located for the purpose of effecting the sale, foreclosure or other disposition
thereof or for any other purpose; or
 
 (viii) sell,
lease, transfer, assign, deliver or otherwise dispose of any and all Collateral
(including entering into contracts with respect thereto, public or private sales
at any exchange, broker’s board, at any office of the Lender or elsewhere) at
such prices or terms as the Lender may deem reasonable, for cash, upon credit or
for future delivery, with the Lender having the right to purchase the whole or
any part of the Collateral at any such public sale; or
 
 (ix)         terminate
this Agreement.
 
 If any of the Collateral is sold or
leased by the Lender upon credit terms or for future delivery, the Obligations
shall not be reduced as a result thereof until payment therefore is finally
collected by the Lender.  In the event the Lender institutes an action
to recover any Collateral or seeks recovery of any Collateral by way of
prejudgment remedy, the Company waives the posting of any bond which might
otherwise be required.
 
 (b)           The
Lender may bid or become a purchaser at any sale, free from any right of
redemption, which right is expressly waived by the Company.  If notice
of intended disposition of any Collateral is required by law, it is agreed that
ten (10) Business Days’ notice shall constitute reasonable
notification.  The Company will assemble the Collateral in its
possession and make it available at such locations as the Lender may specify,
whether at the premises of the Company or elsewhere, and will make available to
the Lender the premises and facilities of the Company for the purpose of the
Lender’s taking possession of or removing the Collateral or putting the
Collateral in saleable form.  The Lender may sell the Collateral or
any part thereof in one or more parcels at public or private sale, at any
exchange, broker’s board or at any of the Lender’s offices or elsewhere, for
cash, on credit or for future delivery, and upon such other terms as the Lender
may deem commercially reasonable.  The Lender shall not be obligated
to make any sale of Collateral regardless of notice of sale having been
given.  The Lender may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.  The Company hereby grants the Lender a license to enter
and occupy any of the Company’s leased or owned premises and facilities, without
charge, to exercise any of the Lender’s rights or remedies.
  
 
 (c)           The
Lender may, at any time or times that an Event of Default has occurred and is
continuing, enforce any Company’s rights against any account debtor or secondary
obligor or other obligor in respect of any of the Company’s accounts or other
receivables.  Without limiting the generality of the foregoing, the
Lender may at such time or times (i) notify any or all account debtors,
secondary obligors or other obligors in respect thereof that the receivables
have been assigned to the Lender and that the Lender has a security interest
therein and the Lender may direct any or all accounts debtors, secondary
obligors and other obligors to make payment of receivables directly to the
Lender, extend the time of payment of, compromise, settle or adjust for cash,
credit, return of merchandise or otherwise, and upon any terms or conditions,
any and all receivables or other obligations included in the Collateral and
thereby discharge or release the account debtor or any secondary obligors or
other obligors in respect thereof without affecting any of the Obligations,
demand, collect or enforce payment of any receivables or such other obligations,
but without any duty to do so, and the Lender shall not be liable for its
failure to collect or enforce the payment thereof nor for the negligence of the
Lender or its attorneys with respect thereto and take whatever other action the
Lender may deem necessary or desirable for the protection of its
interests.
 
 8.2         License for Use of Software
and Other Intellectual Property.  Upon the occurrence or during
the continuance of an Event of Default, the Company hereby grants to the Lender
an irrevocable, non-exclusive license or other right to use or sublicense,
without charge or royalty, all computer software programs, data bases,
processes, trademarks, trade names, copyrights, labels, trade secrets, service
marks, copyrights, copyrightable material, advertising materials and other
rights, assets and materials of Company, whether now owned or hereafter
acquired, including in such license reasonable access to all media in which any
of the foregoing may be stored or recorded and to all computer programs used for
the compilation or printout thereof.
 
 8.3         No Marshaling; Deficiencies;
Remedies Cumulative.  The Lender shall have no obligation to
marshal any Collateral or to seek recourse against or satisfaction of any of the
Obligations from one source before seeking recourse against or satisfaction from
another source.  The net cash proceeds resulting from the Lender’s
exercise of any of the foregoing rights to liquidate Collateral shall be applied
by the Lender to such of the Obligations and in such order as the Lender shall
elect in its sole and absolute discretion, whether due or to become
due.  The Company shall remain liable to the Lender and the Lenders
for any deficiency with interest at the highest rate applicable to Loan
hereunder and the Lender agrees to remit to the Company or its successor or
assign, any surplus resulting therefrom.  All of the Lender’s remedies
under the Loan Documents shall be cumulative, may be exercised simultaneously
against any Collateral and the Company or in such order and with respect to such
Collateral or the Company as the Lender may deem desirable, and are not intended
to be exhaustive.
 
 8.4         Waivers.  Except
as may be otherwise specifically provided herein or in any other Loan Document,
the Company hereby waives any right to a judicial or other hearing with respect
to any action or prejudgment remedy or proceeding by the Lender to take
possession, exercise control over, or dispose of any item of Collateral in any
instance (regardless of where the same may be located) where such action is
permitted under the terms of this Agreement or any other Loan Document or by
applicable law or of the time, place or terms of sale in connection with the
exercise of the Lender’s rights hereunder and also waives any bonds, security or
sureties required by any statute, rule or other law as an incident to any taking
of possession by the Lender of any Collateral.  The Company also
waives any damages (direct, consequential or otherwise) occasioned by the
enforcement of the Lender’s rights under this Agreement or any other Loan
Document including the taking of possession of any Collateral or the giving of
notice to any account debtor or the collection of any receivable of the
Company.  The Company also consents that upon the occurrence and
during the continuance of an Event of Default, the Lender may enter upon any
premises owned by or leased to it without obligations to pay rent or for use and
occupancy, through self-help, without judicial process and without having first
obtained an order of any court.  These waivers and all other waivers
provided for in this Agreement and the other Loan Documents have been negotiated
by the parties, and the Company acknowledges that it has been represented by
counsel of its own choice, has consulted such counsel with respect to its rights
hereunder and has freely and voluntarily entered into this Agreement and the
other Loan Documents as the result of arm’s-length
negotiations.
  
  8.5         Indemnification;
Reimbursement of Expenses of Collection.   Company hereby
agrees that, whether or not any of the transactions contemplated by this
Agreement or the other Loan Documents are consummated, the Company will
indemnify, defend and hold harmless (on an after-tax basis) the Lender and its
successors and assigns and its directors, officers, agents, employees, advisors,
shareholders, attorneys and affiliates (each, an “Indemnified Party”)
from and against any and all losses, claims, damages, liabilities, deficiencies,
obligations, fines, penalties, actions (whether threatened or existing),
judgments, suits (whether threatened or existing) or expenses (including,
without limitation, reasonable fees and disbursements of counsel, experts,
consultants and other professionals) imposed on, asserted against or incurred by
any of them (collectively, “Claims”) (except, in
the case of each Indemnified Party, to the extent that any Claim is determined
in a final and non-appealable judgment by a court of competent jurisdiction to
have directly resulted from such Indemnified Party’s gross negligence or willful
misconduct) arising out of or by reason of (i) any litigation, investigation,
claim or proceeding related to (A) this Agreement, any other Loan Document or
the transactions contemplated hereby or thereby, (B) any actual or proposed use
by the Company of the proceeds of the Loan, or (C) the Lender’s entering into
this Agreement, the other Loan Documents or any other agreements and documents
relating hereto (other than consequential damages and loss of anticipated
profits or earnings), including, without limitation, amounts paid in settlement,
court costs and the fees and disbursements of counsel incurred in connection
with any such litigation, investigation, claim or proceeding, and (ii) any
pending, threatened or actual action, claim, proceeding or suit by any
shareholder or director of the Company or any actual or purported violation of a
the Company’s governing documents or any other agreement or instrument to which
the Company is a party or by which any of its properties is bound.  In
addition, the Company shall, upon demand, pay to the Lender all costs and
expenses incurred by the Lender (including the reasonable fees and disbursements
of counsel and other professionals) in connection with the preparation,
execution, delivery, administration, modification and amendment of the Loan
Documents, and pay to the Lender all costs and expenses (including the
reasonable fees and disbursements of counsel and other professionals) paid or
incurred by the Lender in (A) enforcing or defending its rights under or in
respect of this Agreement, the other Loan Documents or any other document or
instrument now or hereafter executed and delivered in connection herewith, (B)
collecting the Obligations or otherwise administering this Agreement and (C)
foreclosing or otherwise realizing upon the Collateral or any part
thereof.  If and to the extent that the obligations of the Company
hereunder are unenforceable for any reason, the Company hereby agrees to make
the maximum contribution to the payment and satisfaction of such obligations
that is permissible under applicable law.  The Company’s obligations
hereunder shall survive any termination of this Agreement and the other Loan
Documents and the payment in full of the Obligations, and are in addition to,
and not in substitution of, any of the other Obligations.
 
 8.6         Remedies
Cumulative.  No remedy herein conferred upon Lender is intended
to be exclusive of any other remedy and each and every such remedy shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing at law or in equity or by statute or
otherwise.
 
 
 9.           Miscellaneous.
 
 9.1         Reliance on and Survival of
Representations.   All representations, warranties,
covenants and agreements of Company herein shall be deemed to be material and to
have been relied upon by Lender and shall survive the execution and delivery of
this Agreement, for so long as the Loan remains outstanding.
 
 9.2         Successors and
Assigns.  This Agreement shall bind and inure to the benefit of
and be enforceable by Company, Lender and each of their respective successors
and assigns, and, in addition, shall inure to the benefit of and be enforceable
by each person who shall from time to time be a holder of the Loan.
 
 9.3         Notices.  All
notices and other communications provided for in this Agreement shall be in
writing and delivered by registered or certified mail, postage prepaid, or
delivered by overnight courier (for next Business Day delivery) or telecopied,
addressed as follows, or at such other address as any of the parties hereto may
hereafter designate by notice to the other parties given in accordance with this
Section:
 
 1)
              if
      to the Company:
 ATSI Communications, Inc.
 Attn: Arthur L Smith, President &
CEO
 Antonio Estrada, Sr. VP of
Finance
 3201 Cherry Ridge Road
 San Antonio, TX 78230
 Telephone: (210) 614-7240
   
  2)
              if
      to Lender:
 ATV TEXAS
VENTURES III, LP
 5090
Richmond Ave., Suite 319
 Telephone:
(713) 599-1300 x105
 Telecopy:  (713)
599-1304
 
 Any such notice or communication shall
be deemed to have been duly given on the fifth day after being so mailed, the
next Business Day after delivery by overnight courier, when received when sent
by telecopy or email, or upon receipt when delivered personally.
 
 9.4         Counterparts.  This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.  Signatures may be exchanged by telecopy, with original
signatures to follow.  Each of the parties hereto agrees that it will
be bound by its own telecopied signature and that it accepts the telecopied
signatures of the other parties to this Agreement.  The original
signature pages shall be forwarded to Lender or its counsel and Lender or its
counsel will provide all of the parties hereto with a copy of the entire
Agreement.
 
 9.5         Amendments.  This
Agreement may only be amended by a writing duly executed by the parties
hereto.
 
 9.6         Severability. If any
term or provision of this Agreement or any other document executed in connection
herewith shall be determined to be illegal or unenforceable, all other terms and
provisions hereof and thereof shall nevertheless remain effective and shall be
enforced to the fullest extent permitted by applicable law.
 
 9.7         Governing Law; Submission to
Process. THIS AGREEMENT AND ALL AMENDMENTS, SUPPLEMENTS, WAIVERS AND
CONSENTS RELATING HERETO OR THERETO SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.  THE COMPANY HEREBY IRREVOCABLY SUBMITS ITSELF TO
THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE
STATE OF TEXAS AND AGREES AND CONSENTS THAT SERVICE OF PROCESS MAY BE MADE UPON
IT IN ANY LEGAL PROCEEDINGS RELATING HERETO BY ANY MEANS ALLOWED UNDER TEXAS OR
FEDERAL LAW.  THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH COURT AND ANY CLAIM
THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.  THE COMPANY SHALL APPOINT AN AGENT FOR SERVICE OF
PROCESS IN TEXAS AND SHALL NOTIFY HOLDER OF ANY FUTURE CHANGE
THEREIN.
 
 9.8         Entire
Agreement.  This Agreement contains the entire Agreement of the
parties hereto with respect to the transactions contemplated hereby and
supersedes all previous oral and written, and all previous contemporaneous oral
negotiations, commitments and understandings.
 
 9.9         Further
Assurances.  Company agrees promptly to execute and deliver
such documents and to take such other acts as are reasonably necessary to
effectuate the purposes of this Agreement.
 
 9.10       Headings.  The
headings contained herein are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
 
 9.11       Assignments and
Participations.  Company may not assign its rights or
obligations hereunder or under the Loan without the prior written consent of
Lender.  Lender may assign all or any portion of the Loan without the
prior consent of Company.  Lender may sell or agree to sell to one or
more other persons a participation in all or any part of any of the Loan or
Warrants without the prior consent of Company.  Upon surrender of the
Loan or Warrants, Company shall execute and deliver one or more substitute
notes, warrants or other securities in such denominations and of a like
aggregate unpaid Principal Amount or other amount issued to Lender and/or to
Lender’s designated transferee or transferees.  Lender may furnish any
information in the possession of Lender concerning Company, or any of its
respective subsidiaries, from time to time to assignees and participants
(including prospective assignees and participants).
  
 
 9.12       JURY
WAIVER.  HOLDER AND COMPANY EACH WAIVES ANY RIGHT TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THE LOAN DOCUMENTS OR ANY
OF THE TRANSACTIONS CONTEMPLATED HEREIN.
 
 IN WITNESS WHEREOF, the parties hereto
have caused this Agreement to be executed as of the day and year set forth
above.
  COMPANY:ATSI
      COMMUNICATIONS, INC.,a
      Nevada corporationBy:
                    /S/ Arthur L SmithName:
      Arthur L SmithTitle:
      President & CEOHOLDER:ATV
      TEXAS VENTURES III, LPBy:
                    /S/ Scott CristName:
      Scott CristTitle:
      Officer
  
  EXHIBIT
A
 
 The Collateral shall consist of all
right, title and interest of Company in and to the following:
 
 (a)          Account
Receivables other than accounts that have been sold to Wells Fargo under the
Account Transfer Agreement dated December 6, 2007.
 
 (b) ownership
interest in ATSICOM.
  
  PAYBACK
SCHEDULE
  December
      10, 2009
                  
                  
                  4,707.35January
      10, 2010
                  
                  
                  4,707.35February
      10, 2010
                  
                  
                  4,707.35March
      10, 2010
                  
                  
                  4,707.35April
      10, 2010
                  
                  
                  4,707.35May
      10, 2010
                  
                  
                  4,707.35June
      10, 2010
                  
                  
                  4,707.35July
      10, 2010
                  
                  
                  4,707.35August
      10, 2010
                  
                  
                  4,707.35September
      10, 2010
                  
                  
                  4,707.35October
      10, 2010
                  
                  
                  4,707.35November
      10, 2010
                  
                  
                  4,707.35December
      10, 2010
                  
                  
                  4,707.35January
      10, 2011
                  
                  
                  4,707.35February
      10, 2011
                  
                  
                  4,707.35March
      10, 2011
                  
                  
                  4,707.35April
      10, 2011
                  
                  
                  4,707.35May
      10, 2011
                  
                  
                  4,707.35June
      10, 2011
                  
                  
                  4,707.35July
      10, 2011
                  
                  
                  4,707.35August
      10, 2011
                  
                  
                  4,707.35September
      10, 2011
                  
                  
                  4,707.35October
      10, 2011
                  
                  
                  4,707.35November
      10, 2011
                  
                  
                  4,707.35