Document:

Exhibit:
      10.5

     

    PROMISSORY
      NOTE

    

    October
      31, 2007

    

    
      	 	
              $200,000.00

            

    

    

    FOR
      VALUE RECEIVED,
      the
      undersigned, ATSI
      COMMUNICATIONS, INC.,
      a
      Nevada corporation (the “Company”),
      promises to pay CCA
      FINANCIAL SERVICES
      (the
“Lender”)
      at
      P.O. Box 16298, Sugar Land, TX 77496 or other address as the Lender shall
      specify in writing, the principal sum of Two
      Hundred Thousand Dollars ($200,000) and
      interest at the annual rate of fifteen percent (15%) on the unpaid balance
      pursuant to the following terms of this Promissory Note (the “Note”):
      

     

    1. Principal
      and Interest.
      For
      value
      received, the Company hereby promises to pay to the order of the Lender on
      the
      6-month anniversary of the date hereof (“Maturity
      Date”)
      in
      lawful money of the United States of America and in immediately available funds
      the principal sum of Two Hundred Thousand Dollars ($200,000), together with
      interest on the unpaid principal of this note at the rate of fifteen
      percent (15%) per year (computed on the basis of a 365-day year and the
      actual days elapsed) from the date of this Note until paid. 

    

    2. Monthly
      Principal and Interest Payments.
      The
      Company shall make monthly payments of principal and interest in accordance
      with
the
      payment schedule attached hereto as Exhibit A (the “Payment
      Schedule”).
      Each
      payment shall be due and payable as of the Payment Due Date set forth on the
      Payment Schedule and all payment amounts shall be first applied to interest
      and
      the balance to principal. There shall be no prepayment fee or penalty.

    

    3. Right
      of Prepayment.
      Notwithstanding the payments pursuant to Section 2, the Company at its option
      shall have the right to prepay, with three (3) business days advance written
      notice, any additional amounts of outstanding principal of the Note without
      penalty. 

    

    4. Waiver
      and Consent.
      To the
      fullest extent permitted by law and except as otherwise provided herein, the
      Company waives demand, presentment, protest, notice of dishonor, suit against
      or
      joinder of any other person, and all other requirements necessary to charge
      or
      hold the Company liable with respect to this Note.

    

    5. Costs,
      Indemnities and Expenses.
      In the
      event of default as described herein, the Company agrees to pay all reasonable
      fees and costs incurred by the Lender in collecting or securing or attempting
      to
      collect or secure this Note, including reasonable attorneys’ fees and expenses,
      whether or not involving litigation, collecting upon any judgments and/or
      appellate or bankruptcy proceedings. The Company agrees to pay any documentary
      stamp taxes, intangible taxes or other taxes which may now or hereafter apply
      to
      this Note or any payment made in respect of this Note, and the Company agrees
      to
      indemnify and hold the Lender harmless from and against any liability, costs,
      attorneys’ fees, penalties, interest or expenses relating to any such taxes, as
      and when the same may be incurred.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    6. Secured
      Nature of the Note.
      This
      Note is secured by the Security Agreement of even date herewith between the
      Company and the Lender (the “Security
      Agreement”)
      (collectively this Note, the Security Agreement, and any other related
      agreements entered into between the Company and the Lender are collectively
      referred to herein as the “Transaction
      Documents”).
      

    

    7. Event
      of Default.
      An
“Event
      of Default”
shall
      be deemed to have occurred upon the occurrence of any of the following:

    

    (i) The
      Company should fail for any reason or for no reason to make any payment of
      the
      principal of, interest on or other charges in respect of this Note, within
      ten
      (10) days of the date the same shall become due and payable (whether on an
      installment date or the Maturity Date or by acceleration or
      otherwise);

    

    (ii) The
      Company shall fail to observe or perform any other covenant, agreement or
      warranty contained in, or otherwise commit any breach or default of any
      provision of this Note, or any of the other Transaction Documents, which is
      not
      cured within fifteen (15) days after the time of breach;

    

    (iii) The
      Company or any subsidiary that is controlled by the Company shall commence,
      or
      there shall be commenced against the Company or any subsidiary controlled by
      the
      Company under any applicable bankruptcy or insolvency laws as now or hereafter
      in effect or any successor thereto, or the Company or any subsidiary controlled
      by the Company commences any other proceeding under any reorganization,
      arrangement, adjustment of debt, relief of debtors, dissolution, insolvency
      or
      liquidation or similar law of any jurisdiction whether now or hereafter in
      effect relating to the Company or any subsidiary controlled by the Company
      or
      there is commenced against the Company or any subsidiary controlled by the
      Company any such bankruptcy, insolvency or other proceeding which remains
      undismissed for a period of 61 days; or the Company or any subsidiary controlled
      by the Company is adjudicated insolvent or bankrupt; or any order of relief
      or
      other order approving any such case or proceeding is entered; or the Company
      or
      any subsidiary of the Company suffers any appointment of any custodian, private
      or court appointed receiver or the like for it or any substantial part of its
      property which continues undischarged or unstayed for a period of sixty one
      (61)
      days; or the Company or any subsidiary controlled by the Company makes a general
      assignment for the benefit of creditors; or the Company or any subsidiary
      controlled by the Company shall fail to pay, or shall state that it is unable
      to
      pay, or shall be unable to pay, its debts generally as they become due; or
      the
      Company or any subsidiary controlled by the Company shall by any act or failure
      to act expressly indicate its consent to, approval of or acquiescence in any
      of
      the foregoing; or any corporate or other action is taken by the Company or
      any
      subsidiary controlled by the Company for the purpose of effecting any of the
      foregoing; provided however, that the no such action relating to or affecting
      ATSI Communications, Inc., a Texas corporation, or Telespan, Inc., a Texas
      corporation) shall be considered an Event of Default hereunder; and

    

    (iv) The
      Company or any subsidiary controlled by the Company shall default in any of
      its
      obligations under any other promissory note, or any mortgage, credit agreement
      or other facility, indenture agreement, factoring agreement or other instrument
      under which there may be issued, or by which there may be secured or evidenced
      any indebtedness for borrowed money or money due under any long term leasing
      or
      factoring arrangement of the Company or any subsidiary controlled by the Company
      in an amount exceeding $200,000, whether such indebtedness now exists or shall
      hereafter be created and such default shall result in such indebtedness becoming
      or being declared due and payable prior to the date on which it would otherwise
      become due and payable; and

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (v) The
      Common Stock shall cease to be quoted for trading or listed for trading on
      the
      OTC Bulletin Board (“OTC”),
      Nasdaq SmallCap Market, New York Stock Exchange, American Stock Exchange or
      the
      Nasdaq National Market and shall not again be quoted or listed for trading
      thereon within five (5) Trading Days of such delisting.

    

    8. Remedies. Upon
      an
      Event of Default (as defined above), the entire principal balance and accrued
      interest outstanding under this Note, and all other obligations of the Company
      under this Note, shall be immediately due and payable without any action on
      the
      part of the Lender; interest shall accrue on the unpaid principal balance at
      twenty four percent (24%) per year or the highest rate permitted by applicable
      law, if lower; and the Lender shall be entitled to seek and institute any and
      all remedies available to it. Furthermore, anytime after the occurrence of
      an
      Event of Default the Lender from time to time may convert the outstanding
      amounts owed under this Note into shares of Common Stock (the “Conversion
      Shares”)
      at a
      conversion price equal to the lesser of (a) the fixed price - one hundred twenty
      percent (120%) of the Closing Bid Price as quoted by Bloomberg, LP on the date
      of this Note, or (b) eighty percent (80%) of the lowest Closing Bid Price of
      the
      Common Stock as quoted by Bloomberg, LP during the five (5) trading days
      immediately preceding the date of such conversion. However, in no event, shall
      the number of shares issued exceed seventy-five million (75,000,000) shares.
      In
      order to convert, the Lender shall send a notice of conversion in the form
      attached hereto as Exhibit B (“Conversion
      Notice”)
      to the
      Company and to the Company’s transfer agent, and the Company shall, or cause its
      transfer agent to, deliver to the Lender the Conversion Shares in an amount
      equal to the outstanding amount of this Note being converted divided by the
      applicable conversion price as set forth on the Conversion Notice within three
      (3) Trading Days receipt of such Conversion Notice. 

    

    9. Maximum
      Interest Rate.
      In no
      event shall any agreed to or actual interest charged, reserved or taken by
      the
      Lender as consideration for this Note exceed the limits imposed by New Jersey
      law. In the event that the interest provisions of this Note shall result at
      any
      time or for any reason in an effective rate of interest that exceeds the maximum
      interest rate permitted by applicable law, then without further agreement or
      notice the obligation to be fulfilled shall be automatically reduced to such
      limit and all sums received by the Lender in excess of those lawfully
      collectible as interest shall be applied against the principal of this Note
      immediately upon the Lender’s receipt thereof, with the same force and effect as
      though the Company had specifically designated such extra sums to be so applied
      to principal and the Lender had agreed to accept such extra payment(s) as a
      premium-free prepayment or prepayments.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    10. Representations,
      Warranties, and Covenants of the Company.
      

    

    
      	 	
              (a)

            	
              Organization
                and Qualification.
                The Company and its subsidiaries are corporations duly organized
                and
                validly existing in good standing under the laws of the jurisdiction
                in
                which they are incorporated, and have the requisite corporate power
                to own
                their properties and to carry on their business as now being conducted.
                Each of the Company and its subsidiaries is duly qualified as a foreign
                corporation to do business and is in good standing in every jurisdiction
                in which the nature of the business conducted by it makes such
                qualification necessary, except to the extent that the failure to
                be so
                qualified or be in good standing would not have a material adverse
                effect
                on the Company and its subsidiaries taken as a
                whole.

            

    

     

    
      	 	
              (b)

            	
              Authorization,
                Enforcement, Compliance with Other Instruments.
                (i) The Company has the requisite corporate power and authority to
                enter into and perform this Note and the other Transaction Documents
                and
                to issue the Conversion Shares upon an Event of Default in accordance
                with
                the terms hereof and thereof, (ii) the execution and delivery of
                the
                Transaction Documents by the Company and the consummation by it of
                the
                transactions contemplated hereby and thereby, including, without
                limitation, the issuance of the Note and the reservation for issuance
                and
                the issuance of the Conversion Shares issuable upon conversion, have
                been
                duly authorized by the Company’s Board of Directors and no further consent
                or authorization is required by the Company, its Board of Directors
                or its
                stockholders, (iii) the Transaction Documents have been duly executed
                and
                delivered by the Company, (iv) the Transaction Documents constitute
                the
                valid and binding obligations of the Company enforceable against
                the
                Company in accordance with their terms, except as such enforceability
                may
                be limited by general principles of equity or applicable bankruptcy,
                insolvency, reorganization, moratorium, liquidation or similar laws
                relating to, or affecting generally, the enforcement of creditors’ rights
                and remedies. 

            

    

    

    
      	 	
              (c)

            	
              The
                authorized capital stock of the Company consists of 150,000,000 shares
                of
                Common Stock, $.001 par value per share (“Common
                Stock”),
                50,000 shares of Series A Preferred Stock, $.001 par value per share
                (the
                “Series
                A Preferred”),
                3,000 shares of Series D Preferred Stock, $.001 par value per share
                (the
                “Series
                D Preferred”),
                10,000 shares of Series E Preferred Stock, $.001 par value per share
                (the
                “Series
                E Preferred”),
                and 16,000,000 shares of Series H Preferred Stock, par value $0.001
                per
                share (the “Series
                H Preferred”)
                of which 39,128,493
                shares
                of Common Stock and 742 shares of Series D Preferred are issued and
                outstanding. All of such outstanding shares have been validly issued
                and
                are fully paid and nonassessable.

            

    

    

    
      	 	
              (d)

            	
              Reporting
                Status.
                Until the earlier of (i) the date as of which the Lender may sell
                all of
                the Conversion Shares without restriction pursuant to Rule 144(k)
                promulgated under the Securities Act of 1933, as amended (or successor
                thereto), or (ii) the date on which (A) the Lender shall have sold
                all the
                Conversion Shares and (B) none of the Note remains outstanding, the
                Company shall file in a timely manner all reports required to be
                filed
                with the SEC pursuant to the Securities Exchange Act of 1934, as
                amended
                (the “Exchange Act”), and the regulations of the Securities and Exchange
                Commission thereunder, and the Company shall not terminate its status
                as
                an issuer required to file reports under the Exchange Act even if
                the
                Exchange Act or the rules and regulations thereunder would otherwise
                permit such termination.

            

    

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    
      	 	
              (e)

            	
              Listings
                or Quotation.
                The Company’s Common Stock shall be listed or quoted for trading on any of
                (a) the American Stock Exchange, (b) New York Stock Exchange, (c)
                the
                Nasdaq National Market, (d) the Nasdaq Capital Market, or (e) the
                OTC
                Bulletin Board (“OTC”)
                (each, a “Primary
                Market”)
                and if issued, the Company shall promptly secure the listing or quotation
                of the Conversion Shares for trading on the same Primary Market upon
                which
                the shares of Common Stock are then listed or
                quoted.

            

    

    

    
      	 	
              (f)

            	
              Each
                of the Company and the Lender shall pay all costs and expenses incurred
                by
                such party in connection with the negotiation, investigation, preparation,
                execution and delivery of the Transaction
                Documents.

            

    

    

    
      	 	
              (g)

            	
              Issuance
                of Capital Stock.
                So long as any portion of this Note is outstanding, the Company shall
                not,
                without the prior written consent of the Lender, (i) issue or sell
                shares
                of common stock or preferred stock without consideration or for a
                consideration per share less than 80% of the bid price of the common
                stock
                determined immediately prior to its issuance, (ii) issue any warrant,
                option, right, contract, call, or other security instrument granting
                the
                holder thereof, the right to acquire common stock without consideration
                or
                for a consideration less than 80% of such common stock’s bid price value
                determined immediately prior to its issuance, (iii) enter into any
                security instrument granting the holder a security interest in any
                and all
                assets of the Company, or (iv) file any registration statement on
                Form S-8
                except to register up to 15% of the number of shares outstanding
                to be
                issued to employees, officers, or directors pursuant to a employee
                stock
                option plan approved by the Company’s Board of Directors.

            

    

    

    11. Cancellation
      of Note.
      Upon
      the repayment by the Company of all of its obligations hereunder to the Lender,
      including, without limitation, the principal amount of this Note, plus accrued
      but unpaid interest, the indebtedness evidenced hereby shall be deemed canceled
      and paid in full. Except as otherwise required by law or by the provisions
      of
      this Note, payments received by the Lender hereunder shall be applied first
      against expenses and indemnities, next against interest accrued on this Note,
      and next in reduction of the outstanding principal balance of this
      Note.

    

    12. Severability.
      If any
      provision of this Note is, for any reason, invalid or unenforceable, the
      remaining provisions of this Note will nevertheless be valid and enforceable
      and
      will remain in full force and effect. Any provision of this Note that is held
      invalid or unenforceable by a court of competent jurisdiction will be deemed
      modified to the extent necessary to make it valid and enforceable and as so
      modified will remain in full force and effect.

    

    13. Amendment
      and Waiver.
      This
      Note may be amended, or any provision of this Note may be waived, provided
      that
      any such amendment or waiver will be binding on a party hereto only if such
      amendment or waiver is set forth in a writing executed by the parties hereto.
      The waiver by any such party hereto of a breach of any provision of this Note
      shall not operate or be construed as a waiver of any other breach.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    14. Successors.
      Except
      as otherwise provided herein, this Note shall bind and inure to the benefit
      of
      and be enforceable by the parties hereto and their permitted successors and
      assigns.

    

    15. Assignment.
      This
      Note shall not be directly or indirectly assignable or delegable by the Company.
      The Lender may assign this Note as long as such assignment complies with the
      Securities Act of 1933, as amended.

    

    16. No
      Strict Construction.
      The
      language used in this Note will be deemed to be the language chosen by the
      parties hereto to express their mutual intent, and no rule of strict
      construction will be applied against any party.

    

    17. Further
      Assurances.
      Each
      party hereto will execute all documents and take such other actions as the
      other
      party may reasonably request in order to consummate the transactions provided
      for herein and to accomplish the purposes of this Note.

    

    18. Notices,
      Consents, etc.  Any
      notices, consents, waivers or other communications required or permitted to
      be
      given under the terms hereof must be in writing and will be deemed to have
      been
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile (provided confirmation of transmission is mechanically or
      electronically generated and kept on file by the sending party); or (iii) one
      (1) Trading Day after deposit with a nationally recognized overnight delivery
      service, in each case properly addressed to the party to receive the same.
      The
      addresses and facsimile numbers for such communications shall be:

    

    
      	
              If
                to Company:

            	
              ATSI
                Communications, Inc

            
	 	
              3201
                Cherry Ridge Drive, Suite C300

            
	 	
              San
                Antonio, TX 78230

            
	 	
              Attention:

            	
              Arthur
                L. Smith

            
	 	 	
              Chief
                Executive Officer

            
	 	
              Telephone:

            	
              210-614-7240

            
	 	
              Facsimile:

            	
              210-614-7264

            
	 	 	 
	
              With
                a Copy to:

            	
              Franklin,
                Cardwell & Jones

            
	 	
              1001
                McKinney, 18th
                Floor

            
	 	
              Houston,
                Texas 77002

            
	 	
              Attention:

            	
              Lawrence
                E. Wilson

            
	 	
              Telephone:

            	
              (713)
                425-3259

            
	 	
              Facsimile:

            	
              (713)
                222-0938

            
	 	 	 
	
              If
                to the Lender:

            	
              CCA
                Financial Services, Inc.

            
	 	
              P.O.
                Box 16298

            
	 	
              Sugar
                Land, TX 77496

            
	 	
              Attention:

            	
              Frank
                L. Angelo

            
	 	
              Telephone:

            	
              (713)
                202-4609

            
	 	
              Facsimile:

            	
              (281)
                265-5392

            

    

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    or
      at
      such other address and/or facsimile number and/or to the attention of such
      other
      person as the recipient party has specified by written notice given to each
      other party three (3) trading days prior to the effectiveness of such change.
      Written confirmation of receipt (A) given by the recipient of such notice,
      consent, waiver or other communication, (B) mechanically or electronically
      generated by the sender's facsimile machine containing the time, date, recipient
      facsimile number and an image of the first page of such transmission or (C)
      provided by a nationally recognized overnight delivery service, shall be
      rebuttable evidence of personal service, receipt by facsimile or receipt from
      a
      nationally recognized overnight delivery service in accordance with clause
      (i),
      (ii) or (iii) above, respectively.

     

    19. Remedies,
      Other Obligations, Breaches and Injunctive Relief.
      The
      Lender’s remedies provided in this Note shall be cumulative and in addition to
      all other remedies available to the Lender under this Note, at law or in equity
      (including a decree of specific performance and/or other injunctive relief),
      no
      remedy of the Lender contained herein shall be deemed a waiver of compliance
      with the provisions giving rise to such remedy and nothing herein shall limit
      the Lender’s right to pursue actual damages for any failure by the Company to
      comply with the terms of this Note. No remedy conferred under this Note upon
      the
      Lender is intended to be exclusive of any other remedy available to the Lender,
      pursuant to the terms of this Note or otherwise. No single or partial exercise
      by the Lender of any right, power or remedy hereunder shall preclude any other
      or further exercise thereof. The failure of the Lender to exercise any right
      or
      remedy under this Note or otherwise, or delay in exercising such right or
      remedy, shall not operate as a waiver thereof. Every right and remedy of the
      Lender under any document executed in connection with this transaction may
      be
      exercised from time to time and as often as may be deemed expedient by the
      Lender. The Company acknowledges that a breach by it of its obligations
      hereunder will cause irreparable harm to the Lender and that the remedy at
      law
      for any such breach may be inadequate. The Company therefore agrees that, in
      the
      event of any such breach or threatened breach, the Lender shall be entitled,
      in
      addition to all other available remedies, to an injunction restraining any
      breach, and specific performance without the necessity of showing economic
      loss
      and without any bond or other security being required. 

    

    20. Governing
      Law; Jurisdiction.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Agreement shall be governed by the internal laws of the State of New
      Jersey without giving effect to any choice of law or conflict of law provision
      or rule (whether of the State of New Jersey or any other jurisdictions) that
      would cause the application of the laws of any jurisdictions other than the
      State of New Jersey. Each party hereby irrevocably submits to the exclusive
      jurisdiction of the Superior Court of the State of New Jersey sitting in Hudson
      County, New Jersey and the United States Federal District Court for the District
      of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute
      hereunder or in connection herewith or therewith, or with any transaction
      contemplated hereby or discussed herein, and hereby irrevocably waives, and
      agrees not to assert in any suit, action or proceeding, any claim that it is
      not
      personally subject to the jurisdiction of any such court, that such suit, action
      or proceeding is brought in an inconvenient forum or that the venue of such
      suit, action or proceeding is improper. Each party hereby irrevocably waives
      personal service of process and consents to process being served in any such
      suit, action or proceeding by mailing a copy thereof to such party at the
      address for such notices to it under this Agreement and agrees that such service
      shall constitute good and sufficient service of process and notice thereof.
      Nothing contained herein shall be deemed to limit in any way any right to serve
      process in any manner permitted by law.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    21. No
      Inconsistent Agreements.
      None of
      the parties hereto will hereafter enter into any agreement, which is
      inconsistent with the rights granted to the parties in this Note.

    

    22. Third
      Parties.
      Nothing
      herein expressed or implied is intended or shall be construed to confer upon
      or
      give to any person or entity, other than the parties to this Note and their
      respective permitted successor and assigns, any rights or remedies under or
      by
      reason of this Note.

    

    23. Waiver
      of Jury Trial.
      AS A
      MATERIAL INDUCEMENT FOR THE LENDER TO LOAN TO THE COMPANY THE MONIES HEREUNDER,
      THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
      RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS
      ASSOCIATED WITH THIS TRANSACTION.

    

    24. Entire
      Agreement.  This
      Note (including any recitals hereto) set forth the entire understanding of
      the
      parties with respect to the subject matter hereof, and shall not be modified
      or
      affected by any offer, proposal, statement or representation, oral or written,
      made by or for any party in connection with the negotiation of the terms hereof,
      and may be modified only by instruments signed by all of the parties
      hereto.

    

    IN
      WITNESS WHEREOF,
      this
      Promissory Note is executed by the undersigned as of the date
      hereof.

    

      
        	 	
                CCA
                  Financial Services, Inc.

              
	 	 	 
	 	 	 
	 	
                By:

              	
                /s/
                  Frank L. Angelo

              	 
	 	
                Name:
                  Frank
                  L. Angelo

              
	 	 	 
	 	 	 
	 	
                ATSI
                  Communications, Inc.

              
	 	 	 
	 	
                By:

              	
                /s/
                  Arthur L. Smith

              	 
	 	
                Name:
                  Arthur
                  L. Smith

              
	 	
                Title:  
                  President
                  & CEO

              

      

    

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    EXHIBIT
      A

    

    PAYMENT
      SCHEDULE

    

    AMORTIZATION
      SCHEDULE - Normal Amortization

    

    
      	
               

            	 	
              Date

            	 	
              Payment

            	 	
              Interest

            	 	
              Principal

            	 	
              Balance

            	 
	
              Loan

            	 	 	
              10/31/2007

            	 	 	 	 	 	
            	 	 	
            	 	 	
              200,000.00

            	 
	
              1

            	 	 	
              11/30/2007

            	 	 	
              12,614.33

            	 	 	
              2,500.00

            	 	 	
              10,114.33

            	 	 	
              189,885.67

            	 
	
              2

            	 	 	
              12/31/2007

            	 	 	
              12,614.33

            	 	 	
              2,373.57

            	 	 	
              10,240.76

            	 	 	
              179,644.91

            	 
	
              2007
                Totals

            	 	 	 	 	 	
              25,228.66

            	 	 	 4,873.57	 	 	
              20,355.09

            	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              3

            	 	 	
              1/31/2008

            	 	 	
              12,614.33

            	 	 	
              2,245.56

            	 	 	
              10,368.77

            	 	 	
              169,276.14

            	 
	
              4

            	 	 	
              2/29/2008

            	 	 	
              12,614.33

            	 	 	
              2,115.95

            	 	 	
              10,498.38

            	 	 	
              158,777.76

            	 
	
              5

            	 	 	
              3/31/2008

            	
               

            	 	
              12,614.33

            	 	 	
              1,984.72

            	 	 	
              10,629.61

            	 	 	
              148,148.15

            	 
	
              6

            	 	 	
              4/30/2008

            	 	 	
              150,000.00

            	 	 	
              1,851.85

            	 	 	
              148,148.15

            	 	 	
              0.00

            	 
	
              2008
                Totals

            	 	 	 	 	 	
              187,842.99

            	 	 	 8,198.08	 	 	
              179,644.91

            	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Grand
                Totals

            	 	 	 	 	 	
              213,071.65

            	 	 	
              13,071.65

            	 	 	
              200,000.00

            	 	 	 	 

    

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      B

     

    CONVERSION
      NOTICE

     

    (To
      be executed by the Lender in order to Convert the Note)

    

    
      	
              TO:
                

            

    

    

      The
        undersigned hereby irrevocably elects to convert
        $_________________________________________ of the principal amount of this
        Note
        into shares of Common Stock of ATSI
        Communications, Inc.,
        according to the conditions stated therein, as of the Date written
        below.

    

     

    
      	
              Conversion
                Date:

            	 
	
              Amount
                to be converted:

            	
              $ 

            
	
              Conversion
                Price:

            	
              $

            
	
              Number
                of shares of Common Stock to be issued:

            	 
	
              Amount
                of Note Unconverted:

            	
              $

            

    

     

    
      	
              Please
                issue the shares of Common Stock in the following name and to the
                following address:

            
	 
	
              Issue
                to:

            	 
	
              Authorized
                Signature:

            	 
	
              Name:

            	 
	
              Title:

            	 
	
              Broker
                DTC Participant Code:

            	 
	
              Account
                Number:

            	 

    

    

    
      
        
        

      

      
        10Exhibit:
      10.6

     

    SECURITY
      AGREEMENT

     

    THIS
      SECURITY AGREEMENT
      (the
“Agreement”), is
      entered into and made effective as of October 31, 2007, by and between
ATSI
      COMMUNICATIONS, a
      Nevada
      corporation with its principal place of business located at 3201 Cherry Ridge
      Drive, Suite C300, San Antonio, TX 78230 (the “Company”),
      and
      the BUYER(S)
      listed
      on the signature page hereof (the “Secured
      Party”,
      whether one or more).

     

    WHEREAS,
      the
      Company executed that certain Secured Promissory Note of even date herewith
      (the
“Note”),
      pursuant to which the Company has promised to pay the principal sum of Two
      Hundred Thousand and No/100 Dollars ($200,000) to the Secured Party, all as
      more
      particularly described therein; and 

     

    WHEREAS,
      to
      induce
      the Secured Party to enter into the transaction contemplated by the Note of
      even
      date herewith between the Company and the Secured Party (collectively referred
      to as the “Transaction
      Documents”),
      the
      Company hereby grants to the Secured Party a security interest in and to the
      property identified on Exhibit
      A
      hereto
      (collectively referred to as the “Property”)
      until
      the satisfaction of the Obligations, as defined herein below.

     

    NOW,
      THEREFORE, in
      consideration of the promises and the mutual covenants herein contained, and
      for
      other good and valuable consideration, the adequacy and receipt of which are
      hereby acknowledged, the parties hereto hereby agree as follows:

     

    ARTICLE
      1.

    DEFINITIONS
      AND INTERPRETATIONS

     

    Section
      1.1. Recitals.
      

     

    The
      above
      recitals are true and correct and are incorporated herein, in their entirety,
      by
      this reference.

     

    Section
      1.2. Interpretations.
      

     

    Nothing
      herein expressed or implied is intended or shall be construed to confer upon
      any
      person other than the Secured Party any right, remedy or claim under or by
      reason hereof.

     

    Section
      1.3. Obligations
      Secured.

     

    The
      obligations secured hereby are any and all obligations of the Company now
      existing or hereinafter incurred to the Secured Party, whether oral or written
      and whether arising before, on or after the date hereof including, without
      limitation, those obligations of the Company to the Secured Party under this
      Agreement, the Note, and any other amounts now or hereafter owed to the Secured
      Party by the Company thereunder or hereunder (collectively, the “Obligations”).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      2.

    PROPERTY,
      ADMINISTRATION OF COLLATERAL 

    AND
      TERMINATION OF SECURITY INTEREST

     

    Section
      2.1. Property.

     

    (a) Company
      assigns to the Secured Party, and creates in the Secured Party for its benefit,
      a security interest for such time until the Obligations are paid in full, in
      and
      to all of the property of the Company as set forth in Exhibit “A”
      attached
      hereto and the products thereof and the proceeds of all such items
      (collectively, the “Property”):

     

    (b) Simultaneously
      with the execution and delivery of this Agreement, the Company shall make,
      execute, acknowledge, file, record and deliver to the Secured Party any
      documents reasonably requested by the Secured Party to perfect its security
      interest in the Property. Simultaneously with the execution and delivery of
      this
      Agreement, the Company shall make, execute, acknowledge and deliver to the
      Secured Party such documents and instruments, including, without limitation,
      financing statements, certificates, affidavits and forms as may, in the Secured
      Party’s reasonable judgment, be necessary to effectuate, complete or perfect, or
      to continue and preserve, the security interest of the Secured Party in the
      Property, and the Secured Party shall hold such documents and instruments as
      secured party, subject to the terms and conditions contained
      herein.

     

    Section
      2.2. Rights;
      Interests; Etc.

     

    (a) So
      long
      as no Event of Default (as hereinafter defined) shall have occurred and be
      continuing:

     

    (i) the
      Company shall be entitled to exercise any and all rights pertaining to the
      Property or any part thereof for any purpose not inconsistent with the terms
      hereof; and

     

    (ii) the
      Company shall be entitled to receive and retain any and all payments paid or
      made in respect of the Property.

     

    (b) Upon
      the
      occurrence and during the continuance of an Event of Default:

     

    (i) All
      rights of the Company to exercise the rights which it would otherwise be
      entitled to exercise pursuant to Section 2.2(a)(i) hereof and to
      receive payments which it would otherwise be authorized to receive and retain
      pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such
      rights shall thereupon become vested in the Secured Party who shall thereupon
      have the sole right to exercise such rights and to receive and hold as Property
      such payments; provided,
      however,
      that if
      the Secured Party shall become entitled and shall elect to exercise its right
      to
      realize on the Property pursuant to Article 5 hereof, then all cash sums
      received by the Secured Party, or held by Company for the benefit of the Secured
      Party and paid over pursuant to Section 2.2(b)(ii) hereof, shall be
      applied against any outstanding Obligations; and

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    (ii) All
      interest, dividends, income and other payments and distributions which are
      received by the Company contrary to the provisions of
      Section 2.2(b)(i) hereof shall be received in trust for the benefit of
      the Secured Party, shall be segregated from other property of the Company and
      shall be forthwith paid over to the Secured Party; or 

     

    (iii) The
      Secured Party in its sole discretion shall be authorized to sell
      any
      or all of the Property at public or private sale in order to recoup all of
      the
      outstanding principal plus accrued interest owed pursuant to the Note as
      described herein

     

    (c) An
      “Event
      of Default”
shall
      be deemed to have occurred under this Agreement upon an Event of Default under
      the Note.

     

    ARTICLE
      3.

    ATTORNEY-IN-FACT;
      PERFORMANCE

     

    Section
      3.1. Secured
      Party Appointed Attorney-In-Fact.

     

    Upon
      the
      occurrence of an Event of Default, the Company hereby appoints the Secured
      Party
      as its attorney-in-fact, with full authority in the place and stead of the
      Company and in the name of the Company or otherwise, from time to time in the
      Secured Party’s discretion to take any action and to execute any instrument
      which the Secured Party may reasonably deem necessary to accomplish the purposes
      of this Agreement, including, without limitation, to receive and collect all
      instruments made payable to the Company representing any payments in respect
      of
      the Property or any part thereof and to give full discharge for the same. The
      Secured Party may demand, collect, receipt for, settle, compromise, adjust,
      sue
      for, foreclose, or realize on the Property as and when the Secured Party may
      determine. To facilitate collection, the Secured Party may notify account
      debtors and obligors on any Property to make payments directly to the Secured
      Party.

     

    Section
      3.2. Secured
      Party May Perform.

     

    If
      the
      Company fails to perform any agreement contained herein, the Secured Party,
      at
      its option, may itself perform, or cause performance of, such agreement, and
      the
      expenses of the Secured Party incurred in connection therewith shall be included
      in the Obligations secured hereby and payable by the Company under
      Section 8.3.

     

    ARTICLE
      4.

    REPRESENTATIONS
      AND WARRANTIES

     

    Section
      4.1. Authorization;
      Enforceability.

     

    Each
      of
      the parties hereto represents and warrants that it has taken all action
      necessary to authorize the execution, delivery and performance of this Agreement
      and the transactions contemplated hereby; and upon execution and delivery,
      this
      Agreement shall constitute a valid and binding obligation of the respective
      party, subject to applicable bankruptcy, insolvency, reorganization, moratorium
      and similar laws affecting creditors’ rights or by the principles governing the
      availability of equitable remedies.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    Section
      4.2. Ownership
      of Property.

     

    The
      Company warrants and represents that it is the legal and beneficial owner of
      the
      Property free and clear of any lien, security interest, option or other charge
      or encumbrance except for the security interest created by this
      Agreement.

     

    ARTICLE
      5.

    DEFAULT;
      REMEDIES; SUBSTITUTE COLLATERAL

     

    Section
      5.1. Default
      and Remedies.

     

    (a) If
      an
      Event of Default occurs, then in each such case the Secured Party may declare
      the Obligations to be due and payable immediately, by a notice in writing to
      the
      Company, and upon any such declaration, the Obligations shall become immediately
      due and payable. 

     

    (b) Upon
      the
      occurrence of an Event of Default, the Secured Party shall be entitled to
      (i) receive all distributions with respect to the Property, (ii) cause
      the Property to be transferred into the name of the Secured Party or its
      nominee, (iii) dispose of the Property, and (iv) realize upon any and
      all rights in the Property then held by the Secured Party.

     

    Section
      5.2. Method
      of Realizing Upon the Property: Other Remedies.

     

    Upon
      the
      occurrence of an Event of Default, in addition to any rights and remedies
      available at law or in equity, the following provisions shall govern the Secured
      Party’s right to realize upon the Property:

     

    (a) Any
      item
      of the Property may be sold for cash or other value in any number of lots at
      brokers board, public auction or private sale and may be sold without demand,
      advertisement or notice (except that the Secured Party shall give the Company
      ten (10) days’ prior written notice of the time and place or of the
      time after which a private sale may be made (the “Sale
      Notice”)),
      which notice period is hereby agreed to be commercially reasonable. At any
      sale
      or sales of the Property, the Company may bid for and purchase the whole or
      any
      part of the Property and, upon compliance with the terms of such sale, may
      hold,
      exploit and dispose of the same without further accountability to the Secured
      Party. The Company will execute and deliver, or cause to be executed and
      delivered, such instruments, documents, assignments, waivers, certificates,
      and
      affidavits and supply or cause to be supplied such further information and
      take
      such further action as the Secured Party reasonably shall require in connection
      with any such sale.

     

    (b) Any
      cash
      being held by the Secured Party as Property and all cash proceeds received
      by
      the Secured Party in respect of, sale of, collection from, or other realization
      upon all or any part of the Property shall be applied as follows:

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    (i) to
      the
      payment of all amounts due the Secured Party for the expenses reimbursable
      to it
      hereunder or owed to it pursuant to Section 8.3 hereof;

     

    (ii) to
      the
      payment of the Obligations then due and unpaid.

     

    (iii) the
      balance, if any, to the person or persons entitled thereto, including, without
      limitation, the Company.

     

    (c) In
      addition to all of the rights and remedies which the Secured Party may have
      pursuant to this Agreement, the Secured Party shall have all of the rights
      and
      remedies provided by law, including, without limitation, those under the Uniform
      Commercial Code as adopted and in effect in the State of Texas.

     

    (i) If
      the
      Company fails to pay such amounts due upon the occurrence of an Event of Default
      which is continuing, then the Secured Party may institute a judicial proceeding
      for the collection of the sums so due and unpaid, may prosecute such proceeding
      to judgment or final decree and may enforce the same against the Company and
      collect the monies adjudged or decreed to be payable in the manner provided
      by
      law out of the property of Company, wherever situated.

     

    (ii) The
      Company agrees that it shall be liable for any reasonable fees, expenses and
      costs incurred by the Secured Party in connection with enforcement, collection
      and preservation of the Transaction Documents, including, without limitation,
      reasonable legal fees and expenses, and such amounts shall be deemed included
      as
      Obligations secured hereby and payable as set forth in Section 8.3
      hereof.

     

    Section
      5.3. Proofs
      of Claim.

     

    In
      case
      of the pendency of any receivership, insolvency, liquidation, bankruptcy,
      reorganization, arrangement, adjustment, composition or other judicial
      proceeding relating to the Company or the Property or of such other obligor
      or
      its creditors, the Secured Party (irrespective of whether the Obligations shall
      then be due and payable as therein expressed or by declaration or otherwise
      and
      irrespective of whether the Secured Party shall have made any demand on the
      Company for the payment of the Obligations), shall be entitled and empowered,
      by
      intervention in such proceeding or otherwise:

     

    (i) to
      file
      and prove a claim for the whole amount of the Obligations and to file such
      other
      papers or documents as may be necessary or advisable in order to have the claims
      of the Secured Party (including any claim for the reasonable legal fees and
      expenses and other expenses paid or incurred by the Secured Party permitted
      hereunder) allowed in such judicial proceeding, and

     

    (ii) to
      collect and receive any monies or other property payable or deliverable on
      any
      such claims and to distribute the same; and any custodian, receiver, assignee,
      trustee, liquidator, sequestrator or other similar official in any such judicial
      proceeding is hereby authorized by the Company to make such payments to the
      Secured Party and, in the event that the Secured Party shall consent to the
      making of such payments, to pay to the Secured Party any amounts for expenses
      due it hereunder.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    Section
      5.4. Duties
      Regarding Property.

     

    The
      Secured Party shall have no duty as to the collection or protection of the
      Property or any income thereon or as to the preservation of any rights
      pertaining thereto, beyond the safe custody and reasonable care of any of the
      Property actually in the Secured Party’s possession.

     

    ARTICLE
      6.

    AFFIRMATIVE
      COVENANTS

     

    The
      Company covenants and agrees that, from the date hereof and until the
      Obligations have been fully paid and satisfied, unless the Secured Party shall
      consent otherwise in writing (as provided in Section 8.4
      hereof):

     

    Section
      6.1. Existence,
      Properties, Etc.

     

    (a) The
      Company shall do, or cause to be done, all things, or proceed with due diligence
      with any actions or courses of action, that may be reasonably necessary
      (i) to maintain Company’s due organization, valid existence and good
      standing under the laws of its state of incorporation, and (ii) to preserve
      and keep in full force and effect all qualifications, licenses and registrations
      in those jurisdictions in which the failure to do so could have a Material
      Adverse Effect (as defined below). For purpose of this Agreement, the term
      “Material
      Adverse Effect”
shall
      mean any material and adverse affect as determined by Secured Party in its
      sole
      discretion, whether individually or in the aggregate, upon (a) the
      Company’s assets, business, operations, properties or condition, financial or
      otherwise; (b) the Company’s ability to make payment as and when due of all
      or any part of the Obligations; or (c) the Property.

     

    (b)  The
      Company shall not do, or cause to be done, any act impairing the Company’s
      corporate power or authority (i) to carry on the Company’s business as now
      conducted, and (ii) to execute or deliver this Agreement or any other
      document delivered in connection herewith, including, without limitation, any
      UCC-1 Financing Statements required by the Secured Party to which it is or
      will be a party, or perform any of its obligations hereunder or thereunder.
      

     

    Section
      6.2. Financial
      Statements and Reports.

     

    The
      Company shall furnish to the Secured Party within a reasonable time such
      financial data as the Secured Party may reasonably request, including, without
      limitation, the following:

     

    (a) The
      balance sheet of the Company as of the close of each fiscal year, the statement
      of earnings and retained earnings of the Company as of the close of such fiscal
      year, and statement of cash flows for the Company for such fiscal year, all
      in
      reasonable detail, prepared in accordance with generally accepted accounting
      principles consistently applied, certified by the chief executive and chief
      financial officers of the Company as being true and correct and accompanied
      by a
      certificate of the chief executive and chief financial officers of the Company,
      stating that the Company has kept, observed, performed and fulfilled each
      covenant, term and condition of this Agreement during such fiscal year and
      that
      no Event of Default hereunder has occurred and is continuing, or if an Event
      of
      Default has occurred and is continuing, specifying the nature of same, the
      period of existence of same and the action the Company proposes to take in
      connection therewith;

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (b) A
      balance
      sheet of the Company as of the close of each month, and statement of earnings
      and retained earnings of the Company as of the close of such month, all in
      reasonable detail, and prepared substantially in accordance with generally
      accepted accounting principles consistently applied, certified by the chief
      executive and chief financial officers of the Company as being true and correct;
      and

     

    (c) Copies
      of
      all accountants' reports and accompanying financial reports submitted to the
      Company by independent accountants in connection with each annual examination
      of
      the Company.

     

    Section
      6.3. Accounts
      and Reports.

     

    The
      Company shall maintain a standard system of accounting in accordance with
      generally accepted accounting principles consistently applied and provide,
      at
      its sole expense, to the Secured Party the following:

     

    (a) as
      soon
      as available, a copy of any notice or other communication alleging any
      nonpayment or other material breach or default, or any foreclosure or other
      action respecting any material portion of its assets and properties, received
      respecting any of the indebtedness of the Company in excess of $25,000 (other
      than the Obligations), or any demand or other request for payment under any
      guaranty, assumption, purchase agreement or similar agreement or arrangement
      respecting the indebtedness or obligations of others in excess of $25,000,
      including any received from any person acting on behalf of the Secured Party
      or
      beneficiary thereof; and

     

    (b) within
      fifteen (15) days after the making of each submission or filing, a copy of
      any report, financial statement, notice or other document, whether periodic
      or
      otherwise, submitted to the shareholders of the Company, or submitted to or
      filed by the Company with any governmental authority involving or affecting
      (i)
      the Company that could have a Material Adverse Effect; (ii) the
      Obligations; (iii) any part of the Property; or (iv) any of the
      transactions contemplated in this Agreement or the Loan
      Instruments.

     

    Section
      6.4. Maintenance
      of Books and Records; Inspection.

     

    The
      Company shall maintain its books, accounts and records in accordance with
      generally accepted accounting principles consistently applied, and permit the
      Secured Party, its officers and employees and any professionals designated
      by
      the Secured Party in writing, at any time to visit and inspect the Property,
      corporate books and financial records, and to discuss its accounts, affairs
      and
      finances with any employee, officer or director thereof.

     

    Section
      6.5. Contracts
      and Other Collateral.

     

    The
      Company shall perform all of its obligations under or with respect to each
      instrument, receivable, contract and other intangible included in the Property
      to which the Company is now or hereafter will be party on a timely basis and
      in
      the manner therein required, including, without limitation, this
      Agreement.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    Section
      6.6. Defense
      of Collateral, Etc.

     

    The
      Company shall defend and enforce its right, title and interest in and to any
      part of: (a) the Property; and (b) if not included within the
      Property, those assets and properties whose loss could have a Material Adverse
      Effect. The Company shall defend the Secured Party’s right, title and interest
      in and to each and every part of the Property, each against all manner of claims
      and demands on a timely basis to the full extent permitted by applicable
      law.

     

    Section
      6.7. Payment
      of Debts, Taxes, Etc.

     

    The
      Company shall pay, or cause to be paid, all of its indebtedness and other
      liabilities and perform, or cause to be performed, all of its obligations in
      accordance with the respective terms thereof, and pay and discharge, or cause
      to
      be paid or discharged, all taxes, assessments and other governmental charges
      and
      levies imposed upon it, upon any of its assets and properties on or before
      the
      last day on which the same may be paid without penalty, as well as pay all
      other
      lawful claims (whether for services, labor, materials, supplies or
      otherwise) as and when due

     

    Section
      6.8. Taxes
      and Assessments; Tax Indemnity.

     

    The
      Company shall (a) file all tax returns and appropriate schedules thereto
      that are required to be filed under applicable law, prior to the date of
      delinquency, (b) pay and discharge all taxes, assessments and governmental
      charges or levies imposed upon the Company, upon its income and profits or
      upon
      any properties belonging to it, prior to the date on which penalties attach
      thereto, and (c) pay all taxes, assessments and governmental charges or
      levies that, if unpaid, might become a lien or charge upon any of its
      properties; provided,
      however,
      that
      the Company in good faith may contest any such tax, assessment, governmental
      charge or levy described in the foregoing clauses (b) and (c) so long as
      appropriate reserves are maintained with respect thereto. 

     

    Section
      6.9. Compliance
      with Law and Other Agreements.
      

     

    The
      Company shall maintain its business operations and property owned or used in
      connection therewith in compliance with (a) all applicable federal, state
      and local laws, regulations and ordinances governing such business operations
      and the use and ownership of such property, and (b) all agreements,
      licenses, franchises, indentures and mortgages to which the Company is a party
      or by which the Company or any of its properties is bound. Without limiting
      the
      foregoing, the Company shall pay all of its indebtedness promptly in accordance
      with the terms thereof.

     

    Section
      6.10. Notice
      of Default.
      

     

    The
      Company shall give written notice to the Secured Party of the occurrence of
      any
      default or Event of Default under this Agreement, the Note, or any other
      agreement of Company for the payment of money, promptly upon the occurrence
      thereof.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    Section
      6.11. Notice
      of Litigation.

     

    The
      Company shall give notice, in writing, to the Secured Party of (a) any
      actions, suits or proceedings wherein the amount at issue is in excess of
      $50,000, instituted by any persons against the Company, or affecting any of
      the
      assets of the Company, and (b) any dispute, not resolved within fifteen
      (15) days of the commencement thereof, between the Company on the one hand
      and
      any governmental or regulatory body on the other hand, which might reasonably
      be
      expected to have a Material Adverse Effect on the business operations or
      financial condition of the Company.

     

    ARTICLE
      7.

    NEGATIVE
      COVENANTS

     

    The
      Company covenants and agrees that, from the date hereof until the Obligations
      have been fully paid and satisfied, the Company shall not, unless the Secured
      Party shall consent otherwise in writing:

     

    Section
      7.1. Indebtedness.

     

    The
      Company shall not directly or indirectly permit, create, incur, assume, permit
      to exist, increase, renew or extend on or after the date hereof any indebtedness
      on its part, including commitments, contingencies and credit availabilities,
      or
      apply for or offer or agree to do any of the foregoing; provided, however,
      that
      the Company may incur obligations and indebtedness for acquisition of assets
      or
      services in the ordinary course of business.

     

    Section
      7.2. Liens
      and Encumbrances.

     

    The
      Company shall not directly or indirectly make, create, incur, assume or permit
      to exist any assignment, transfer, pledge, mortgage, security interest or other
      lien or encumbrance of any nature in, to or against any part of the Property
      or
      of the Company’s capital stock, or offer or agree to do so, or assign, pledge or
      in any way transfer or encumber its right to receive any income or other
      distribution or proceeds from any part of the Property or the Company’s capital
      stock;, or enter into any sale-leaseback financing respecting any part of the
      Property as lessee, or cause or assist the inception or continuation of any
      of
      the foregoing.

     

    Section
      7.3. Certificate
      of Incorporation, By-Laws, Mergers, Consolidations, Acquisitions and
      Sales.

     

    Without
      the prior express written consent of the Secured Party, that will not be
      unreasonably withheld, the Company shall not: (a) Amend its Certificate of
      Incorporation or By-Laws; (b) be a party to any merger, consolidation or
      corporate reorganization, (c)  sell, transfer, convey, grant a security
      interest in or lease all or any substantial part of its assets, nor
      (d) create any subsidiaries nor convey any of its assets to any subsidiary,
      unless in connection therewith, the subsidiary grants to the Secured Party
      a
      security interest of the same tenor as created hereunder. 

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Section
      7.4. Management,
      Ownership.

     

    The
      Company shall not materially change its ownership, executive staff or management
      without the prior written consent of the Secured Party. The ownership, executive
      staff and management of the Company are material factors in the Secured Party's
      willingness to institute and maintain a lending relationship with the
      Company.

     

    Section
      7.5. Dividends,
      Etc.

     

    The
      Company shall not declare or pay any dividend of any kind, in cash or in
      property, on any class of its capital stock, nor purchase, redeem, retire or
      otherwise acquire for value any shares of such stock, nor make any distribution
      of any kind in respect thereof, nor make any return of capital to shareholders,
      nor make any payments in respect of any pension, profit sharing, retirement,
      stock option, stock bonus, incentive compensation or similar plan (except as
      required or permitted hereunder), without the prior written consent of the
      Secured Party.

     

    Section
      7.6. Guaranties;
      Loans.

     

    The
      Company shall not guarantee nor be liable in any manner, whether directly or
      indirectly, or become contingently liable after the date of this Agreement
      in
      connection with the obligations or indebtedness of any person or persons, except
      for (i) the indebtedness currently secured by the liens identified on the
      Property identified on Exhibit A hereto and (ii) the endorsement of negotiable
      instruments payable to the Company for deposit or collection in the ordinary
      course of business. The Company shall not make any loan, advance or extension
      of
      credit to any person other than in the normal course of its
      business.

     

    Section
      7.7. Debt.

     

    The
      Company shall not create, incur, assume or suffer to exist any additional
      indebtedness of any description whatsoever in an aggregate amount in excess
      of
      $100,000 (excluding any indebtedness of the Company to the Secured Party, trade
      accounts payable and accrued expenses incurred in the ordinary course of
      business and the endorsement of negotiable instruments payable to the Company,
      respectively for deposit or collection in the ordinary course of
      business).

     

    Section
      7.8. Conduct
      of Business.

     

    The
      Company will continue to engage, in a business of the same general type as
      conducted by it on the date of this Agreement.

     

    Section
      7.9. Places
      of Business.

     

    The
      location of the Company’s chief place of business is 3201 Cherry Ridge Drive,
      Suite C300, San Antonio, Texas 78230. The Company shall not change the location
      of its chief place of business, chief executive office or any place of business
      disclosed to the Secured Party or move any of the Property from its current
      location without thirty (30) days' prior written notice to the Secured Party
      in
      each instance. 

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      8.

    MISCELLANEOUS

     

    Section
      8.1. Notices.

     

    All
      notices or other communications required or permitted to be given pursuant
      to
      this Agreement shall be in writing and shall be considered as duly given on:
      (a) the date of delivery, if delivered in person, by nationally recognized
      overnight delivery service or (b) five (5) days after mailing if
      mailed from within the continental United States by certified mail, return
      receipt requested to the party entitled to receive the same:

    

      
        	
                If
                  to the Secured Party:

              	
                CCA
                  Financial Services, Inc.

              
	 	
                P.O.
                  Box 16298 

              
	 	
                Sugar
                  Land, TX 77496 

              
	 	
                Attention: 

              	
                Frank
                  Angelo

              
	 	
                Telephone: 

              	
                (713)
                  202-4609

              
	 	
                Facsimile: 

              	
                (281)
                  265-5392

              
	 	 	 
	
                With
                  a copy to:

              	
                David
                  Fine, Esq.

              
	 	
                101
                  Hudson Street, Suite 3700

              
	 	
                Jersey
                  City, NJ 07302

              
	 	
                Telephone: 

              	
                (201)
                  985-8300

              
	 	
                Facsimile: 

              	
                (201)
                  985-8266

              
	 	 	 
	
                And
                  if to the Company:

              	
                ATSI
                  Communications, Inc

              
	 	
                3201
                  Cherry Ridge Drive, Suite C300

              
	 	
                San
                  Antonio, TX 78230

              
	 	
                Telephone:
                  

              	
                210-614-7240

              
	 	
                Fax:
                  

              	
                210-614-7264

              
	 	 	 
	
                With
                  a copy to:

              	
                Franklin,
                  Cardwell & Jones

              
	 	
                1001
                  McKinney, 18th
                  Floor

              
	 	
                Houston,
                  TX 77002

              
	 	
                Attention: 

              	
                Lawrence
                  E Wilson

              
	 	
                Telephone: 

              	
                (713)
                  425-3259

              
	 	
                Facsimile: 

              	
                (713)
                  222-0938

              

      

    

     

    Any
      party
      may change its address by giving notice to the other party stating its new
      address. Commencing on the tenth (10th) day
      after the giving of such notice, such newly designated address shall be such
      party’s address for the purpose of all notices or other communications required
      or permitted to be given pursuant to this Agreement.

     

    Section
      8.2. Severability.

     

    If
      any
      provision of this Agreement shall be held invalid or unenforceable, such
      invalidity or unenforceability shall attach only to such provision and shall
      not
      in any manner affect or render invalid or unenforceable any other severable
      provision of this Agreement, and this Agreement shall be carried out as if
      any
      such invalid or unenforceable provision were not contained herein.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Section
      8.3. Expenses.

     

    In
      the
      event of an Event of Default, the Company will pay to the Secured Party the
      amount of any and all reasonable expenses, including the reasonable fees and
      expenses of its counsel, which the Secured Party may incur in connection with:
      (i) the custody or preservation of, or the sale, collection from, or other
      realization upon, any of the Property; (ii) the exercise or enforcement of
      any of the rights of the Secured Party hereunder or (iii) the failure by
      the Company to perform or observe any of the provisions hereof.

     

    Section
      8.4. Waivers,
      Amendments, Etc.

     

    The
      Secured Party’s delay or failure at any time or times hereafter to require
      strict performance by Company of any undertakings, agreements or covenants
      shall
      not waiver, affect, or diminish any right of the Secured Party under this
      Agreement to demand strict compliance and performance herewith. Any waiver
      by
      the Secured Party of any Event of Default shall not waive or affect any other
      Event of Default, whether such Event of Default is prior or subsequent thereto
      and whether of the same or a different type. None of the undertakings,
      agreements and covenants of the Company contained in this Agreement, and no
      Event of Default, shall be deemed to have been waived by the Secured Party,
      nor
      may this Agreement be amended, changed or modified, unless such waiver,
      amendment, change or modification is evidenced by an instrument in writing
      specifying such waiver, amendment, change or modification and signed by the
      Secured Party.

     

    Section
      8.5. Continuing
      Security Interest.

     

    This
      Agreement shall create a continuing security interest in the Property and shall:
      (i) remain in full force and effect until payment in full of the
      Obligations; and (ii) be binding upon the Company and its successors and
      heirs and (iii) inure to the benefit of the Secured Party and its
      successors and assigns. Upon the payment or satisfaction in full of the
      Obligations, the Company shall be entitled to the return, at its expense, of
      such of the Property as shall not have been sold in accordance with
      Section 5.2 hereof or otherwise applied pursuant to the terms
      hereof.

     

    Section
      8.6. Independent
      Representation.

     

    Each
      party hereto acknowledges and agrees that it has received or has had the
      opportunity to receive independent legal counsel of its own choice and that
      it
      has been sufficiently apprised of its rights and responsibilities with regard
      to
      the substance of this Agreement.

     

    Section
      8.7. Applicable
      Law: Jurisdiction.

     

    This
      Agreement shall be governed by and interpreted in accordance with the laws
      of
      the State of New Jersey without regard to the principles of conflict of laws.
      The parties further agree that any action between them shall be heard in Hudson
      County, New Jersey, and expressly consent to the jurisdiction and venue of
      the
      Superior Court of New Jersey, sitting in Hudson County and the United States
      District Court for the District of New Jersey sitting in Newark, New Jersey
      for
      the adjudication of any civil action asserted pursuant to this
      Paragraph.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    Section
      8.8. Waiver
      of Jury Trial.

     

    AS
      A
      FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO
      MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES
      ANY
      RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS
      AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS TRANSACTION.

     

    Section
      8.9. Entire
      Agreement.

     

    This
      Agreement constitutes the entire agreement among the parties and supersedes
      any
      prior agreement or understanding among them with respect to the subject matter
      hereof.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    

    IN
      WITNESS WHEREOF, the
      parties hereto have executed this Security Agreement as of the date first above
      written.

     

    

    
      	 	COMPANY:
	 	ATSI
              COMMUNICATIONS, INC.
	 	 	 
	 	
              By:

            	
               /s/
                Arthur L. Smith

            
	 	
              Name:

            	
              Arthur
                L. Smith

            
	 	
              Title:

            	
              Chief
                Executive Officer

            
	 	 	 
	 	SECURED
              PARTY:
	 	CCA
              FINANCIAL SERVICES, INC.
	 	 	 
	 	
              By:

            	
               
                /s/Frank L. Angelo

            
	 	
              Name:

            	
              Frank
                L. Angelo

            
	 	
              Title:

            	
              Portfolio
                Manager

            

    

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    EXHIBIT
      A

    DEFINITION
      OF PROPERTY

     

    For
      the
      purpose of securing prompt and complete payment and performance by the Company
      of all of the Obligations, the Company unconditionally and irrevocably hereby
      grants to the Secured Party a continuing security interest in and to, and lien
      upon, the following:

     

    (a) all
      goods
      of the Company, including, without limitation, machinery, equipment, furniture,
      furnishings, fixtures, signs, lights, tools, parts, supplies and motor vehicles
      of every kind and description, now or hereafter owned by the Company or in
      which
      the Company may have or may hereafter acquire any interest, and all
      replacements, additions, accessions, substitutions and proceeds thereof, arising
      from the sale or disposition thereof, and where applicable, the proceeds of
      insurance and of any tort claims involving any of the foregoing;

     

    (b) all
      inventory of the Company, including, but not limited to, all goods, wares,
      merchandise, parts, supplies, finished products, other tangible personal
      property, including such inventory as is temporarily out of Company’s custody or
      possession and including any returns upon any accounts or other proceeds,
      including insurance proceeds, resulting from the sale or disposition of any
      of
      the foregoing;

     

    (c) all
      contract rights and general intangibles of the Company, including, without
      limitation, goodwill, trademarks, trade styles, trade names, leasehold
      interests, partnership or joint venture interests, patents and patent
      applications, copyrights, deposit accounts whether now owned or hereafter
      created;

     

    (d) all
      documents, warehouse receipts, instruments and chattel paper of the Company
      whether now owned or hereafter created;

     

    (e) all
      accounts and other receivables, instruments or other forms of obligations and
      rights to payment of the Company (herein collectively referred to as
“Accounts”),
      together with the proceeds thereof, all goods represented by such Accounts
      and
      all such goods that may be returned by the Company’s customers, and all proceeds
      of any insurance thereon, and all guarantees, securities and liens which the
      Company may hold for the payment of any such Accounts including, without
      limitation, all rights of stoppage in transit, replevin and reclamation and
      as
      an unpaid vendor and/or lienor, all of which the Company represents and warrants
      will be bona fide and existing obligations of its respective customers, arising
      out of the sale of goods by the Company in the ordinary course of
      business;

     

    (f) to
      the
      extent assignable, all of the Company’s rights under all present and future
      authorizations, permits, licenses and franchises issued or granted in connection
      with the operations of any of its facilities;

     

    (g) all
      equity interests, securities or other instruments in other companies, including,
      without limitation, any subsidiaries, investments or other entities (whether
      or
      not controlled); and

     

    (h) all
      products and proceeds (including, without limitation, insurance proceeds) from
      the above-described Property.

     

    
      
        
        

      

      
        A-1

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