**EMPLOYMENT
      AGREEMENT**





THIS
      EMPLOYMENT AGREEMENT (“ Agreement ”),
      executed this 2 nd day of
      January 2008 (the “ Effective
      Date ”)
      is
      between ATSI Communications, Inc., a Nevada corporation (the “ Employer ”),
      and Arthur
      L. Smith ,
      an
      individual resident of the State of Texas (“ Employee ”).





**R** **E** **C** **I** **T** **A** **L** **S** :





A.
            Employer
                considers the maintenance of a sound and effective management team,
                including Employee, essential to protecting and enhancing its best
                interests and those of its
                stockholders.





B.
            Employer
                desires to offer employment to Employee and Employee desires to be
                employed by Employer.





C.
            Employer
                and Employee agree to enter into an Employment Agreement providing
                for a
                one-year term with automatic annual renewal on the terms and conditions
                herein provided.





NOW,
      THEREFORE, in consideration of Employer’s agreement to employ Employee pursuant
      to the terms of this Agreement and Employee’s future employment with Employer,
      and other good and valuable consideration, the parties agree as
      follows:





**Section
      1** .  **Employment.** Employer
      hereby employs Employee, and Employee hereby accepts employment, upon the terms
      and subject to the conditions stated in this Agreement.





**Section
      2** .  **Duties.** Employee
      shall be employed as the CEO
      & President  of
      Employer, or such other comparable positions with Employer to which he may
      be
      appointed by the Board of Directors of Employer (the “ Board ”).
      Employee shall have such duties and responsibilities as are normally associated
      with the foregoing position and such additional duties and responsibilities
      as
      he may be assigned from time to time by the Board. It is understood that
      Employee may be requested from time to time to provide assistance or services
      to
      subsidiary and affiliated companies of Employer or other company that are wholly
      or partially owned by Employer (each an “ Affiliate ”).
      Employee shall perform such services without additional compensation other
      than
      the compensation set forth in this Agreement. Employee agrees to devote his
      full
      work time and best efforts to the performance of the duties as an employee
      of
      Employer and to the performance of such other duties as assigned him from time
      to time by Employer.





**Section
      3** .  **Term.** The
      Agreement shall commence on the Effective Date and continue until the last
      day
      of the fiscal year in which the Effective Date occurs (the “ Initial
      Term ”).
      Unless Employer or Employee shall provide the other with at least 60 days
      written notice, this Agreement shall automatically renew thereafter on the
      first
      day of each fiscal year of Employer for an additional one year term commencing
      on such first day of each fiscal year and continuing until the last day of
      such
      fiscal year (each, an “ Extension
      Term ”
and
      together with the Initial Term, the “ Employment
      Period ”).
      The
      foregoing notwithstanding, the Employment Period may be terminated early in
      accordance with Section 6 of this Agreement.










**Section
      4** .  **Compensation
      and Benefits.** In
      consideration for the services of Employee hereunder, Employer shall compensate
      Employee as follows during the Employment Period:





(a)  *Base
      Salary* .  Employer
      shall pay Employee a base salary at the rate of at least $150,000 per year,
      payable in accordance with the regular payroll practices of Employer for
      executives. The Base Salary shall be reviewed annually by the Board during
      the
      first quarter of each fiscal year and shall be increased by such amount as
      the
      Board shall deem appropriate effective as of the first day of such fiscal year;
      provided that such increase shall be in an amount of not less than the increase,
      if any, in the Consumer Price Index as of the previous December 31 using the
      December 31, 2007 as the base year. The Base Salary may not be decreased at
      any
      time during the Employment Period.





(b)  *Executive
      Bonus Plan* .  Employee
      shall be eligible to receive from Employer such management incentive bonuses
      as
      may be provided in management incentive bonus plans adopted from time to time
      by
      Employer or approved by the Board.





(c)  *Stock*  *Options* .  Employee
      shall participate in the stock compensation plan adopted by the Board to provide
      management and employees with long-term stock-based compensation. The number
      and
      terms of any options or other stock compensation granted to Employee under
      the
      stock compensation plan shall be determined by the Board in its discretion.





(d)  *Vacation* .  Employee
      shall be entitled time off in accordance with Employee’s vacation and absence
      policy, as it may be modified from time to time during Employee’s employment
      hereunder; provided that Employee will have no less than three (3) weeks of
      paid
      vacation during the Initial Term or any Extension Term of this Agreement. Any
      time off not used within the Initial Term or any Extension Term shall be
      accumulated and may be used during any subsequent Extension Term up to an
      aggregate amount of five (5) weeks during any Extension Term.





(e)  *Group
      Insurance Benefits* .  Employee
      shall be entitled to participate in Employer’s group health, life and disability
      programs as are made available to Employer’s ** other
      executives and Employee’s participation in such programs shall be at the same
      rates that are available to Employer’s other executives. Nothing herein shall be
      deemed to require Employer to adopt and maintain a group health, life and
      disability program or to limit or prohibit Employer’s right to amend or
      terminate any group health, life or disability program adopted by
      Employer.





(f)  *Savings
      Plans.* Employee
      shall be entitled to participate in Employer’s 401(k) savings plan, profit
      sharing plan, or other retirement or savings plans as are made available to
      Employer’s other executives on the same terms that are available to Employer’s
      other executives. Nothing herein shall be deemed to require Employer to adopt
      and maintain a 401(k) savings plan or other retirement or savings plans or
      to
      limit or prohibit Employer’s right to amend or terminate any 401(k) savings plan
      or other retirement or savings plans adopted by Employer.




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          2 -




**Section
      5** .  **Expenses.** The
      parties anticipate that in connection with the services to be performed by
      Employee pursuant to the terms of this Agreement, Employee will be required
      to
      make payments for travel, entertainment of business associates and similar
      expenses. Employer shall reimburse Employee for all appropriate and reasonable
      expenses authorized by Employer and incurred by Employee in the performance
      of
      his duties hereunder. Employee shall comply with such budget limitations and
      approval and reporting requirements with respect to expenses as Employer may
      establish from time to time.





**Section 6** .  **Termination.**





(a)  *General* .  Employee’s
      employment hereunder shall commence on the Effective Date and continue until
      the
      end of the Employment Period, except that the employment of Employee hereunder
      shall terminate prior to such time in accordance with the
      following:





(i)  *Death
      or Disability* .  Upon
      the death of Employee during the Employment Period or, at the option of
      Employer, in the event of Employee’s Disability, upon 30 days’ notice to
      Employee. “Disability” with respect to Employee shall be deemed to exist if
      Employee meets the definition of either “disabled” or “disability” under the
      terms of Employer’s long-term disability benefit program (including the
      definitions for total or partial disability) or if there is no such definition
      or program, if Employee is unable to perform his obligations under this
      Agreement for a period of 30 consecutive days or 60 days in any twelve month
      period. Any refusal by Employee to submit to a reasonable medical examination
      to
      determine whether Employee is so disabled shall be deemed to constitute
      conclusive evidence of Employee’s disability.





(ii)  *For
      Cause* .  Immediately
      upon written notice from Employer specifying that one or more of the following
      events has occurred (except that Employee shall have 30 days after such notice
      to cure or otherwise resolve the occurrence of the events set forth in
      paragraphs 3, 4 or 5):





(1)
            Employee
                is convicted of fraud, bribery, embezzlement or other material dishonesty
                with the respect to the business of Employer, or Employer discovers
                that
                Employee has been convicted of any such act in the past with respect
                to a
                previous employer; or





(2)
            Employee
                is convicted of a felony or any criminal act involving moral turpitude
                or
                Employer discovers that Employee has been convicted of any such act
                in the
                past; or





(3)
            Employee
                commits a material breach of any of the covenants, representations,
                terms
                or provisions hereof; or




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          3 -




(4)
            Employee
                violates any material instructions or policies of Employer with respect
                to
                the operation of its business or affairs or Employee fails in a material
                way to obey written directions delivered to Employee by the Board;
                or





(5)
            Employee
                commits or omits to perform any act the performance of which, or
                the
                omission of which, constitutes substantial failure of Employee to
                diligently and effectively perform his duties to Employer or has
                a
                material adverse effect or could materially adversely affect Employer’s
                business reputation; or





(6)
            Employee
                uses illegal drugs.




(iii)  *By
      Employee for Good Reason* .  Employee
      may terminate his employment hereunder for Good Reason upon written notice
      to
      the Company setting forth the nature of such Good Reason in reasonable detail
      (except that Employer shall have 15 days after such notice to cure or otherwise
      resolve the occurrence of the events set forth in paragraphs 1, 2, 3). “Good
      Reason” shall mean:





(1)
            Employer
                commits a material breach of any of the covenants, representations,
                terms
                or provisions hereof or fails to provide Employee the Base Salary
                and
                incentive compensation and benefits in accordance with the terms
                of
                Section 4 herein; or





(2)
            any
                material and adverse diminution in Employee’s duties or responsibilities
                with Employer; or





(3)
            any
                relocation of Employee from San Antonio, Texas without Employee’s consent;
                or





(4)
            at
                any time upon written notice by Employee to Employer within 12 months
                after (A) a merger or consolidation of Employer with any person; or
                (B) the sale, lease, or other disposition of all or substantially all
                of Employer’s assets to any person; unless in each case, the board of
                directors or other governing body of the surviving person or acquirer,
                as
                the case may be, is the same as the Board immediately before such
                transaction; or





(5)
            the
                acquisition by any person of voting securities constituting 20% or
                more of
                the outstanding voting securities issued by Employer or the right
                to
                elect, by ownership of voting securities or otherwise, more than
                33% of
                the persons that make up the Board.




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(iv)  *Voluntary
      Termination.* Either
      Party may voluntarily terminate the employment of Employee upon thirty (30)
      days’ written notice to the other. Any such termination by Employer shall be
      without Cause if the notice of termination fails to specify one of the reasons
      set forth in Section 6(a)(ii) (or if any such reason is specified that may
      be cured by Employee has been cured within the applicable cure period). Any
      such
      termination by Employee shall be without Good Reason if the notice of
      termination fails to specify one of the reasons set forth in
      Section 6(a)(iii) (or if any such reason is specified that may be cured by
      Employer has been cured within the applicable cure period).





(b)  *Severance
      Benefits* .





(i)  In
      the
      event that Employee’s employment hereunder is terminated as a result of
      Employee’s death or disability pursuant to Section 6(a)(i), Employer shall
      pay Employee (or his estate) a cash amount equal to Employee’s Base Salary for
      the lesser of (A) the period prior to the commencement of benefits under
      any death or disability insurance provided by Employer; or (B) the
      remaining term of this Agreement or sixty (60) days from the date of such death
      or disability, whichever is greater. In addition to the payment under the first
      sentence of this subsection, Employer shall pay all unpaid expense
      reimbursements under Section 5 for expenses incurred in accordance with the
      terms hereof prior to termination and compensation and all accrued and unused
      vacation time as of the date of termination.





(ii)  In
      the
      event that Employee’s employment hereunder is terminated by Employer for Cause
      pursuant to Section 6(a)(ii), Employee provides Employer notice that
      Employee that the Agreement will not be renewed for any Extension Term, or
      voluntarily by Employee pursuant to Section 6(a)(iv), Employer shall have
      no obligation to make any payments to Employee except for payments of Employee’s
      Base Salary accruing prior to the date of termination.





(iii)  In
      the
      event that Employee’s employment hereunder is terminated by Employee for Good
      Reason pursuant to Section 6(a)(iii), Employer provides Employee with
      notice that the Agreement will not be renewed for any Extension Term, or
      voluntarily by Employer pursuant to Section 6(a)(iv), Employer shall pay
      Employee a cash amount equal to Employee’s Base Salary for a period of twelve
      (12) months plus one (1) month for each year of employment by Employer;
      (B) Employer shall continue coverage under Employer’s group health, life
      and disability plan and contribute the Employer’s cost of such coverage for a
      period of twelve (12) months plus one (1) month for each year of employment
      by
      Employer (or pay such amount to Employee as reimbursement for the costs of
      continuing coverage under COBRA or obtaining comparable independent coverage);
      and (C) all options, grants, or other rights issued to Employee under
      Employer’s Stock Compensation Plan, incentive compensation plan, or other
      benefit plans shall immediately vest and be exercisable for the lesser of twelve
      (12) months plus one (1) month for each year of employment by Employer or the
      remaining term of such rights, whichever is less. For the purposes of this
      paragraph 6(b)(iii), Employee will be deemed to have been employed by Employer
      on December 16, 1993.





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          5 -


**Section 7** .  Inventions;
      Assignment.





(a)  *Inventions
      Defined* .  All
      rights to discoveries, inventions, improvements, designs and innovations
      (including all data and records pertaining thereto) that relate to the business
      of Employer, including its Affiliates, whether or not able to be patented,
      copyrighted or reduced to writing, that Employee may discover, invent or
      originate during the term of his employment hereunder, and for a period of
      six
      (6) months thereafter, either alone or with others and whether or not during
      working hours or by the use of the facilities of Employer (“ Inventions ”),
      shall
      be the exclusive property of Employer. Employee shall promptly disclose all
      Inventions to Employer, shall execute at the request of Employer any assignments
      or other documents Employer may deem necessary to protect or perfect its rights
      therein, and shall assist Employer, at Employer’s expense, in obtaining,
      defending and enforcing Employer’s rights therein. Employee hereby appoints
      Employer as his attorney-in-fact to execute on his behalf any assignments or
      other documents deemed necessary by Employer to protect or perfect its rights
      to
      any Inventions.





(b)  *Covenant
      to Assign and Cooperate* .  Without
      limiting the generality of the foregoing, Employee shall assign and transfer
      to
      Employer the worldwide right, title and interest of Employee in the Inventions.
      Employee agrees that Employer may apply for and receive patent rights (including
      Letters Patent in the United States) for the Inventions in Employer’s name in
      such countries as may be determined solely by Employer. Employee shall
      communicate to Employer all facts known to Employee relating to the Inventions
      and shall cooperate with Employer’s reasonable requests in connection with
      vesting title to the Inventions and related patents exclusively in Employer
      and
      in connection with obtaining, maintaining and protecting Employer’s exclusive
      patent rights in the Inventions.





(c)  *Successors
      and Assigns* .  Employee’s
      obligations under this Section 7 shall inure to the benefit of Employer, its
      Affiliates and their respective successors and assigns and shall survive the
      expiration of the term of this Agreement for such time as may be necessary
      to
      protect the proprietary rights of Employer and its Affiliates in the
      Inventions.





**Section
      8** .  **Confidential
      Information.**





(a)  *Acknowledgment
      of Proprietary Interest* .  Employee
      acknowledges the proprietary interest of Employer and its Affiliates in all
      Confidential Information (as defined below). Employee agrees that all
      Confidential Information learned by Employee during his employment with Employer
      or otherwise, whether developed by Employee alone or in conjunction with others
      or otherwise, is and shall remain the exclusive property of Employer. Employee
      further acknowledges and agrees that his disclosure of any Confidential
      Information will result in irreparable injury and damage to
      Employer.





(b)  *Confidential
      Information Defined* .  “Confidential
      Information” means all trade secrets, copyrightable works, confidential or
      proprietary information of Employer or its Affiliates, including without
      limitation, (i) information derived from reports, investigations,
      experiments, research and work in progress, (ii) methods of operation,
      (iii) market data, (iv) proprietary computer programs and codes,
      (v) drawings, designs, plans and proposals, (vi) marketing and sales
      programs, (vii) the identities of clients or customers,
      (viii) historical financial information and financial projections,
      (ix) pricing formulae and policies, (x) all other concepts, ideas,
      materials and information prepared or performed for or by Employer and
      (xi) all information related to the business, services, products, purchases
      or sales of Employer or any of its suppliers and customers, other than
      information that is publicly available.




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          6 -




(c)  *Covenant
      Not To Divulge Confidential Information* .  Employer
      is entitled to prevent the disclosure of Confidential Information. As a portion
      of the consideration for the employment of Employee and for the compensation
      being paid to Employee by Employer, Employee agrees to hold in strict confidence
      and not to disclose or allow to be disclosed to any person, firm or corporation,
      other than to persons engaged by Employer to further the business of Employer,
      and not to use except in the pursuit of the business of Employer, the
      Confidential Information, without the prior written consent of
      Employer.





(d)  *Return
      of Materials at Termination* .  In
      the event of any termination or cessation of his employment with Employer for
      any reason, Employee shall promptly deliver to Employer all documents, data
      and
      other information derived from or otherwise pertaining to Confidential
      Information. Employee shall not take or retain any documents or other
      information, or any reproduction or excerpt thereof, containing or pertaining
      to
      any Confidential Information.





**Section 9** .  **Non-Solicitation.**





(a)  *Solicitation
      of Employees* .  During
      Employee’s employment with Employer and for a period equal to the greater of
      (i) six (6) months after termination of such employment at any time and for
      any reason, or (ii)  the term of any severance benefits payable under
      Section 6 hereof, Employee shall not solicit, participate in or promote the
      solicitation of any person who was employed by Employer or any of its Affiliates
      at the time of Employee’s termination of employment with Employer to leave the
      employ of Employer or any of its Affiliates, or, on behalf of himself or any
      other person, hire, employ or engage any such person. Employee further agrees
      that, during such time, if an employee of Employer or any of its Affiliates
      contacts Employee about prospective employment, Employee will inform such
      employee that he or she cannot discuss the matter further without the consent
      of
      Employer (and the applicable affiliate).





(b)  *Solicitation
      of Clients, Customers, Etc* .  During
      Employee’s employment with Employer and for a period of six (6) months after
      termination of Employee’s employment at any time and for any reason, Employee
      shall not, directly or indirectly, solicit any person who either during any
      portion of the time of Employee’s employment or at the time of termination of
      Employee’s employment with Employer, was a client, customer, policyholder,
      vendor, consultant or agent of Employer or its Affiliates to discontinue
      business, in whole or in part, with Employer or its Affiliates. Employee further
      agrees that, during such time, if such a client, customer, policyholder, vendor,
      or consultant or agent contacts Employee about discontinuing business with
      Employer or moving that business elsewhere, Employee will inform such client,
      customer, policyholder, vendor, consultant or agent that he or she cannot
      discuss the matter further without the consent of Employer (and the applicable
      affiliate).




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**Section
      10** .  **Non-Compete.** Employer
      agrees to disclose to Employee and Employee agrees to receive from Employer
      Confidential Information (as set forth above) which would provide competitors
      of
      Employer with an unfair advantage. In consideration for such disclosure by
      Employer, Employee agrees as follows:





(a)  *Competition
      During Employment* .  Employee
      agrees that during the term of his employment with Employer, neither he nor
      any
      of his Affiliates (Employee’s Affiliates is defined as any legal entity in which
      Employee owns, controls, holds a financial interest in or is the beneficiary
      of)
      will directly or indirectly compete with Employer or its Affiliates in any
      way
      in any business in which Employer or its Affiliates is engaged or intends to
      engage, and that he will not act as an officer, director, employee, consultant,
      shareholder, lender, or agent of any entity which is engaged in any business
      of
      the same nature as, or in competition with, the businesses in which Employer
      and
      its Affiliates are now engaged or in which Employer or its Affiliates become
      engaged during the term of employment; provided, however, that this
      Section 10(a) shall not prohibit Employee or any of his Affiliates from
      purchasing or holding an aggregate equity interest of up to 10% in any publicly
      traded business in competition with Employer and its Affiliates, so long as
      Employee and his Affiliates combined do not purchase or hold an aggregate equity
      interest of more than 10%. Furthermore, Employee agrees that during the term
      of
      employment, he will not accept any board of director seat or undertake any
      planning for the organization of any business activity competitive with Employer
      and Employee will not combine or conspire with any other employees of Employer
      and its Affiliates for the purpose of the organization of any such competitive
      business activity.





(b)  *Competition
      Following Employment* .  In
      order to protect Employer against the unauthorized use or the disclosure of
      any
      Confidential Information of Employer and its Affiliates presently known or
      hereinafter obtained by Employee during his employment under this Agreement,
      Employee agrees that for a period equal to the greater of (i) six (6)
      months after the termination or cessation of his employment with Employer at
      any
      time and for any reason, other than cessation of his employment caused by
      Employer’s filing for reorganization under the bankruptcy laws of the United
      States, and regardless of whether any payments are made to Employee under this
      Agreement as a result of such termination, or (ii) the period for which any
      severance benefits are payable under Section 6 hereof, neither Employee nor
      any of his Affiliates, shall, directly or indirectly, for itself or himself
      or
      on behalf of any other corporation, person, firm, partnership, association,
      or
      any other entity (whether as an individual, agent, servant, employee, employer,
      officer, director, shareholder, investor, principal, consultant or in any other
      capacity):





(i)  engage
      or
      participate in any business which engages in competition with such businesses
      being conducted by Employer or any of its Affiliates during the term of
      employment anywhere in any state in the United States or in any foreign country
      where Employer or any of its Affiliates is engaged; or





(ii)  assist
      or
      finance any person or entity in any manner or in any way inconsistent with
      the
      intents and purposes of this Agreement.




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**Section
      11** .  **General.**





(a)  *Notices* .  All
      notices and other communications hereunder shall be in writing or by written
      telecommunication, and shall be deemed to have been duly given if delivered
      personally or if mailed by certified mail, return receipt requested or by
      written telecommunication, to the relevant address set forth below, or to such
      other address as the recipient of such notice or communication shall have
      specified to the other party in accordance with this Section 11(a):





If
      to
      Employer, to:





ATSI
      Communications, Inc.


3201
      Cherry Ridge, Suite C300


San
      Antonio, Texas, 78230


Attention:
      President




If
      to
      Employee, to Employee’s last known address appearing on Employer’s
      records.





(b)  *Withholding* .  All
      payments required to be made to Employee by Employer under this Agreement shall
      be subject to the withholding of such amounts, if any, relating to federal,
      state and local taxes as may be required by law and such amounts, if any, as
      Employee shall authorize in connection with benefit plans in which Employee
      is a
      participant.





(c)  *Equitable
      Remedies* .  Each
      of the parties hereto acknowledges and agrees that upon any breach by Employee
      of his obligations under any of Sections 7, 8, 9, and 10 Employer shall suffer
      immediate, great and irreparable injury and shall have no adequate remedy at
      law. Accordingly, in event of such breach or threatened breach, Employer shall
      be entitled, in addition to other remedies and without showing actual damages,
      to specific performance and other appropriate injunctive and equitable relief.
      Employer shall not be obligated to provide a bond for any such
      injunction.





(d)  *Severability* .  If
      any provision of this Agreement is held to be illegal, invalid or unenforceable,
      such provision shall be modified as to duration or geography to the minimum
      extent necessary to make it legal, valid and enforceable and as so modified
      enforced. If any such provision cannot be modified to be made legal, valid
      and
      enforceable, such provisions shall be fully severable, and this Agreement shall
      be construed and enforced as if such illegal, invalid or unenforceable provision
      never comprised a part hereof, and the remaining provisions hereof shall remain
      in full force and effect and shall not be affected by the illegal, invalid
      or
      unenforceable provision or by its severance. Furthermore, in lieu of such
      illegal, invalid or unenforceable provision, there shall be added automatically
      as part of this Agreement a provision as similar in its terms to such illegal,
      invalid or unenforceable provision as may be possible and be legal, valid and
      enforceable.





(e)  *Effect
      on Other Agreements.* This
      Agreement modifies and amends, to the extent necessary to give effect to the
      provisions hereof, any Stock Option Agreement, Stock Grant, or other contract
      relating to the issuance of benefits under Employer’s benefit
      plans.




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          9 -




(f)  *Waivers* .  No
      delay or omission by either party in exercising any right, power or privilege
      hereunder shall impair such right, power or privilege, nor shall any single
      or
      partial exercise of any such right, power or privilege preclude any further
      exercise thereof or the exercise of any other right, power or
      privilege.





(g)  *Counterparts* .  This
      Agreement may be executed in multiple counterparts, each of which shall be
      deemed an original, and all of which together shall constitute one and the
      same
      instrument.





(h)  *Captions* .  The
      captions in this Agreement are for convenience of reference only and shall
      not
      limit or otherwise affect any of the terms or provisions hereof.





(i)  *Interpretation
      of Agreement* .  This
      Agreement shall be construed according to its fair meaning and not for or
      against either party. The Parties have each been represented by counsel (or
      advised of their right to be represented by counsel and waived such right)
      and
      have participated in the drafting of this Agreement. No rule of construction
      or
      interpretation shall be applied that construes any provision against a Party
      because it was drafted by such Party. Use of the words “herein,” “hereof,”
“hereto,” “hereunder” and the like in this Agreement refer to this Agreement
      only as a whole and not to any particular section or subsection of this
      Agreement, unless otherwise noted. The masculine gender shall be deemed to
      denote the feminine or neuter genders, the singular to denote the plural, and
      the plural to denote the singular, where the context so permits.





(j)  *Binding
      Agreement* ; *Assignment.* This
      Agreement shall be binding upon and inure to the benefit of the parties and
      shall be enforceable by the personal representatives and heirs of Employee
      and
      the successors and assigns of Employer. The Affiliates of Employer shall be
      considered third party beneficiaries of this Agreement with respect to any
      services provided by Employee to them and in connection with Employee’s
      covenants in Sections 7, 8, 9 and 10 hereof. Employer may assign this Agreement
      to any person. If Employee dies while any amounts would still be payable to
      him
      hereunder, such amounts shall be paid to Employee’s estate. This Agreement is
      not otherwise assignable by Employee.





(k)  *Entire
      Agreement* .  This
      Agreement contains the entire understanding of the parties, supersedes all
      prior
      agreements and understandings relating to the subject matter hereof and may
      not
      be amended except by a written instrument hereafter signed by each of the
      parties hereto.





(l)  *Governing
      Law* .  This
      Agreement and the performance hereof shall be construed and governed in
      accordance with the laws of the State of Texas, without regard to its choice
      of
      law principles.




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(m)  *Arbitration.* Without
      limiting Employer’s right to seek equitable remedies under Section 11(c)
      above, Employer and Employee agree that any dispute or controversy arising
      under
      or in connection with this Agreement shall be settled first by attendance at
      a
      mandatory mediation process and, if not resolved by mediation, by arbitration.
      If the parties are unable to agree on a mediator, either party may petition
      a
      Bexar County state district court judge for assistance in selecting a mediator.
      Arbitration under this Agreement shall be governed by the Federal Arbitration
      Act and proceed in San Antonio, Texas in accordance with the rules of the
      American Arbitration Association (“ AAA ”).
      Arbitration will be conducted before a panel of three neutral arbitrators
      selected from an AAA list of proposed arbitrators with business law experience.
      Either party may take any legal action needed to protect any right pending
      completion of the arbitration. The arbitrator will determine whether an issue
      is
      arbitrate able and will give effect to applicable statutes of limitation. The
      arbitrator has the discretion to decide, upon documents only or with a hearing,
      any motion to dismiss for failure to state a claim or any motion for summary
      judgment. Discovery shall be governed by the Federal Rules of Civil Procedure
      and the Federal Rules of Evidence. All information developed by the arbitration
      or litigation shall be held in confidence subject to such protective orders
      as
      the arbitrator deems useful to ensure complete confidentiality. The decision
      of
      the arbitrator shall be final and binding on all parties to this Agreement,
      and
      judgment thereon may be entered in any court having jurisdiction over the
      parties. The party against whom the arbitrator decides shall pay all costs
      of
      the arbitration proceeding or litigation to enforce the arbitration
      award.





(n)  *Employee
      Representations.* Employee
      represents and certifies to Employer that he: (i) has received a copy of
      this Agreement for review and study and has had ample time to review it before
      signing; (ii) has read this Agreement carefully; (iii) has been given
      a fair opportunity to discuss and negotiate the terms of this Agreement;
      (iv) understands its provisions; (v) has had the opportunity to
      consult his attorney; (vi) has determined that it is in his best interest
      to enter into his Agreement; (vii) has not been influenced to sign this
      Agreement by any statement or representation by Employer or its counsel not
      contained in this Agreement; and (viii) enters into this Agreement
      knowingly and voluntarily.





EXECUTED
      as of the date and year first above written.




EMPLOYER:ATSI
              Communications, Inc.By:
            /s/ John
              FlemingName: John FlemingTitle: Interim ChairmanEMPLOYEE:/s/Arthur
              L. SmithArthur
              L. Smith




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